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Sui is a cutting-edge blockchain network designed for everyday products that serve millions, offering high-throughput and low-latency performance. Achieving this level of performance requires not only advancements in technology, but also a thoughtfully designed economic model. Sui's tokenomics, or economics and incentives, have been crafted with the aim of creating a thriving ecosystem where all participants' interests are aligned. Low fees must be maintained for retail customers, building costs must be predictable for businesses, and activity must be reliable for IT budgets to be planned accordingly.
In this post, we delve into Sui's tokenomics, explaining how it has been designed to operate seamlessly with the platform's technology, creating a user- and developer-friendly platform that can support millions of users.
Players in the Sui Economy
The Sui economy is a system that involves three primary groups of people:
- Users who interact with the platform by submitting transactions to create, modify, or transfer digital assets. They can also use the platform to engage with applications built on Sui.
- SUI token holders who are either staking their funds to validators to help secure the network and participate in governance or using their tokens to pay for fees associated with interacting with assets and applications on the chain.
- Validators who manage the processing and execution of transactions on the Sui platform.
These three groups interact in various ways across the network. This interaction leads to the formation of three core components of Sui's tokenomics, which are:
- Sui's Proof-of-Stake Mechanism: This mechanism ensures that the incentives of SUI token holders align with those of Sui's validators. As a result, both parties work towards the betterment of the network.
- Sui's Gas Mechanism: This mechanism ensures that the network charges low and stable gas fees to users, regardless of the level of activity on the network. This provides users with an affordable and consistent experience.
- Sui's Storage Fund: This mechanism ensures that data storage is priced accurately. It prevents the storage of data today from burdening future users of the network.
The SUI token is the native asset of Sui and acts as the glue that holds the whole system together. It is essential for the smooth operation of the platform and facilitates the interaction between all participants.
The SUI Token
SUI tokens play four essential roles on the Sui network:
- Security: SUI tokens can be staked to a validator to help secure the network and earn stake rewards.
- Transaction fees: SUI tokens can be used to pay for gas fees that enable the execution of transactions and other operations on the network.
- Liquidity: SUI tokens provide on-chain liquidity that is crucial to the Sui economy.
- Governance: SUI tokens grant holders the right to participate in future governance of the network.
The total supply of SUI tokens is capped at 10 billion, and they are distributed in a manner that supports the growth of the network while promoting decentralization. More than 50% of the SUI tokens are in the Community Reserve, which is initially managed by the Sui Foundation. Through a number of programs, these tokens will be given out to network members like as builders, researchers, validators, and others. These include the Developer Grant Program, which awards tokens to early projects building on Sui, and the Delegation Program, which provides tokens to validators that may not be able to afford the upfront costs of operating on the network. Most of the other 50% of SUI tokens are allocated to early contributors and supporters of the network.
Sui’s Proof-of-Stake Mechanism
A little bit about consensus mechanisms
In a centralized network, data is processed and stored on a single server. However, in a decentralized network, there can be hundreds or thousands of servers, also known as "nodes," that store and process this information. For the network to function properly, these nodes must communicate and work together to ensure that the data recorded on each node is the same. Additionally, the network must remain secure and operational at all times.
Decentralized networks use various methods to verify transactions safely, but two common mechanisms are proof-of-work and proof-of-stake. Both systems require participants to risk capital as an incentive for good behavior.
Proof-of-work involves nodes, or "miners," expending computational energy to solve incredibly challenging mathematical problems. This process is expensive and time-consuming. The first node to solve the problem can then verify the data and write it to the blockchain.
Proof-of-stake, on the other hand, involves locking or staking tokens to a validator. Validators with sufficient stake can operate on the network and process transactions. By staking tokens, validators indicate their trust in their good behavior. Some validators face financial repercussions for dishonest or malevolent activity.
Sui’s Use of Delegated Proof-of-Stake
Sui uses Delegated Proof-of-Stake (DPoS) to operate its network. Validators are responsible for network operations within each epoch, which is a fixed period of time. Validators are selected based on the amount of SUI tokens staked to them, which serves as a proxy for voting power. This ensures that those who have a larger stake in the network have a bigger say in its current operations.
Most SUI token holders do not have the funds, ability, or interest in running a validator, but still want to participate in securing the network. They can do so by delegating their tokens to a validator they trust. These delegated tokens help the validator meet the minimum amount required to be part of the active set of validators for the epoch. The tokens are locked for the epoch, which means they cannot be transferred or sold.
Validators receive stake rewards for operating and securing the network, which are given in the form of SUI tokens. These benefits are the same as gas costs plus betting subsidies. Subsidies will gradually disappear as the network develops and activity increases, and stake rewards will only come from gas taxes.
The validator receives rewards in proportion to their percentage of the total stake in the network, but this can be adjusted based on the storage fund and tallying rule. Except for a tiny commission fee paid to the validator's manager, rewards are given to all token holders who delegated to its stake.
This design aligns the incentives of SUI token holders and validators because non-performing validators receive slashed stake rewards. This causes SUI token holders to move their stake to more performant validators, and validators are incentivized to perform well to keep their stake. Sui eliminates any worries about partiality for higher stakes that can be observed on other networks by ensuring that all validators receive their fair portion of rewards for each epoch.
Sui’s Gas Pricing Mechanism
Gas fees, also called transaction fees, are charges for using a network that are paid directly to validators, who operate the network. To ensure a network runs smoothly, gas fees need to be properly managed. If fees are too low, validators may not want to participate, and transactions will not be processed quickly or efficiently. On the other hand, if fees are too high, users may not want to use the network.
Sui's gas pricing mechanism accomplishes three important goals:
- Providing users with predictable, low transaction fees
- Encouraging validators to optimize their transaction processing
- Preventing spam and denial of service attacks
To deliver predictable transaction fees, validators on Sui agree on a reference price for transactions at the start of each period. They state the minimum price they will accept to process a transaction, and a reference price is chosen where a quorum of validators are willing to promptly process transactions.
Because the network employs the tallying rule to select which validators execute transactions at the current gas price, validators are encouraged to suggest prices that are realistic. Validators evaluate each other's performance, creating a multiplier for the stake rewards of other validators. Slow or non-performing validators may have their rewards slashed through the Tallying Rule, which encourages validators to honor the reference gas price.
Sui's Reference Gas Price provides users with an accurate estimate of transaction costs. Users can submit any gas price they want, but transactions submitted close to the reference price will be processed promptly. This avoids the complexity of forecasting current gas prices and helps users avoid overpaying.
Sui users also play a significant network-wide monitoring role thanks to the gas price mechanism. To have transactions processed quickly and efficiently, users prioritize communication with the most responsive validators. Although less proactive validators are punished, these ones obtain increased rewards. SUI delegators who receive boosted or diminished rewards will choose to move their stake to more responsible validators, penalizing unresponsive validators directly through lower rewards and indirectly through reduced stake in future periods.
Unlike gas fees, storage fees are set through governance proposals to align with off-chain data storage costs. As off-chain storage costs decline, governance proposals will update Sui's on-chain storage fees to reflect the new target price.
Sui’s Storage Fund
A blockchain network is always changing. The validators responsible for writing transactions to the chain now may not be the same ones who store that data in the future. As the amount of data grows, if users only pay the fees necessary for their transaction, future users may end up paying unfairly high fees, which could discourage people from using the network.
To address this problem, Sui has developed the Storage Fund. With this approach, users pay for both processing and storage upfront, with the storage fees going into the Storage Fund. These funds are then distributed to validators who store the data, and are taken into account when calculating the stake rewards. Validators will receive additional stake incentives if the amount of storage required is high, and vice versa if the amount of storage required is low. This ensures that validators are fairly compensated for holding the data in storage.
Sui's storage model also has a "delete option" that allows users to receive a storage fee rebate when they delete previously stored data from the blockchain. This is expected to encourage users to delete data when it is no longer necessary, preventing an endless growth of storage needs. Sui provides users with the ability to store on-chain data while also using a market mechanism that ensures only important data is kept on Sui.
Sui's tokenomics and engineering design are intentionally aligned to create a cost-effective and high-performance platform. This compatibility makes it attractive to both developers and users. If you're interested in learning more about Sui's tokenomics, check out the Sui tokenomics whitepaper.
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