In response, Celestia co-founder John Alder has made a counterintuitive but audacious suggestion to radically alter the network’s tokenomics. He proposes scrapping the current Proof of Stake (PoS) model and replacing it with a Proof of Governance system. This proposal comes just as the price of the TIA token has taken a significant nosedive, crashing 93% from its ATH. Alder knows the current Proof of Stake (PoS) system isn’t sustainable. It rewards stakers with TIA tokens that are proportional to 8% of the ever-growing circulating supply annually. The rewards, now worth about $127 million, are only 13% of TIA’s market cap. While their proposed change attempts to address worries about token value, it would better align the incentives driving the network’s data availability services with the revenue earned from those services.

Addressing Tokenomics Concerns

Celestia’s current inflation rate is 8% per year. The PoS model further distributes TIA tokens to stakers, incentivizing them to secure the network. Alder argues that this model isn’t fully incentivizing value to TIA token holders in the right way.

Demand for Celestia's data availability services has not met initial expectations, contributing to the TIA token's price decline. Today, staking rewards represent 46.26% of the token’s market cap value. This makes us wonder, in the long-term, how sustainable is a PoS system? Celestia has already received flak for assuming a PoS model in the past, forcing the team to seek solutions in different directions.

Proof of Governance Proposal

Alder’s suggested Proof of Governance model would reduce the annual issuance of new tokens by 95%. Far from $127 million, that annual allocation could fall to as little as $4 million – an incredible reduction to only 0.25%. This dramatic cut is designed to help reduce inflation and, ultimately, help stabilize the TIA token’s price.

The Proof of Governance model will function offchain. This decision is largely a product of the Celestia blockchain’s technical constraints of supporting onchain governance voting. Alder further contends that this offchain system is equal in security to the onchain counterparts of similar size and scope. He points out that Celestia is backed by strong offchain governance structures. Proponents of Proof of Governance claim that it simplifies administration and increases cost-effectiveness. They argue that it offers the same security guarantees as Proof of Stake (PoS).

Path to Sustainable Value

Doing so will put Celestia on the right track to implement Proof of Governance. This new approach makes a strong pivot toward putting revenue generation first through its data availability services. Celestia minimizes incentive misalignment by connecting incentives directly to network broadband usage and value generated for TIA token holders. This approach is intended to create a more sustainable and healthier ecosystem.

Recently, Celestia approved a community proposal to decrease staking rewards from ~8% to 5%. Even though this change was supposed to be made almost four years ago, it has not been implemented. The move from POS to PoG represents a huge break from the existing paradigm. This shift reflects a larger reckoning within the industry, as it collectively develops a more sophisticated understanding of tokenomics. Despite Celestia’s innovative approach, it suffers from significant problems, primarily caused by the large number of tokens it hands out to stakers. This reality highlights the critical need for enterprising solutions to ensure lasting sustainability.