Updates to Incentive, Challenge Period, and Elimination Criteria
This proposal is a routine update with tuning the sensitivity of the incentive distribution being the largest change. In addition, there are three minor tweaks which will reduce complexity in challenge period, elimination criteria, and scoring.
The softmax implementation for the distribution of miner incentive has a temperature parameter that allows us to adjust the sensitivity of the distribution. Details on softmax can be found in proposal 11 here.
Miners in the main competition that exceed a maximum drawdown of 10% are currently given a weight score of 0 for 5 days. This is captured by the drawdown threshold penalty, and these miners with a maximum penalty are not included in the general scoring process. Excessive drawdown also reduces the Short-Term Calmar ratio for 5 days and the Calmar ratio for 90 days.
Setting minimum values Sharpe, Omega, Sortino, and Statistical Confidence in the challenge period serves as a soft 60-day time restriction for the challenge period since promotion is unlikely but possible at any time. Setting minimum values allows us to have confidence in the scores of these miners since these metrics can be volatile and unreliable with small sample sizes.
Problem Statement
The current distribution of incentive doesn’t sufficiently reward minor performance gains. With the current temperature value of 0.2, emissions are distributed more evenly to miners and may not sufficiently incentivize innovation and competition.
The current method of penalizing extreme drawdowns has led to confusion on how miners are scored. Miners with a maximum drawdown penalty have shown that they carry excessive risk, yet they remain in the system, temporarily receiving no emissions.
Setting minimum values for statistics in the challenge period until 60 days have elapsed has also led to confusion on how scores are calculated and if it is possible to be promoted in these 60 days.
Proposed Adjustments
To remedy the issues enumerated above, we propose the following:
- We will be changing the softmax temperature from 0.2 to 0.06, making the distribution more similar to a max function.
- Miners that exceed a drawdown of 10% will be eliminated.
- Miners will be unable to be promoted to the main competition from the challenge period until at least 60 full trading days have elapsed.
- Simplify both Calmar ratios to directly use the max drawdown as a denominator.
Decreasing Temperature for Softmax
Decreasing the temperature won’t affect rankings; however, the emissions received by each miner will likely change. With the top 25% of miners receiving more than 99% of emissions, there will be a greater incentive to become a top miner. Furthermore, differences in performance will now lead to greater differences in received emissions. We hope to increase competition and justly reward miners for higher performance.
The graphs below illustrate that decreasing the temperature modifies the distribution to be more similar to taking a maximum of miner scores. As of 01/28/25, the top 10 miners will now be receiving roughly 75% of emissions rather than the previous 34%.
Elimination for Max Drawdown
Eliminating miners for drawdowns exceeding 10% will reduce clutter in the network, unify the challenge period and the main competition, and simplify the scoring process.
Challenge Period Time Restriction
Miners won’t be able to enter the main competition until at least 60 full days of trading have been observed. Miners will then have 30 days to pass until the total 90 days for the challenge period have elapsed.
Switching to a strict time limit of 60 days until possible promotion will reduce the complexity of the challenge period. Miners will still be able to view their performance before 60 days have elapsed, and miners will still have 90 days until they are eliminated. More details on the challenge period can be found in proposal 13 here.
Calmar Simplification
Currently, the Calmar metrics are set to 0 if the max drawdown exceeds 10%. This helped ensure proper risk management, but is no longer needed after this update. We will be removing any drawdown augmentations and using the max drawdown value directly.
Timeline
Proposal Delivery: Jan 28, 2025
PR: Jan 28, 2025
Integration: Feb 4, 2025