One of the defining characteristics of most modern blockchains is the built-in scarcity of their token economies.
Fiat currencies like the US dollar suffer from high inflation rates which are controlled by the decisions of central banks in charge of the issuance of new money into the system. Unlike fiat, a peer-to-peer, decentralised system of money needs its native currency or token to be scarce to prevent inflation and make it an attractive proposition for those using it to transact value.
For this reason Bitcoin, the first blockchain protocol, was designed with a total token supply limit of 21 million and an ongoing inflation rate reduction mechanism.
The importance of this characteristic is spotlit whenever Bitcoin experiences a “halving”, a regular event hard-coded into the protocol that sees the block rewards it allocates to miners halved. This controls the supply of new tokens coming into the economy and helps to ensure its sustainability.
As with other major blockchain protocols, Zilliqa also has a limited supply of its native ZIL tokens – with the total supply capped at 21 billion.
New ZIL is introduced into the system through rewards allocated to stakers and miners on the network, but this must be adjusted to dynamically control inflation and ensure the token economy remains sustainable.
Find out more about Zilliqa’s token economy, the value of low inflation for a blockchain economy, and how you can earn staking rewards as a ZIL holder.
Scarcity and staking rewards
The scarcity of tokens is a highly praised feature of blockchain networks. Bitcoin’s fixed supply of 21 million has led it to be labelled as “sound money” due to its low-to-zero inflation and its fixed, pre-defined and publicly auditable issuance policy.
This perspective has been expanded further with allusions to Ethereum as “ultra-sound” money, due to its deflation over time as tokens are burned to process transactions.
The Zilliqa community is cognizant of the benefits of reducing ZIL inflation, which will be necessary for the amount of circulating ZIL to remain below the fixed total supply of 21 billion. This is why gZIL holders previously voted to adjust staking rewards on the Zilliqa network with the aim of reducing inflation.
This rewards adjustment has already been implemented on the mainnet, with the share of total rewards allocated to Staked Seed Nodes (SSNs) being reduced by a percentage point each month until it reaches 25% in October 2024.
Adjusting staking rewards according to this schedule will gradually aid the Zilliqa network in moving towards zero inflation and ensuring long-term sustainability of the ZIL token ecosystem.
This is one of the primary considerations of the token economics for Zilliqa 2.0, which aims to offer a new, Proof-of-Stake consensus model with attractive yet sustainable rewards for validators.
Zilliqa 2.0 and Proof-of-Stake
Currently, Staked Seed Nodes (SSNs) earn a share of block rewards for the role they play in processing information and serving data access to users on the Zilliqa network. ZIL holders are able to delegate the ZIL in their wallet to SSN operators, who then return staking rewards to holders after taking a small commission for this service.
Under the current consensus model, a percentage of block rewards is also issued to miners for their role in securing transactions on the network. However, this is set to change after the upcoming Zilliqa 2.0 overhaul.
Zilliqa 2.0 will use a Proof-of-Stake consensus model, with validators using staked ZIL tokens instead of hashpower to signal their support for the correct order and composition of transactions. The consequent removal of mining rewards that accompanies this model allows the inflation rate of ZIL to be significantly reduced, aiding the shift towards a low-inflation token economy.
Validators on Zilliqa 2.0 will comprise the SSNs operating on the current network, bolstered by new validators who are incentivised to participate through staking rewards. The rewards earned by validators under this PoS system will be adjusted dynamically to preserve a healthy staking ratio (the number of ZIL staked versus ZIL in circulation).
Whenever staking rewards are adjusted, they will be voted on through decentralised governance, giving the community a role in the management of Zilliqa’s token economy. Similarly to the current staking mechanism, ZIL holders will be able to delegate their stake to validator nodes and earn a share of the rewards for participating in consensus.
Stake to start earning ZIL
As staking rewards are adjusted and the Zilliqa network approaches a more sustainable tokenomics model with reduced inflation, the estimated annual percentage return for stakers remains attractive, especially compared with other major blockchains.
Despite the ongoing adjustment to staking rewards, the estimated annual percentage return for staking ZIL at the time of writing is 10.32%. Additionally, the shift to Proof-of-Stake will see the network’s real reward rate (accounting for token inflation) improve and reach much higher levels than other major PoS networks.
Any ZIL holder can take advantage of these attractive incentives to stake their ZIL and earn returns, and there are a number of powerful features now available on Zilliqa that offer extended functionality to standard staking.
Avely Finance, for example, has launched a liquid staking platform that awards stakers with a corresponding balance of its liquid staking token, which they can then use to swap for ZIL or other tokens and participate in the DeFi ecosystem.
That means that a ZIL holder can benefit from staking rewards while retaining their liquidity and exploring DeFi services like $SEED, the multi-chain digital reserve asset deployed by Kalijo. Additionally, if they stake through platforms like IgniteDAO’s Torch wallet, they can use instant unstaking to instantly unlock their staked ZIL when needed.
By staking ZIL, users can unlock these powerful incentives and take advantage of these new DeFi tools while also improving the network’s staking ratio and playing a role in securing the Zilliqa blockchain.
In the overhauled Zilliqa 2.0 network, users who stake ZIL will play a crucial part in the blockchain’s security, actively participating in consensus and earning rewards for protecting against malicious actors and verifying transactions.
With the growing ecosystem of DeFi applications being built on Zilliqa, the shift to a more sustainable token economy with Zilliqa 2.0, and staking rewards remaining attractively high, there has never been a better time to stake your ZIL.
Get started with staking ZIL on the Zilliqa network.