This paper presents a three-part proposal to enhance the Interchain Security (ICS) mechanism design for Cosmos Hub, ensuring the alignment of incentives between validators, delegators, and consumer chains, as well as maintaining the long-term sustainability of the security provided by the multi-billion dollar Proof of Stake (PoS) layer. I propose a chain-specific validator commission structure, a security deposit scheme, and a permanently capped budget of vested ATOM for the community pool.
The launch of Cosmos Hub Interchain Security (ICS) introduces challenges for validators, delegators, and consumer chains to navigate a tri-directional relationship. ICS1, replicated security, enables other blockchains to pay rent to Cosmos Hub in exchange for utilizing its validator set. The optimal mechanism design for replicated security should ensure that validators have sustainable income and are motivated to continue validating while minimizing the incentive to collude against the chains secured by their keys and infrastructure. In this context, we are faced with a variant of the principal-agent problem.
Currently, Neutron, a permissionless CosmWasm blockchain, has become the first replicated security consumer chain of Cosmos Hub. As compensation for the security layer, it pays validators and delegators 25% of transaction fees and 25% of MEV. This distribution, while potentially effective for their small DAO, poses challenges when split among ATOM validators and delegators, as the yield becomes negligibly small. Moreover, the required permissionless CosmWasm infrastructure for Neutron is costly to operate and demands significant computational resources. The resulting yield difference for delegators is insufficient to provide proper incentive alignment between consumer chain developers and the ATOM token.
I propose a three-part solution to address these concerns:
To address the already-evident discrepancy in revenues between the Cosmos Hub and consumer chains, I propose implementing a chain-specific validator commission structure. Validators would have the ability to set custom commissions for consumer chains, adapting to varying revenue and cost structures.
For example, consider a validator, AcmeNodes, with a 5% commission on ATOM rewards on Cosmos Hub, where they generate $1000/month. If AcmeNodes’ revenue on Neutron were only $30/month with an operational cost of $300/month, the same 5% commission would be insufficient. By allowing AcmeNodes to set a 50% commission on Neutron, they can cover their costs without impacting their commission structure on Cosmos Hub. This flexibility will not significantly affect delegators, as the yield differences are minimal when split among an array of stakeholders.
If non-negligible to delegators, wallets and block explorers can still display validator total APRs to users, reflecting the cumulative outcomes of the diversified commission structures.
I propose that each new consumer chain contributes a security deposit initially equivalent to 0.01% of total bonded ATOM, with a one-year unbonding period. At the time of writing, this amounts to approximately $200k—a very conservative upfront cost for leasing security from a multi-billion dollar blockchain. This security deposit provides a deflationary effect on the ATOM token, which is beneficial for ATOM holders. It also aligns the incentives of consumer chain developers with those controlling the voting power securing their blockchains.
Additionally, I propose that the provider chain (Cosmos Hub) retains the ability to cancel the unbonding of this security deposit. Given the lengthy unbonding period of one-year, this is feasible via governance and ensures that if a consumer chain’s economic interests diverge significantly from the interests of Cosmos Hub, their deposit remains locked indefinitely.
To ensure the inflationary security mechanisms of Cosmos Hub remain intact, while also invoking organic market demand for ATOM, I propose allocating a single total amount of ATOM allocated and vested to the community pool over a designated period (10 years). This approach reduces the long term dilution risk for investors and guarantees that ICS chains generate actual demand for ATOM on the free market. Cohesively, this aims to prevent ICS security deposits from being sourced primarily from the community pool.
This three-part proposal for enhancing the Cosmos Hub Interchain Security mechanism design aims to improve the alignment of incentives among validators, delegators, and consumer chains, and to ensure the long-term sustainability of the PoS security layer. By implementing a security deposit scheme, chain-specific validator commission structure, and a single vesting total amount of ATOM allocated to the community pool, we can foster an ecosystem where all parties have proper incentives to support the growth and maintenance of Cosmos Hub.