Signalling Proposal: Inflation reduction and the introduction of co-staking
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Description
This governance proposal seeks support from the Babylon community regarding adjusting BABY tokenomics, including reducing inflation and introducing BTC-BABY co-staking.
The Context
Babylon is building native use cases for Bitcoin, making it productive without wrapping or bridging. The Bitcoin staking protocol allows native BTC to secure any blockchain or roll-up, while the trustless Bitcoin vaults expand BTC’s role into DeFi across chains. This broad deployment maximizes adoption, utility, and the impact of Babylon protocols, enhancing BABY’s value.
To support this strategic direction, BABY tokenomics should evolve so that inflation incentivizes active contributions, reduces with adoption, and increases BABY’s utility.
The Proposed Upgrade to the Tokenomics
Currently, BABY inflates 8% annually (4% for BABY stakers, 4% for BTC stakers). With nearly $7B BTC staked, the bootstrap goal is achieved. The proposal reduces inflation ~30%, from 8% to 5.5% p.a., allocated as:
- 1% to BTC stakers (with commission by finality providers).
- 2% to BABY stakers (with commission by CometBFT validators).
- 2.35% to BTC stakers who also stake BABY (co-staking rewards). Every 20,000 BABY staked makes 1 BTC eligible.
- 0.075% to active finality providers (by delegation size).
- 0.075% to active CometBFT validators (by delegation size).
This prepares for future tokenomics revisions once the trustless Bitcoin vault protocol is live.
The Co-Staking Reward Mechanism
BTC stakers who also stake BABY earn proportional co-staking rewards. A co-staker’s weight is:
w = min(B_BABY / R, B_BTC), with R = 20,000.
Rewards are distributed as C * (w / W), where W is the total weight. For example:
- Alice stakes 6 BTC and 50K BABY → weight 2.5.
- Bob stakes 6 BTC and 150K BABY → weight 6. If 10K BABY rewards are distributed, Alice gets 2.94K, Bob gets 7.06K.
For full details, see the forum post: https://forum.babylon.foundation/t/inflation-reduction-and-the-introduction-of-co-staking/718
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