Internet Computer Protocol : What is ICP? How Does It Work?

What is ICP?

ICP is the native token or digital coin of the Internet Computer (IC). This token is utilized in the protocol in the following way: Initially, any ICP holder has the opportunity to engage in the governance of the IC by staking ICP, voting on or proposing governance measures, and receiving voting rewards. Additionally, ICP has the capability to be converted into cycles to compensate for Internet Computer resources.

Thirdly, ICP tokens are utilized for compensating node providers who manage node machines that run the Internet Computer protocol. Finally, ICP can also be utilized for engaging in token exchanges within decentralized autonomous organizations (DAO) on the IC platform. These four protocol use cases are further explained in the upcoming section. Nonetheless, ICP can also function as a form of payment for items like NFTs, memberships, and other services.

How Does ICP Work?

Now that we have defined what ICP is, let’s delve deeper into how the token works. 

1. Governance and voting rewards

Anyone is able to take part in the governance of the IC by investing ICP tokens in neurons. Owners of neurons have the ability to vote on suggestions for modifications to the IC. The voting influence of the neurons in decision-making depends on the amount of ICP staked and other characteristics like staking duration. 

For instance, a neuron can double its voting power by increasing the staking time to a maximum of 8 years. Giving more voting power to neurons that hold staked ICP for a longer period encourages them to participate in voting for proposals that will increase the value of their tokens in the future.

The voting neurons’ maturity rises with involvement in governance. Maturity allows for the minting of ICP tokens. Every day, the IC determines a voting reward pool based on a schedule, which is subsequently distributed among all qualified neurons based on their voting power ratio. The voting rewards schedule aims to encourage early usage by distributing an annualized 10% of the total ICP supply in rewards from inception. 

Over a span of eight years, this figure decreases to 5%. The daily reward is not based on the total staked ICP in the system but is given to neurons based on their voting power and the proposals they voted on. This system encourages people to stake ICP and engage in governance by providing higher rewards for lower participation. 

As of November 2022, a total of 266 million ICP tokens have been staked, which represents 54% of the entire supply. A large portion of staked ICP, specifically 123 million ICP (equivalent to 46%), is staked for the full duration of 8 years demonstrating the commitment.

2. Rewards for Nodes Provider

ICP tokens reward node providers, who are the owners and operators of the computing nodes in charge of running the Internet Computer protocol. Rewards for node providers are distributed in the form of newly created ICP tokens. The compensation they are given is set for each node and closely linked to their real expenses. Hosting prices vary depending on the node’s location, which is determined by two parameters. Next, the node’s category, such as its hardware and connectivity specifications.

Node provider rewards are specified in XDR to cover the investment and running cost of nodes, which are then converted into ICP using the average exchange rate over the past 30 days, translating them from fiat currency terms.

Investing in IC Ecosystem

The IC offers a simple solution for developers to hand over control of their dapps to a Decentralized Autonomous Organization (DAO) and raise capital.

Users have the option to allocate a portion of their ICP to a new DAO in a decentralization swap. Once the decentralization swap is finished, these users will be rewarded with tokens from the DAO at an equal cost for all. Developers have the ability to set a duration and minimum & maximum funding goal for ICP to be raised, which dictates the end of the sale.

The proceeds from the decentralized exchange’s ICP fundraising are kept in the reserves of the fully independent DAO instead of being given to the creators of the dapp or service. These funds can be utilized for covering upcoming computational requirements of the dapp as well as compensating for code bounties for future dapp improvements.

Investments made through decentralized swaps in DAOs serve as powerful drivers for the IC ecosystem. It grants simple and clear entry to engaging Web 3 projects and directs funds towards the productive utilization of the platform.

Total Supply Development

The IC has both inflationary and deflationary processes. Participants in governance have the ability to exchange their voting rewards for newly created ICP. Additionally, node operators are compensated with newly generated ICP tokens as rewards. Conversely, ICP is transformed into cycles (i.e., burned) as a means of covering costs for computation and storage. This is shown in the picture below.