I want to walk you through why, in my opinion, Internet Computer Protocol has the best tokenomics out of anything I have ever seen in crypto. You combine the fact that ICP only has about 3% inflation right now with what I consider the best technology in the world for crypto, and to me that equals a strong game. This definitely is not financial advice, and I am certainly not a financial advisor. I am a full-time YouTuber and Twitch streamer recording this live, and I hold somewhere around 10,000 ICP, plus ICP altcoin values, myself. So I am clearly drinking the Kool-Aid. That said, I researched this and found it out for myself.
What I found is that other people online were, from my point of view, blatantly deceiving me when they said ICP had bad tokenomics. I listened to what they said, I looked at their data, and then I went and looked it up myself. What I discovered is that there are many people who, at least from my perspective, are intentionally deceiving their audiences and saying things that are provably false the moment you go and check them. This is exactly why I believe you should always look stuff up yourself. Do not take what I say for granted either. Look up the things I tell you and make your own decisions. This is my research, and I am going to share it with you.
The voting rewards function
Let's start with the dashboard. ICP has incredible tokenomics because several things come together at once. First off, there is the voting rewards function. ICP has a formula that, in my experience, nothing else has. Right now the voting rewards in total are 6.28%, which means if you lock up ICP for eight years right now, you will get a 13.4% APR. A lot of people at face value would say that has to ruin the tokenomics, right? Wrong. The total voting rewards function is 6.28%. The 13% you see comes from that total. That figure is based on the total supply, and it is determined by how much ICP is locked up and able to vote. Right now you have a grand total of 233 million ICP that is locked. So the 6% is on the whole supply, not just the locked portion.
Here is the magic formula, and this is the most clever tokenomics design I have ever seen. When you actually earn your voting rewards, they are given to you as maturity. You then have to manually spawn that maturity into ICP. Right now there is 98 million in maturity that has not been spawned into ICP. There is only about 49 million that has. Most people, like me, are just compounding theirs into maturity. So most of the voting rewards are not even being spawned, which is exactly why this design makes sense. On top of that, the ICP burn rate has just skyrocketed in recent months.
Doing the inflation math yourself
Let's look at the facts first, because this is where I found people were being deceptive about ICP. I listened to people say ICP had horrible tokenomics and that the inflation was crazy. So I went and looked it up myself. If you look back a year ago, the total supply was about 517,782 thousand, or 517.782 million. This is the kind of thing you need to do for your own research, so you learn to just do stuff yourself and do not have to take somebody else's word for it.
So that is how much ICP there was a year ago. Now we divide by what we have right now, about 532,464 thousand, roughly 532 million, and then we inverse that to give us the interest. What you can see is the amount the supply has increased. That is the real inflation in the ICP supply. There has only been 2.8% growth in the ICP supply. That is less than 3%, and that is the actual inflation we have seen in the last year.
We can go all the way back to Genesis too. At Genesis there were about 469 million ICP, and there are about 532 million today. If you inverse that, that is a total of roughly 13% total inflation since this started almost four years ago. Divide that 13% by four and you get about 3.25% actual inflation per year over the entire history of ICP. If you look at what other altcoins are doing, that is vastly superior.
Why the maturity overhang is not what it looks like
I should address one fair objection. In theory, there is maturity sitting in these neurons right now. Some of you will say, wait a minute, that is 100 million ICP, or a little less than 20%, that has not been converted into ICP. Yes. These are voting rewards that have been paid out, and if somehow all of those got spawned, that would be an additional 20% of the supply. That is correct.
However, from what I can see, and you can do your own research on this, the majority of those voting rewards have been put into locked eight-year neurons, because eight-year neurons have been earning the majority of that maturity. From what I can see, the majority of that maturity has been compounded right back into eight-year neurons, which means it cannot be spawned for the next decade or so. We have never seen this happen at scale anyway. The absolute most we have ever seen spawned at once in the history of ICP is 2.7 million, which would be about 2%. That is the absolute most. In some months, like May 2023, there was only 400,000 or so from total voting rewards. So the actual real interest is only about 3.25%.
Meanwhile, the ICP burn has started to skyrocket recently, and ICP can actually become deflationary.
The real source of utility: putting everything on-chain
If you want more detail on the tokenomics, I would read the page at internetcomputer.org/how-it-works/tokenomics. The ICP token is a utility token. You can participate in governance by staking ICP. If you want that explained further, you can search for my Network Nervous System (NNS) staking tutorial, where I explain how staking and voting work. You can also burn your ICP to pay for cycles, and ICP is used to pay node providers.
What I find critically interesting, and one of my key takeaways, is that ICP right now has the absolute most potential utility out of anything else in crypto. ICP has the most active DAO in all of crypto. You stake ICP, and 47% of the ICP supply is locked, most of it for eight years. So you have about the same amount locked up as when the project started, except now almost nothing is unlocking. We have gotten through most of the investor token unlocks, which is a huge issue in a lot of other coins. Meanwhile, we have a ton of ICP locked that simply cannot move. Then you combine that with what I believe is the best tech in crypto, and that gives the ICP token a real, special utility you cannot find anywhere else.
Here is why. Take an app like OpenChat. Other cryptos have chat apps for people on their blockchain, but the difference is that ICP is the only technology where you can put everything completely on the blockchain. What these other cryptos do is run a blockchain that basically sends transactions and holds tokens, and then they use third-party websites to host the actual application. The developer ends up hosting the app on something like Amazon or Google.
Since OpenChat is hosted on ICP, it lives on the blockchain, and OpenChat pays its web hosting bill by burning cycles. They burn ICP to get cycles, and the cycles get burned to pay for actual computation. So because OpenChat is built on ICP, they have to pay their web hosting bill by burning ICP. Now imagine OpenChat was built on some other chain. You would have tokens that run the blockchain, but then OpenChat would be paying a substantial web hosting bill to something like Amazon or Google, and all that money would flow off the chain to pay regular cloud hosting. That is how the rest of crypto outside of ICP works.
When you see this, it hits you: ICP can go nuts. When you build applications, you have to pay your web hosting bill on ICP by burning ICP, and that adds massive utility to the token. The ICP burn rate spiked when Bob came out, but it has been trending consistently upward on average.
Why Caffeine AI could send the burn rate insane
What we are about to see is the Caffeine AI release. When Caffeine AI launches, I believe the cycle burn rate should absolutely blow away anything we have seen so far, because all kinds of people like me are going to be writing and coding our own apps. Right now this costs me far less in cycles, in terms of how much ICP I have to burn, than hosting anywhere else, but that is because I have a simple website. Once I start doing more, I am going to have to pay a higher web hosting bill as I use Caffeine AI to make a new, advanced version of my website with all kinds of cool stuff on it.
I am talking about games, like Jerry Banfield Power, which ranks how much you have, plus paying for services directly on my website and chatting directly on my website. All of that is going to take cycles. I think the cycle burn is going to go absolutely insane when Caffeine AI comes out and people start building things, and people like me have to burn more ICP just to keep our websites operating. People like me stockpile ICP when it is cheaper, so that whenever the price pumps, and this is not financial advice, I can burn ICP at a higher price to get more cycles to pay my web hosting bill.
So what I see is that ICP has the absolute most theoretical possible utility out of anything I see in crypto, and the projections, including the detailed key takeaways I believe the DFINITY team has posted, back that up.
How ICP Is Minted Today
I'd point you toward Bjorn's post-op tokenomics series, where he projects the total supply of ICP coming from the DFINITY team. I've probably butchered the spelling of his name, but you can find the series, read his key takeaways, and look at the projections for yourself. I've read all of it, and I'd suggest you read all of it too. Here's what stood out to me.
Right now, ICP is only minted in two ways. The first is voting rewards. The second is node provider rewards. Node provider rewards go to the people putting the actual machines in data centers that run the Internet Computer Protocol. At the moment, those node provider rewards are tiny. They're paid out in US dollars, or technically in XDR, but they're essentially pegged to fiat. So the lower the price of ICP is, the more relative ICP has to be minted to cover those node provider rewards. Even with a lower ICP price, though, there hasn't been much inflation at all.
Meanwhile, the cycles being burned are consuming more ICP to pay for computation. The more cycles get burned, the closer the whole thing moves toward being deflationary.
The Path to Deflation
Here's one of the key takeaways. In a little over three years from when that post was written, which works out to roughly 2026, the amount of cycles burned is projected to surpass node provider rewards. That timing lines up perfectly with Caffeine AI being released. So at least in terms of node provider rewards, ICP should become deflationary, not yet counting voting rewards. That's a significant achievement, and from what I can tell, everything is on track for it to happen within the next year. That milestone marks the point where the revenue ICP receives will exceed the cost of running its operations. With Caffeine AI, I believe we should hit it.
Then here's the truly incredible part. When you stack up cycles burned against node provider rewards plus voting rewards combined, the projection is that in five to six years from the original post, which is three to five years from now since it was written about two years ago, the amount of cycles burned should surpass the combined sum of node provider rewards and voting rewards. Remember all the time I spent talking about voting rewards and how they add to supply? At that point, three to five years out, the amount of ICP burned to pay for computation should surpass all of the node rewards and all of the voting rewards combined, which would mean the entire supply becomes deflationary. If that happens, given how much ICP is locked up, that's incredible.
A Few More Observations
There are some additional observations worth noting. The voting rewards decrease over time and will flatten out at 5%. Right now we're only about one and a half percent or so away from where that settles.
On node provider conversion to ICP: node provider rewards are initially determined in XDR, and they were assumed to decrease as the ICP price increased. However, as the network grows and adds more nodes, node provider rewards will start increasing. The bigger the network gets, the more nodes there are to pay, and the node provider rewards could actually end up surpassing the ICP voting rewards. As the network gets bigger and bigger, you have to pay more and more nodes, so the amount of node provider rewards could snowball significantly. That's exactly what the projections show, and you have to look about two years out from where they made the graph.
In the simulation of cycles burned and rewards, the voting rewards are one line, the green line is cycles burned, and the node rewards are the blue line. In reality, the node rewards have actually skyrocketed faster than the original simulation projected. With Caffeine AI, I think we could see this go even faster. Right now, the voting rewards make up the majority of inflation. Over time, though, the node rewards should climb a lot more and become roughly equal to the voting rewards. And if everything works the way it's designed to on ICP, the cycles burned should eventually consume both the voting rewards and the node rewards.
Why I Believe This Is the Best Setup in Crypto
With all of this in mind, this is the absolute best setup I've ever seen, and in my experience nothing else is even a close second right now. The ICP that gets minted goes out only to two groups: people who are staking and determining governance, which is fully on-chain, and node providers who are actually providing the full tech stack in data centers, from websites to blockchain to data, pictures, and NFTs, all of it fully on-chain. All of that minting comes in at less than 3%, all of it on what I believe is the best tech in crypto, and all of it currently giving you around 13.4% passive income.
In my view, that yield should stay steady over time unless we see a dramatic surge in the amount of ICP that's locked, which could happen if a lot of people start buying. We've seen the amount of ICP locked and not dissolving continue to go up, and we've seen the amount of ICP unlocking continue to go down. I've come to believe this is the best setup anywhere in the world for passive income from crypto tokenomics. To me it's an absolute dream come true.
That said, please do your own research and look all of this up yourself. I've put hundreds of hours into studying it, and this is my research shared with you, not financial advice. If you want to go deeper into all of this, you can dig through my ICP Crypto playlist, where I walk through the tokenomics, the staking, and everything else I've learned along the way.