During the months that have preceded the Shelley mainnet a discussion about the parameters that are ruling the blockchain was in progress.
Even if the focus was mainly on a0, k and d parameters, IOG researchers were also analyzing the right mix of tau, the parameter that sets the treasury taxation applied to the epoch reward pot, and rho, the expansion rate of the circulating supply.
At the beginning IOG researchers were evaluating to set tau parameter to 5% (0.05) and let unclaimed rewards to flow to the treasury as well.
But then they realized that unclaimed rewards were expected to be a huge amount of ADA due to the possibility, then confirmed, that the average pool pledges would have been quite low compared to the pool saturation point and, due to the effect of a0 parameter, a consistent amount of rewards would not be distributed.
So, in order to mitigate an excessive transfer of ADA from the reserve to the treasury, they decided to update these rules.
Few weeks before the Shelley mainnet launch they chose to set the treasury tax (tau) to 20% and to change the destination of unclaimed rewards from treasury back to the reserve for the benefit of both delegators and pool operators.
This decision however has a side effect that I would like to highlight, not with the scope to criticize that decision but, firstly, to understand if it’s expected or not and then, if unexpected, how to fix it in a way as fair as possible.
Since epoch 211, when the first rewards of epoch 209 have been distributed, I noticed that the epoch reward pot has been roughly split in rewards, treasury tax and unclaimed rewards through following percentages:
- Treasury Tax 20%
- Rewards to delegators and pools 30%
- Unclaimed Rewards 50%
At the moment in ADA we are roughly talking about:
- Total Reward Pot 39.1M
- Treasury Tax 7.8M ada
- Rewards 11.8M ada
- Unclaimed Rewards 19.5M ada
As you know the treasury tax applies before the reward calculation and distribution, so the whole epoch reward pot is taxed first.
The consequence is that the 50% that goes back to reserve is affected by a double taxation (20% + 20%).
But, except the first round of reward distribution, it also means that all ADAs that compose the reserve will be affected by double taxation sooner or later, because the 50% of unclaimed rewards that is taxed and then sent back to the reserve will be taxed again, at the moment it will be used to pay delegators and operators as you can see in the simple schema below.
The result is that every 50% of the reward pot is taxed by 20% so treasury taxation is actually 40%.
My question is: is the treasury tax rate of 40% expected?
Maybe yes, maybe it’s good for the whole ecosystem, but in case it’s a collateral effect in an attempt to distribute more rewards to delegators and SPOs I foresee two possible options to remedy the situation.
The first one is to decrease the treasury tax parameter tau from 20% to 10% in order to reach the expected and desired 20%.
The second one, more complex, consists on applying the treasury tax only to the distributed rewards instead of to the whole reward pot.
I think that connected to this topic other ones could be approached.
For example, if we decide to increase a0 in order to increase the importance of the pledge we need to face the side effect of a decrease of ROI because the reward cut due to a higher a0 will be more severe.
The savings, as result of a decrease of treasury taxation from 40% to 20%, could be used to sustain the cost of an increase of a0 parameter in order to preserve the current ROI percentages, for example.
That’s all, I hope my post will start a constructive discussion.
I take this opportunity to thank Antonio [CSP] and LordWotton [RIOT] for their support on developing the topic and reviewing the draft.