Growth Pressure Capped & Stepped Supply Schedule

This proposal is an alternative to 1709 and 1710, with one substantial improvement: We introduce a pool for algorithmic growth incentives to create DOT demand drivers and grow the economy.

• Reduce inflation by 33% every two years
• Effective supply cap of 2.1b DOT
• Introduce a system account "growth incentives" towards which a variable share of the inflation is directed

Just hammering down inflation is dangerous

The other proposals are good, but have a problem: They only address supply, but not demand.

If we remove incentives to stake DOT, and the DOT has no place to go and nothing productive to do, it might go idle and further reduce DOT demand, reducing price and further disincentivize holding DOT, sending DOT into a dangerous downward trajectory. It is unclear how much additional demand the psychological effect of a supply cap can create and is a purely speculative bet. Too risky for a multi-billion dollar asset.

Tokenomics policy needs to create demand for DOT

The main problem with current tokenomics is not they are creating too much supply, it is that they are creating too little demand. There is no incentive to use DOT in parachains. Even worse, there is a disincentive, because the staking APR is too damn high. Even an inflation halving will not eliminate this problem.

The primary driver of DOT demand can only come from the economy. In Polkadot, parachains are the economy. Right now, only 0.7% of DOT are used on parachains for economic activity. 54% are staked. 45% are idle. The DOT economy is practically non-existent.

Good DOT tokenomics has to answer the question: How do we create demand for DOT?

To create DOT demand, it is not enough to just sharpen the supply curve. We need to actively create demand drivers. For this, we need policy levers. The "Growth Incentives" pool is such a policy lever.

Creating an Economic Growth Incentive Pool

The idea of introducing a buffer fund that captures unused inflation for economic policy was recently discussed by Gavin Wood at the Web3 Summit 2025: Closing Keynote Day 1 - Gavin Wood - Web3 Summit 2025 @ 41:26

This proposal suggests to introduce such a mechanism: an account that receives a variable share of the inflation that neither goes to stakers nor the Treasury. Governance can control how many staking rewards are distributed and direct any excess amounts to the buffer fund.

The buffer fund shall be used through algorithmic mechanisms to stimulate economic growth or be directed back to staking rewards when needed. By introducing a growth incentive pool that can only be distributed indirectly and algorithmically and not through direct OpenGov decisions, we retain an important economic policy lever.

Currently, inflation in Polkadot is distributed as follows:

• 85% staking rewards
• 15% Treasury income

By introducing a new account and an additional variable under control of OpenGov, the distribution can now be changed, such that for example:

• 64% staking rewards
• 15% Treasury income
• 21% buffer fund

The initial distribution share proposed in the remark of this proposal is illustrated below:

This distribution share would in the first year effectively cut staking rewards in half (102m->51m DOT), remove 1/3 from the Treasury (18m->12m DOT), and set up the new Growth Incentives Pool with 17m DOT per year.

The share distribution could be configurable, so that it can be adapted by future governance decisions.

Example mechanisms

The distribution mechanism itself is not part of the proposal. But for a better understanding of what could be done algorithmically I share two existing ideas: Economic Growth Incentives and Optimistic Project Funding.

I have laid out one algorithmic mechanism in the forum post Economic Growth Incentives. There I argue that we can algorithmically allocate DOT to parachains in proportion to how much each parachain sovereign account has captured in non-staked DOT. This creates a virtouous cycle of economic growth, letting parachains compete for DOT incentives, forcing innovation and a race to capture DOT. It also eliminates the disincentive for DeFi to capture hundreds of millions of USD in DOT. The effect is that hundreds of millions of USD worth of DOT gets pulled into the economy and sets the ecosystem on a new growth trajectory.

Economic Growth Incentives is also described in a video here:
Video: Economic Growth Incentives

Another potential model is Optimistic Project Funding, which received 55m AYes on the WFC track.

Include the pool in the tokenomics decision now to secure this important economic policy lever

I strongly believe we must not rush decisions that affects billions of USD of market cap. We need to determine the exact model through calm and logical economic research led by the resources and personnel currently only available to the W3F.

Ref 1710 is way too harsh by reducing inflation by 54%. It would reduce staking rewards to 47m DOT and Treasury income to 8m DOT. After this reduction, there will be no more room to accumulate funds for the buffer fund until the ideas suggested by Gavin Wood would be implemented, which currently has an inderminate timeline.

We need to act on economic growth now. We have the tools to introduce the pool at hand, so we should not wait.

It is important that we do not lock us out of incentivicing economic growth by hammering down inflation without any room to move policy levers. If a hard staking reward reduction is enacted, we must also set aside DOT to the economic growth incentive pool.

The current proposal maintains all the benefits of 1710 (supply cap + staking rewards halving) but mitigates the risk of not being able to counter a deadly downward spiral.

If we will not find agreement on the mechanism, we can still discard the idea and burn the incentive pool later.