Viktor Bunin, Bison Trails’ Protocol Specialist, recently submitted a Livepeer governance proposal to help sustain the network until it gains greater adoption. We believe this is an important governance proposal. It’s also the first governance proposal from Bison Trails.

We asked Viktor to provide context on the necessity of the inflationChange parameter proposal and why we’re hopeful the Livepeer community considers—and ultimately decides to support—the update.

Q: Why is Livepeer’s inflation rate “unsustainable” for infrastructure providers, transcoding customers, and the network. What’s going on?

A: Currently, there are almost no fees earned on the Livepeer network. Infrastructure providers on the network are supported almost entirely by Livepeer’s inflationary rewards. With inflation trending towards zero, infrastructure provider revenues will also approach zero, which will make supporting Livepeer financially unsustainable for node operators.

Building multi-sided marketplaces like Livepeer is notoriously difficult because both sides must be at the table at the same time and in sufficient numbers. Extremely low or zero inflation can significantly reduce an infrastructure provider’s incentive to make transcoding services ready and available to the network.

At an inflation rate of zero, professional infrastructure services are unlikely to be provided, so when demand finally arrives, there will be limited supply available. Startups often solve this with VC dollars—subsidizing one side—until sufficient scale is achieved and monetization begins. In Livepeer, this subsidy takes the form of inflation. Removing it before there’s adoption does not benefit the network. Furthermore, the immense amount of inflation to date went to non-GPU node providers, so the folks that need the subsidy least are the ones that got the most.

Q: Why should the community adopt the proposal? Why now?

A: Livepeer pioneered staking rate based inflation targeting. As the protocol continues to grow, the role of inflation remains the same: subsidize infrastructure providers until fees are sufficiently high and consistent enough to enable sustainable orchestrator and transcoder businesses.

Livepeer's inflation is scheduled to hit 0% in late 2020. Since the network has not experienced sufficient adoption yet—11 ETH were earned by all nodes in the last ~6 months—a 0% rate of inflation will make running infrastructure on Livepeer financially unsustainable and impede further adoption.

The proposed update to Livepeer's monetary policy would account for network realities and extend the runway for Livepeer to establish a self-sustaining fee market.

Q: Why not wait for the Participation rate (currently 67%) to fall below the target staking rate (50%)?

A: This argument currently suffers from the "tragedy of the commons." 3.8m LPT tokens (17% of the supply) would need to be unbonded in order to get the Livepeer participation rate below the target staking rate. We have not seen unbonding at this scale for any network, other than those that were failing or imploding. Even if this many tokens were successfully unbonded, what will happen to them? There is not nearly enough liquidity for the market to absorb them.

Looking at other networks, we have not seen significant changes in the participation rate as the inflation rate approaches its lowest bound. This is true for networks like Cosmos, where the inflation has been at the minimum value of 7% for months. It is also true for Kusama, where the participation rate continued rising past its target rate, which decreased inflation from 10% to 3%. As the rate fell, governance changed the target staking rate from 50% to 75% to account for this higher than expected staking.

Q: What happens next? How does voting on a proposal like this work on Livepeer?

A: This proposal is currently open to the community for comment on the Livepeer Improvement Proposal (LIP) Github issues list. Community feedback is essential to improve the proposal and address any anticipated issues.

Monetary policy changes are contentious; the proposal is simultaneously being discussed on LIP governance calls and in the Livepeer Discord. After a period of feedback, Bison Trails will work with the Livepeer team to create an implementation of the code changes required to implement the proposal. Once created and reviewed, it will be put up for a vote by token holders (quorum of 33%), where a simple majority must vote for the proposal to implement it.

Q: What if the community doesn’t adopt the proposal?

A: Then we get to experiment! The inflation rate will continue falling towards 0% as long as the participation rate (currently 67%) remains above the target staking rate (50%). We think it is highly unlikely that 17% of tokens will stop participating in the next few months and expect to hit 0% inflation in December. This event will force infrastructure providers to stop supporting the network as they’d be running their transcoders at a loss.

Q: This proposal is the first governance proposal from Bison Trails. Why start now?

A: Livepeer is one of the very first networks Bison Trails supported, starting with very active participation in the Merkle Mine, Livepeer’s token distribution mechanism. We love the protocol and the team, and we want to do our part to help. We see monetary policy as a critical issue for Livepeer to address at this time. We strongly believe that swift action is warranted to help the Livepeer team realize their vision and for the network to achieve greater adoption.

View the inflationChange parameter proposal on github. Learn more about Livepeer.