A renewal of the Governance Council(GC) reward structure due to abolition of the Gini coefficient.
In addition to traditional enterprises, Klaytn is expanding the Governance Council (GC) by bringing DAOs in response to the growth of nontraditional entities. Such a change in the GC ecosystem will restructure the entire Klaytn governance structure. Abolishing the current block proposal selection method based on the Gini coefficient and staking quantity, the new reward program alleviates the problem of providing insufficient compensation for the network contribution and block verification due to lack of staking. The instability of certain nodes with high staking amounts can result in poor network stability as a whole. The renewed structure enables to reward the staking amount regardless of block miner by providing 20% total rewards for block generation and 80% based on staking amount. This form is to reward the participants for providing network stability with node operation and financial support.
Klaytn has been compensating GC with block creation rewards based on the quantity of staking and the Gini coefficient. This included rewards incurred by minting and gas fee rewards generated by transactions during block creation. As mentioned in the Klaytn 2.0 Lightpaper, Klaytn is abolishing the Gini coefficient since this measure demotivates members from staking. Discontinuation of the Gini coefficient increases the risk to network stability due to the expanding reliance on certain nodes. This change ultimately calls for the revision of block proposer selection and reward structure. In an effort to enhance individual voting power and promote ultimate decentralization, we aim to accomplish the following changes:
- Ameliorate the risk that block creation depends on larger staker nodes
- Associate GC reward with the growth of the Klaytn ecosystem
Block generation is rewarded for the node operations that are serving as public goods in the Klaytn network. CN and PN are in charge of block creation and propagation while EN is in charge of blockchain data inquiry based on an individual’s needs. The infrastructure cost remains similar, enabling some fixed benefits. Therefore, fixed compensation will be equivalent to the sum of the transaction fee and an additional block compensation, which can be both inflationary and deflationary.
The block proposal method will be based on equal selection regardless of the staking amount. The current model provides a block generation reward based on staking amount and the Gini-coefficient. Until now, the Gini coefficient was utilized to alleviate the chance of an entity with more staking amount being selected as a block proposer. As this model provided a fairly equal chance to every participant, each node was promised a certain amount of rewards.
In the new method, the reward for node operation is required since the staking amount is not considered in the proposal selection process. Therefore, 20 percent of the total reward amount will be placed as a node operation reward.
Node operators will also be compensated with the staking for enhancing network stability from an economic standpoint. The opportunity cost incurred from staking is rewarded based on inflation. In this system, inflation provides a tax-like common effect. Public users can also participate and receive rewards through the GC-run public staking program.
Of the 300 million KLAYs that are minted annually, only 100 million go to GC, and 20% and 80% of the distribution is from this 100 million. The renewal separates GC reward into two groups: basic reward and staked reward. The basic reward is compensating for node operation by providing 20% of GC reward and 100% of gas fee resources from transactions. The staked reward provides only the rest of 80% of the minting resource based on the total stake amount.
After the Magma hard fork, Klaytn has been burning the first half of the gas fee based on the KIP-71 proposal while the second half is distributed. The remaining second half is distributed into GC reward, Klaytn Improvement Reserve (KIR) and Klaytn Growth Fund (KGF).
In addition to changing the reward structure, this renewal will include burning the gas fee that is provided as GC’s basic reward. The KGF and KIR portion will be excluded from the gas fee.
If the amount of gas fee that is provided as a basic reward does not exceed a certain level, all of them will be burned. The threshold amount is 20% of minting provided as a basic reward. If the gas fee exceeds this amount, 20% will be incinerated and the additional amount will be distributed to GC.
To reduce the KLAY supply amount due to inflation, the gas fee will be burned.
The Klaytn node will be updated according to the new reward policy. The CN portion is further splitted into basic reward and staked reward. The staked reward is then distributed among CNs proportional to their staking shares. Their shares are calculated proportionally to their stake amounts except for the minimum staking amount.
The update is expected to increase the amount of per-block state changes by number of GCs. The increase should be reasonable since the amount is much smaller than Klaytn’s transaction processing capability.
The proposed GC reward mechanism is expected to produce the following changes:
- GC members increase individual staking amount
- The higher number of KLAY holders receive profit from staking
- Total Value Locked (TVL) of Klaytn increases
- The total circulation reduces