The Concordium blockchain is undergoing a significant redesign in its tokenomics model to increase its appeal and attract a broader spectrum of Web3 players. The consensus protocol, ConcordiumBFT, is one of the cornerstones on which the new tokenomics is built.

This is the first part in a series of articles regarding tokenomics changes which will be effective near the end of Q4 2023. The aim of the articles is to explain the new changes.

ConcordiumBFT and the Impact on the Tokenomics

The old consensus was cutting-edge when it was introduced. It employed a Nakamoto-style protocol for consensus, which was considered the gold standard at the time. It further improved this by introducing an additional finality layer to address the finalization challenge inherent in Nakamoto-style protocols. However, this protocol did not scale optimally as required by industry standards due to the probabilistic block time, which makes handling large volumes of transactions in a fast and efficient manner more cumbersome.

In order to enhance both transactions per second (TPS) and confirmation speed, Concordium adopted a new protocol: ConcordiumBFT. In today’s blockchain landscape, BFT-style (Byzantine Fault Tolerance) protocols have gained prominence for their ability to provide high TPS while maintaining security and reliability. One of the key advantages of BFT-style protocols is that they inherently include finality in their consensus mechanism.

The inherent finality in ConcordiumBFT means that as soon as a block’s child is certified, the block is final and it is not possible to rollback the transactions included in it. This not only simplifies the consensus process but also eliminates the need for a separate finality layer streamlining the whole blockchain architecture.

Concordium’s revamped tokenomics model comes as an adjustment to the new ConcordiumBFT consensus architecture, significantly widening Concordium’s appeal in the Web3 industry. The new tokenomics model removes the concepts of bakers and finalizers, merging them into a new role called validator and thus significantly simplifying the tokenomics, aligning them with other chains, and making Concordium more approachable to new users. It also increases decentralization, as after this change all validators will be certifying blocks, not just the finalizers.

The rewards that were previously given to finalizers will be distributed to all validators for producing valid blocks. Given that only very little stake is in non-finalizer pools, current finalizers should not see a noticeable difference in their rewards, whereas current non-finalizer bakers will obtain a significant increase in rewards.

Adjusting Pool Sizes

The very low threshold of 14k CCD (less than 100 EUR) needed to run a validator has resulted in multiple non-functional validators with low stake, which never made blocks and never got rewards. Furthermore, very small pools significantly slow the protocol, because they send the same number of messages as other validators, but their weight is too little to have an impact on the consensus. So the requirement on the stake to become a validator is being increased from 14k CCD to 500k CCD.

Note that all validators that are currently active with less than 500k CCD can remain as validators. This change is not retroactive, and we will not be removing any of our current validators.

The upper bound on the pool size is also being lowered, from 10% of all CCD staked in pools to 5%. This increases decentralization — our Nakamoto coefficient will change from 4 to at least 7 — and makes the Concordium blockchain less vulnerable to individual nodes being down for maintenance or nodes suffering from DDOS attacks.

Technical changes

1.Bakers and finalizers merge into validators

As a consequence of now having a streamlined single-layer system, bakers and finalizers will get merged into validators, and will all be certifying the validity of blocks. Kindly note that there might be some temporary inconsistencies in terminology as we update the website, white paper, wallets and overall documentation.

2. Rewards for finalizers are removed, rewards for producing blocks increased.

Finalizer rewards will disappear, instead they will all be given to validators for producing blocks. The 5% of the minted CCD currently rewarded to finalizers will be set to 0, and the 85% distributed for producing valid blocks will be increased to 90%.

3. Increase the threshold to be a baker from 14,000 CCDs to 500,000 CCDs

The threshold is increased to optimize the functionality of validators on the tail end and increase the efficiency of the consensus protocol. However, it is important to highlight that existing validators with too low stake can continue running their validator as before and will not be removed.

4. Decrease cap on maximum pool size from 10% to 5% (of the amount of CCD staked in pools)

This change favors decentralization and increases the Nakamoto coefficient of the chain from 4 to 7. Decentralization is a fundamental aspect of a strong tokenomics that is both resilient and aligns with the principles of blockchain technology.

Summary

Concordium’s tokenomics redesign coupled with ConcordiumBFT, aims to drive higher user adoption while ensuring the protocol’s long-term sustainability. The pool size adjustments and the simplification resulting from the merge between bakers and finalizers make Concordium more accessible to new users while simultaneously enhancing decentralization and improving the functionality of validators for optimized efficiency.

Moreover, the powerful combination of a simplified tokenomics design, the ConcordiumBFT consensus protocol and the ID layer embedded at the protocol level, make Concordium immensely attractive.