ATOM Tokenomics Update (Blockworks Research - AADAO Grant) - Monetary Policy

[effortcapital]

TL;DR - Blockworks Research is looking for community feedback on their recommendation of changing ATOM’s monetary policy from a dynamic inflation model (as a function of % bonded) to a static supply schedule due to the advent of liquid staking. We also request feedback on the parameters outlined for this new supply schedule. Blockworks will have a follow-up post around the Cosmos Hub’s fiscal policy sometime next week.

Introduction

In the AADAO grants process, the committee chose Binary, RMIT, and Blockworks Research to lay out a new vision for the Cosmos Hub as a security provider of the ATOM Economic Zone and the natural Schelling point of the wider Interchain. I suggest reading the Medium article here to understand better what the three teams are working on individually.

To introduce ourselves, Blockworks Research is a multidisciplinary team of protocol-specific analysts that cover the entire crypto space. We have extensive knowledge across all ecosystems, and are taking best practices and lessons learned to help inform and guide our thoughts on the future of the Cosmos Hub. Additionally, as Cosmos Hub community members ourselves, we have also long followed the discussions on the forums and believe we have a good understanding of the needs of the community. We were tasked with redesigning ATOM tokenomics, developing a mechanism to potentially help with validator stake centralization, and identifying the Cosmos Hub’s place in a rollup-centric world. We have also been coordinating between the other two teams to ensure our findings and end deliverables fit into a larger, more cohesive vision for the Cosmos Hub.

Taking lessons learned from ATOM 2.0, through the next few weeks leading up to Cosmoverse, we will be actively (and publicly) engaging with the community to provide initial findings of our research and our potential recommendations. We want the community to help inform the final recommendations that we will provide. While the three teams are working individually in separate swimlanes, we have been meeting frequently to map out dependencies across the work streams. What we want the Cosmos Hub community to take away from this is that there will be no omnibus bill.

Ultimately, these proposals will be presented so that the wider community can choose what they like from the three teams’ proposals and what they want to reject. In the event of a rejection of an idea, the community will know its downstream impacts on the other proposals they pass.

Example: If the community ultimately decides they want the “ATOM Alignment Treasury” proposed by Binary in an initial forum post here, but the community rejects an idea brought forward by Blockworks Research to fund a portion of the AAT with inflation as part of our scope of work (tokenomics), that is OK, but the community should know that this may lead to fewer funds in the AAT for Protocol-Owned-Liquidity to align ATOM with the growth of the Interchain.

Blockworks Research will outline the dependencies across all proposed ideas to ensure the community fully knows how their future decisions may impact the result.

The result of this work will likely culminate into multiple onchain proposals over the span of a few months to allow the community time to digest each proposal at a time. While this may take longer than some might like, we believe it is the right path forward to build social consensus on what the future of the Cosmos Hub should be.

ATOM is Not Interchain Money (YET!)

Despite not being a required gas token for IBC and the wider Interchain, the drama (feature or bug?) surrounding the Cosmos Hub, the lack of a dedicated team for 2+ years, and no service offering until recently with the launch of Replicated Security, the ATOM has naturally achieved product market fit as the “numeraire” for those in the Cosmos ecosystem. While this has allowed it to outperform most other assets in the ecosystem, it has still struggled to receive the same institutional and retail attention that assets like BTC, ETH, SOL, OP, ARB, and others have had.

From the outside looking in, ATOM is not money for all the above reasons. While that could change with the AEZ building out around the Cosmos Hub, we believe some changes to ATOM’s monetary and fiscal policy should be implemented to strengthen the Interchain Money narrative and make ATOM a much more attractive asset to hold over the long term.

Monetary Policy

As we all know, ATOM has a dynamic inflation model that’s dependent on the ATOM bond ratio. If the % ATOM bonded is >66%, inflation decreases block-by-block to a minimum of 7% inflation, and if the bond ratio is <66%, inflation increases block-by-block to a maximum of 20%. The speed at which inflation increases/decreases is based on how far away the bond ratio is from 66% and a scalar factor set to “1” as part of Prop 48.

For example: At 70% bond ratio, ATOM inflation would decrease by ~6.06%/yr until it reaches the minimum bound of 7%. A bond ratio of 64% would increase inflation by ~3%/yr until it reaches the maximum bound of 20%.

But why have a dynamic inflation model as a function of the bond ratio? Outside of DOT, most other PoS networks do not have this feature. At the time when the Cosmos Hub launched, this mechanism made sense! PoS system security degrades when the asset can be used for security OR as a collateral asset throughout DeFi. If a DeFi protocol offered higher lending yields than staking yields by the network, rational actors would unstake to capture that higher yield. The dynamic inflation model creates a competitive equilibrium between staking and DeFi rates, as this research paper outlines. In a pre-liquid staking world, dynamic inflation was the best path forward to ensure the Cosmos Hub remained secure.

With the advent of liquid staking, is this dynamic mechanism outdated since market participants that liquid stake can now get both staking rewards and DeFi yield? We believe it is. PoS networks no longer need to compete with DeFi by inflating its supply, ultimately creating larger supply overhangs.

With ATOM’s historical inflation being much higher relative to its peers, this has not only harmed the perception of ATOM’s monetary premium, but it has also led to constant sell pressure that has hurt its price performance. Additionally, we believe the uncertainty around the future supply of ATOM contributes to the negative perception as a reserve asset and store of value.

To show what we mean by uncertainty around supply, as of ~2.5 weeks ago, the bond ratio fell from 70% to 68%. At 70% bonded (red), ATOM was on pace to reach the 7% minimum inflation bound by November 2024. At the current 68% bonded (blue), this 2% difference in the bond ratio has kicked this out by a full year to the end of 2025.

This has altered the course of the current supply of ATOM by the end of the decade from ~590M to ~615M ATOM, a ~4% increase in total supply, as can be seen below (same colors for each bond ratio example).

Those opposed to changing ATOM’s monetary policy may argue that liquid staking will forever keep the bond ratio above 66% and that ATOM’s future supply will be more concrete. While that may be true, we believe for ATOM to ossify, so should its inflation schedule. As long as ATOM’s inflation is a function of the bond ratio, there will always be uncertainty around its supply, hurting its monetary characteristics.

Blockworks Research is initially proposing that ATOM move towards a more set supply schedule that is no longer a function of bond ratio.

If this is something that the community is not comfortable with, we believe that the next best thing is that the minimum and maximum bounds of ATOM inflation need to head lower at a set schedule so that the potential future swings in ATOM supply are dampened. While this is not our initial recommendation to the community, we wanted to present this second option.

During the ATOM 2.0 debates, there was conversation from those against it that lowering the minimum bound to 3% should be considered, but there was never a conversation about lowering the maximum bound of inflation too. In our opinion, this is something that the community should strongly consider if it does not want to go with a set supply schedule.

Recommended Inflation Schedule

We want to recommend a much simpler inflation schedule that will allow the ATOM asset to ossify and ensure a minimum security budget with a low inflation rate in perpetuity. Although the parameters we are showing to the community are not final, we want to give the community insight into our thinking. Hopefully, our discussions will help inform our final recommended parameters.

Unlike assets like BTC and OSMO that have large supply shocks (halvenings/thirdenings) baked into their future supply schedules, we believe a gradual block-by-block decrease in inflation, similar to what ATOM has now, is the most appealing.

We propose the following inflation schedule:

Once an effective annual inflation rate of 1.5% is reached, it stays there in perpetuity as a “minimum security budget.”

Below we compare ATOM’s inflation and expected supply schedules under the following 3 scenarios:

1. Current Parameters (70% bond ratio at 7% min inflation) - blue
2. Changing minimum inflation bound (70% bond ratio at 3% min inflation) - red
3. Blockworks’ Recommended Inflation Schedule - yellow

Please note the first two scenarios assume 70% bond ratio throughout, but as discussed above, this fluctuates frequently.

As you can see, the recommended inflation schedule brings future ATOM supply from ~600M by the end of the decade based on the current parameters to ~500M. Additionally, this inflation schedule closely matches the minimum bound going down to 3% while removing the unknown around the bond ratio impacting future supply.

Another reason why we are recommending our supply curve over the current parameters (and lowering the min bound to 3%) is because of the uncertainty around Replicated Security economics in the short term. This new supply curve kicks out the time to reach 3% inflation from mid-2025 to late 2026, which gives the AEZ additional time to create sustainable value for stakers and validators. Once 3% annualized inflation is hit, we reduce inflation from 50% year-over-year to 25% to accustom validators and stakers into this low inflation environment gradually.

Fiscal Policy Follow-Up Post

Blockworks Research will follow up this post next week with a post about the future of ATOM’s fiscal policy (taxation and budget allocation). The fiscal policy will have dependencies on the work of both Binary Builders and RMIT (an example being what we outlined above concerning the AAT). While what we presented above is by no means final, we hope this initial post starts a community-wide discussion about the future of ATOM. We firmly believe a strong ATOM will not only lead to a strong AEZ but a strong Interchain as well.

Thank you for taking the time to read this, and we look forward to your feedback!

[jtremback]

Blockworks Research is initially proposing that ATOM move towards a more set supply schedule that is no longer a function of bond ratio.

Will reduction in the inflation rate and elimination of bond ratio result in less ATOM being staked, thereby hurting the security of the network?

[SpaceMonster]

What do Hub transaction fees currently pay for? Where do they even go? I can’t believe I don’t even know this.

I guess I assumed they were being burned.
Up the fees, up the burn, thus room for higher emmision to those providing the S in PoS?

[jtremback]

They show up in your staking rewards

[Cosmic_Validator]

@jtremback

Will reduction in the inflation rate and elimination of bond ratio result in less ATOM being staked, thereby hurting the security of the network?

Exactly, the security of the Cosmos Hub, which is also provided to consumer chains, is measured by the value of the staked ATOM. When the amount of ATOM staked is reducing then the inflation increases to encourage more staking and more security for the network. Important to notice is that those staking are not being diluted even the inflation increases, only those not staking get diluted and hence are encouraged to stake and secure the network, because wealth is being transferred from those not staking ATOM to staked ATOM. The dynamic inflation rate is a security measure to maintain a high staking ratio and hence the security of the network.

Those staking ATOM and validators won’t be happy with a very low inflation, because the inflation is there to encourage and compensate staking. Those not staking don’t seem to care about being diluted even with the current inflation rate, so I don’t think this change to the inflation dynamics is just to dilute less those not staking and hurt those staking?

I’m assuming the expectation here is that because of lower inflation then the price would be higher, but we should be careful with this. Bitcoin is deflationary BUT the security of bitcoin is not provided by the ‘amount of BTC staked’, it is provided by the hashrate, so when Bitcoin halving happens there is a supply shock, if some miners leave because of less rewards, then the mining difficulty would decrease and it would be more interesting for others then to join and mine, it is very different from the dynamics in the Cosmos Hub. If the inflation halving is applied to the Cosmos Hub, the costs to run validators stays the same and the risks for stakers as well. The price of ATOM and other staking tokens is more related to macro factors and the overall market not changes in the inflation rate, many projects decreased inflation including Osmosis hoping that then the price would increase and this hasn’t been the case.
The current dynamic inflation rate has worked well so far for several years to maintain a high amount of ATOM staked and hence the security of the Cosmos Hub. I think such drastic changes to this dynamic inflation are very risky, what if the amount of staked ATOM starts to decrease rapidly and there is no mechanism to revert this as currently? Then not only the Cosmos Hub would be affected but its main function as security provider for consumer chains. With Interchain Security and consumer chains, the top priority is maintaining or increasing the amoung of staked ATOM to maintain a high security.

@effortcapital

If a DeFi protocol offered higher lending yields than staking yields by the network, rational actors would unstake to capture that higher yield

But it is important to mention also that when staking ATOM there is eligibility for airdrops and other advantages such as governance voting power and more, it is not just the inflation. Even with existing DeFi opportunities the amount of ATOM staked has remained constant over the years. Osmosis suffered of low staking ratio because DeFi in Osmosis was rewarded a lot compared to staking so this decreased the security of the network by a low amount of OSMO staked.

@effortcapital

With the advent of liquid staking, is this dynamic mechanism outdated since market participants that liquid stake can now get both staking rewards and DeFi yield?

Here please notice the 25% global limit for liquid staking, the other 75% of staked ATOM won’t be eligible for liquid staking, so you seem to be considering only the 25% minority.

@effortcapital

as a reserve asset and store of value.

I don’t think ATOM needs to be seen as an asset like BTC, ATOM is used to provide security by staking or governance participation.

[Zed_Erazer]

Good ideas. However, if inflation is reduced without seeing a corresponding increase in staking rewards from AEZ revenue, then there isn’t an incentive to stake. Airdrops are dust and individual stakers typically don’t participate in governance.

It is worth debating what the acceptable reward for staking should be. Maybe 10%. This lets us reduce the inflation without having to wait for AEZ revenue. Then we wait for AEZ revenue to kick in before reducing inflation further ?

Basically, we need to ensure that stakers get around 10% return to ensure that enough people stake to maintain the number 1 Cosmos Hub product - security.

[jaekwon]

ATOM isn’t money. Using language of fiscal policy and monetary policy just confuses the matter when the fact of the matter is, if you knew ATOM economics and its business model, you wouldn’t be using these terms.

So maybe try writing about what the vision for ATOM is without using these terms, at all, first.

The metric that matters is TPS of the ICS system and what token is used there as the dominant monetary fee token doesn’t matter a blip to what ATOM is and who should use it.

Anything but unification around this core, is just bringing confusion to Cosmos and what it already is and was always meant to be.

We don’t need to pitch ATOM as money for this to work. Rather, to conflate ATOM with money is completely counter productive.

Whatever primary monetary token we use (call it hypothetically PHOTON) we can provide ICS bonding with such tokens. There is no need to, and it is counter-productive to, pitch ATOM has a monetary token because our customers are blockchains with their own monetary token and why would they want to use the Cosmos Hub as a Hub if we are competing with them?

So to tie ATOM with monetary language and to pitch ATOM as interchain money is completely counter productive.

ATOM isn’t money.
It will never be money.
It doesn’t need to be money.

And to everyone who doesn’t understand how a token can survive without becoming money, I ask, kindly, to please leave the ATOM ecosystem.

Kindly sell your ATOMs and fork off to another chain, because ATOM will never be money.

Danke schoen.

[jaekwon]

Man if you have a serious objection to what I wrote above,
I tell you, you have no idea what ATOM is, and you had better
sell your ATOMs and leave the ecosystem before you get hurt,
because this is one slashy token and you can get slashed,
and no money behaves that way or incentivizes inflation to keep 2/3 slashable thusly at all times.

that’s no money,

and if you don’t get that, you have no business writing anything about economics.
truly, ATOM is not for you.

[SpaceMonster]

(Emissions + fees = staking rewards) sounds like pricing for speed & scaling.

I.e. The more speed & scaling stakers can provide the more fees they can collect.

But stakers provide & resell security. It’s not a Proof-of-Scaling ledger. Validator hosts provide speed & scaling.

Currently if fees are sent directly to staking rewards that means when the network is busiest only the stakers get paid more. It incentivizes validators to vote for emmisions increase before fee increase so they can get paid enough & keep their stakers happy. That then means a busy growing network has to keep charging more & more Atom, unbounded, in order for the validators to keep getting paid to scale.

When the bear comes, since emmisions were high & fees were low, there’s nothing to adjust. You can’t up the fees for a slower bear network.

That’s a race to the bottom.

Stakers are paying validators to bring their Proof of Stake to market. Stakers should be buying more speed & scaling as needed via validator commission rates.

Commission rates should go up as usage goes up. Validators should charge stakers for hosting their proof of stake. That’s the directly sustainable market relationship:

Stakers pay for the ability to sell security to as many ppl as possible –> Validators charge the commissions they need to validate profitably –> Users choose Tx fee based on speed. (e.g. lowest one takes 200 secs , 20 seconds, 2 seconds.)

Fee gets Burned.

Stakers unhappy with Staking ROI due to high commissions vote to increase fees
–> more Atom gets burned
–> Emissions & Commissions stay the same but go up in fiat value. (can still have automatic range that gets adjusted).
–> Everybody gets “paid” via burning w/o increasing emmisions.

This stabilizes fees as well because the busier the network the more valuable $ATOM becomes, which reflects the value of the Txs being paid for.

As usage goes up more Tx fees get burned. This pays everybody and lowers inflation.
It also encourages validator self-stakes and helps keep all interests aligned.

When fees go up, Atom goes up, inflation goes down, staking ROI goes up, emissions stay flat & predictable.
It all works to make a sustainable market.

Another knock on effect is that the people who are invested in the AEZ through Atom are all the same ppl who then don’t mind to see fees going up a bit. Fees are there for takers, fees help contributors. Fees then even help holders of stATOM. Everyone is much more serendipitously aligned to make sure everyone gets paid.

During a nasty bear when Atom goes down, that makes fees appreciably cheaper, less is burned, commisions can come down from a high usage high, emmisions stay the same. The ecosystem adjusts. Everyone is relatively more aligned to spend the treasury to attract usage.

If the hub is the security heavyweight then the hub needs to be more of fee charging heavyweight. And the fees need to be burned. Ticket stubs please.

How better to align all the interests and value propositions of Atom & the AEZ?

[WillB]

@jtremback

Will reduction in the inflation rate and elimination of bond ratio result in less ATOM being staked, thereby hurting the security of the network?

The economic security ‘on paper’, I guess ? I tried to find a relevant example of a PoS chain getting attacked for this reason but couldn’t. I’ve been very critical of the gravity bridge chain because their economic security is quite bad. They have a staking ratio of 42%, the value of all staked tokens is $672,000 and the bridged USDT/USDC are worth $28,000,000. And yet, no one has succeeded at stealing those (maybe it happens someday), even if they’re the most liquid tokens to liquidate after a hack.

Ethereum has a staking ratio way below that (25%) with inflation rewards at 2%, and yet the main conversation is not security, but decentralization.

With that said, I’m with EffortCapital when it comes to assuming that liquid staking skips that conversation. In my head we have 80% of the supply liquid staked 5 years from now, but of course I might be completely off the mark.

@Cosmic_Validator

When the amount of ATOM staked is reducing then the inflation increases

You don’t need an increase in inflation for the staking APR to go up when delegators unstake. Simply having less tokens competing for block rewards increases the staking APR.

@Cosmic_Validator

Those staking ATOM and validators won’t be happy with a very low inflation, because the inflation is there to encourage and compensate staking.

Delegators have no cost so they would not enter in my worries, but small validators would. Mitigation should be considered to have a more balanced validator set. Other than that I don’t know what the solution could be.

@Cosmic_Validator

Bitcoin is deflationary

Bitcoin is inflationary.

As to me I remain undecided. I am 100% in favor of a reduction of inflation. I think the optimal scenario is one where this is the last human intervention on ATOM’s token schedule, because, as the author implied, predictability and stability is desired. The choice is basically between a fixed tail emission (Monero-like) or variable tail emission (Ethereum-like). The first is really simple to do, the latter can be at the same time more elegant and useful, but I’d remain away from obsessing over the bonding ratio to determine inflation.

[jacobgadikian]

Value of atom:

• expected gain if staked
• participation in the network and its information flows
• governance

Concerning Cosmos governance tokens, I have always said that they have characteristics of money but clearly aren’t money.

• Money does not secure anything.

• Money doesn’t have a purpose beyond transfer of value.

• Money does not let you participate in networks intrinsically

• Money does not confer weight in governance decisions

---

I believe the phrase that I have used in the past is “valuable, but not itself money”

[SpaceMonster]

• Getting more Atom doesn’t count as adding any value to Atom. Emissions are just practical means of payment for providing PoS. Emissions decrease the value of Atom by printing more of them.

• It’s not even validating ledger transactions that create value. That can be done much more cheaply by 30 yo tech running on a bank server.

• Governance itself isn’t providing any value unless it’s governing something of value.

So what is that something?

That something is the unique value of the services the Hub provides. That’s it. Any additional value isn’t value, it’s just speculation demand at best. Demand is not value (see meme coins, beanie babies, Franklin Mint “collectibles”, Thomas Kincaid paintings, etc). More precisely that value is what customers receive when they pay for Hub services with outside coin.

The way to pay for Hub services with outside coin is to buy service tokens. Aka ATOM.

Nowhere else is the Hub creating value. It’s all in how those services are valued in fiat over time. Great UX, secure as heck, fast, ubiquitous, safe, trusted, shared, reliable, easy, non-volatile, long lived, all that.

** The Hub is a service provider providing a service. That is the value. **

The Hub does not create new value any other way. Everything else is just moving that value around, controlling & managing that value, sustaining it, exchanging it, inflating it to spend away, growing the service that is the actual value provided, etc.

Therefore Atom can only ever be worth what consumers of Txs are willing to pay for the Hub PoS chain. (Unlike a liquidity service protocol where outside value denominations are held and leveraged toward TVL). Atom can’t be worth itself (inflation). Again it’s only worth what people are willing to pay in exchange for the value Atom confers. Even if an Atom was 60 usd right now, it wouldn’t actually confer that much value when redeemed for Hub services. People would just be speculating that it will eventually be worth that because they see the Hub as providing an increasingly valuable service.

Every time delegators & validators are paid with emissions they are removing value from Atom itself by way of “printing” more Atom. So how does that value get put back into the Atom token? By getting rid of some of those tokens elsewhere. By burning fees. Why fees? Fees are the only real value intake for the whole Atom market because they’re the only place where outside value is exchanged for the goods & services (created value) that the Atom token confers. That value is exchanged sustainably by “teleporting” it over to emissions.

This isn’t crypto stuff really. It has nothing to do with coding or tech expertise at all. It’s fundamentals of market dynamics, value creation & exchange.

The Hub creates value by providing a service. That value is conferred by exchanging an otherwise worthless token. Thats the p̶r̶o̶b̶l̶e̶m̶ s̶p̶a̶c̶e̶ opportunity space.

[Wil]

+1 for a set supply schedule, as all (almost all ?) other PoS blockchains do. As Cosmos was one of the first PoS, it was maybe thought that it’s required to have a bonding curve but other blockchains seem indeed to show it’s not required

Especially because what counts in the economic security so the number of staked ATOM * the value of staked ATOM. And it’s easier to have a 50% increase of the value of ATOM instead of trying to have a +50 increase of number of staked ATOM. So it makes sense to focus on economic value of ATOM

And for ATOM as money, I think it makes sense at least as “common token fees payment” and it would also greatly improve the UX of the cosmos multi-chains usage, if we were able to pay with the same token everywhere

[SHabuQureshi]

@effortcapital

here

So Jae’s point that the hub and Atom’s purpose is not primarily money -though obnoxiously stated - is probably correct, at least now. But does that matter, and would adding “moneyness” to Atom be a positive?
At first glance, for any asset to inflate at roughly 17% is problematic if you care about that asset’s value. Since most of us on this forum care, it would seem that adding “moneyness” to ATOM’s value would be beneficial, unless you take the position that other Cosmos chains want their token to be money and you don’t want ATOM to compete with them. But looking at other Cosmos token, there’s nothing that comes close to being money and I don’t expect that to change for a while. So I don’t buy the competition argument.

At second glance, will reducing inflation make ATOM price go up? Almost definitely yes – this is just plain supply and demand. But if I hold staked ATOM I get the same effect, with STATOM at $8.4 now vs ATOM at $7.1. Inflation has its winners and losers, and the losers are those who don’t stake or hold LSTs and the winners are the LST holders and stakers and validators.

Selfishly, I’m happy taking value from non-stakers & non-LST holders. But I’m pretty sure that’s not a great outcome for the Cosmos ecosystem as a whole – some real value should go to providing security but 17% seems like too much. So while I’m concerned that the proposal goes a bit too far and a bit too fast, I think directionally it’s something I would support – subject to hearing more from validators, who are going to see their income shrink with less inflation.

[tom]

we should add no new feature to Atom
actually we should just let it die slowly and let it be replaced by a perfect meta-system that only god can have created

and @effortcapital you should sell everything and leave.

but before that you should repent and recognize every single thought you had to enhance Atom soundness was an evil wish.

repentance from being one step closer to becoming a financial terrorist.

/me leaves the chat

[SpaceMonster]

On the Moneyness of Atom

Money is a Medium of Exchange that is also a Store of Value and a Unit of Account.

Atom shouldn’t seek to be the primary Medium of Exchange in terms of ICS or IBC Tx volume on any one chain. That does compete with the function of other tokens.

However the dependability of being widely exchangeable, of being a secure store of value, of being perceived as Stable Growth, and possibly of an easier “accounting ability” those are all moneyness features that can be encouraged by building on the Hubs primary mission - Security.

People should want to hold Atom because it’s a better value proposition. It should be less volatile (more financially secure) over the months & years than app chain tokens, but more useful & growth oriented than stable coins.

It should be where you put your capital when you don’t know what else to do with it because it’s Safe & Secure, but is still cheaper & faster to access & exchange than BTC. Since the Hub (hopefully) provides a growing comprehensive suite of security services maybe you think it’ll grow faster than BTC as well. (Sidenote: this probably makes Babylon somewhat of a direct competitor unless it comes to the AEZ)

So you park your bags in ATOM as your default holding place. A Schelling Point Store of Value.

Lastly, as purely a knock-on effect of all that, Atom becomes accepted (not expected) as Tx fees in more places than almost anything else. Why, because most people have some already and it’s IBC incarnate - useful.

This is a vision of the Hub that starts with Proof of Stake Security and then builds Trust everywhere it can, low-volatility trust, UX trust, transparency trust, accounting trust. Ppl want Cosmwasm on the hub? Nah, but spin up a fully hub controlled no-token service chain for Tx reporting tools, accounting tools, audit verifications, IBC Account services, vetted Tax prep scripts, trusted dApp url cert provision & verification, wallet service hooks, etc. NO DEFI EVER. Call it Electron because it powers Trust everywhere. Built on Atom.

The Hub can make the moneyness of Atom arise out of people’s desire to rely on the Hub.

[Seppmos]

Thanks for sharing your thoughts with us.

I really like the idea of moving away from the dynamic inflation model towards a more static one and simultaneously lower inflation gradually over the course of the next few years.

I think the dynamic inflation model is outdated, too complicated and not straight forward, it makes the ATOM supply unpredictable, and hence shies away investors.

The current inflation rate is way to high and should indeed come down in the coming months and years. I like the approach of reducing inflation on a block by block basis by 50% every year until we reach the threshold of 3% in late 2026.
This should give both validators and stakers enough time to adapt to the lower emission schedule and the AEZ (AAT, LaaS, atomic IBC ect) to thrive and generate revenue for ATOM holders.

At this point I think it makes good sense to further lower the ATOM inflation to the targeted 1.5% (might also be 2%) which can be kept at that level for perpetuity to guarantee the Hub’s security and a living for validators.

The argument that lower staking APRs will deter investors from buying and holding ATOM is very week imo. Quite the opposite I guess, folks are sick of holding “highly inflationary” coins and seeing the price of the asset going down. Even though they don’t really get diluted, since their share of the network stays the same or slightly grows via staking, people coming into Web3 and crypto are not compelled by a coin that’s price constantly goes down. They care about numbers going up, a strong narrative backing the coin (AEZ, Security provider, Interchain Store of Value, …) and a sustainable value proposition (value accrual mechanism) for the token.

The moneyness argument is a good one, however I agree that ATOM is not money. Perhaps it makes more sense to move the narrative more towards ATOM the store of value of the Interchain.
Using ATOM as a default to pay tx fees within the AEZ makes total sense though, and improves UX.

Thanks again for sharing your initial research and ideas here with us. I highly appreciate it along with all the other efforts to give the Hub a new purpose and direction.

Less constructive are the comments of those folks who haven’t been involved in the development for the Hub for years, yet always show up when new and enticing ideas are brought to the table to bash them down without adding anything valuable to the conversation.

This is sadly a well known reality of the Cosmos Hub that keeps innovation and human capital away from it.

I deeply hope and wish that we as a community can do better than that and together make the Hub a place of innovation and greatness again, as it once was.

[jBQ]

Thanks for sharing your ideas. Very interesting. I celebrate that there is people studying and discussing these topics.

Some thoughts:

• How did you set those boundaries in the inflation rate (3%, 1.5%)?

• One important thing to think about is how the new inflation will affect the earnings for those who stake their assets. I understand that (in your scheme) the inflation rate is gradually decreasing, but let’s assume it’s currently at 3%. With 250 million ATOMs being bonded and 364 million ATOMs in circulation, a 3% inflation rate translates to a APR of around 4%. So, the net yield is roughly 1% per year. For most validators, this won’t be enough to cover their expenses, and potential delegators might not find it attractive either. For instance, a delegator could opt for US Treasury bonds with a 5% interest rate and significantly lower risk instead.

• Although less inflation may be desirable, as was pointed above, we need first to have other revenue sources to reward validators/delegators.

• I understand that your idea is that, once the inflation rate reaches 3%, these alternative sources of revenue will be already replacing it. According to your projection, this transition should occur within three years. The critical question here is whether it’s realistic to replace the current rewards from inflation with income from other sources in such a short time frame.
  To provide a ballpark estimate, let’s perform some quick (though not highly accurate) calculations. In three years, the network would need to generate approximately $250 million in revenue from these alternative sources to fully replace the income currently derived from inflation (if we make the calculation for the first year, we need $170 million, or $210 million in 2 years). These calculations are based on the current inflation rate of 14.3%, a circulating supply of 364 million ATOMs, and a constant price of $7 per ATOM . Do you think that those goals are reachable? (by the way, We should double-check these numbers)

• I am not very convince about not having your scheme tied to the bond ratio. How do you plan to incentivize more staking if the bonded ratio falls to, e.g., 40%? Your scheme does not react to such a situation.

[Noam]

I’m a big fan of reducing inflation and stepping away from tying the inflation rate to the bonding ratio. The primary reason why this was tied in the first place was because ATOM inflation had to compete with DeFi yields.

Firstly, Liquid Staking will partially eliminate this competition as people can now stake and earn yield elsewhere at the same time. More importantly though, the initial premise was flawed:

There is no correlation between inflation and the bonding ratio in Cosmos!

source: Numia Data

Regardless of the conversation about whether ATOM is or should be money, the fact of the matter stands: more inflation = higher supply. Higher supply = lower ATOM price.

[Cosmic_Validator]

@Noam

the fact of the matter stands: more inflation = higher supply. Higher supply = lower ATOM price.

It is important to make the distinction of how inflation affects those not staking ATOM vs ATOM stakers and validators. As mentioned above, inflation alone is only diluting those not staking, wealth is being transferred from those not staking to ATOM stakers and validators, so ATOM stakers and validators won’t be happy if things are changed to dilute less and support more those not staking ATOM by reducing inflation.
I mean think about how the Fed works, what is inflation really? By printing money they are not creating value from thin air, what they are effectively doing is transferring wealth silently from the general population to themselves.
So, given that reducing inflation alone benefits only the subset of those not staking ATOM, and hurts revenues of ATOM stakers and validators, the argument is then based on the ATOM price which impacts all stakeholders. Maybe you could prepare a similar graph showing the correlation between the inflation rate and the ATOM price? According to you, there should be strong inverse correlation between ATOM inflation and price, but I don’t think this is the case, for example a few months ago ATOM inflation was higher and the price also higher than now. Then, you could also prepare a graph showing correlation between ATOM and BTC price and I assume here there will be more correlation than between ATOM inflation and price.
The fact of the matter is that reducing inflation so drastically will 100% hurt revenues for ATOM stakers, for validators and likely affect the security of the Cosmos Hub, and there is 0 certainty that the price of ATOM will increase so much automatically after reducing the inflation, so overall very risky and a lot of assumptions and maybe interesting for those not staking to get less diluted, but definitely not interesting for ATOM stakers and validators.

@Noam

There is no correlation between inflation and the bonding ratio in Cosmos!

What does this even mean? This graph shows on the horizontal line for the Cosmos Hub one data point of an inflation around 15% and one data point in the vertical line with a bonding ratio around 65%. We don’t need any graph to see easily that there IS a correlation between inflation and the bonding ratio in Cosmos: several months ago the bonding ratio was lower so the inflation was higher, then more ATOM was staked, the bonding ratio increased and the inflation was then decreasing since then. So yes, a higher bonding ratio means decreasing inflation and a lower bonding ratio means higher inflation, so there is a correlation definitely as intented since it is an incentivized security mechanism to ensure a high bonding ratio and hence a high security of the Cosmos Hub.