Gavin made a significant proposal at the Berlin Web3 Summit — replacing NPoS with PoP (Proof of Personhood), fixing the rewards for validators, and setting a fixed supply of DOT.
This will significantly reduce Polkadot's security expenditures, could compress staking rewards, and may release hundreds of millions of DOT into DeFi, reshaping the entire ecosystem's capital flow.
In this episode, we invited guests from Bifrost, core developers, ecological VC institutions, and others to discuss in depth about product strategies, technical challenges, treasury fund allocation, market pressure on DOT, and competition for DeFi liquidity.
The transition from NPoS to PoP and its impact on vDOT and DeFi
Will the decrease in validator rewards threaten network security?
Can reducing security costs alleviate the selling pressure on DOT and boost its price?
The long-term significance of liquidity and application deployment speed for the ecosystem.
Continue reading to see the full content!
What impact will the decrease in staking rewards have on Bifrost’s vDOT?
Kristen: Next, let's talk about Gavin's speech at the Berlin Web3 Summit.
He proposed a vision for the future of Polkadot, believing that the current cost of network security is too high, suggesting replacing the existing NPoS with PoP (Proof of Personhood) and fixing the rewards for validators while setting a fixed supply of DOT. These changes will have far-reaching effects on the entire ecosystem.
I would like to invite Tyrone to talk first, as Bifrost’s core product vDOT and other businesses are based on the NPoS model. If NPoS is really replaced, how significantly will it affect your product strategy?
Tyrone: There will definitely be an impact, but I believe it will likely be positive overall. First of all, such a transformation cannot happen overnight; it won't be PoS today and PoP tomorrow. A transition period of one to two years is expected. Currently, there is no relevant code submitted on-chain, so nothing will happen in the short term.
From a positive perspective, reducing the inflation rate of DOT and cutting staking rewards may actually help activate the DeFi ecosystem.
On Ethereum, stable yield products like AAVE can usually only offer around 6% yields; while on Polkadot, staking rewards are high, so users naturally lack the motivation to participate in DeFi. If staking rewards decrease, capital may flow into DeFi protocols, driving liquidity growth.
We are also working on cross-chain collaborations, such as promoting DeFi Singularity with Hyperbridge to connect L2 and Ethereum Midnight. However, users still find the cross-chain experience complex, and the price data of cross-chain assets can easily deviate, indicating that the infrastructure is still not smooth enough. If staking rewards stabilize, it will help assets flow freely between different ecosystems and promote collaboration among DeFi protocols, which will be an important opportunity.
Kristen: PolkaWorld has calculated that if PoP is implemented, about 345 million DOT will be released from staking. If this portion of funds flows into DeFi, Polkadot is expected to rank among the top ten in DeFi.
So I would like to ask YC: if validator rewards are significantly reduced, will node participation decrease? Is a 'non-profit incentive' model for nodes really feasible? What is the biggest technical challenge for client development teams in transitioning from PoS to PoP?
YC: I think this is not only a technical issue but also a 'political issue.' You need to persuade the validators to accept lower income and convince them to migrate from the old model to the new one; this is quite difficult to advance. Operating validation nodes requires hardware and manpower investment, and there will be significant short-term resistance. However, one of the biggest advantages of PoP is its low cost; operating expenses may be 80% less than NPoS. In the long run, gradually reducing the high expenses of validators may be beneficial for the Polkadot ecosystem, but it requires time for communication and transition.
Kristen: So from the perspective of clients, what is the biggest technical challenge in transitioning from NPoS to PoP?
YC: Technically, we are confident we can accomplish this, but PoP is the first real implementation in the blockchain field. We first need to clarify the implementation path, such as how to design the validator mechanism. The key challenge is — how to prove you are 'a person.' In PoP, each person can only vote once; you must prove you are an independent individual while also protecting privacy. This is a dual challenge of balancing security and privacy.
Kristen: Thank you, YC, for your sharing.
Treasury revenue may not necessarily decrease; the challenge lies in 'how to allocate proportions' and 'when to cap it.'
Kristen: Next, let's invite Filippo and Max to discuss.
The proposed PoP reform has significant implications; it will not only significantly change Polkadot's economic model but may also lead to a decrease in treasury income, which is a concern for us. As DV, we have already felt great pressure in our daily audits, so we have established internal principles — the hourly wage for development roles must not exceed 100 dollars, and for maintenance roles, it must not exceed 30 dollars. However, many proposers feel this price is too low and unacceptable, and some have even expressed dissatisfaction. If treasury income further decreases in the future, such conflicts may escalate.
So I would like to hear your thoughts: will a 'tighter' treasury demotivate contributors or even drive them away from the ecosystem? Filippo, you go first.
Filippo: First, it is important to emphasize that the PoP reform mentioned at the Web3 Summit is currently only a proposal and has not been finalized. However, many people have already regarded it as a 'done deal,' which needs clarification.
As for whether PoP will lead to a decrease in treasury income, that is not necessarily the case. It depends on how the distribution ratio of future inflation is set. Currently, most of Polkadot's inflation is used to pay validators (for network security), with the treasury receiving 15% of the inflation. If PoP only reduces security spending while maintaining the treasury's 15%, the impact will not be too great.
The importance of the treasury is self-evident. Over the past two years, it has funded a large number of activities and, together with OpenGov, has become quite a successful social experiment.
In the last referendum, the inflation cap for DOT was already set, but the cycle lasts for 20 years. From an investor's perspective, the market response to 'cap in 20 years' may be completely different from 'cap in 1 year,' and Max may have more insights on this later.
Regarding the use and pricing of treasury funds, I have indeed seen people apply for unreasonable budgets for unreasonable things. However, as long as the DV and community representatives can uphold reasonable standards, such as setting reasonable hourly wages for different roles like development, community, design, etc., this mechanism can operate sustainably. There will always be dissatisfaction, complaints, and even attempts to exploit loopholes to obtain funds; this politically charged process is not something everyone is willing to participate in. This is also why more and more people delegate voting rights to DV or DAO, because they do not want to spend time reading proposals, participating in debates, and voting on each item.
As for the PoP mechanism, I don't want to jump to conclusions just yet. PoS has been validated effectively in several public chains, such as Ethereum transitioning from PoW to PoS. I agree that our spending on security is high, but security itself is extremely important. Moreover, Polkadot does not yet have a clear source of revenue, unlike TRON, which has become the settlement layer for USDT, with a large volume of transactions and fee income. Polkadot's current commercialization is not mature enough, and saying 'security spending is too high' may be premature.
Of course, Polkadot has been online for four years, and maybe it is indeed time to consider more radical adjustments. But this is a complex and far-reaching issue. Transitioning from one mechanism to another requires thorough research and discussion. This is a major transformation and cannot be rushed into a decision.
I'll stop here for now and hand it over to Max, especially regarding the impact of inflation and supply mechanisms on the investment field; he may have more professional insights.
Reducing security costs can alleviate excessive selling pressure on DOT.
Max: Alright, thank you, I will continue on Filippo's topic.
First, it must be acknowledged that the price of DOT is important. But the reality is that the price of DOT has been continuously declining, which is a very bad signal. Recently, Tommy published an article discussing 'What exactly happened to DOT?', responding to a member's view from Altcoin Daily — that DOT is one of the very few mainstream assets that has continuously declined over the past two years.
The reason for the price decline is not complicated; it is essentially due to excessive selling pressure. If there weren't so many people selling, the price would naturally rise. The question is — who is selling? Analysis shows that primarily it is the stakers who are continuously selling: they stake DOT for rewards and then sell those rewards into the market, creating sustained selling pressure.
I believe this is exactly the logic behind Gavin's statement at this summit that 'we are investing too much in security.' Most of the staking rewards are immediately sold off, which is continuously lowering the price of DOT. Gavin pointed out that we are indeed 'overpaying' for security, and this situation needs to change. Security is certainly important, but once a certain level of investment is reached, the enhancements brought by additional budget are very limited.
Let me give you an example: you love bread. The bread you buy at a cheap supermarket is quite ordinary; going to a better bakery, the price is slightly higher, but the taste improves significantly; at a top-notch bakery, you spend 20 euros to get the best bread you've ever eaten. But if someone sells you bread for 40 euros, 100 euros, or even 500 euros, you'll find that the taste isn't much better than the 20-euro one, because the quality has reached its limit. The same applies to security — spending more money will not significantly enhance security; this is the law of diminishing returns in economics.
Let's take another example. You are a politician or a star, hiring a bodyguard for 200,000 dollars a year, which provides decent security; switch to a retired Navy SEAL, costing 1 million dollars a year, which further enhances safety. But if you increase it to 2 million or 5 million, you still can't hire a 'better' bodyguard, because the top-tier level is already there. Spending more money will not result in higher security.
Polkadot is the same. Even if part of the staking rewards are reduced, validators will still remain, and the network will still be decentralized and robust; the Nakamoto coefficient will not fluctuate significantly. But this will allow us to reduce huge unnecessary spending, which is good for the ecosystem.
"Security may be overspent" is not just an assumption, but a real issue. We are indeed overpaying for security, which directly puts pressure on the price of DOT, as stakers continuously sell rewards, amplifying market selling pressure. Gavin mentioned that in terms of the overall distribution of DOT, stakers may receive rewards that are over ten times the treasury allocations (though I don't remember the exact ratio, but it's roughly this magnitude). If we want to "balance the budget," such adjustments are necessary.
This is somewhat akin to the Austrian school of economic perspective: to curb inflation, government spending must be reduced. In Polkadot, security spending is the largest 'budget item' for DOT, similar to a country's military expenditure; perhaps we don't need to spend so much on 'security military expenses.'
So I believe this is a step in the right direction — reducing security spending can help stabilize or even increase the price of DOT, which is what everyone hopes to see.
As for 'Proof of Personhood' (PoP), it and 'reducing staking rewards' are actually two different levels of issues: one is optimizing the existing mechanism, and the other is introducing a new validation logic. PoP is still in very early discussion stages, and it is uncertain whether it will be implemented, and even if it is, it will be gradual.
In the future, there may be a 'dual validation' model:
The vast majority (for example, 99%) of security is still provided by PoS;
A small portion (for example, 1%) is provided by PoP validators, who do not need to stake DOT but only need to prove they are 'a person' to receive rewards.
Even if the reform is initiated, it is highly likely to first pilot on Kusama, as Kusama's positioning is to be an experimental ground that 'embraces chaos.' If successful, it may gradually be promoted to Polkadot. It will not overturn the system overnight, nor will it shock users unexpectedly.
In summary, Gavin touched on a very core issue this time, and I am personally very excited about it and look forward to further in-depth discussions and developments.
Filippo: I agree with Max's viewpoint — it is entirely reasonable to reduce spending without sacrificing security. Security investment has diminishing returns; initially increasing the budget will significantly improve security, but after reaching a certain level, adding more money has very limited effects, and Polkadot's security measures may have already 'overpaid.'
Polkadot's security relies on the 'relay chain + rollup' architecture, where relay chain validators are usually nodes that stake a lot of DOT. System optimization can first occur within the existing PoS framework, such as reducing staking rewards and observing whether the network remains stable, rather than directly switching to PoP. However, this involves complex interests and requires extensive research and testing, not mere assumptions.
This is not merely a technical issue; it is also a social and economic issue. DOT holders decide on economic parameters through OpenGov, but validators are often among the largest holders, with extremely high voting weight, and their attitudes will directly affect the success or failure of the reform.
Kristen: So, does the Web3 Foundation have any research plans currently in progress?
Filippo: Yes, actually this discussion came a bit suddenly; the research team was caught off guard. I guess in the coming months, the Web3 Foundation's research team will conduct some investigations to see what improvements can be made. However, as we mentioned earlier, it is completely possible to attempt to reduce rewards within the existing PoS system. For example, redesigning a more reasonable and attractive DOT release mechanism for future planning over the next few years is something that can be done. So, the next period will definitely be one worth watching.
Reducing staking rewards, releasing DOT liquidity, and revitalizing DeFi in Polkadot.
Kristen: In Gavin's proposal, it was mentioned that security spending could be reduced from 500 million dollars a year to 90 million dollars, equivalent to an 82% reduction. So the question is — will these 'savings' of DOT flow into the market and cause new selling pressure? Or will they enter DeFi protocols?
YC: I think there may be different scenarios. These funds may not directly enter DeFi, but rather it presents an opportunity for DeFi projects to enter the Polkadot ecosystem. Because once such a large amount of DOT is no longer locked for staking, a massive amount of liquidity will be released. This way, DeFi protocols will have the opportunity to attract this flowing capital, thus activating the entire ecosystem. When the DeFi system enters Polkadot, there will be large-scale capital flows within the system, which will also positively impact the price of DOT. I think this is a very optimistic direction that will benefit the entire Polkadot community.
Filippo: If inflation decreases, it does not mean that these DOT will be released elsewhere; rather, it means the issuance of DOT has decreased. If you want to earn more passive income, you will need to use DeFi products. This will encourage tokens to flow more actively within the ecosystem, and with the help of the XCM cross-chain protocol, DOT can easily move from the relay chain to projects like Bifrost or Hydration to do other things.
But now many people, especially those holding large amounts of DOT, are actually unwilling to move their holdings because staking is so hassle-free; they can just leave it there and earn 13% returns. So, I think this change will make funds more active within the ecosystem, which is precisely what Polkadot lacks. Too many DOT are lying staked on the relay chain, not flowing, and Gavin's point about 'excessive security spending' may also hint at this: users enjoy the profits so much that they just lay flat, and this perspective is crucial.
But I also want to emphasize: reducing inflation will not let DOT flow into the market or into DeFi projects; it essentially means that the issuance of DOT has decreased. For example, if it was originally 120 million DOT issued each year, now only 20 million DOT will be issued. A portion goes to the treasury, and the remaining part is distributed to stakers, who can at least earn considerable service income by maintaining operations.
Kristen: What I mean is that if staking incentives are significantly reduced, people may no longer stake; they will unlock their staked DOT.
Filippo: Oh right, this is definitely something to consider. If they unlock DOT, they can choose how to handle it. This topic is actually very important, and I think it is quite sensitive, as it is no longer just a technical issue, but rather a topic that involves social and economic aspects, which requires very careful handling.
Kristen: So, Max and Tyrone, do you have anything to add?
Max: Let me briefly mention that we have basically covered this topic today. But I think there are two aspects of benefits that come from reducing staking rewards:
First, as Filippo mentioned earlier, reducing the DOT distributed to stakers means that the selling pressure in the market also decreases, which is inherently very important. With reduced selling pressure, the price of DOT will naturally rise. This is the main positive aspect.
Secondly, as everyone mentioned today, there is the competitive relationship between the DeFi ecosystem and staking. Currently, DeFi products have to compete with the high staking rewards of DOT, making it difficult to succeed. Staking rewards can be understood as a 'risk-free interest rate,' which in traditional economics usually refers to the yield of treasury bonds. If this rate is low, people will tend to invest in higher-risk areas, such as venture capital; but if people can make a guaranteed high return by buying treasury bonds, who would still invest in the stock market or venture capital? High staking rewards operate on the same principle.
So Gavin's direction is correct. If it can be implemented, it will absolutely be a net positive for Polkadot.
Kristen: Alright, Tyrone, do you have any thoughts to add?
Tyrone: We can imagine that if Ethereum's staking yield is 10% now, how many DeFi protocols do you think could survive? Most would 'die.' Because all user funds would run to stake ETH for rewards, who would still care about DeFi? Stablecoins like USDC, USD, SUSD would die off, and custodial projects would also fail; no one can compete with such yields. This is the problem we currently face in the DeFi ecosystem, and to be honest, this situation must be resolved.
Additionally, I want to mention that ultimately 'security' is determined by the token price. If the tokens in your hands are worthless, then talking about security is meaningless. The foundation of token price is liquidity, and liquidity depends on application projects within the ecosystem.
I want to focus on discussing: how fast can applications be deployed on Polkadot now? For example, two days ago, Ethereum's Athena announced significant opportunities related to stablecoins on AAVE, and the next day, a team developed an automated protocol that could leverage stablecoin yields on AAVE, and it went live the same day at a very fast speed. As a result, this event was fully subscribed within half a day, attracting about 1.5 billion dollars in liquidity, showing astonishing growth. This is a typical example of 'rapid response.'
Then we have to ask a question: Can Polkadot currently achieve such a fast deployment speed? Is there such an opportunity? This is a question mark. But we can look forward to faster development deployment on Polkadot Hub in the future through pre-compile features.
Ultimately, the logic is simple: deployment needs to be fast enough → liquidity comes in → price rises → security can then be established. This is a whole chain.
Kristen: Alright, after listening to you, it seems that high inflation is indeed not good for the DeFi ecosystem. However, if more DOT flows into DeFi in the future, it could be a very optimistic prospect for Polkadot; I'm really glad to hear that.
Alright, I think we have discussed all the topics for today. Thank you all for participating today, and a special thanks to our guests for sharing your insights and perspectives. Please follow all our guests to stay updated on their projects. You can also follow PolkaWorld, and we will keep you updated on Polkadot-related news. That’s all for today, see you next time, goodbye everyone!
All: Goodbye~ Thank you~ Cheers~
Original video: https://www.youtube.com/watch?v=GK4LMUS5Mb8
This is the latter part of the recent English live broadcast organized by PolkaWorld; you can view the former part here (Who is doubling down on Polkadot? HIC announces a new round of investment, Bifrost × Hydration drives DeFi institutionalization against the trend!)
