Why do tokens exist?

In order to understand why ICX is important in the ICON universe, we should take a step back and understand why tokens exist in the first place.

Simply put, tokens accomplish two key objectives:

Providing an incentive for block validators (the people dedicating computing power and resources) Providing a disincentive to spam the network (since there is a cost to doing so)

As you should know by now, all blockchains require complex mathematical equations to validate each block of data. In order to create an incentive to complete these mathematical equations, something of value must be provided to the “miner.”

ICON is no different. In order for the ICON blockchain to function properly, it requires block creators and validators. Without an incentive to create and validate blocks, individuals wouldn’t go through the hassle of creating and validating; accordingly, tokens exist to do that.

But why do tokens have value?

In the case of ICON, ICX has value because it’s required to access and utilize the ICON network. If other entities demand the use of ICON’s network — because they value its ability to connect one blockchain with another — they will need to purchase ICX in order to pay the fee required to utilize the network. As demand increases from zero, the value of ICX grows, providing continued (and possibly additional) incentives for validators to keep validating.

This is a very basic explanation of the ICX token; however, ICON’s incentive and fee model contains a number of complexities that go well beyond what’s explained above. The model isn’t complex for the sake of being complex; rather, its design is geared toward ensuring the stability and security of the ICON network — a critically important process any serious blockchain must execute.

With that in mind, we will now break down the nuances of ICON’s economic architecture to provide an overall perspective of the ICON economy and how it will ensure the network works as it’s supposed to.

How to Contribute to the Network

At its basic level, ICON’s economic model rewards those who contribute the most to the functioning of the network. Let’s explore how that’s done.

As you may know, there are a number of different economic models within blockchain technology. For instance, Bitcoin utilizes “Proof of Work,” (PoW) while Ethereum utilizes “Proof of Stake” (PoS).

ICON’s model is built around something called “Delegated Proof of Contribution,” (DPoC). The ICON IISS Yellow Paper explains:

“The ICON Network utilizes the Delegated Proof-of-Contribution protocol to quantify ecosystem contributions, which allows for a more precise and decentralized distribution of economic incentives. Without an effective system like Delegated Proof-of-Contribution, valuable network resources could be allocated to entities with misaligned or apathetic interests, thus hindering the growth of the network and diluting the token holdings of ICONists that have made valuable contributions to the network. For this reason, the ICON Network focuses on selecting proven contributors through a delegation process.”

They key mechanism for executing this model? Delegation via staking.

At its basic core, there are two reasons to utilize staking in a cryptoeconomic model:

It allows ICONists to delegate their ICX holdings in order to choose who governs them — voting to generate democratic governance. Those who contribute the most to the network are given rewards for their efforts, providing greater incentive to ensure a functional network.

Here is what the ICON paper points out:

“Delegated Proof-of-Contribution (DPoC) is a decentralized and democratized incentive and governance protocol whereby token holders (ICONists) exercise their right to governance through delegating their stake to those that contribute directly to network growth. By delegating their stake, ICONists elect proven contributors to receive rewards from the network, while at the same time reaping rewards themselves by contributing through stake delegation.”

So how exactly does one contribute to the ICON Network? There are a few ways:

Public Representative (P-Rep)

A public representative, or P-Rep, contributes to the ICON Network through both block validation and participating in governance decisions. According to the IISS paper:

“A total of 100 P-Reps will be elected by ICONists. The top 22 P-Reps (‘Main P-Reps’) will produce blocks, verify blocks, and participate in governance, while the bottom 78 P-Reps (‘Sub P-Reps’) will add further security to the network by storing a copy of the ledger and making themselves available to replace a Main P-Rep if necessary.”

As you likely know by now, P-Reps are elected by ICONists, who delegate their ICX through staking to the candidates they choose. One ICX is equal to one vote. The candidates who rank among the Top 22 in votes received become P-Reps, while those ranked 23–100 become Sub P-Reps.

Ecosystem Expansion Projects

“An Ecosystem Expansion Project (‘EEP’) is a project or activity that can contribute to the growth and expansion of the ICON Network. In order to promote self-development of a decentralized network, the system should be designed in such a way that anyone who is willing to contribute to the development or expansion of the ecosystem can do so without relying on a single development or community group. All EEP Contributors willing to propose a project can submit their project idea on-chain. EEPs include, but are not limited to: ICON Network development, 3rd Party App development, community activities, and education activities.”

Similar to public representatives, ICONists are permitted to delegate ICX to desired EEPs, with the Top 100 EEPs (determined by delegated ICX) being eligible to receive rewards.

DApp Booster Program

“The Decentralized Application Booster Program” (DBP) is a program that selects and rewards DApps to help grow the value of the ICON Network, and all DApps on the ICON Network can register with the DBP and receive delegation from ICONists.”

Like the EEPs and P-Reps, the Top 100 DBPs will be eligible to receive rewards. This creates additional incentive to not only create dApps on the ICON blockchain — to receive rewards — but to also create high-quality dApps, to ensure your project is ranked among the Top 100.

ICONists

As described above, the Top 100 P-Reps, EEPs, and DBPs are determined based on the amount of delegated ICX (aka, votes) from ICONists (anyone who owns ICON). In order to provide an incentive for ICONists to stake their ICX and participate in the democratic process, ICX has created rewards for ICONists who choose to delegate their ICX as well.

ICONists can delegate the same stack of ICX to all three categories. Let’s pretend an ICONist has 10,000 ICX in their wallet. They can delegate 10,000 to vote for 5 of their preferred P-Reps, 10,000 ICX to vote for 8 of their preferred EEPs, and 10,000 to vote for 3 of their preferred DBPs. In each case, they can vote for as many or few candidates in each category as they choose. You can dedicate your entire ICX stake to one candidate in each category, or spread it 150 ways in each category, or any combination in the middle of those two extremes.

If they’d prefer, they can only delegate to elect P-Reps, and choose not to participate in the other elections. However, if that’s the case, they’ll receive rewards only for that category, so it’s unlikely that ICONists would choose to ignore any of the three categories.

Rewards

So we now essentially have four ways an individual can contribute to the ICON Network and receive rewards for doing so:

P-Reps, who essentially run the network; EEPs, who help grow the network; DBPs, who build on the network; ICONists, who vote to choose who serves in the roles above;

So just how — and at what amount — are rewards distributed?

First, you need to be familiar with the term “I_score,” a variable (determined by formula) that is used to mathematically calculate and quantify a contribution to the ecosystem for an individual representative, EEP, or DBP. Here is the explanation from the ICON yellow paper:

“I-Score is a metric used to quantify an ICONist’s contribution to the network. ICONists can use their I-Score to claim ICX rewards at any time from the Public Treasury contract at a fixed rate of 1 ICX = 1,000 I_Score. I-Score is non-transferable between ICONists. All ICONists can obtain I-Score by contributing directly to the ecosystem (by running a P-Rep node, building a popular DApp, or executing an EEP) or by delegating to direct contributors.”

Technically speaking, those receiving rewards do not directly receive ICX. Rather, they are provided with an I_score, which can be exchanged (at a conversion rate of 1,000:1) for ICX within the public treasury (sort of like the “Bank of ICON”).

Calculating I_Score is an exceedingly elaborate and complex process, but understanding it helps understand the entire machinery of the ICON economy. Below, I will attempt to walk you through the I_Score process in a way that is hopefully somewhat easy to understand.

Calculating Network Contribution

The first phase of this process is to measure the overall contribution to the network by each category in aggregate. This is done through a formula (examined below) that seeks to generate a “reward” for each category, which is quantified by using ICX as the unit to determine the amount of contribution to the network from each category (Representatives, EEPs, DApps, and ICONists), per each block generated.

First, let’s meet Bob. Bob has been elected as a P-Rep, meaning his top two responsibilities are to a) produce and validate blocks to add to the ICON blockchain and b) provide on-chain governance. Bob owns powerful and expensive hardware that will be used to perform block creation and validation on the ICON network.

Bob’s friend, Jill, also ran to be a Representative, but did not finish among the Top 22 like Bob, meaning she isn’t a P-Rep, but because she still finished in the Top 100, she gets to be a “Sub P-Rep,” which means she has a responsibility to “add further security to the network by storing a copy of the ledger and making themselves available to replace a Main P-Rep if necessary.”

For their efforts, Bob — and the other 21 P-Reps — will collectively generate both a Block Validation Reward (for the work their computers do), AND a Representative Reward, while Jill — and the other 99 representatives — will only collectively generate the Representative Reward. Again, both reward amounts represent what the entire category has contributed, of which Bob and Jill are a part.

Meanwhile, two of their other friends, Brandon and Susan, have been elected among the Top-100 of EEPs (Brandon) and DBPs (Susan). Brandon has developed a specific proposal to promote ICON in the Southern Hemisphere, and Susan is developing a DApp that will allow golfers to preserve their scorecards on the ICON blockchain. Since their proposals were admired enough to get them elected into the Top 100, they will collectively generate (with their fellow EEPs and DBPs) an EEP Reward and a DBP reward, respectively.

On the other side of the world, we have Michael. Bob, Jill, Brandon, and Susan have never met Michael. However, Michael has 10,000 ICX, and he’s liked all their proposals so much, he’s supporting all of them.

When delegating his ICX to vote for a Representative, he delegated 7,500 to Bob, and 2,500 to Jill.

When delegating his ICX to vote for an EEP, he delegated all 10,000 to Brandon.

When delegating his ICX to vote for a DBP, he delegated all 10,000 to Susan.

Since he took the effort to delegate and vote in each category, he helps generate — along with all other ICONists — a Representative Delegation Reward, an EEP Delegation Reward, and a DApp Delegation Reward.

Understand all these individuals and their roles? Good.

As mentioned, each of these reward values (those in bold), are a way of quantifying — with ICX as the unit of measurement — each category’s overall contribution to the ICON network per block.

All of the rewards these individuals generate will be used to calculate the “reward fund,” which is a mechanism for determining just how much ICX must be distributed during a given payment period as a reward for contributions. In simpler terms, the “reward fund” is basically an invoice to the Public Treasury, saying “here is how much you must pay out, based on the work we’ve done for you.”

So let’s first look at exactly how the reward fund is determined. Here is the yellow paper:

“The determination of the reward fund is the process of calculating the necessary amount of rewards for the entire ecosystem, as defined by DPoC, during the production of each block and sending these rewards to the Public Treasury. The Public Treasury is a fully automated reward fund, operated autonomously by a smart contract deployed on the ICON Network.”

So just how do we calculate each reward described above?

Calculating the Representative Reward

Remember, the Representative Reward is used to calculate the overall contribution to the ICON Network by P-Reps and Sub P-Reps (“Representatives”).

The first step in the calculation is to determine the “Monthly Reward for Representatives.” This is done partly by the representatives themselves. “This variable represents the monthly amount of ICX that is assumed to be required for the operation of the Representative node,” according to the yellow paper.

While all 100 may submit a proposal for what the monthly representative reward should be, only the Top 22 Representative’s proposals will be factored into the calculation, with each proposal weighted by the total amount of ICX that has been delegated to that P-Rep.

That means Bob, as a P-Rep, will get to propose the “Monthly Reward for Representatives,” with his proposal being incorporated into the adopted amount, based on the amount of staked ICX that has been delegated to him. Jill will also be able to submit a proposal, but hers won’t be counted, unless she is bumped into the Top 22 through an increase in the amount of ICX that has been delegated to her.

In other words, Bob personally calculates the amount of ICX required to cover his monthly operating costs (remember, he has that expensive hardware) and profits, and submits that number. The other 21 P-Reps submit their numbers as well. Those numbers are averaged (with weight being determined by the amount of delegated ICX each representative received), with the final number serving as the “Monthly Reward Variable for Representative.”

Wait — but what’s to stop Bob and the other P-Reps from submitting a number that is way too high and far above their actual costs.

A few different mechanisms.

First, if they act unreasonably, P-Reps can simply be voted out by ICONists. If they are seen as too greedy, they can be removed as representatives very quickly as ICONists re-allocate their delegated ICX to other candidates, so they have an incentive to act fairly. According to the yellow paper, when Bob is elected as a Representative, he is elected to a “term” (just like in most real-life democracies), which lasts 43,120 blocks (this is about 24 hours). That means, if he acts maliciously and is removed as a Representative, he will not receive an additional term, meaning his role as a Representative will last 24 hours or less (approximately).

Second, the “Monthly Reward for Representatives” cannot increase beyond 20% relative to the prior term. So, if the number was 50,000, the most it could increase it from one term to the next is 10,000.

Third, the variable rate for all three categories cannot lead to annual inflation amount greater than 14%.

So, now that we have the number, what do we do with the Monthly Reward Variable for Representative?

Let’s assume, after all representatives submit their proposal, the average submissions of the Top 100 representatives — weighted by stake — is 50,000 ICX. This number is supposed to represent what it costs to run a node and hire people to serve on a P-Rep team. ICON refers to this number as “irep”. Based on the formula ICON has created, we take 50,000 and divide it by two, which in this case equates to 25,000. We then multiply that number by the total number of P-Reps (100), which equals 2,500,000. Finally, we multiply that number by (1 ÷ 1,296,000). This last step is important. The “Monthly Reward for Representatives” is calculated by the Representatives based on their monthly costs. However, reward values are calculated every block. So this last part of the equation is geared toward extrapolating a monthly variable into a “per block” variable, since every 30 days the network generates approximately 1,296,000 blocks

After all that math, the total is 1.929 ICX as the Representative Reward for that block. Again, this amount represents the quantified contribution amount made by Representatives to the ICON Network.

The same formula applies to determine the Block Validation Reward, except instead of multiplying by 100, we multiply by 22, which represents the number of P-Reps. Based on the outcome of the formula, that number is .4244 ICX.

Like Representatives, EEPs and DBPs also have a “Monthly Reward Variable for EEP” (ieep) and “Monthly Reward Variable for DApp” (idapp). These are calculated at a fixed rate of 25% of whatever the “Monthly Reward Variable for Representative” is set at. So if the “Monthly Reward for Representatives” variable is set at 50,000, Brandon (EEP) and Susan (DBP) would be set at 12,500. The formulas to determine their EEP Reward and DBP Reward are similar to Bob and Jill’s:

Based on these formulas, the EEP Reward and the DApp Reward will both equal 0.9645 ICX.

So we now have three of the rewards that help determine the overall amount for the reward fund.

To generate the other three variables, we have the Representative Delegation Reward, EEP Delegation Reward, and DApp Delegation Reward.

Remember Michael, our ICONist who had delegated his 10,000 ICX? These are the rewards he (and his fellow ICONists) will collectively generate for staking their ICX. This reward is calculated dynamically based on the total amount of ICX delegated across the three categories. Here is how the yellow paper explains this calculation:

“If delegation rates are low within a specific category, the reward rate will be higher, thus incentivizing more ICONists to participate in the delegation process for that category. Conversely, if delegation rates are high within a specific category, ICONists will be incentivized to delegate their ICX to other categories within the ICON Ecosystem. Annual Delegation Reward Rates vary from a minimum of 2% to a maximum of 12% per category depending on the amount of ICX delegated for each category.”

That means, hypothetically, ICONists in aggregate might delegate their ICX at a very high rate to P-Reps, meaning their reward rate would be lower, while they delegate their ICX at lower rates for EEPs and DApps, meaning the reward rates are much higher. In practice, I anticipate the amount of fluctuation between categories will be minimal, as most ICONists will want to maximize their overall returns.

The exact formula to determine the reward rate is very complex but can be found on page 22 of the yellow paper, for those who are feeling ambitious. (In addition, Brian Li of Rhizome has developed an ICX Staking calculator to estimate annual returns.)

To determine what the Delegation Rewards are, let’s assume the total delegated ICX amount is 20% of the entire supply of ICX (which is currently 800,460,000). Based on the formula used by IISS, the Representative Delegation Reward, EEP Delegation Reward, and DApp Delegation Reward equals .9645 ICX each, per block.

So now we know what each reward amount is, for each category. To summarize:

Block Validation Reward = 0.4244 ICX

Representative Reward = 1.929 ICX

EEP Reward = 0.9645 ICX

Dapp Reward = 0.9645 ICX

Representative Delegation Reward = 0.7311 ICX

EEP Delegation Reward = 0.7311 ICX

Dapp Delegation Reward = 0.7311 ICX

Total = 6.4757 ICX

That means that, based on the way ICON calculates contribution, the total contribution made by all contributing categories is equal to 6.4757 ICX.

I want to take a moment to point out that the frequency with which these rewards are calculated varies slightly. While the rewards for the Representatives, EEPs, and DApps are calculated every 24 hours or so, the rewards for delegating are calculated at every block (every few seconds). That’s because, with several hundred thousand ICONists potentially delegating their ICX at any given moment, there is much more volatility; when it comes to Reps, EEPs, and DApps, it’s better to have a bit more stability — changing P-Reps every several minutes, for instance, could get a bit chaotic.

So now we know what the reward fund needs to be. For this block, we will be distributing a total of 6.4757 ICX to all contributors on the network. This probably doesn’t seem like much of a reward; but remember, there are 43,120 blocks generated every day. That means, in one day, the network will be distributing 279,232.184 ICX in rewards (assuming the above conditions are in place).

Distributing Rewards

The next step is to determine the I-Score, which will determine who gets how much ICX. Reminder:

“The ICON Network measures the contribution of ICONists to the development of the ecosystem and distributes I-Score. ICONists can exchange I-Score at a fixed rate of 1 ICX = 1,000 I-Score. I-Score is issued only when necessary and is distributed based on the contributions made by each ICONist.”

In order to determine the total amount of I_Score available for distribution per block, one simply needs to multiply the amount sent to the reward fund per block by 1,000.

So, in the above scenario, the amount dedicated to the reward fund was 6.4757 ICX. All we need to do is multiply that by 1,000. So the “pool” of I_Score available to be distributed as a reward to all participants is 6,475.7.

Since Bob is a P-Rep, he’ll be receiving an I_Score formulated around his individual contribution to the network. Remember, in our example above, the total reward generated by all P-Reps is 0.4244 ICX. When multiplied by 1,000, that means the I_Score for P_Reps as a category is 424.4. For reference, here is the I_Score for the other categories, based on our assumptions from above:

Block Validation Reward = 424.4 I_Score

Representative Reward = 1929.0 I_Score

Representative Delegation Reward = 731.1 I_Score

EEP Reward = 964.5 I_Score

EEP Delegation Reward = 731.1 I_Score

DApp Reward = 964.5 I_Score

DApp Delegation Reward = 731.1 I_Score

Total I_Score to be distributed = 6475.7 I_Score

So, then, how is that 6,475.7 distributed to Bob, Jill, Brandon, Susan, and Michael?

First, let’s start with Bob. Let’s assume in this scenario, Bob is the P-Rep who actually produces the block as a node (as opposed to simply validating a block produced by another P-Rep). According to the yellow paper, “When one produces a block, one gets 50% of the block validation reward that is issued per block. When one participates in the block validation, one divides the remaining 50% of the reward issued per block by the number of Representatives who participated in the block validation.”

In other words, Bob receives half the reward for that block score. Had he not produced the block, but validated it instead, he would split the remaining 50% (since the initial 50% went to the P-Rep who did produce the block) with however many other P-Reps helped validate that block.

So let’s assume he produces the block, but doesn’t validate it. That means he receives 50% of the block reward (50% of 424.4 is 212.2). So, at the moment, Bob is entitled to an I_Score of 212.2.

But remember, Bob is entitled to an I_Score from serving as both a P-Rep and a regular Representative (since he’s in the Top 22 and Top 100). Jill is also entitled to the I_Score as a Representative (since she’s among the Top 100).

To calculate the amount both will receive, we have to take the I_Score generated for all Representatives, which was 1929.0.

We take that number and weight it by the percentage of delegated ICX that Bob and Jill each received among the entire group. That’s because the more delegated ICX an individual receives, the more support they have from the ICON community, meaning they should receive greater rewards.

Let’s assume that, when it comes to the entire amount of ICX delegated to all Representatives, Bob has received 2% of this amount, and Jill has received 1%. (So if 1,000,000 ICX has been delegated to electing Representatives, Bob received 20,000, and Jill received 10,000.)

Accordingly, Bob is eligible to receive 2% of the I_Score for all Representatives (which was 1929.0), and Jill will receive 1%. So Bob receives 38.58, and Jill receives 19.29 I_Score.

So now we take Bob’s score of 38.58 and add it to the 212.2 I_Score he received from his efforts as a P-Rep creating a block. He walks away from this block with an I_Score of 231.4. This is a high score, because Bob validated a block, which will happen only (approximately) once every 22 blocks.

Jill, meanwhile, walks away with 19.29.

What about Brandon — who served as an EEP — and Susan, who served as a DBP? They have the same formula as Jill.

Let’s assume Brandon has received 3% of the total amount of delegated ICX to the EEP category, and Jill has received 1% among the DBP category. Brandon is entitled to 3% of the 964.5 (the EEP Reward), meaning his I_Score is 28.93, while Jill is entitled to 9.64 I_Score.

Finally, we have Michael, who has delegated his 10,000 ICX three concurrent ways. To keep it simple, let’s look at just one category: his delegation to Representatives.

Like above, we need to take the amount he has staked, and weigh it by how much Michael’s stake represents among the total amount of staked ICX.

Let’s say that, in total, 100 million ICX are currently being delegated by ICONists to candidates for Representative. Relative to that total, Michael’s 10,000 ICX represents .0001 of all ICX staked in that category. That means, if the Representative Delegation Reward for this block is 731.1, then Michael receives .0731 I_Score.

Remember, assuming the numbers are the same for EEPs and DBPs, he’ll also receive 7.311 I_Score for those two categories, giving him .21 I_Score total.

So here is how they all stand:

Bob = 231.4 I_Score

Jill = 19.29 I_Score

Brandon = 28.93 I_Score

Susan = 9.64 I_Score

Michael = .21 I_Score

Remember: I_Score is exchanged at the Public Treasury for ICX, at a ratio of 1000:1. So when do our friends get their rewards? Here is what the yellow paper says:

“The Payment Period is a concept required to understand the calculation process of I-Score. IISS does not immediately distribute I-Score after each contribution action. Distribution of I-Score instead occurs at the end of the Payment Period.”

According to the yellow paper, each payment period is an interval of 43,120 blocks (approximately 24 hours). To explain how this process works, let’s use a hypothetical calendar as an example.

Let’s take all the above information and fold it into this example. All the “work” being done is being done on January 1st — all the blocks being validated, all the delegation being staked, etc. During the duration of January 1st, 43,120 blocks are generated. On January 2nd, all accumulated contribution activities (from the prior day) are measured and IISS converts them to I-Score. As 11:59pm on January 2 turns to midnight, the I_Score is paid out to all contributors.

So for the entirety of Day 1, you do the work. For the entirety of Day 2, your boss (IISS) calculates just how much work you did. At midnight, he pays you what you’re owed.

Here is ultimately what each will receive for their efforts within this block:

Bob = .2314 ICX

Jill =.01929 ICX

Brandon = .02893 ICX

Susan = .00964 ICX

Michael = .00021 ICX

Multiply those numbers by 43,120 to calculate what they’d receive in a day. Multiply by 1,296,000 to calculate what they’d receive in a month. Multiply by 15,552,000 to calculate what they’d receive in a year. (Note that, if you do run these numbers, Bob’s will be inflated, as he won’t be receiving that much reward per block.)

Funding Rewards

So we now have two processes: the first, to calculate the amount of contribution made by each category as a whole, which is used to calculate the reward fund; the second, to calculate how much each individual contributor receives.

But how do we actually fund what the contributors are supposed to receive? It’s one thing for a company to owe you money; but if they don’t actually have the money, then it doesn’t matter what they owe. Fortunately, ICON has a solution! Here is the yellow paper:

“The ICX reserve required in the Public Treasury to match the I-Score issuance originates from two sources: transaction fees and newly minted ICX. Transaction fees are subtracted from the amount of ICX deposited into the Public Treasury to match the I-Score issuance, and, if necessary, the remainder of the necessary ICX for reward distribution is minted by the network.”

By now, you probably know what an ICX fee is. If not, it’s the small amount of ICX that must be paid when anyone utilizes the ICON network, either to execute a smart contract, transfer ICX, utilize a DApp, or other activities. This amount is typically very small, but with many transactions on the network, it can add up.

Remember, in our example above that calculated how much ICX was generated for the reward fund, the amount was 6.4757 ICX for that block. Let’s assume that same block generated an aggregate amount of fees through network usage that added up to 4 ICX. Where does the 2.4757 ICX come from to close the deficit? The network will generate new ICX to fill the gap. This is important, so I’ll just let the ICON yellow paper explain why:

“This is one of the biggest economic features of the ICON Network. The issuance of ICX will change dynamically depending on the amount of transaction fees in a block. ICX can be either inflationary or deflationary depending on the utilization of the network, which corresponds with the amount of transaction fees, and the decisions made by the Public Representatives. If the transaction volume of the ICON Network is high and transaction fees provide sufficient funding for the reward fund, new ICX will not be minted. If the transaction volume increases further and the amount of transaction fees exceed the required funding sum for the reward fund, the excess transaction fees will be burned.”

Penalties

In addition to incentives created to stabilize the network over the long-term, ICON has also created several disincentives to prevent malicious or irresponsible behavior. While met with some criticisms initially, these penalties play a critical role in securing the network:

“Reaching consensus without interruption is at the core of a healthy blockchain ecosystem, therefore the network must penalize representatives that disrupt the consensus process through malicious behavior or negligence. Depending on the severity of the infraction, Representatives could either lose block production rights for a period of time or suffer a burn of delegated ICX and be permanently disqualified from block production.”

There are three penalties:

Validation Penalty — If a specific representative fails to validate blocks successively for 660 blocks, they will be excluded from block production during the remainder of that term (43,120 blocks), which means they are losing out on potential rewards. 660 blocks represents approximately 1.5% of the term.

Low Productivity Penalty — This applies when the Productivity Ratio of a specific representative has dropped below 85%. The Productivity Ratio is the ratio of actual blocks produced and validated divided by the number of opportunities to produce and validate a block. Representatives will not be subject to this penalty for their first 86,240 blocks as a block producing Representative. This will be a very rare occurrence; however, if it does happen, the representative is disqualified, and 6% of all ICX delegated to them is burned as well.

This last part is what has generated some concern among ICONists. ICON added this component to provide additional incentive for ICONists to maximize their due diligence when it comes to which candidates receive their delegated ICX. Rather than just tossing their ICX at random candidates simply so they could receive rewards, ICONists instead will be required to do research to ensure they are delegating to truly qualified candidates.

Disqualification Penalty — This applies when a specific representative has been disqualified via a ‘P-Rep Disqualification Proposal.’ This is a pro-active governance mechanism that can be put forth by other P-Reps to disqualify a P-Rep that is not acting in the best interests of the network. The punishment is the same as the low productivity penalty.

Summary

Hopefully, you were able to digest this to an extent that allows you to understand the many incentives (and disincentives) that are built into the ICON economy that are geared toward providing network stability and security. Let’s take a moment to summarize them, since it’s an important concept to nail down.

Representatives

P-Reps are incentivized to be productive block producers and block validators, as they receive an additional reward for validating a block, and a significant reward for generating a block. Block generation and validation is at the core of a healthy network, and should be rewarded most significantly.

Sub P-Reps are incentivized to add further security to the network by storing a copy of the ledger and making themselves available to replace a Main P-Rep by receiving rewards that are indirectly tied to the cost of running a node and are higher than both EEPs and DBPs.

All Representatives are disincentivized from over-stating the costs of running operations, as they can be removed as representatives for unreasonable proposals.

All representatives are disincentivized from neglecting the network, since they can lose rewards of they temporarily fail to generate or validate blocks, and they can lose their representative status if they fail to generate or validate blocks over a longer-term time period, or if they act maliciously.

EEPs and DBPs

Individuals or organizations with good ideas to either grow, improve, or build on the ICON network are provided the opportunity to earn ICX rewards, if their proposals are of high enough quality to be chosen by ICONists delegating their stake.

Both groups are incentivized to maximize the quality of their projects, as the more votes they receive, the more rewards they accumulate.

Both groups are incentivized to help grow the ICON network and expand the amount of activity occurring on it. By expanding activity, more fees will be paid; when fees are paid into the Public Treasury exceed the amount of rewards for distribution, not only will inflation not exist, but ICX will be burned, decreasing overall supply and increasing scarcity, which increases the value of ICX for holders.

ICONists

ICONists are incentivized to delegate their ICX — meaning choosing representatives — by receiving rewards. Without providing an incentive to elect representatives, few people will participate in the process, leading to poor governance. ICONists are further incentivized to choose the best representatives, since choosing a sub-optimal representative who fails to protect the network will result in losing 6% of their stake delegated to that representative. While this outcome is highly unlikely, the 6% penalty is an important safeguard nonetheless.

If fewer individuals stake, then the rewards for staking are high. If more people stake, the rewards are less. Accordingly, the incentive is geared to increase the amount of the network staked, ensuring more people play a role in the democratic process and produce stronger representation.

If inflation occurs in order to generate ICX to pay out rewards, then ICONists who do not stake will see the value of their ICX diminish. Staking will ensure their reward rate outpaces inflation.

You can use your imagination and new understanding of the ICON economy to determine what other incentives might be built in that may not be listed here.

In general, ICON has built an extraordinarily thoughtful and balanced economic architecture. This design is built to point all incentives and disincentives toward ensuring long-term network stability and security — exactly what a successful blockchain requires.

In the next chapter, I will examine and analyze the relationship between ICON and ICONLOOP.