Hello everyone. Hi Sean. Hi Sean. Hello. Hello. How are you doing? Good. Good. I'm looking forward to this conversation.
Yes, likewise. What's going on your side?
Us. We really are sort of ramping up here. So I think the main thing is really working on software releases and updates and then bringing on board some quite big new use cases.
And for the space today, the topic is around the impacts reward function.
And we can cover some questions around that.
What impact it would have on stakeholders, token holders, validators, impact producers, and the implementation of the function, I guess.
Yeah, and I think we need to start off with understanding what the function is. What's the purpose of this?
Why? Why do we want to bring this function in? And so there's a very clear rationale for it. And so I'd love to share that.
And we have Skalnix on the call as well. So I'd love for you to invite up, I think if it's Charlie and the team.
So part of what we are still doing is modeling out the crypto economics and doing the engineering for the design.
So the conceptual design is laid out in the light paper. And that gives a high level view on what this is and why we are implementing it.
And now going into the detailed technical specification and modeling simulation, that's an important next step.
So this mechanism doesn't exist in isolation. It's part of a complex system, both the systems that exist within the state space, if I can put it that way, of the digital infrastructure.
So the XO chain is related services and so on. But it also exists within a much more complex real world, where the dynamics are mostly beyond our control.
And so getting the interplay between the real world and the crypto economic mechanisms of the state space of the digital world or the digital mechanisms, getting that right and understanding the interplay between them is super important.
And we can't design for or plan for all possibilities. We can look at a proper understanding of the model from a causality perspective, what kind of things can cause changes in the system, what might those effects be, what are the counterfactuals and so on.
So we're going through that process. But then we need to develop some simulations of what we think could happen. So we take it through various kind of battle testing processes of simulating ways in which the mechanism can be interacted with from the real world, from users.
And then how that would respond in terms of the way that the mechanisms operate and the mechanisms operate as well within a more complex set of other mechanisms.
So we've got staking and we've got inflation and we've got various uses for the token. We've got different dynamics around the production and supply and lifecycle of carbon credits.
We've got interactions with other chains. So there's quite a lot of kind of moving parts, if I can put it that way.
And the most responsible approach is to look at a whole systems dynamic and the best of our ability to model that out and test it out.
So that's part of the phase that we're going through. But I think before we get into that level of technical detail, it's important to understand why we want to have this function and what purpose it serves.
Yeah, exactly. So maybe we can dive into the why a little bit more and the need for a function like this.
Sure. So I'd also like to invite other people up to the stage and to make this more of an interactive conversation.
Please feel free to put up your hand and get involved, ask questions and so on.
So let's take a step back and look at what the purpose of the Exo Network is. So we've spoken about this before and written about it a lot that the Exo Network is the genesis of this Internet of Impacts.
And the Internet of Impacts has the purpose, obviously, as the name implies, of achieving impacts, positive impacts in the real world.
And so the Exo chain provides part of that infrastructure.
We think it's a core part of the infrastructure and the impact hub, which is the Exo Network, provides a bunch of services which are very fundamental to what is needed for this new Internet and also helps to draw on the services of other networks.
But fundamentally, the purpose of this network is impact. And so we can think of that as an objective function.
And the way that we can measure whether that objective function is being achieved or not is to look at the outcomes that are being measured and that are flowing through the system.
And so we have a very specific way of measuring these outcomes, which is impact credits, which are tokenized units of outcomes.
So an example of an impact credit is a carbon credit and that represents one kilogram of carbon emissions that have not been made, that have been abated, or a kilogram of carbon emissions of carbon that has been sequestered.
And so that's a really good measure of the objective function. But it's not the full part of the story, because if we look at the life cycle of impact, it needs to go through the production of the impact, the verification of the impact.
And ultimately, you need to kind of close the book on it. Just like with financial accounting, at the end of every year, you've got financial statements and you have an audit on the financial statements and that provides a state from which you can then move into the next period.
And so for the life cycle of impact, the retirement of impact credits is a really important step, because until that happens, those credits are still available in the economy and can be used for other purposes.
And some of those purposes are sort of primary purposes that help to support the impact objective.
So for instance, providing a measure of quantification, the verifiability, etc. But it can also be used for secondary purposes, such as speculation and trading and putting it into other financing mechanisms.
And this is what we've seen a lot of with tokenized carbon that has been generated in some other networks, particularly, as we've seen with the bridging of carbon credits from traditional registries into tokenized forms.
That most of those credits are actually still circulating, they're still in a liquid form. And so the impact hasn't actually been concluded, the books haven't been closed on that.
And so what drives the whole financing and progression of the impacts in the real world is the retirement of the carbon credits, which then creates the demand for more carbon credits, which means that more financing becomes available to be used in the implementation of projects that reduce the carbon emissions or sequester carbon.
So carbon credit retirement is a really important final step of the impact lifecycle and represents finality in the state.
And so to truly achieve the objective function of the network, we need to ensure in various ways that retirement of credits happens.
And so if we use the incentive mechanisms that are available in the network to incentivize the retirement of carbon credits, then we're helping to progress and incentivize the achievement of the objective function of the network.
Now, I hope that wasn't too, too wordy and kind of complex. But I would love to hear other people's questions about that. And whether you have any, any questions about understanding that mechanism, or like whether you think it's a great idea.
And, you know, it's, it's important in the systems that we create, particularly where these systems are machine systems, whether it's an AI system, machine learning, or a blockchain system, that we are very clear about what the objective function is.
And generally, the objective function then has a huge effect on how the system operates, and getting the right objective function and incentivizing the achievement of that objective function, then becomes, you know, much easier to understand what needs to be done,
and to measure whether the objective function is being achieved or not, or whether there's perhaps some unexpected outcomes of this, you know, as, as we know, within AI systems, sometimes the objective function can lead to unexpected results.
If you're not clear about understanding that objective, I can defining it and managing it.
Yeah, there was quite a lot there.
But I think for me, what stood out is using incentive mechanisms to promote retirement of credit. And as you say, closing the book, so that we actually know that the impact activity has concluded.
So I'd like to open it up to to the floor and invite other people to share their thoughts. Do you guys think this is a good idea worth pursuing?
What do you think some of the challenges around this might be in terms of implementation? You should be able to speak, I've adjusted the settings that allow anyone to speak.
But I see everyone is still on on listening mode.
Yeah, so maybe I can just talk, whilst, whilst people are gathering their questions and their responses about incentives of blockchain networks, and generally, the, the incentives that have kind of been foundational to proof of stake networks have been focused on the security
of the network. You know, so proof of stake was a novel invention a few years ago, not that long ago. And I still remember the big debates about whether proof of stake was actually going to be really secure.
And you know, there were these sort of maximalists who were saying that proof of proof of work is the only way to properly secure blockchains and so on. And so in the early days of proof of stake, in order to secure the networks with proof of stake, really the incentive structure of running a blockchain needed to be focused on the security of the network.
And this is really the fundamental reason why the primary incentivization mechanism is staking, particularly in the, in the proof of stake mechanism, which was Tendermint implemented in the Cosmos network.
And so the, the way that a network has to provide incentives is through network inflation. So providing more tokens as incentives for validators to run nodes, and we've seen that work really, really well as an incentive for operating infrastructure within the Bitcoin network, for instance,
and Ethereum networks. So in the first instance, you know, run a node of the network. And then the second instance, stake economically into the nodes of the network in the proof of stake mechanism and Cosmos has delegated proof of stake.
Today's call isn't about proof of stake, so I won't go into the technical details of that unless anybody wants to learn more. But that was the first phase of, you know, what needed to be done in these networks,
was create a token that's part of your layer one network, and that token's function is to secure the network. What we've seen evolve is that there's now new ways of securing networks that provide more optionality around how the networks get secured.
And we will see more of these innovations going live within the Cosmos networks. So with interchange security, with mesh security, even interchange security using the Bitcoin network as the sort of to secure the chains and ensure the integrity of the chains.
And so that means that the primary function can look beyond this securing the network objective function of a blockchain network. And we can start looking at, okay, well, what is this blockchain network actually supposed to be serving a purposeful.
And we've been very clear from the start what the purpose of the EXO network is. And so now we have the optionality of putting some of the network token incentive towards incentivizing the objective function of the network.
And so this is where the incentive comes from. And it's a balancing act, still, until we have fully implemented, you know, additional network security mechanisms, such as mesh security and interchange security.
And so it's an iterative process. But I feel that we're at a point now where we can start putting some of the network incentives into achieving the objective function. And this is really where the impacts reward mechanism comes in.
Great. And yeah, then again, just opening it up to the floor. Does anyone have any questions related to concepts or implementation, or how other stakeholders might be impacted, whether they're token holders or validators or impact producers?
Graham, I see you've requested to ask a question.
Hi, Sean. Hi, Sean, I don't have a question right now. I'm just busy digesting what's been shared.
All right, cool. Well, yeah, I always say that I don't want to be doing monologues, but there's a lot of information to download here.
So the thing I'm particularly excited about with the with this mechanism design is that it in effect provides a an economic incentive and to to the retirement that results in a subsidy, essentially, for the production of impacts.
And so we spoke about this a little bit on last week's call that by putting some of the network economy into a reward that gets paid for retiring credits, such as carbon credits, that reward is essentially providing a subsidy for the retirement of credits.
Now, it's even conceivable, you know, just theoretically, that you could 100% cover the costs of production and retirement of carbon credits.
So, you know, conceivably, a network could 100% off take the carbon credits that get produced by the projects that are using the digital infrastructure as part of their means of producing those credits.
And this is a pretty profound thing, because in the current traditional finance construct around project financing, there's a lot of rent taking, there's a lot of extraction of value.
So typically, you know, if you want to finance a carbon project, the project finance will take something of the order of 50%, maybe even 70% of the value of the credits, and that goes back to the investors.
And so that gets extracted from the system, which means that the project implementers end up with somewhere between 30 and 50% of the actual capital that goes back into implementing the project.
And you know, that compromises the value of financing that should come from carbon finance or climate finance back into projects that are actually doing the work to bring about the changes that are needed.
And so hopefully with this mechanism, we may see that the network economy is actually the off taker. And because of the efficiency of the process, the rent taking disappears from the system or becomes much, much, much less.
And I'm particularly excited about the potential that this has.
We still need to see how this will play out in reality. So we're going through, as I said earlier, the simulations and modeling and and testing out our assumptions.
And then we will bring this into implementation. And only in implementation will we actually see the dynamics and whether it's playing out in the way that we expected or there may be some unexpected outcomes that
that arise from the system and that we need to respond to. So our approach to the implementation is to take an experimental approach and to do this, starting more centrally controlled and in a more limited way.
So putting a relatively small amount of the network inflation into the impact reward mechanism and then test it out, monitor it, gather the data, see how it's actually playing out in reality and then use that learning to adapt the mechanism as needed before making it an integral part of the network protocol.
OK, great. And if I may take it to, I guess, a practical level for for an individual user, say myself, for example, if I've got a supermotor nifty that's generating digital carbon credits based on the switch from or based on households switching to renewable energy to cook their food.
If I retire my carbon on the XO app, can you hear me now? Yeah.
I was just saying, if I retire my carbon on the XO app, once this mechanism is in place, would I then receive an amount of tokens depending on how much I've staked in the XO network into my account?
Correct. Yes. And so the principle is that if you're staked in the network and there's a staking ratio that you need to achieve, then then you've got an economic stake in the growth of the economy.
So that's really important is that, you know, you're staked into the economy and therefore you can participate in the mechanisms that are provided.
So firstly, you must be staked. And then when you do your retirement, there is a reward that comes back, which will be based on a dynamic impact reward ratio.
So if the ratio is one to one for every one carbon credit that you retire, you'll get one XO token.
Now, obviously, there's going to be a dynamic around the pricing of both the XO token and the carbon token.
And there needs to be a way of adapting the ratio such that it achieves an efficiency and also kind of has a positive effect rather than, in a sense, kind of draining the carbon credits or draining the XO.
And so the mechanism is designed with an algorithmic calculation of this impact reward ratio, which will become an automated ratio that varies as the price relative between XO and carbon credits changes over time.
OK, just an announcement. We're going to end the space in about five minutes.
So we want to keep these spaces relatively short, but have them consistently.
So every week to have a 30 minute call updates discussion about what's going on.
So if you've got any questions, please don't hesitate to request to speak.
In the meantime, and please correct me if I'm mistaken, Sean.
So the eligible credits to benefit from this mechanism are currently the carbon credits from the clean cooking project.
What other future possibilities around other impact credits?
So so so firstly, other classes of impact credits, sorry, carbon credits may be eligible and the eligibility will be determined by governance mechanism.
So there's a list of eligible credits and that will be curated through a governance mechanism.
And the criteria for being on the list would include an assessment of the real world impacts that are being achieved by that credit class being retired.
Conceivably, any impact credit could be used in the rewards mechanism.
And so the mechanism is designed in a very flexible way to enable any class of credits to be to be retired in this way.
It does require impact credits that are issued on the XO chain.
So carbon credits that you bring across from Polygon, for instance, which are really just coins.
They're not eleven fifty five standard tokens backed by by impact certificates would not immediately be able to be retired and therefore wouldn't wouldn't qualify for the impact reward mechanism unless they were somehow converted
into the XO standard impact credits.
The the other part of this in terms of decentralization is that we envisage that once this mechanism is up and running and it's proven itself out that any other user of the network would be able to define their their own impact rewards.
So not bringing an incentive from the network inflation, but they could put their own incentives so they could say, you know, like with USDC tokens, for instance, into a gauge and say, right, this is available for any credits that get generated.
And this is a pretty cool way of providing subsidies to think about how subsidies are currently provided through government mechanisms.
And and so this provides a permissionless way that anybody could say, you know, we we have a class of impact credits that is relevant to our cause and our use case.
And we agree that this is to the standards that we expect. And what we're going to do is incentivize the production and the retirement of these credits and they can set up their own gauge and their own rewards ratios and things.
So this should become a service that I think would be extremely high utility for a much broader range of stakeholders and use cases.
Great. Thanks for that. It answers my question.
Perhaps as we wrap up, you could touch on the implementation of this mechanism and what are the timelines looking like.
So so there's a government, a governance process around this. So we will be taking a proposal through the impact style, which will put forward the network proposal.
The impact style is a major stakeholder in the network, having a large stake of exotokens.
And and we expect that should pass through through the impact style. As soon as that happens in the next few days, a network proposal will then go live to get a signaling approval from the network validators and state delegators
to to say, yep, we want to make this go forward and approve the implementation. And following that, we will
continue with the technical work or in parallel within the technical work in terms of modeling and simulation and so on. And then the technical implementation, which
I expect to go live around about the end of this quarter.
Wonderful. Well, I look forward to watching watching come alive.
And if there are no questions from the floor, I think we could just about wrap things up. I just want to say thanks to to Sean for making this time available and thanks to everyone who who's attended.
Thank you very much. Yeah, and look forward to seeing everyone again next week.
Great. Thank you, everyone.
Thanks, Sean. Thanks for hosting.