Some Takeaways from Yellow Paper: Part III

ICON has finally released the long-awaited Part III of its Yellow Paper, a detailed explanation of the network’s Incentives Scoring System (IISS).

If you found it a bit difficult to understand, you were not alone. The paper reads a bit like the unholy spawn of a computer science thesis and a US Federal Reserve report. Chock full of numbers, tables and mathematical equations, it’s an intimidating document, one that leaves you with little doubt as to why the system runs on artificial intelligence.

Thankfully, ICX Station San Francisco’s Daeki Lee and Scott Smiley and ICON’s Ricky Dodds have readied a very helpful overview of the IISS. Just seven slides, the overview does a great job explaining the system in plain language, with plenty of helpful bullet lists and examples. If you’re planning to stake in ICON, read it now.

Rewarding active involving

As the Yellow Paper explains, the IISS is an artificial intelligence-based assessment system that accurately measures one’s contribution to the ICON network, the philosophy of which is embodied by the Delegated Proof of Contribution (DPoC) governance model, a model that creates an environment that encourages innovation and progress through unbiased and quantifiable reward policies.

“With such a model in place, each network participant can be assured that their contribution is immutable, provable, and fairly weighted against that of another ICONist,” writes the Yellow Paper. “Each ICONist also has the right to delegate their contribution to whatever entity they see fit. This system has been designed to motivate each individual to act in accordance of traditional economic principles, where those that contribute most to society are rewarded accordingly.”

With this aim in mind, the IISS rewards “active” staking.

If you hold, say, 10,000 ICX, you can stake all 10,000 ICX in three categories simultaneously – in Reps, who produce and verify the network’s blocks; in Ecosystem Expansion Projects (EEP), which grow the network; and in DApps. An “active” staker adjusts its stake as the situation demands. “Passive” stakers, on the other hand, never change their initial stakes, even if the DApp or EEP projects in which they staked fails. By neglecting to adjust their stakes to changing circumstances, the staker loses out on rewards. In this way, the system encourages active participation.

Reward rates are still unset

Some of the examples in the Yellow Paper (and overview) include hypothetical rates of return – the one in the Yellow Paper uses a 9% annual return rate, while that in the overview uses a 12% rate.

These are nothing more than hypotheticals, however. The actual rates of reward have yet to be set. We can’t stress this point enough.

The P-Reps – the representatives who represent the interests of the entire ICON network – determine the staking reward rates, taking into account factors such as the reward rates of other networks. The P-Reps, however, have yet to be elected. No P-Reps means no reward rate. Talk to the contrary is just speculation.

Monetary policy can and will shift

Once they are elected, P-Reps can also shift the ICON Network’s monetary policy in accordance with the network’s needs.

In particular, during the network’s growth phase, monetary policy will focus on attracting new users to the network using higher rewards for staking. Once the network is nice, big and stable, monetary policy will shift towards growing specific sectors, pursuing certain policy goals and incentivizing spending over saving, i.e., staking. Accordingly, the P-Reps could lower staking reward rates to incentivize more transactions.

If this sounds a lot like how the US Federal Reserve or national central banks adjust interest rates to promote saving or spending, it should.