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Merge pull request #334 from anoma/zjcio-patch-14
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Update shielded-pool-incentives.mdx
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zjcio authored Mar 26, 2024
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## Shielded pool rewards

Privacy provided by the MASP in practice depends on how many users use the shielded pool and what assets they use it with. To increase the likelihood of a sizeable privacy set, Namada pays a variable portion of inflation, up to 10% per annum, to shielded pool incentives, which are allocated on a per-asset basis by a PD-controller targeting specific amounts of each asset being locked in the shielded pool.
Data protection provided by the MASP in practice depends on how many users use the shielded pool and what assets they use it with. To increase the likelihood of a sizeable shielded set, Namada pays a variable portion of inflation, up to 10% per annum, to shielded pool incentives, which are allocated on a per-asset basis by a PD-controller targeting specific amounts of each asset being locked in the shielded pool.

### Rationale

The economic rationale for subsidizing the shielded set comes from "positive externalities": the shielding of more assets into the current privacy set not only provides better privacy for the owner of the assets, but enhances privacy for *everyone*. In this way, even users that are indifferent about privacy, are "nudged" into shielding their assets. This is especially important in an environment where users pay for computation, and shielded transactions are expected to be more expensive than transparent transactions.
The economic rationale for subsidizing the shielded set comes from "positive externalities": the shielding of more assets into the current shielded set not only provides better data protection for the owner of the assets, but enhances data protection for *everyone*. In this way, even users that are indifferent about data protection, are "nudged" into shielding their assets. This is especially important in an environment where users pay for computation, and shielded transactions are expected to be more expensive than transparent transactions.

The subsidy on Namada adheres to the following constraints in order to avoid perverse incentives:
- Fee subsidies cannot reduce fees to zero, or reduce fees so much that inexpensive transaction spam can fill blocks and overload validators.
- Incentives for contributing to the privacy set should not incentivise transactions which do not meaningfully contribute to the privacy set or merely repeat a previous action (shielded and unshielding the same assets, repeatedly transferring the same assets, etc.)
- Incentives for contributing to the privacy set, since the MASP supports many assets, will need to be adjusted over time according to actual conditions of use.
- Incentives for contributing to the shielded set should not incentivise transactions which do not meaningfully contribute to the shielded set or merely repeat a previous action (shielded and unshielding the same assets, repeatedly transferring the same assets, etc.)
- Incentives for contributing to the shielded set, since the MASP supports many assets, will need to be adjusted over time according to actual conditions of use.

### Design

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