![](https://subsquare.infura-ipfs.io/ipfs/QmVWw87pnKQeN3SYYjg3cmVm4Y4vj2avc2rKTgwxS5kpvv)

This proposal is an alternative to [1709](https://polkadot.subsquare.io/referenda/1709) and [1710](https://polkadot.subsquare.io/referenda/1710), with one substantial improvement: We introduce a pool for algorithmic growth incentives to create DOT demand drivers and grow the economic.

- Supply Cap of 2.1b USD
- Stepped reduction every two years:
    - Reduce inflation by 33%
    - Reduce staking rewards by 50%
- Set aside the excess DOT in a pool dedicated for algorithmic economic growth incentives

![output (6) (2).png](https://subsquare.infura-ipfs.io/ipfs/QmSFf4sDsSGB9H6kixxFuDAvM5KK7oedrRNAdk4QBEmrUz)

## Just hammering down inflation is dangerous
The other proposals are good, but have a problem: They only address supply, but not demand.

If we remove incentives to stake DOT, and the DOT has nowhere to go, it might go idle and further reduce DOT demand, reducing price and further disincentivize holding DOT, sending DOT into a dangerous downward trajectory. It is unclear how much additional demand the supply cap can create and is a purely speculative bet. Too risky for a multi-billion dollar asset.

## Tokenomics policy needs to create demand for DOT
The main problem with current tokenomics is not they are creating too much supply, it is that they are creating too little demand. There is no incentive to use DOT in parachains. Even worse, there is a disincentive, because the staking APR is too damn high. Even an inflation halving will not eliminate this problem.

The primary driver of DOT demand can only come from the economy. In Polkadot, parachains are the economy. Right now, only 0.7% of DOT are used on parachains for economic activity. 54% are staked. 45% are idle. The DOT economy is practically non-existant.

Good DOT tokenomics has to answer the question: How do we create demand for DOT?

![image (40).png](https://subsquare.infura-ipfs.io/ipfs/QmUSb5NVneDSZfaFxNcwj2apzKCKbTcUrZMxuygRhYQkmg)

## Creating an Economic Growth Incentive Pool

To create DOT demand, it is not enough to just sharpen the supply curve. We need to actively create demand drivers. I propose to go forward with a halving of staking rewards, but only a 1/3 reduction of inflation. This leaves extra DOT that can go into an economic growth incentive pool.

![Frame 16 (2).png](https://subsquare.infura-ipfs.io/ipfs/QmYjbqLaNFLQ6CkxcKpVjsJ7SoeuUoaatr6RH7rc42Y9h2)

I have laid out one algorithmic mechanism in the forum post [Economic Growth Incentives](https://forum.polkadot.network/t/economic-growth-incentives/14300). There I argue that we can algorithmically allocate DOT to parachains in proportion to how much each parachain sovereign account has captured in non-staked DOT. This creates a virtouous cycle of economic growth, letting parachains compete for DOT incentives, forcing innovation and a race to capture DOT. It also eliminates the disincentive for DeFi to capture hundreds of millions of USD in DOT. The effect is that hundreds of millions of USD worth of DOT gets pulled into the economy and sets the ecosystem on a new growth trajectory.

Economic Growth Incentives is also described in a video here:
[Video: Economic Growth Incentives](https://www.youtube.com/watch?v=aZ5Gn4wXzY0)

## Include the pool in the tokenomics decision now to secure this important economic policy lever

However, I strongly believe we must not rush decisions that affects billions of USD of market cap. We need to determine the exact model through calm and logical economic research led by the resources and personnel currently only available to the W3F.

**It is important that we do not lock us out of incentivicing economic growth by hammering down inflation without any room to move policy levers. If a hard staking reward reduction is enacted, we must also set aside DOT to the economic growth incentive pool.**

The current proposal maintains all the benefits of 1710 (supply cap + staking rewards halving) but mitigates the risk of not being able to counter a deadly downward spiral.

If we will not find agreement on the mechanism, we can still discard the idea and burn the incentive pool later.

#1711 Growth Pressure Capped & Stepped Supply Schedule