PIP-41: Introducing a Deflationary Mint Mechanism for Shannon Tokenomics

Proposals Improvements
1

Summary

This proposal introduces an initial and reducible 97.5% mint ratio to Shannon tokenomics, ensuring POKT achieves measurably deflationary supply dynamics. By minting only 97.5% of application burns, 2.5% of all relay-driven token flow is permanently removed from supply—creating clear, on-chain deflation that scales with network usage. As the token value grows, the mint may be further reduced to more rapidly decrease the total supply.

Authors

  • Jinx (Chris Jenkins)

Revision Notes

This revision incorporates community feedback from @RawthiL, @msa6867, and @Cryptocorn on the original pre-proposal. The primary change is adoption of a simplified implementation approach that achieves the same deflationary outcome with reduced code complexity and cleaner parameter values.

Motivation

The Current State

Shannon introduced the mint = burn mechanism where tokens burned by applications are matched by equivalent minting for network participants. While this achieves supply neutrality under ideal conditions, POKT remains slightly inflationary due to the global Mint TLM parameters producing fractional inflation even at minimal values

This fractional inflation undermines our ability to market POKT as a truly deflationary asset. “Mostly neutral with tiny inflation” is categorically different from “definitively deflationary.”

Why This Matters

  • Investor confidence: Clear deflationary mechanics create buy pressure from both speculation and utility

  • Exchange relationships: Listings and continued support depend on healthy token economics

  • Marketing narrative: “Burns 2.5% of every relay” is infinitely more compelling than “roughly neutral tokenomics”

  • Price floor mechanism: At lower POKT prices, more tokens are burned per dollar of relay fees, creating natural price support

Specification

Implementation Approach: Reduced Mint Ratio

Based on community discussion, this proposal adopts the mint ratio reduction approach rather than adding a burn allocation entity. This method:

  • Requires minimal code changes (single parameter adjustment)

  • Achieves true supply reduction (unminted tokens never exist)

  • Avoids creating a superfluous “burn” actor in the distribution

  • Maintains clean, easily communicable parameter values

Current Parameters

{
  "mint_ratio": 1.0,
  "mint_allocation_percentages": {
    "dao": 0.05,
    "proposer": 0.14,
    "supplier": 0.78,
    "source_owner": 0.03
  }
}

Proposed Parameters

{
  "mint_ratio": 0.975,
  "mint_allocation_percentages": {
    "dao": 0.045,
    "proposer": 0.14,
    "supplier": 0.79,
    "source_owner": 0.025
  }
}

How It Works

Data Request
    │
    └── Application burns CUPR (e.g., 100 POKT worth)
            │
            └── TLM Mints 97.5% of burn (97.5 POKT)
                    │
                    ├── 79.0% → Supplier (77.03 POKT)
                    ├── 14.0% → Proposer (13.65 POKT)
                    ├── 4.5% → DAO (4.39 POKT)
                    └── 2.5% → Source Owner (2.44 POKT)
                    
            └── 2.5% NEVER MINTED (2.5 POKT permanently removed from supply)

Parameter Changes Summary

Parameter Current Proposed Rationale
Mint Ratio 100% 97.5% Creates 2.5% net deflation
DAO 5.0% 4.5% Slight reduction, offset by token appreciation
Proposer 14.0% 14.0% Unchanged—protects validator economics
Supplier 78.0% 79.0% Slight increase—protects node runner incentives
Source Owner 3.0% 2.5% Reduction to underutilized allocation

Net Impact on Recipients

For every 100 POKT burned by applications:

Entity Before (100% mint) After (97.5% mint) Net Change
Supplier 78.00 POKT 77.03 POKT -1.24%
Proposer 14.00 POKT 13.65 POKT -2.50%
DAO 5.00 POKT 4.39 POKT -12.2%
Source Owner 3.00 POKT 2.44 POKT -18.7%
Supply Reduction 0 POKT 2.50 POKT ∞

The allocation adjustments deliberately protect suppliers and proposers (the active network participants) while the DAO and source_owner allocations absorb proportionally more of the deflationary impact.

Code Changes Required

The implementation is localized to a single location in the Token Logic Module:

// In tlm_relay_burn_equals_mint.go

// Current implementation (line ~114):
tlmbem.tlmCtx.SettlementCoin = settlementCoin

// Modified implementation:
mintRatio := tlmbem.tlmCtx.TokenomicsParams.MintRatio // Initially 0.975
adjustedAmount := settlementCoin.Amount.ToLegacyDec().Mul(mintRatio).TruncateInt()
tlmbem.tlmCtx.SettlementCoin = sdk.NewCoin(settlementCoin.Denom, adjustedAmount)

The existing distribution logic then operates on the reduced mint amount with no changes required to distribution code.

Governance Transaction

{
  "@type": "/poktroll.tokenomics.MsgUpdateParams",
  "authority": "<dao_authority_address>",
  "params": {
    "mint_ratio": "0.975",
    "mint_allocation_percentages": {
      "dao": "0.045",
      "proposer": "0.14",
      "supplier": "0.79",
      "source_owner": "0.025"
    }
  }
}

Economic Analysis

Current Network Metrics

Metric Value
Daily Relays 150-250M (avg ~200M)
Daily CU Usage 400-600B (avg ~500B)
CUTTM ~100,000 pPOKT (at ~$0.01 POKT)
Daily App Burn ~50,000 POKT

Deflationary Impact Projections

With 2.5% mint reduction at current traffic levels:

Timeframe App Burn Net Supply Reduction
Daily ~50,000 POKT ~1,250 POKT
Monthly ~1.5M POKT ~37,500 POKT
Annual ~18.25M POKT ~456,250 POKT

Annual supply reduction: ~0.019% of total supply at current traffic levels.

Scaling with Traffic Growth

Daily CU Usage Daily App Burn Annual Net Burn % of Supply
500B (current) 50,000 POKT 456K POKT 0.019%
1T 100,000 POKT 912K POKT 0.038%
2.5T 250,000 POKT 2.28M POKT 0.095%
5T 500,000 POKT 4.56M POKT 0.19%
10T 1,000,000 POKT 9.12M POKT 0.38%

Price Sensitivity

The USD-pegged CU pricing means burn quantity varies inversely with POKT price:

POKT Price CUTTM (approx) Daily Burn Annual Net Reduction
$0.005 200,000 pPOKT 100,000 POKT 912K POKT
$0.01 100,000 pPOKT 50,000 POKT 456K POKT
$0.05 20,000 pPOKT 10,000 POKT 91K POKT
$0.10 10,000 pPOKT 5,000 POKT 46K POKT

This creates natural price support: Lower prices → more POKT burned → greater supply reduction → upward price pressure.

Rationale

Why 97.5% Mint Ratio (2.5% Deflation)?

  1. Conservative starting point: Allows data-driven increases via future governance

  2. Minimal stakeholder impact: Suppliers see only ~1.24% reduction in rewards

  3. Clear narrative: “2.5% of every relay burns tokens” is simple and compelling

  4. Foundation sustainability: PNF remains the largest network consumer; aggressive burns could squeeze operational runway

Why This Implementation Over Burn Entity?

Per community feedback from @RawthiL:

“The burn is implicit in the minting step… Total supply is reduced (some coins ceased to exist, less coins were minted into existence).”

And @msa6867:

“Option A is not particularly elegant. We just burned POKT from app usage; why follow this with mint directly to a burn wallet… just mint less in the first place.”

Benefits of reduced mint ratio approach:

  • True supply reduction: Unminted tokens never exist (vs. minting then burning)

  • Simpler code: Single parameter change vs. new distribution entity

  • Cleaner accounting: No burn wallet balance to track or explain

  • Ecosystem consistency: All dashboards and tooling work unchanged

Why These Allocation Adjustments?

The allocation changes (Supplier 78%→79%, DAO 5%→4.5%, etc.) are designed to:

  1. Protect active participants: Suppliers and proposers see minimal net impact

  2. Absorb from reserves: DAO and source_owner take proportionally larger reductions

  3. Maintain clean numbers: All values use at most one decimal place

Future Adjustability

The mint ratio can be adjusted via governance as conditions evolve:

Scenario Action
Token price increases significantly Consider increasing burn (lower mint ratio)
Network usage grows substantially Data supports higher burn rate
Supply reduction insufficient for narrative Increase burn rate
Economic stress on participants Can reduce burn rate if needed

Recommended approach: Start at 97.5%, evaluate quarterly, adjust in 0.5% increments based on network health metrics.

Backwards Compatibility

This proposal:

  • Does not alter existing claim/proof mechanics

  • Does not change relay pricing (CUTTM, CU per relay)

  • Does not affect staking requirements

  • Requires no changes to existing integrations

Security Considerations

  1. Integer precision: Ensure mint ratio multiplication doesn’t create dust accumulation

  2. Parameter validation: Mint ratio should be constrained to reasonable bounds

  3. Governance safeguards: Large changes should require elevated consensus

Test Cases

  1. Basic reduction: Verify mint = 97.5% of burn

  2. Distribution accuracy: Confirm allocation percentages apply correctly to reduced mint

  3. Zero traffic: No mint occurs when no relays processed

  4. High volume: Test at 10T+ CU levels for integer handling

  5. Parameter bounds: Governance rejects mint_ratio outside valid range

Implementation Timeline

Phase Duration Activities
Discussion 1 week Final community feedback
Implementation 1 week Code changes, unit tests
Testnet 1 week Deployment and validation
Governance 1 week Proposal submission and voting
Mainnet — Activation upon next release

Summary

This proposal achieves true deflationary tokenomics for POKT through a simple mechanism:

Mint 97.5% of what applications burn.

The result:

  • 2.5% net deflation on every relay

  • Scales with usage: More traffic = more deflation

  • Protects participants: Suppliers see only ~1.24% reduction

  • Simple narrative: Easy to explain to investors and DAO members

  • Minimal code changes: Single parameter adjustment

Combined with Shannon’s burn-to-pay model, this positions POKT as one of the few DePIN tokens with genuinely deflationary economics tied directly to real utility.

References

This proposal incorporates feedback from @RawthiL, @msa6867, @Cryptocorn, @TracieCMyers, @tony, and other community members.

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