Economic reasoning for Storage Emissions – do the reasons given make sense?
For a TL:DR, see the summary at the bottom of this post!
Firstly, I want to say that I’m not against the 70% of token supply entering circulation over time. But I do think there needs to be a good reason given for it, and I don’t think the reasoning given in the White Paper makes it clear that it’s required, or that it will be beneficial.
I’ve sometimes said 49% relating to Storage Emissions, but I think the same reasoning applies to the full 70% if similar methods are expected for future son-storage resource provision.
Here are two quotes from the White Paper that provide the reasoning for storage emissions:
Physical infrastructure-based decentralized platforms require upfront infrastructure availability before usage can scale. To drive node network growth, new token emission incentivises node operators independent of current network usage levels.
The above implies that node supply and user demand isn’t expected to scale in a coordinated manner without intervention. I think this underestimates the coordinating ability of the market if price signals can clearly signal demand levels to node operators, and supply levels to uploaders.
It also suggests it’s a good idea to incentivise node operators to supply more resources that what is demanded by current usage levels of the network, rather than letting the network’s market balance supply and demand.
The foundational premise of Autonomi asserts that larger network sizes correlate with enhanced performance and heightened security. However, the dynamic pricing mechanism, while effective in providing a supply-and-demand-based incentive structure that augments rewards as demand rises, operates retrospectively. In essence, rewards only increase once new demand has emerged. This retrospective nature can potentially delay network growth due to market inefficiencies. The time lag between increased prices and the subsequent generation of additional resource supply could impede network expansion and adversely affect user experience.
This quote builds on the thinking that the network’s market (through Dynamic Pricing alone) may not be sufficient to coordinate supply & demand as the network grows, due to the retrospective response of supply to increases in demand.
The market should be good
I expect that when demand pushes storage cost a bit above the emerging ‘norm’, new nodes will quickly be spun up by opportunistic individuals / organisations. There will be a race to supply new nodes to catch the rewards when they’re juicy, so the network will keep up with demand. Some will likely automate a process to spin up new VPS instances at certain price levels. If demand continually outpaces supply, then perhaps a higher price is exactly what’s needed to keep things in balance, rather than being something to try to fight.
When demand is slow, new nodes won’t be incentivised to join, but why should they need to be if resource supply & demand are in balance, and operators are responsive when demand is strong?
Even if it were the case that in the early days of the network some kind of incentive were needed to help supply keep up with demand, I can’t imagine an optimal solution would be a multi-decade intervention that emits 49% of the token supply in a way that isn’t linked to demand levels, making this reasoning for the Storage Emissions questionable in my view.
Market inefficiencies
It is stated in the second quote above that a lag between demand pushing pricing upwards and nodes responding to this could be considered a market inefficiency. To me that sounds like a very efficient market if the pricing signal is clear. It’s normal to have some lag in supply responding to demand, even if in this case it’ll likely be very small.
Potential issue 1: Reduced network responsiveness to demand increases
An effective way to cause market inefficiencies is to reduce the potency of pricing signals between market participants, which is one potentially significant effect of the proposed Storage Emission plan.
For example, imagine a scenario where increased demand under Dynamic Pricing alone might push up store cost & node earnings by 10%. If Storage Emissions represented 50% of a node’s income at that time, the increased demand would only lead to a 5% increase in node income, which may not inspire the increase in node provision that is warranted by the increase in demand, due to the dilution of the price signal.
There are many variables, but the principle is that this intervention, which is intended to solve potential market inefficiency, is highly likely to cause market inefficiency.
Potential issue 2: Distorted market
One thing I love about Autonomi’s market is that it can work purely on supply and demand, with no ‘block subsidy’ needed to secure the network as with Bitcoin, or ‘Staking Rewards’ as with ETH… a pure market for real resources that is scalable and should work over long periods of time seems simpler and better to me.
Bitcoin’s change in economics when the blocksize limit was reached was dramatic in how it affected usage of the network due to rapidly rising fees. No more paying for Beer at the ‘Royal Dick’ (a pub in Edinburgh that accepted Bitcoin… does anyone here remember that?), and many emerging Bitcoin utilising business models became unsustainable as fees rocketed due to changing network economics.
The Storage Emissions as proposed would likely have the intended effect of pushing supply of resources ahead of demand. This may not be a good thing. Due to Dynamic Pricing, it would push down the cost of storing data on the network below the level at which nodes will be willing to provide similar resources on a long-term basis, effectively subsidising the cost of storing data below the market level.
This could be problematic as people start using the network in a way that seems great, but isn’t sustainable as the Storage Emissions reduce and the true market price becomes apparent.
Do we want people / companies in the early days figuring out how to use Autonomi in their daily life / product offerings, only to face steadily rising costs of using the network over time due to reducing Storage Emissions, and making previously enjoyed use cases too expensive? Would it be better if they could see a more accurate long-term price emerging for services on the network?
Of course it won’t be as dramatic as what happened with Bitcoin. It’s hard to say how significant this distortion will be, and the rate of change would be very low due to the slow rate of change in emissions, but it’s very likely that it will exist and may be unhelpful rather than beneficial.
As a side thought, it may be that some node operators would be better incentivised to provide extra resources in the early days if they expected that earned tokens would have a higher future value than if diluted by the release of the Storage Emissions. If this were a common position, the Storage Emissions may not stimulate the additional resource provision hoped for, and no emissions might be more effective in stimulating early participation than big emissions. (I expect the emissions would on balance stimulate more additional supply than zero emissions would… I doubt most operators will be thinking that long term)
Proposed tweak to Storage Emissions
Here’s a suggestion of a tweak to the Storage Emissions plan that may be preferable in some ways.
The tweak here allows the market to operate naturally and as efficiently as possible up to a certain point.
Above this point, the cost-curve to uploaders is made more shallow, while payments to node operators are kept in line with the original Dynamic Pricing curve. The difference would be funded with Storage Emissions.
Compared with the White Paper’s proposal, this tweak should;
- Magnify, rather than reduce price signals to increase storage in response to demand increases above a certain point
- Reduce market distortions because additional incentives to nodes are proportional to demand
- Reduce market distortions because the price to uploaders will not be subsidised below a certain point, so there is less potential for data pricing ending up way below a sustainable level
This would still lead to a market distortion above a certain point, but as it’s occurring where the pricing curve is steep, it should quickly lead to more nodes responding to higher prices to ensure more than sufficient resource provision.
One thing this wouldn’t do is ensure the full 70% are emitted in a predictable timeframe. Release would be dependent on demand level, so it may either never fully happen, or may happen quickly if the market settles deep in the yellow zone.
Summary
In summary, I expect that the market mechanism with Dynamic Pricing alone should be sufficient to balance supply and demand on the network & the Storage Emissions as described are unnecessary and possibly harmful.
To me, the economic rationale given in the Whitepaper felt more like an attempted rationale to explain the 70% emissions, rather than the 70% emissions being a solution to clear problems.
Issuance of 70% of the eventual token supply is a huge event, and I feel the genuine and clear rationale should be given to justify such a significant action. What is given seems highly unsatisfactory (though of course, I could just be wrong!)
One rationale for the 70% emissions that makes sense to me is the justifiable ethical / ideological thinking that early investors should control 100% of the initial supply & not face dilution, but that most of the token supply should emerge through rewards to those who contribute by running nodes.
If something along these lines is the true rationale, I’d like to see it laid out clearly, rather than what is, in my view weak economic reasoning for a huge supply dilution.
Anyway, those are my long-winded thoughts on the Storage Emissions described in the White Paper.
I hope it makes sense, and provokes some good discussion even if my thinking turns out to be all wrong 
Edit: further along in this discussion, my thinking has moved on from; ‘how to optimise emissions distributions to nodes to avoid pitfalls’, to; ‘Allocating emissions to nodes is unnecessary, where could the huge value of emissions be allocated to far greater effect?’
