Network Sustainability Mechanism (NSM) - ZecHub

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Please Read: What is the Network Sustainability Mechanism (NSM) and why is it important?

In recent years, there has been increased attention around Bitcoin’s future security budget due to concerns that miner revenue from transaction fees may not be sufficient to provide adequate network security after the block subsidy decreases. Discussions in the Bitcoin community have focused on solutions like adding tail emissions, which could breach Bitcoin’s 21 million coin cap, or whether Bitcoin’s price will rise enough for transaction fees to adequately compensate miners.

Zcash faces a similar challenge to Bitcoin that the NSM is specifically designed to address. The NSM is an upgrade to the issuance mechanism that maintains the 21 million coin cap and enables the burning of ZEC from circulating supply, which can later be reintroduced as future block rewards to help sustain the network. Future use cases include donations, ZSA fees, an EIP-1559 dynamic fees, and other fee applications that compensate the network.

There are three ZIPs associated with the NSM:

ZIP 233 establishes a voluntary burn mechanism that allows users to contribute to network sustainability. This allows “donations” to be made directly to the Zcash network instead of development organizations or individuals. The ZEC that’s removed from circulation can be re-created in future block rewards to support miners, stakers, and Dev Fund recipients, which enhances the long-term sustainability of the network. There are two key impacts related to the removal of ZEC from circulation: First, by removing ZEC from circulation, the overall supply decreases in the short term, resulting in a deflationary effect. The reduced supply increases scarcity, which can potentially result in a higher value for ZEC. Second, removing ZEC from circulation allows for a higher rate of coin creation in the long term. This means that there will be more ZEC available for future block rewards further along the emissions curve, supporting incentives for miners, stakers, and Dev Fund recipients while still respecting the 21 million coin cap.

ZIP 234 smooths the issuance curve and enables burned coins to be reintroduced into circulation in a straightforward and predictable manner. The primary objective of the NSM is to create an automated mechanism that enables users to contribute to the sustainability of the network. As part of this process, burned ZEC can be reintroduced into future block rewards. Smoothing the issuance curve with an exponential decay model offers a dependable way to reintroduce burned coins back into circulation. This approach allocates coins at a steady, declining rate, allowing for predictable issuance while preventing sudden changes that could disrupt the network. The issuance mechanism is intentionally designed to approximate a four-year half-life, similar to what exists with current halvings.

ZIP 235 proposes to burn 60% of transaction fees (approx 210 ZEC per year) to help sustain the network. The impact on miners is minimal because transaction fees are currently low. While the amount of burned ZEC is small, our intention has always been to implement a modest version of the NSM to introduce its basic functionality, leaving discussions about future changes to fee burning mechanisms for the community to decide after the NSM is operational. This approach decouples the technical implementation from governance discussions. Furthermore, given that transaction fees are low, this is the ideal time to implement the burn mechanism before block producers have any strong economic incentive to oppose it.

Please read the full FAQ here: https://forum.zcashcommunity.com/t/network-sustainability-mechanism-nsm/42703/176.

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