TL;DR: Conflux is a high-throughput blockchain network created by Turing Award recipient Dr. Andrew Yao. The network uses the Tree-Graph, a novel consensus mechanism that optimizes security and scalability without sacrificing decentralization. To support the growth of the ecosystem, Conflux uses a token, CFX, to provide several economic incentives. The unique token economics of CFX is designed to promote participation in the Conflux Network at every level, incentivizing behaviors that contribute to the optimal functionality of the ecosystem.
On any decentralized blockchain network, data is stored and organized without the need for a trusted third party. This is possible because of the consensus algorithms that are used to operate decentralized blockchains. Through these algorithms, all parties maintaining the network can “agree” on what is canonically true without having to know or trust one another.
To keep the network running smoothly, each consensus algorithm must operate at a very high level. Conflux uses a powerful, unique Proof-of-Work (PoW) algorithm called the Tree-Graph to achieve consensus. The algorithm is capable of processing 3000–6000 transactions per second (TPS) — a much higher rate than other blockchains, including Bitcoin and Ethereum. While high throughput has become standard in modern-day layer-ones, Conflux can achieve an industry-standard high while staying true to Satoshi’s vision of PoW without sacrificing decentralization, as with a PoS or PoA model.
In addition to reliable technology, the network also needs well-designed economic models that incentivize constructive network behavior. This combination of high-functioning technology and well-designed tokenomics is vital for the health and growth of the ecosystem.
What makes a blockchain economy function well? Conflux has identified three crucial factors: a well-established value system; a fair set of governance rules; and healthy community collaboration. Conflux’s tokenomics have been designed to optimize each of these factors.
The Core of Conflux’s Economic Model: The CFX Token
To understand how these factors operate within Conflux’s economic model, we first need to take a look at the core of Conflux’s value system: Conflux’s native token, CFX.
Each CFX token consists of smaller units called drips, which are similar to Gwei on the Ethereum network or Satoshis on Bitcoin. A single CFX token contains 10¹⁸ drips. To send a transaction on the Conflux Network, a small amount of drip is paid as a transaction fee. These fees are awarded to system maintainers (miners).
The Conflux Network incorporates a certain level of built-in inflation: more CFX is gradually added to the total circulation over time. Today, there are more than 800M CFX in circulation, which is a mix of both the pre-mine distribution and the new mining and staking rewards being generated.
Liquid vs. Staked CFX Tokens
Each CFX token exists on the Conflux Network in one of two forms: tokens are either liquid or staked. If tokens are liquid, they can be transferred and used freely. If a token is staked, it cannot be freely transferred, until it is no longer staked.
CFX tokens are staked if:
- They have been intentionally staked in the Conflux Network, thus earning interest payments for the holder through staking rewards;
- They have been locked into the Conflux Network for a fixed period of time to purchase votes in Conflux Network governance;
- They have been placed into bonded storage to purchase space on the network. (This is necessary to keep smart contracts and data stored on-chain active on Conflux.)
Economic Incentive Mechanisms on the Conflux Network
Each mechanism has been designed to encourage users to participate in the network. Their collective goal is to ensure that Conflux is safe, reliable, and stable, and can be accessed with minimal barriers to entry. These incentivizing mechanisms also contribute to the proper usage of Conflux’s computing and on-chain storage resources.
During the initial stages of Conflux’s development, the economic model was designed to reward direct builders of the network. These include the Conflux Foundation and Conflux’s founding team.
Now that the network is fully operational, its incentivizing mechanisms are primarily designed to reward system maintainers and ecosystem contributors. System maintainers are miners who ensure the secure operation of Conflux; ecosystem contributors are the community of users who continuously generate value for the Conflux ecosystem.
Economic incentivizing mechanisms currently operate on the Conflux Network as follows:
#1: Conflux users are incentivized to stake their CFX tokens with interest payments. Staking plays an important role in securing the Conflux Network. Therefore, users who stake CFX receive interest payments at a fixed, annualized rate of roughly 4%. These payments are added to the user’s holdings at the time the tokens are “un-staked” (i.e., when the tokens are converted back to a liquid state).
Staking rewards are generated from the issuance of additional CFX tokens. When users do not stake their tokens, their interest payments go to Conflux’s public fund. Therefore, these interest payments implicitly shift value from those who do not stake to those who do.
#2: Conflux users are incentivized to eliminate unnecessary data storage with bonded storage. To deploy a smart contract on Conflux, a user is charged Collateral for Storage (CFS) when the data is written. In other words, smart contract deployers must lock tokens into the Conflux Network at a rate of 0.5 CFX per 1 kilobyte of data. Only specific kinds of transactions require Collateral for Storage (CFS).
Because bonded tokens are staked, they generate interest. However, the payments are sent to miners instead of smart contract deployers. As a result, the deployers of the smart contracts are disincentivized to keep unnecessary data on the network, while the miners that maintain the network are incentivized to keep up their work. This prevents network congestion. If a smart contract deployer wants to release tokens from bonded storage, they must move data off of the Conflux blockchain.
#3: Conflux users are incentivized to participate in governance with interest payments. To obtain voting rights on Conflux, users agree to lock CFX tokens into the network for a fixed period of time, measured in quarters. To incentivize participation in governance, users retain staking rights for the tokens that have been locked for voting rights.
The number of votes that a user has is determined by two factors: the amount of CFX they have agreed to lock and the amount of time they have agreed to lock them for. This is calculated by multiplying the number of quarters by the number of tokens, and then multiplying the total by 0.25 (number of quarters × number of tokens × 0.25.) The maximum amount of time that tokens can be locked is four years.
- Locking maturity less than a quarter: No voting rights
- Locking maturity more than a quarter: One CFX has 0.25 vote
- Locking maturity more than half a year: One CFX has 0.5 vote
- Locking maturity more than a year: One CFX has 1 vote
Source: The Conflux Economic White Paper
Conflux Mining Rewards
In addition to economic incentives for staking, Conflux also offers financial incentives for system maintainers or miners.
Due to Conflux’s Tree-Graph PoW consensus algorithm, miners play an important role in the network. Like Bitcoin miners, miners on Conflux receive financial rewards in exchange for the computing power that they contribute to maintaining the network. These rewards are earned in the form of block rewards and transaction fees.
When the Conflux mainnet was launched, the initial base block reward was set at 7 CFX per block, with blocks mined approximately every .5 seconds. Conflux’s block rewards are gradually reduced over time. However, instead of being cut in half, Conflux’s block rewards will be gradually reduced over measures of time called epochs. Epochs are phases in the Tree-Graph’s life cycle. Eventually, at epoch height 3,615,000, the Conflux block reward will be reduced to 2 CFX per block. There is currently no plan for a halving event since the block rewards are reduced. When the 4-year mark approaches, there will be a governance vote to see what should be done for the halving.
The distribution of block rewards includes a disincentivizing mechanism that punishes attackers. If an attacker attempts to generate a block of false transaction data (i.e. a double-spend attack), the attacker will be hit with a financial penalty.
Miners on Conflux also receive income in the form of interest payments. This interest income is generated from the Collateral for Storage (CFS) tokens that smart contract deployers must pay. As previously discussed, this interest is paid at an annualized rate of roughly 4%
The Role of the Conflux Foundation
The tokenomics of the Conflux Network, including each of the economic incentivizing mechanisms described here, were initially designed by a non-profit organization known as the Conflux Foundation.
In the early stages of development, the Conflux Foundation existed to provide incentives to overcome the “cold start” problem; in other words, to promote participation and development in the network in its early stages. Today, the Conflux Foundation has the responsibility for making adjustments when allocating resources from the network’s equilibrium. Or, when the governance model decides on implementing a change to the network.
Since mainnet was launched in late 2020, the Foundation has been in charge of two funds that have aided in Conflux’s development: the Community Fund and the Ecosystem Fund. As the Network continues to grow, the Foundation plans to gradually transfer the governance of both of these funds to the decentralized autonomous organization (DAO) controlled by Conflux stakeholders. Therefore, over time, full control over the Conflux Network will be placed into the hands of users.
A Scalable Economic Model
Conflux’s economic model incorporates incentivizing mechanisms geared to encourage healthy participation and growth of the network. The system is designed such that economic participation in the network supports the technological stability of Conflux. This economic model is a key element of Conflux’s smart contract ecosystem, as well as the network’s ability to process 3,000–6,000 transactions per second. And as the only regulatory compliant, public, and permissionless blockchain in China, Conflux’s economic model also promotes the network’s functionality as an economic and technological bridge for globally-minded individuals and crypto projects interested in entering China.
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