Are inflationary rewards too high? Are we paying too much for staking-based network security?

Is our goal for the Cosmos Hub still to attract 67% of the ATOM supply to stake?
If our goal is still 67%, we have overshot that. I capture stats on the 20th of each month, and we have been above our target since July 20, 2019. What this tells me is that even though inflationary staking rewards are at their lowest possible rate, it’s still more than enough to meet our staking goal.

1.4M new ATOMs created each month. Are we paying too much for network security?
Right now we are minting new ATOMs, increasing the supply, and doing that to fund staking-based network security. Around 1.4M new ATOMs are created each month. Why are minting so many? Since the rate of inflationary rewards has bottomed and we’re holding steady at 72% of the supply staking, it makes me think that we could have a smaller rate of staking rewards and still meet our 67% staking target.

Who benefits from excessive security spending?
Validators and stakers get 98% of the inflationary rewards. Who decides how these parameters are changed? Also validators and stakers, and particularly those willing to hold ATOMs the longest. Why would the majority of voting power agree to a smaller rate of rewards? Excessive rewards enable those with the strongest positions to be able to further monopolize their ownership of the network, which makes distribution less likely. So in the short-term this seems to benefit stakers/validators, but in the long run it may hinder broader adoption.

Distribution problems in staking networks
Proof of work chains use real resources that typically have to be paid for by selling a portion of the earned tokens, which ideally leads to a wider distribution of the token. But the supply side of staking networks is different–the participation costs aren’t nearly as great. A well-funded operation can afford to hold their position and compound it. It seems to me that staking networks tend to incentivize monopolies on token distribution.

Potential solution
Currently the Community Pool is allocated 2% of inflationary rewards. What if this rate changed algorithmically? When inflation is at its minimum and staking participation exceeds 67%, more of the inflationary rewards could be directed to the Community Pool. Thoughts about this? Keeping in mind that we may all be biased toward excessive inflation :slight_smile:


I will add similar thoughts, alas, in a slightly different key, but I think they complement each other. Sorry if I went off track here.

Another good question is how to sustain a pool that isn’t (a) a pot of money which goes solely to network security, (b) a pool that isn’t solely a build up of inflationary result and has long term prosperity value.

Let me explain:
A: If you invest everything in the locks and the doors of a house, so no one can break in, eventually it will either fall down because the foundation is wrong, the roof is rotter, etc. What I mean is that the community pool must be valuable not just for security, but for all other things too. It must be destined for the development of the ecosystem and not just security (I am NOT saying that security should be ignored, on the contrary, it is one of the most important things)
B: A pot of money that is build up entirely from inflation rewards has very little value in comparison to a pot of money that is build up of different things, investment, rewards, etc. The idea is to reach a sustainable flow of income that can support Cosmos as an ecosystem. Otherwise how is this any different from Q.E. (ok, this is a bit of an extreme analogy, however, it has a point imo)?

So the solution IMO, is to start using the pool for other purposes, investments into projects, investments into developers, other solutions. The idea is to create a pool that can one day, be filled not just with ATOM, but many tokens. The community pool has to be a full blown VC (read virtual community) fund, that can support itself, the ecosystem and be a market player. This IMO will give it life for the long term.

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Thanks for bringing this topic up.

A few thoughts from my side:
1. Paying for security
I think from a game theoretic perspective, it’s hardly necessary to have 67% of the supply staking. But even if we do aim for such a high staking ratio, I don’t think the staking supply would drop substantially if, for example, the inflation rate dropped to 4%.

And down the line, we will have liquid staking, so then we might get close to 100% staking ratio even if inflationary rewards will only be 2-3%.

2. Validator Compensation
It’s worth thinking through how much of the staking rewards go to token holders versus validators. Validators have real work, fixed and operational costs, etc. Delegators don’t. For delegators more inflation might feel nice, but it basically just means their relative ownership stays the same. For validators, the rewards (or commission earned from rewards is essential).

In my view, the Cosmos Hub is underpaying its validators currently. (Obviously I’m biased here since we run a validator with Chorus One). The amount paid for the security is really just 10% (average commission) * 7% = 0.7% of the total supply. But validators do a ton more than just securing the network. I think paying vaildators more would lead to more investment in the Cosmos ecosystem and be beneficial.

(However, it’s unclear to me how to effectively accomplish this.)

3. Community Pool
When it comes to how much of the inflation goes to delegators / commission vs the community pool, I’d be strongly in favor of putting more funding into the community pool. That could be something like pay 7% as inflationary rewards and an additional 2% (of total supply) annually into the community pool. Or maybe by increasing the percentage of inflation that goes to the community pool.

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