CONTEXT:
Firstly, we express our gratitude to @effortcapital for their extensive research and the comprehensive post they shared (link to the post). The ongoing discussion about tokenomics is expected to take longer than anticipated. To strike an appropriate balance, we need to explore various technical and fundamental approaches. The community has already contributed interesting perspectives to this discussion.
At Govmos (PRO Delegators validator governance branch), we plan to leverage our experience in traditional finance to propose our inflation modeling, aiming to enrich this discussion. We believe that examining existing “tradfi” (traditional finance) structures can offer valuable insights into their decentralized counterparts in the digital assets realm.
ANALYSIS:
First and foremost, we assert that comparing Cosmos to other decentralized “money” systems like Ethereum or Bitcoin is misleading. The confusion often arises from the distinction between money and value. Money is meant for spending, whereas value is meant for storage. For an asset to be considered a “store of value,” it must possess predictable scarcity and have limited use cases within the economy.
In the realm of finance, “moneyness” is typically measured through a metric known as “velocity,” which gauges the speed at which a unit of currency is utilized to purchase goods and services within a specific time frame.
In this context, we question how we can perceive ATOM as money when it is not suitable for purchasing goods and services. This is a common confusion observed in many discussions: conflating money (a debt collateral) with money multipliers. In finance, the money multiplier effect pertains to the creation of debt and illustrates how a single dollar deposited in a bank can multiply into a larger amount within the economy through the lending process.
In our current financial system, private banks play a pivotal role in this process, effectively amplifying the amounts of central bank money circulating in the economy. While some may advocate moving away from this system, we argue that a fully functional economy necessitates a money multiplier. We believe ATOM falls into this category, just as BTC fits clearly into the “Store of Value” category. Ethereum, serving as a foundational security layer for the industry, corresponds to the “money” we recognize today, acting as a primary form of collateral in the debt system.
The chart below, extracted from PRO-Indicators.com, summarizes the fundamental characteristics of each type of currency and aligns well with our current analysis.
CONCLUSION:
Using this model, we can position ATOM within the spectrum of currencies and predict its likely form by comparing it to existing structures in today’s financial system. This analogy likens ATOM to investment banks. These banks employ a fractional reserve system, suggesting that ATOM should represent a form of rehypothecation of money, with a risk/reward balance competing with other similar forms of money like DOT, AVAX, SOL.
ATOM is anticipated to “create” money for the Cosmos ecosystem, primarily through debt-related investments in “value creators” group. The yield of such a currency is correlated with the default risk of the creditors.
We also infer that ATOM’s yield should increase with demand (in contrast to the debt collateral like ETH). The demand we refer to is the demand for its multiplier effect, which, in our case, is the amount of liquid staked tokens relative to the standard staked tokens. Consequently, our recommendation to enhance the inflation tokenomics is that the formula should incorporate the ratio of liquid staked ATOMs against regularly staked ATOMs to modulate the chain’s inflation.
Furthermore, in today’s economy, the base deposit yield in banks is adjusted manually by central banks through interest rate decisions. This rate fluctuates in response to economic performance, illustrating that the base yield is not a stable value; it fluctuates over time, mostly in relation to economic cycles. Therefore, our second recommendation is that inflation should also be tied to economic activity on the hub. A feasible metric to measure this is the ratio of free-float circulating supply, which is an easy way to measure ATOM’s money velocity. Thus, the formula should also incorporate this ratio to adjust the base yield, a practice already in place today. Analyzing historical central bank rate decisions, we propose that the amplitude of this base modulation should fall within the range of 3-7%, as per the chart below:
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