@Alex North and @Nicola.

The basic mechanism is:

When a sector expires, only the fraction of target pledge that has been satisfied (initially or from repayments) is released to the SP, i.e. actual pledge is released in proportion to the expired sector’s share of the total pledge requirement. The SP’s shortfall fraction remains constant, and the SP could then onboard one new sector with that released pledge while maintaining that shortfall fraction (if the pledge requirement has remained constant).

Problem (1) of difficulty sourcing pledge tokens is addressed by reducing collateral requirements. SPs will be able to commit more storage & deals with the tokens available to them, but receive a lower net reward after paying fees, compared to SPs that deposit the full pledge.

Problem (2) of inflation is addressed by both the shortfall fees and, much more significantly, by the automatic redirection of vested rewards into pledge.

Problem (3) of crowding out is mitigated by requiring each marginal sector to still provide a large portion of its required pledge, and by setting generally high shortfall fees. Demand for leased tokens will remain high, and leasing externally will usually be more economical than taking a shortfall (but doing both at once is likely).

It is rational for an individual SP onboarding storage to take on a pledge shortfall because they can then get more power for a fixed amount of pledge. However, any increased share of rewards may be competed away by other SPs doing the same thing. The rationality of maintaining a shortfall (when pledge funds are limited) induces a large fraction of block rewards to be re-committed to pledge before they vest, so never enter the circulating supply.

To give a guide to the scale of impact, rough analysis suggests that given Feb 2023 network conditions, a high bound is:

A network parameter of the expected shortfall repayment time is set, say to the minimum sector commitment duration (1y after SDM). This expected duration, plus the repayment rate (below) determines the maximum collateral shortfall amount for any SP: no higher than the amount of expected block rewards to be earned and available to redirect into pledge over the life of the sector. The intuition here is that every sector should reach full collateralisation before it expires.

This maximum shortfall fraction is likely in the range 25-35% today (depending on maximum repayment rate chosen). This value will decrease over time as the block reward decays. This leads to a natural phasing out of the collateral shortfall mechanism in the long term, as the max shortfall shrinks toward zero.

Upon introduction, we may need to ramp up the maximum shortfall slowly to avoid incentives to terminate and re-onboard sectors.

We take as a design principal that an SP’s total shortfall must be repayable from expected rewards, after fees, within the target term of 1 year. This means an upper bound on the repayments + fees is an SP’s total rate of reward.

An SP will presumably need some free token flow in order to pay operational expenses, but this amount will vary between SPs. A good mechanism will let a growing SP take on a shortfall up to their ability to maintain operations.

If we take an upper limit of 100% of expected rewards being directed toward either repayments or fees when an SP takes on the maximum shortfall, then we see network parameters of the maximum fraction of rewards directed toward repayments or fees (adding up to ≤ 1.0). At lower shortfall levels, a lesser fraction of rewards are directed to both repayments and fees, and the remainder is free for the SP’s opex.

These parameters turn out to directly imply a maximum shortfall fee. Or, said another way, a target fee rate determines the split between repayments and fees. Today 75% of an SPs rewards are vested for six months, and 25% released immediately. If we take that split as the repayment/fee split, the implied fee rate is 33.3% (i.e. the ratio). The fee rate may be increased by burning a greater part of their reward (but note this would also reduce the max shortfall, since fewer tokens are available for repayments within the fixed term).

It is also necessary to set a minimum repayment rate in order to have shortfalls actually paid back. Otherwise, as the shortfall is paid back, the repayment rate will shrink too like Xeno’s paradox. E.g. we could set at least 25% of block rewards are used to repay any level of shortfall.

An SP can take as much additional shortfall as they wish to reach breakeven on their total operational return. If they do, all block rewards they earn are either burnt as fees, redirected into pledge, or necessarily spent on operations.

Whatever fixed fee is set, there remains a possibility that external interest rates will rise above it, leading to substitution of a shortfall for leasing. Similarly, the fee could be set too high above sector net returns (i.e. after costs) to be useful, even though tokens for leasing are scarce. As an optional extension, the shortfall fee could change dynamically over time in response to utilisation of the shortfall. If allowable shortfalls are nearly fully utilised, then the fee may be lower than leasing rates (or is at least well clear of minimum net returns), and could be raised. Conversely, if there is ~no utilisation, the fee rate may be too high to be useful and could be lowered toward some floor.

Here are some concrete proposed parameters and functions for analysis. They may be changed if we can quantify better values.

These imply:

For an SP with an actual MinerShortfall amount, given an EarnedReward:

This proposal lets SPs onboard more power for the tokens they have available, it does not decrease the amount that they will lock.

For a shortfall to be preferable to leasing tokens for collateral, both (a) more than 2/3 of the demand for pledge must be available and met by FIL holders at fees compatible with positive sector net returns, and (b) the leasing fee must be higher than the shortfall fee (e.g. 33%). These are unlikely to happen at the same time: abundant supply will generally lead to low fees on leased tokens.

The shortfall fee quantifies how much more the network prefers locking an otherwise free token over a future/vesting one.

The mechanism of using block reward and a target repayment period to set the maximum shortfall means this mechanism naturally decays over time. As the block reward reduces, the maximum shortfall reduces, which reduces the maximum fees earned too. The impact on inflation remains strong if the repayment rate has a floor.

This decay is entirely appropriate, as in the long run we expect (1) leasing markets to mature and resolve the problems of access to collateral, (2) inflation to decrease both with the block rewards, and when SAFT vesting expires. This proposal cannot induce deflation or perpetual burning (but of course other mechanisms can and will).

At first glance, reducing pledge per unit power seems to threaten consensus security, allowing a cheaper buying of power. However, this is only the case if unilaterally adopted. If most SPs take on similar levels of collateral shortfall, then while the total power:collateral ratio increases, no individual SP gains a significantly larger share of power or influence over block production. The raw cost of share of consensus power does not change much. Given upper bounds on the shortfall fraction, consensus risk seems minimal.

Because repayments are taken from earned rewards, it’s possible for an SP that earns much less than expected rewards to not reach full pledge before a sector is eligible for expiration. This could happen if

An un-earned reward is closely equivalent to a burn of that reward. With the current construction of the built-in reward actor, un-earned rewards will accumulate indefinitely and never enter the supply (TODO: confirm this). Protocol changes in the future could possibly alter the minting algorithm to eventually emit these tokens. Thus, from a network perspective, missing a reward has better supply impacts than earning and locking it anyway.

The case of new miner actors below the minimum consensus power needs analysis. Intuition suggests that such SPs earn no consensus power or rewards from the network, so pledging the minimum (2/3) requirement is already sufficient for incentive alignment and security.

The situation of rapid network growth reducing rewards below expectations needs analysis. At the high level this seems like a desirable outcome for the network, and any potential under-collateralisation by SPs left behind as something of a champagne problem. A related situation is the reduction of rewards to simple minting, when raw byte power is below baseline (as it currently is).