The Internet Computer Protocol (ICP) operates using a unique Reverse Gas Model, which directly impacts the efficiency and scalability of decentralized applications (dApps). Developers building on ICP need to burn $ICP tokens to acquire “Cycles,” which are the compute units required to run their dApps on the network.
One of the notable aspects of this model is its dependency on the price of $ICP. The higher the price of $ICP, the less of it is needed to generate the required Cycles for mass adoption. This makes the network more efficient and reduces the need to mint more $ICP tokens to meet growing demand. Essentially, the price of $ICP and its relationship with Cycles acts as a self-regulating mechanism that benefits both developers and the broader ecosystem.
To understand the mechanics of how $ICP works in this context, let’s take a look at the XDR/SDR (Special Drawing Rights) and how it’s pegged to the price of $ICP. The price of Cycles is based on the XDR/SDR, which is a form of international currency issued by the International Monetary Fund (IMF). In simple terms, this means that 1 trillion Cycles is equivalent to 1 XDR/SDR. At the current exchange rate, 1 XDR/SDR is worth $1.31 USD.
Now, let’s break down how much $ICP is required to obtain a specific number of Cycles, based on two price scenarios for $ICP.
Example 1: Current Price of $ICP
If $ICP is valued at $10, and you need 10 trillion Cycles, the calculation would be as follows:
1.31 (XDR/SDR price) × 10 trillion Cycles = $13.10 USD.
So, to obtain 10 trillion Cycles, you would need to burn $ICP worth $13.10. With $ICP priced at $10, the amount of $ICP required would be:
$13.10 ÷ $10 = 1.31 ICP.
Therefore, you would need to burn 1.31 ICP to obtain the 10 trillion Cycles needed.
Example 2: Future Price of $ICP
Now, let’s assume that the price of $ICP increases to $100. Using the same requirement of 10 trillion Cycles, the calculation would be:
1.31 (XDR/SDR price) × 10 trillion Cycles = $13.10 USD.
However, with $ICP now priced at $100, the amount of $ICP needed to obtain the 10 trillion Cycles would be:
$13.10 ÷ $100 = 0.0131 ICP.
As you can see, the amount of $ICP required decreases significantly as the price of $ICP increases. This is the key feature of the Reverse Gas Model: as the price of $ICP rises, less of it needs to be burned to obtain the same amount of Cycles, making the system more efficient and sustainable in the long term.
This dynamic is crucial for the growth and scalability of the Internet Computer Protocol. With mass adoption, the cost of obtaining Cycles will decrease, encouraging more developers to build on ICP and enhancing the overall ecosystem. It’s a win-win situation: developers can access compute power at a lower cost, and the network remains sustainable without the need to mint excessive amounts of $ICP.
