Crypto-models To Overcome Inflation and Callisto Network's Approach
The following is the first of a series of articles we plan to publish for the community to understand how we see the burning mechanisms to be implemented in Callisto Network. In this first article, we give an abstract description with more specific articles following.
These days, inflation has been heard more than ever, with consumer prices rising explosively last month, growing at a rate comparable to the pandemic year. Over June 2022, inflation in the USA reached 9.1 percent, representing the highest rate since November 1986. Around the world, people are witnessing the unexpected effects of inflation as they see their buying power shrink day by day.
US Inflation Rate
An extensive discussion takes place in crypto communities about ways to decrease inflation. The vast majority of the crypto projects were designed inflationary for a very long period, which in many cases exceeds a century, to ensure the support of the mining communities that secure the network by providing processing power.
EIP-1559 Burning Mechanism
Ethereum, with EIP 1559, introduced a burning mechanism that, besides reducing inflation, which can lead to deflation, also ensures the network's stability by burning a large portion of the transaction fees. Another advantage of this mechanism is that it provides a simple, economical method that further increases the network's security as it is necessary for a collusion-proof design that prohibits users from inappropriate actions.
A similar discussion is taking place in the Luna Classic Community to decrease the coins that were minted during the recent collapse. Thus, Terra Governance token holders have voted to implement a relatively rare tax of 1.2% for on-chain transactions to limit the rapid increase in token supply. Although this might seem like an attractive deflationary mechanism in the event of high inflation, burning coins at the users' expense may be a barrier to widespread adoption.
Another example of a burning mechanism is the model followed by Binance, the largest exchange at the time of writing. Depending on its profitability, Binance burns coins quarterly or semi-annually, until 100 million BNB are destroyed.
While the above mechanisms can significantly reduce the total number of coins in circulation, they are static. Moreover, in the case of ethereum, they can further increase the transaction cost, which can be prohibitive for new entrants and thus limit network expansion.
Callisto Network plans to go further than existing solutions by implementing a stability mechanism to control parameters such as block size and transaction cost.
Similarly to Ethereum, the burning mechanism will introduce a minimum fixed transaction fee (base fee), taking advantage of Callisto Network's significantly lower transaction fees compared to any other smart contract blockchain.
Layer 1 offers a high level of security for transactions, and users who wish to prioritise their transactions can pay an additional fee which will be distributed to the miners.
In general, the minimum transaction cost of the PoW blockchains increases over time. The underlying assumption is that the total space available in layer 1 is limited, and the number of transactions on the network will increase over time. As more transactions compete for block space, the cost per transaction will increase.
A significant advantage of Callisto approach is that by increasing the PoW throughput and ultimately reaching the 3 billion coin target it will decrease the cost of transaction as long as blockchain usage is high and the transaction costs that are burned surpass the newly minted coins. This low cost transaction will further increase the Callisto Network adoption.
In the following figure, we can see the effective CLO emission over time according to 2 scenarios. One for the current block size (5M gas) and one for 10M gas. We also considered a scenario where the blocks are, on average, 50% utilized and a maximum scenario where the blocks are fully used over time. Additionally, we assumed a 3% increase in transaction costs every year, given the higher utilization of the blockchain. Again, the Callisto Network's transaction is the cheapest in the PoW market.
Note: The Callisto Network ecosystem is rapidly expanding with a growing number of applications being deployed in a coherent manner. Specific burning methods for applications are also being evaluated to increase the burn rate further.
Considering the technological improvements made over the last decade in the underlying computing and network infrastructure, it becomes clear that proof of work-based networks can process larger blocks without any limitations in disseminating blocks in the network and decentralization. In this direction, Buterin's EIP 4488 proposal, which allows block sizes to be increased up to 4 MB, has recently come to light.
In practice, this means that more transactions can be included per block, and thus more fees can be burned into each block. Considering that the current Callisto Network’s block size is relatively small, there is considerable potential for optimization in this respect.
An essential advantage of Callisto Network is that it offers the lowest transaction fees of all major Proof of Work blockchains (less than 1000 times than the Ethereum Classic fees). In addition, Callisto Network is continuously elevating the market standards for security and insurance through the respective mechanisms guaranteeing the smart contracts safety and compensation in case of loss or hacking.
Finally, the dynamic monetary policy ensures the Cold Staking long-term sustainability. Indeed, with a static monetary policy, the rewards of cold staking become minimal over time. With the proposed approach, cold stakers are rewarded in several ways, with higher rewards as the use of the Callisto Network increases.