NEAR Protocol Inflation Reduction Vote Fails to Clear Threshold, Sparks Governance Debate

Executive Summary

The NEAR Protocol recently faced a governance challenge following a vote on a proposal to halve its annual token inflation rate from 5% to 2.5%. The proposal, aimed at bolstering the blockchain's long-term sustainability and token value, failed to achieve the necessary 66.67% community approval threshold. Despite this outcome, there are indications that NEAR's core contributors may still proceed with the implementation of the change through a nearcore software release, a move that has ignited debate regarding the protocol's decentralized governance principles.

The Event in Detail

The proposed tokenomics upgrade for the NEAR Protocol aimed to reduce the network's annual token emission rate from 5% to 2.5%. This adjustment was designed to create a more sustainable token economy, particularly as fee burns have not met initial expectations, leading to "high inflation without high usage." Currently, NEAR is reportedly issuing approximately $140 million in tokens annually to secure a chain with a total value locked (TVL) of $157 million and approximately $3.2 million in year-to-date fees.

The vote on this emission reduction was structured around validator participation. Validators were tasked with upgrading their nearcore software to version 2.9.0, effectively casting a "YES" vote. The activation of this change was slated for October 28, requiring 80% of the network's active stake to be delegated to block producers running the new software. However, the initial community vote on the proposal did not clear the 66.67% approval threshold, despite securing a simple majority. If the 80% validator upgrade threshold is not met by the specified date, the voting window would extend for an additional 23 days. Should less than 80% of validators upgrade by the end of this 30-day period, the vote would resolve as a "NO," maintaining the current 5% tail emission.

Market Implications

The financial implications of NEAR's emission reduction proposal are centered on enhancing the token's value and the network's economic sustainability. Halving the inflation rate is intended to reduce the supply pressure on the NEAR token, potentially supporting its price. With a 50% staking rate, the proposed reduction would lead to an annual staking reward of approximately 4.75% after the adjustment.

However, the governance controversy surrounding the vote's outcome and the potential for core contributors to proceed with the change despite failing to meet the community approval threshold introduces market uncertainty. Concerns about centralization and a perceived disregard for community consensus could negatively impact investor sentiment and the NEAR token's reputation.

Expert Commentary

Chorus One, a validator infrastructure and staking services company, has publicly criticized the situation, stating:

"We believe this sets a dangerous precedent and undermines the integrity of NEAR."

Chorus One articulated concerns that such actions could create an impression of unilateral decision-making by the core team, especially if validators are not vigilant about the changes implemented during software upgrades. They suggest that the only way for validators to prevent the change is to refrain from upgrading their software.

Conversely, Louis Thomazeau of the L1D fund has argued that cutting emissions is "common sense" economics, suggesting that such economic necessities should take precedence over strict adherence to decentralization ideals.

Broader Context

This proposed emission halving for NEAR Protocol draws parallels to Bitcoin's periodic halving events, representing NEAR's first significant "inflation halving." The broader tokenomics upgrade encompasses additional components beyond inflation reduction, aiming to strengthen long-term growth and incentivize participation.

These include initiatives to support smaller validators, promoting decentralization. A budget of 100,000 NEAR per year is allocated to subsidize small validators, with the top 100 smallest and most stable validators eligible for an additional 150 NEAR each quarter. Furthermore, to encourage governance participation, particularly for veNEAR holders, a reward mechanism with a total budget of 280,682 NEAR for three months is established, projected to provide an additional 4% to 4.5% annual yield.