# Concepts

# Inflation

In a Proof of Stake (PoS) blockchain, inflation is used as a tool to incentivize participation in the network. Inflation creates and distributes new tokens to participants who can use their tokens to either interact with the protocol or stake their assets to earn rewards and vote for governance proposals.

Especially in an early stage of a network, where staking rewards are high and there are fewer possibilities to interact with the network, inflation can be used as the major tool to incentivize staking and thereby securing the network.

With more stakers, the network becomes increasibly stable and decentralized. It becomes stable, because assets are locked up instead of causing price changes through trading. And it becomes decentralized, because the power to vote for governance proposals is distributed amongst more people.

# Evmos Token Model

The Evmos Token Model outlines how the Evmos network is secured through a balanced incentivized interest from users, developers and validators. In this model, inflation plays a major role in sustaining this balance. With an initial supply of 200 million and over 300 million tokens being issued through inflation during the first year, the model suggests a exponential decline in inflation to issue 1 billion Evmos tokens within the first 4 years.

We implement two different inflation mechanisms to support the token model:

  1. linear inflation for team vesting and
  2. exponential inflation for staking rewards, usage incentives and community pool.

# Linear Inflation - Team Vesting

The Team Vesting distribution in the Token Model is implemented in a way that minimized the amount of taxable events. An initial supply of 200M allocated to vesting accounts at genesis. This amount is equal to the total inflation allocatod for team vesting after 4 years (25% * 1B = 250M). Over time, unvested tokens on these accounts are converted into vested tokens at a linear rate. Team members cannot delegate, transfer or execute Ethereum transaction with unvested tokens until they are unlocked represented as vested tokens.

# Exponential Inflation - The Half Life

The inflation distribution for staking, usage incentives and community pool is implemented through an exponential formula, a.k.a. the Half Life.

Inflation is minted in daily epochs. During a period of 365 epochs (one year), a daily provision of Evmos tokens is minted and allocated to staking rewards, usage incentives and the community pool (epochProvison). The epoch provision doesn’t change within a period and its cummulated amount per period is equal total inflation per period (epochProvision * epochsPerPeriod = periodProvision).

At the end of each period , the epoch provision is recalculated with the calculation below:

Copy periodProvision = exponentialDecay * bondingIncentive f(x) = (a * (1 - r) ^ x + c) * (1 + maxVariance - bondedRatio * (maxVariance / bondingTarget)) epochProvision = periodProvision / epochsPerPeriod where (with default values): x = variable = year a = 300,000,000 = initial value r = 0.5 = decay factor c = 9,375,000 = long term supply bondedRatio = variable = fraction of the staking tokens which are currently bonded maxVariance = 0.4 = the max amount to increase inflation bondingTarget = 0.66 = our optimal bonded ratio Copy Example with bondedRatio = bondingTarget: period periodProvision cumulated epochProvision f(0) 309 375 000 309 375 000 847 602 f(1) 159 375 000 468 750 000 436 643 f(2) 84 375 000 553 125 000 231 164 f(3) 46 875 000 600 000 000 128 424