The Flow of Akash Tokens and Reward Mechanism

In this article, we will examine how Akash tokens flow from one participant to another and, by doing so, understand the reward mechanism of Akash better.

What is Akash?

Akash (https://akash.network/) is a marketplace for software developers to buy computing resources from providers so that developers can run their software. To explain that better, we can look at how software developers rent computers today and how that differs from renting computers in Akash.

When software developers want to run their software, they could buy or rent computers from cloud providers. Typically, they research the pricing and services cloud providers provide and go to the cloud provider website (such as Digital Ocean and Amazon Web Service) to rent the computers.

The experience differs when software developers run their software on the Akash network. To run on Akash, software developers need to specify what they want to run and how many computing resources they need (using a "Stack Definition Language"). Cloud providers on Akash would then offer a price/rate for the developers (this process is called bidding). Finally, developers would choose a cloud provider from all the offers they received to run their software.

As you can see, Akash is not a cloud provider. Instead, it is a marketplace that matches software developers who need to rent computers with cloud providers with idle computing resources that they can lease to developers.

The flow of tokens

The flow of Akash Tokens

To understand the economy of Akash, we need to know how Akash rewards each participant in the network and whether the reward mechanism is sustainable in the long run. The picture above shows how Akash tokens flow through each participant. By investigating each flow in detail, we can understand the reward mechanism better:

• The $rent flow: This is the flow of money from software developers to cloud providers when the developers pay to rent the computers
• The $fee flow: For each $rent flow, Akash proposed to tax 20% as the fee (also known as a take rate) for using the network. Akash proposed distributing some of these fees to all delegators (i.e., Akash token holders who delegate the responsibility to secure the blockchain to the validator). We assumed that some of these fees would go to the validator operators as $commission.
• The $stake-reward flow: Akash token holders may choose to stake their tokens by delegating the responsibility to secure the blockchain to the validators. When validators propose a new block to the blockchain, they will receive rewards in Akash tokens. Validators distribute some rewards to token holders as staking rewards and keep other rewards as $commission. Other staking rewards are coming from the $fee flow.
• The $commission flow: Validator operators earn commission by getting rewards when proposing a new block to the blockchain. We also believed that validator operators would eventually earn commission from the $fee flow.
• The $buy and $sell flows: Software developers, token holders, and validator operators would buy and sell Akash tokens in exchange.

Reward mechanism today

So how Akash incentivizes each participant in the network today?

Cloud providers participate in the network because they want to lease their idle or dedicated computers to software developers and earn rent. With the Akash network, the cloud provider business is no longer limited to just a few companies (such as Digital Ocean and Amazon Web Service). Instead, anyone with idle or dedicated computers can be a cloud provider.

In addition, cloud providers also earn rewards by staking. To become cloud providers, they must provide a minimum of 5 AKT as collateral, which they will stake to earn staking rewards.

Software developers participate in the network because there is a pool of computing resources that they can rent at a lower price than other cloud providers.

Token holders participate in the network because they want to earn staking rewards by delegating the responsibility to secure the network to validators.

Validator operators operate the validator to propose new blocks to the blockchain so that they can earn commissions from token holders.

Both token holders and validators expect more software developers to rent computing resources using Akash, creating more intrinsic values for Akash tokens and raising the token prices. Token holders and validators can then sell the tokens for profits.

Today, Akash is not yet charging a fee for each lease on the marketplace (i.e., the $fee flow is not yet enabled). So most rewards for some participants come from inflationary rewards, or in other words, printing new Akash tokens to pay for cloud providers, token holders, and validator operators. The inflationary reward mechanism is not sustainable, but it is essential to bootstrap the network so that early participants are willing to join it.

Reward mechanism in the future

Akash proposed to enable the $fee flow, which means that token holders and validator operators would have more reward sources than just inflationary rewards. The new reward sources would incentivize both token holders and validators to keep running the validators to propose new blocks to the blockchain. Hence, the $fee flow is essential to keep the network running.

However, the $fee flow is currently facing the regulatory issue. Based on comments from the Akash team, Akash tokens may be categorized as security if the $fee flow is enabled.

Akash also proposed slowly stopping the inflationary reward mechanism ten years after the creation of the network, which means Akash must find an alternative reward source for token holders and validators before the ten years deadline. The ten years deadline again highlights the significance of the $fee flow. Without it, validator operators and token holders will not have any rewards and incentives to continue running the validators, and Akash will cease to exist.

Another alternative to charging a flat 20% tax for each lease created in the marketplace is setting a higher transaction fee for all transactions. Regardless of other options, Akash must enable the $fee flow to keep the network running.

Conclusion

The primary reward mechanism for Akash, the inflationary reward, has been working well today and has attracted 53 cloud providers (with 4,300 vCPU, 22TB of memory, and 347TB of storage, according to https://cloudmos.io/) and 100 validators to participate as of writing. However, to keep the network running, Akash must find an alternative reward mechanism in the future.

References:

• Greg Osuri tweeted about the regulatory issue for the take rate: https://twitter.com/gregosuri/status/1547602326843625473.
• Akash Weekly Spaces on June 29, 2022, explaining the regulatory issue: https://t.co/iVwmEssUkh
• "Bootstrapping a Free Market by Borrowing from the Future": https://akash.network/blog/bootstrapping-a-free-market-by-borrowing-from-the-future.
• "Akash Network Validator Rewards": https://akash.network/blog/akash-network-validator-rewards
• Akash Economic Paper: https://ipfs.io/ipfs/QmdV52bF7j4utynJ6L11RgG93FuJiUmBH1i7pRD6NjUt6B
• Akash Whitepaper: https://ipfs.io/ipfs/QmVwsi5kTrg7UcUEGi5UfdheVLBWoHjze2pHy4tLqYvLYv