A Formal Proposal for Enhancing Cosmos Hub Interchain Security Mechanism Design

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A Formal Proposal for Enhancing Cosmos Hub Interchain Security Mechanism Design

Author: Pupmøs

Abstract

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.

1. Introduction

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:

2. Solution

2.1 Chain-specific Validator Commission (Part 1)

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.

2.2 Security Deposit (Part 2)

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.

2.3 Capped Community Pool (Part 3)

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.

3. Conclusion

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.

lovb :heart:

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Queztion 1:

These are great ideas. Could you clarify the third point pls?

“single total amount of ATOM allocated and vested to the community pool over a designated period (10 years)”

Do I have this right: if the current community pool has 10M atoms then after this proposal, only 1M can be drawn from the pool each year?

Answer:

that would be a linear budget

but yesh basically set tax to zero and vest a set amount into the community pool

right now there iznt any financial forethought put into community spending becaz people think we can alwayz print more

(which iz something u are probably familiar with in good ole fazhioned government)

so if u cap the inflation allowed to enter the community pool it requirez gov to either:

A. budget wizely (never drink more than half of the water u have and u will alwayz have water)

or

B. generate itz own income (i.e. good faith depositz from ICS chainz)

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Nice one, Puppers. Diggin’ this.

Have long liked the thought of consumer chains having to pay for their security in ATOMs and then having those ATOMs burned. Creates demand for ATOM token + decreases inflationary pressure. But I don’t believe the hub is striving to be ETH. Nonetheless, this idea you are presenting creates some market demand for ATOMs from consumer chains. I like it.

With all the legal drama recently, I’d be a little apprehensive about holding ATOMs as a “security deposit”. If the Hub chooses not to grant those back to a consumer chain (even if done via on-chain governance), I have a feeling consumer chains might say there was no definitive proof that they were economically diverging from the hub. Could get messy

Maybe it would be better to combine 2.2 and 2.3 and just have consumer chains pay into the community pool while still keeping a cap or threshold of where staking taxes can return to 0%. I’ve long been fearful that the community pool tax will reach unnecessarily high levels (10% is already too high imo). Perhaps each consumer chain could have a simple contract that says they will pay X amount of ATOMs into community pool per year to retain their status as a Cosmos Hub consumer chain. That X amount could hypothetically go down to 0 if cosmos hub stakers believe the consumer chain is driving enough value back to ATOM and wouldn’t want to risk losing them to another ICS provider, or to them creating their own validator set.

Not sure what the right answer is, but I like where your head is. This could potentially offset some of the seemingly microscopic yield for validators and delegators in regards to consumer chains.

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Thanks for that proposal

I think the chain-specific commission is a good idea, although we’d need to work on making these commissions very transparent for users.

I’d also be in favour of the security deposit, but after the onboarding of 5-8 chains with high synergies (we need to kickstart the AEZ before making it harder to join)

The community pool cap may not be necessary with revised tokenomics and less inflation (which is something that should be proposed in the not-so-distant future)

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Hey. I like the idea of different commission rates for different blockchains. I also like the idea of the deposit. Unsure about a limit on the amount of tokens that are given to the community pool over a certain period - seems to go against free market ideas. Regulating manually the market as consensus wants - yes. Though taking away possibilities imo (then again, the hub currently doesnt care that much bout those)

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Thanks for this proposal @pupmos :heart:

Besides an ATOM deposit, at the very least, I think consumer chains should actually pay a decently sized percentage of their initial token mint (i.e. 10-20%, depending on their inflation model) to some kind of treasury, so that the Hub itself becomes a significant stakeholder of the chain. Tooling could be built around this so that validators & delegators can vote on consumer chains with their native ATOM token. For example: if I have 1% of ATOM voting power, and Hub has a 10% share of consumer chains’ voting power, my vote would have 0,1% voting power on the consumer chain.

These are some thoughts, part of a larger vision, myself & Binary Builders are hoping to share with the community soon.

I believe the ATOM Accelerator DAO is close to announcing the grant recipients for the RFP. Binary Builders applied as well (:crossed_fingers:). This would enable a few teams to flesh out some great ideas on token economics, ICS & other potential products on (or adjacent to) the Hub. Ideally, these teams would work together, in the open, transparently & with the rest of the community, to form a holistic vision that we can all finally agree on.

I would love for some elements in your proposal to be included in that larger conversation. I want to make sure that we don’t jump the gun on iterative changes like community pool caps, without having at least somewhat of an idea on future token economic plans.

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This is an interesting proposal. Thanks @pupmos . Some questions / comments:

Intro

@pupmos could you qualify “proper incentive alignment”?

Solutions

I generally agree with Chain-specific valdiator commission, but I still hold the concern of it acting as a centralizing force (though a validator has agency over it, which is a step forward).

I would like to see some more user research around how that would affect consumer chains’ choices to deploy on replicated security, especially at the early stages of it. I tend to agree with @Thyborg about

@pupmos How do you envision such a deposit interfacing with 1) more options for sharing security (RS, mesh, opt-in) and 2) more competitors in the shared security space?

I am pretty opposed to something like this because it feels arbitrary. I still feel that poor management of common-resources is the core issue to address here, and I’m not sure that an arbitrary but definitive cap on those resources would solve for that or further aggravate the issues – especially because future funding needs of the Hub are unknown-unknowns.

@Noam – what if consumer chains decide to launch without a token?

This seems interesting, but how might this affect consumer chains’ choice of governance mechanisms? What if they don’t want to use wealth-based token voting at all?

In Summary

I believe:

  • the Cosmos Hub should not explicitly or implicitly impose design choices on consumer chains
  • incentive alignment is extremely important for long-term partnerships but need not be restricted to a gross-asset deposit
  • the more chains that propose to use replicated security, the higher the chances the Cosmos Hub has to have long-term winners as partners
  • if used well, the community pool + inflation can be an incredible resource for driving the growth of the AEZ & the ATOM token + establishing the Hub’s PMF
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