ICON DPOS (Delegated Proof Of Stack), Incentive Explained
Today I'm going to explain in detail what DPOS is and how it fits into the puzzle of ICON's incentive system. I will try to keep this article as ELI5 as possible, feel free to open up a discussion at the channel for detailed explanation.
This has been raised in our telegram group quite often recently, people are interested to find out if keeping ICX within the network will be inflationary or deflationary (ie, will there be enough incentives to keep up with potential 20% additional annual issuance). Many want to run masternodes to yield better returns from the network, but masternodes actually do not exist in our ecosystem. Instead, ICON uses a Delegated Proof of Stack system. Let's first take a brief look at what masternodes are,
Masternodes are full nodes setup to keep the network healthy and serve particular functions within the network. For instance, in the case of Dash, masternodes gain rights to perform tier-2 functions like InstantSend, PrivateSend, run Dash's treasury system, governance voting etc. Masternodes essentially offer the opportunity of both yield and the potential for capital gains.
Again in the case of Dash, creation of masternodes require locking 1000 DASH in a local wallet, so users can setup to host a masternode, yields are dependent on a few factors, primarily masternode count. Actual calculation of yields can be found here DashTV. This is another common misconception that you're being paid to lock a certain amount of tokens, but in fact you're paid to provide services to the network. Tokens aren't exactly staked because you can never lose any during your service, unless of course you decide to attack your own network but then it is going against your own interest and will require insane amount of money (80%+ MNs), so in a sense this is proof of commitment.
A delegate is simply a node (user) tasked to verify transactions on the network. As a reward, delegates will receive x amount of tokens along w transaction fees within their block. The idea of delegates in a DPOS system is that they will forge or mint new blocks w their verifying rights on transactions, then rewarded for the effort. In traditional POW system, blocks are mined and miners are rewarded for their hash-power (and luck!).
Some fundamental flaws under DPOS include potential centralization where minority dictate the fate of majority, and 'nothing at stake problem' where delegates cannot be financially penalized besides losing their role. Solutions such as Futarchy governance model to penalize voters for their elected delegates' misbehavior, or forcing delegates to stake (but then this becomes POS all over again). These are topics worth exploring but is beyond the scope of this discussion, so I'll only briefly mention here.
While a delegate serves similar functions to a masternode, the key difference here is that becoming a delegate takes a very different approach.
How to become a delegate
Becoming a delegate is quite different from running a masternode, where you can simply stake and lock a certain amount of tokens to secure one. Becoming a delegate is more like running a project where you'll need to write proposals, you'll need coding and scripting skills, you'll need to provide certain level of security, you'll need to market and gain users (votes) etc.
A common scenario in DPOS systems, delegates create proposals for why you should vote for them, example Ark Delegates, where most delegate candidates propose profit sharing structure in order to gain votes. This is however a lot more complex in ICON with many more components as a super chain. In order to clarify this, lets try a real life example
Litecoin as a community joins ICON interchain, Charlie Lee is the C-Rep for Litecoin.
Roger Ver on the other end, brings Bitcoin Cash to ICON, a C-Rep of BCH. Now we have both LTC and BCH in ICON Republic, these communities are grouped to 'Fast Crytocurrency Payments'.
Charlie and Roger, as C-reps of their respective community, are now essentially two nodes within the Nexus in a Representation Channel. Operational policies are then proposed and selected by voting within the channel (this will be similar to electoral college, allocation of number of votes are in proportion to community size and transaction scale, this reinforces the status of relatively small communities).
In Nexus, there's also a channel called Public Channel, as the name suggests, anyone can participate in the Public Channel. You can participate by running light clients that only register and confirm transactions (but still economically incentivized) , or you could run full nodes which can actually validate transactions. This is essentially becoming a 'delegate' in ICON, and delegates are chosen (or removed) through voting in the Representation channels.
Now for the sake of this discussion, only Charlie and Roger are in the Representation Channel, and 2infiniti wants to become a delegate. Since Charlie and Roger are never in agreement, but w more votes in Roger's hands, my application is vetoed and I then stay a regular citizen node in this Fast Cryptocurrency Payment DAPP.
Since most people aren't exactly trying to figure out how the system works, but the economic incentives behind this topic, so let's cut to the chase,
So as an ICX holder, what kind of ROI can I expect?
If you want exact numbers, you can't today. Many of the existing projects are able to calculate precise ROI, not as an estimation, but derived from historical data. As ICON main net is still yet to launch, any number now is really just guess work.
So will my ICX appreciate or not?
I'd say the major deciding factor is still market dynamics, ie, supply and demand of ICX tokens among exchanges. Some might argue that how incentive system works will in turn affect the market supply and demand, while this may be true in some cases where people invest into a project for the incentive system in place, but that is rarely the case. What's happening in reality is that people participate in an ICO for its project fundamentals as well as its potential, and in some extreme cases people participate in a pump'n'dump scheme to benefit from price manipulation.
Incentives offered by the network
IISS (ICON Incentives Scoring System), an AI driven algorithm from DAVinCI LABS to continuously analyze relevant data on ICON Republic, with a variety of criteria such as each node's frozen ICX, C-Rep status, ICX exchange volume etc. refer to pg.30 of WP. Incentives are provided automatically through IISS.
Also note that freezing ICX (staking in ICON, which allows ICX to be deposited in the DEX reserve pool), is one of the most significant evaluation criteria of IISS.
Will incentives be enough to cover inflation from additional issuance?
If you read this far, you should know that there are way too many factors and some unknown variables (like actual issuance), your transaction volume and frequency, your role within the network etc, to give a definitive answer.
Incentives are offered to all nodes within ICON through IISS; however, value of ICXs is mostly tied to trading.