It is great that we are finally warming up to the idea of using our governance system to enable similar mechanics as other DeFi platforms, namely introducing inflation to reward good protocol behavior.
What I don’t like so much about this particular proposal is the fact that is it tied to the MCR % and that it seems really counterintuitive to have locks like a year or so in blockchain. We would turn the Mutual into a speculation powerhouse whenever MCR % is high above 130% and would indirectly discourage staking or claim assessment participation. Also locking up capital below 130% means in no way that we are driving the price up, we just add inflation to those which were long anyways - see @nexudm answer, which I would echo.
Looking at the current design, we already have great ways to lock up capital, the rewards are just not as big as they could be:
- lock up for governance/claims assessment (1-week to 1-month lock I believe)
- lock up for staking (3-months lock)
Why don’t we add inflation to those who lock their capital into these mechanics and participate? This way we could also incentivize certain staking behavior, i.e., for example, divide all inflation into 70% for staking and 30% for governance/claims. Then divide the staking rewards further into how much cover is purchased per contract vs staked and reward stakers of those contracts more who have not reached the minimum price.
The rewards could increase linearly up until withdrawal the longer the capital was locked there, similar to the math that you proposed, no need to have clunky one or two-year locks, which didn’t work well for PoS systems that use those either.
The inflation itself could then be a function of how much NXM is locked up (similar to proven ETH2.0/Cosmos/Polkadot staking mechanics). I.e. up to 50% for a year when the participation rate is low, down to 5-10% when the vast majority of NXM is locked up in the system.