Shardeum Whitepaper V2: SHM Tokenomics Update

Embracing our commitment to the OCC principle (Open, Collaborative & Community-Driven), we’re excited to announce the key updates in Shardeum’s Whitepaper Version 2. This update highlights enhancements to Shardeum’s tokenomics model.

Summary of the Key Revisions (TL;DR)

• The SHM supply at TGE will now be 249 million from the previously planned 508 million—a strategic change focused on sustainable incentives and decentralization.
• Shardeum adopts a dynamic supply model, similar to leading Layer 1s like Ethereum. Post-mainnet, new SHM will be minted solely for node rewards, based on network security needs and staking participation.
• Shardeum scales horizontally by increasing active validator nodes, requiring a standby pool for seamless expansion. Removing a fixed cap on node rewards enables the network to reward node operators forever.
• This update reinforces network integrity without compromising decentralization.
• Shardeum’s tokenomics policy is designed to maintain a stable, predictable, adaptable, and scarce supply by achieving equilibrium, where SHM burned = SHM issued.

New Tokenomics Model

Supply and Allocation

Initial Supply: 249 million SHM

Distribution:

• Sale 91,440,000 SHM (36.72%) – 3 month cliff then 2 year daily linear vesting*
• Team 76,200,000 SHM (30.6%) – 3 month cliff then 2 year daily linear vesting
• Foundation 55,880,000 SHM (22.44%) – unlocked at Token Generation Event (TGE)
• Ecosystem & Airdrops 25,480,000 SHM (10.23%) – unlocked at TGE

*Subsequent public sale of tokens may be unvested.

At the Token Generation Event (TGE), an initial supply of 249 million SHM will be allocated for the foundation, team, sales, and ecosystem & airdrops. Validator rewards will continue to be issued dynamically over time, ensuring sustainable incentives and decentralization.

Note: The allocations for the Team, Foundation, and Sale remain unchanged in absolute terms. However, the Ecosystem & Airdrops allocation has increased slightly by 80,000 SHM due to rounding.

Rationale Behind the Updated Tokenomics

Here is an excerpt from the Whitepaper (section 3) that sums up the rationale: “Since the initial 2022 whitepaper, Shardeum’s tokenomics have undergone refinement, shaped by insights from large-scale testnet participation. Originally structured around a fixed-supply model of 508 million SHM, the network’s design was predicated on predefined adoption metrics, with 51% of the token supply allocated to the community at Genesis. However, as empirical data from testnet activity emerged, it became clear that a more adaptable and demand-driven framework was needed.

It was due to this reason that, at the start of 2025, Shardeum transitioned to a dynamically responsive supply model, whilst still aligning with the principles of EIP-1559, reducing genesis issuance to 249 million SHM. This refined economic structure integrates real-time transaction fee burning with a programmatically adjusted issuance mechanism, ensuring that supply expansion aligns with network utility and transaction throughput rather than speculative preallocations. By synchronizing emissions with actualized demand, this model better balances long-term sustainability with network security, fostering a scalable, self-regulating Layer 1 that dynamically adjusts to evolving adoption patterns.”

The following points capture the essence of the change:

• Token issuance in Shardeum is directly tied to participation in the network, which is much more accessible for the average user when compared to other networks such as Bitcoin and even Ethereum.
• Shardeum is designed to scale horizontally while maintaining its decentralization and security, necessitating a consistent and reliable number of nodes. To ensure the network can scale effectively when needed, it is crucial to maintain reasonable incentives for these nodes.
• Dynamic issuance aligns with real network demand, ensuring incentives remain balanced as the ecosystem grows.
• Similar to other leading Layer 1 projects, Shardeum will ensure the continued generation of tokens for nodes without a fixed cap. This policy ensures that rewards for nodes are sustainable and that the network’s integrity is maintained without compromising its decentralized nature.

What Does Not Change?

• The existing allocation for the foundation, team, and sales remains unchanged, with the allocation for ecosystem/airdrops being slightly increased by 80,000 tokens due to rounding.
• SHM is designed to be a scarce, dynamically issued asset over time, while avoiding the accumulation of unnecessary pre-minted tokens for node rewards.
• Supply equilibrium will be maintained by balancing the number of tokens issued with those burned, thereby promoting economic stability.
• SHM’s value continues to be driven by its innovation, utility, user engagement, and transparent operations, augmented by the burning of transaction fees, and slashing penalties. These elements collectively position SHM’s potential as a deflationary asset over time.
• The revised tokenomics ensures that validators consistently receive reasonable rewards and the ecosystem functions sustainably.

FAQ

1. How does the dynamic supply model function, and how will it contribute to token scarcity over time?

The SHM tokenomics policy is designed to make the supply stable, predictable, adaptable and scarce. Let’s evaluate how SHM aims for scarcity:

• Similar to Ethereum, Shardeum follows a dynamic issuance model where additional SHM is minted to reward validators based on staking participation and network security needs
• The initial supply is 249M SHM, with additional validator rewards minted dynamically only as required by the network
• 100% of fees are burned on Shardeum, with no transaction fees going to validator nodes, driving scarcity
• SHM tokens from slashed validators are also burned, adding to the scarcity of SHM
• This fee structure bolsters the scarcity of SHM’s tokenomics as Shardeum undergoes technological maturity and sees greater adoption (with increased transaction total, smart contract deployments, etc.) SHM’s supply is designed to dynamically adjust based on network demand, balancing issuance and burning to maintain long-term sustainability.

In summary, Shardeum’s tokenomics have been designed for controlled issuance, where scarcity increases over time due to transaction fee burning and validator slashing, while maintaining sustainable validator incentives.

2. Does this mean that the validator allocation is reduced from 51%?

No, it removes any ceiling to the number of rewards that can be earned via staking. This is because previously rewards were capped at 259,080,000 SHM, which was 51% of 508 million. By removing this cap, rewards are unlimited – although of course we have designed our model to become deflationary over time through burning.

3. Is SHM now an inflationary or deflationary token?

SHM follows a dynamic supply model. After mainnet, new tokens will be minted solely for node rewards to secure the network, while transaction fees will burn SHM, to counter inflation. As network activity grows, the burn rate may surpass issuance, making SHM increasingly disinflationary (this is when the rate of inflation decreases). Over time, the aim is that SHM can become deflationary.

4. What will the initial SHM supply be at the mainnet launch, and are further changes to tokenomics or allocations expected?

At launch, only 249 million SHM will be in existence, and future minting of SHM will occur solely for node rewards. With mainnet fast approaching, we do not anticipate any further changes to our tokenomics. However, and similar to all permissionless networks, if in the future our community was to vote for tokenomic changes, then that would be possible if it complied with the governance framework that existed at that time.

5. I appreciate the dynamic issuance of SHM for node rewards, but what mechanisms are in place to prevent excessive minting?

SHM isn’t minted arbitrarily; its issuance is based on network demand. To manage the overall supply, transaction fees contribute to burning SHM, ensuring a balanced approach. Overall, this adaptive model maintains sustainable supply and demand dynamics over time.

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