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

That’s a great point about transferring wealth from non-stakers to stakers & validators.

The Hub needs stakers & validators.
And who’s doesn’t like have wealth transferred to them.

But hyperinflation is death, & nobody wants to buy into having wealth transferred away from them. Price goes down.

Sustainable balance is very likely somewhere in the middle.

Change slowly & predictably enough and balance can be found. Like tuning the sensitivity on a brand new game controller; big changes are the opposite of helpful. Make tiny changes, play for awhile, repeat.

Nice graph. Do you have historical data for the Cosmos Hub? That is, how bond ratio changes with inflation rate.
I do not think you can compare chains. E.g., the Hub tokenomics is very different to Osmosis tokenomics. Osmosis needs to use part of its inflation to reward liquidity providers and dev. teams. Therefore, a large part of it do not go to stakers and they do not find very attractive (in APR) to stake. Hence, you see there a low bond ratio even with high inflation.

I fully agree with this view. New tokens do not change the market cap by itself. The total wealth remains constant. The overall wealth in the system remains the same. The current tokenomics design has a dual purpose: it penalizes those who don’t stake their tokens by reducing the value of their holdings, and the value “taken” from non-stakers is given to those who do stake. By reducing inflation, even when we keep the net yield unchanged, we lessen the penalty for non-stakers. This means there are fewer incentives for people to stake their tokens.

If the market-cap doesn’t change when new tokens are minted, then the price of the token must decrease (everything else equal). So, inflation does have an impact on the token price. However, it doesn’t seem like it is the primary reason for the drop in ATOM’s price. or it is? how much of the price drop can be attributed to inflation? It would be very interesting to see an economic analysis that examines the correlations between the price of ATOM, inflation, and the price of Bitcoin, as suggested by @Cosmic_Validator.

If you’re referring to USD value, this is not what I’m suggesting. Macro economics are far too powerful for that. But it is exactly what I’m suggesting if you are referring to ATOM’s performance compared to other tokens. Just not within the timeframes you’re suggesting (e.g. not as a direct response to inflation a few months ago), but over multi-year periods.

This is a valid concern, but there are several ways to address this:

  • Increase minimum commission rate
  • Slow down the speed with which inflation decreases (i.e. give us more time)
  • Build a stability reserve fund for operational costs during a bear market with funds saved from a bull market (working on it!)
  • Tie inflation rate to a minimum USD ATOM price: e.g. if inflation is 3%, but lowest ~20 validators earn only 50$ a month on average, start increasing inflation until a max cap is reached (somewhat controversial ideal, not a fan)
  • Change the minimum inflation to a higher amount in this current proposal
  • Enable options to change the minimum inflation in case validators aren’t earning enough

Almost all of these are better options than not stepping away from the current model. I actually don’t think we’ll need most of these options in a few years from now, but if we did, I would be fairly confident to say the ATOM project has failed.

Keep in mind we’re going to 7% inflation before 2025 anyway at the current model, assuming we stay over 67% bond (which is logical given Liquid Staking). The discussion is really more about how we want to get there, and whether 1.5% is too low or not. @effortcapital might be better suited to give you some details here in terms of validator income at different price points. This might be helpful for our shared understanding here. Nobody wants validators to operate at a loss!

Yes, of course, there is a correlation specifically on the Hub because we built it into the software. However, this only explicitly tells us that a higher bonding ratio results in a lower inflation rate, NOT that a higher inflation rate would automatically mean more people would stake. The correlation as enforced by this software mechanism provides no data points on human behaviour.

The whole point of this conversation is about what happens when you don’t use this mechanism. The chart I shared tells you what happens. Nothing happens.

And yes, this is different per chain as @jBQ mentions, but there are plenty of chains included that don’t have heavy incentive programs, some of which have a similar mechanism to the Hub, and some that have inflation untied to the bonding ratio. Some have super high inflation, some very low inflation.

Unfortunately I don’t have access to historical bonding ratio data :frowning: But I should get current staking APR / bonding ratio ratio soon, as it’s more useful.

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If the price of ATOM is already low, and you decide to raise the inflation rate to support the bottom 20 validators, this increased inflation might actually cause the ATOM price to drop even further. In response, this scheme implies to increase the inflation rate even more, and this cycle could continue until it reaches the cap. This appears to be a negative pattern. I might be missing something here. Could you please provide more details and explanation on this matter?

It was really just a brain dump. And probably a very bad idea. lol.

But you would have to set up a max inflation rate on this obviously, and would only apply this for operational costs like validators (not delegators), to minimize price impact. But I don’t think the idea has much merit tbh.

I think tying inflation rate to price might be a good idea but in the other way around. If ATOM price increases too much, then you can raise the inflation rate. By doing this, you have your mechanism to :point_down:

I would use this reserve to finance new projects.

The increment in the inflation rate should be lower than the increment in the price, to not kill that increment.

In any case, we are far away of having this problem.

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hey @Cosmic_Validator really appreciate your feedback! I don’t have much more to add than what @WillB already said.

The Cosmos Hub is paying way too much for security when compared to almost every other PoS network in the space. Additionally, while inflation can be seen as a tax on non-stakers, it also causes large supply overhangs that negatively affects ATOM price. If everyone re-staked their inflation, ATOM bond ratio would continue to trend above 70%, but we have only seen this happen a select few times in the Hub’s history.

The dynamic inflation security model is outdated with the advent of liquid staking, but you have a valid point about the 25% global limit! We encourage you to read our new post here that seeks to remove this max cap.

It is important to note that we took some inspiration from the supply schedule of SOL while also looking at the issuance rate of ETH (which is a function of how much ETH is staked to the network). SOL is planning on reaching 1.5% base inflation rate by ~2029 and ETH will issue ~1.2% if/when ~67-70% supply is staked (assuming ~120M ETH supply). Its important to compare ATOM to other assets in its vertical, and a minimum bound of 7% inflation is much too high.

If the community decides to lower the min bound to 3% (which was discussed by Jae and others in prior ATOM 2.0 debates), our supply schedule would actually kick out the time to reach that level by over a year - giving the AEZ time to generate more revenue.

Ultimately, we are confident a more set supply schedule is the way to go to create more certainty around ATOM. While our proposed inflation schedule may seem aggressive, we hope the community can come to an agreement on removing the dynamic inflation schedule first THEN coming to an agreement on what this new supply curve should look like.


Thanks for the reply @effortcapital, I think we appreciate your efforts and ideas to increase ATOM price. You mention that most other PoS networks are paying less for security, this is actually great data to confirm or not your hypothesis about inflation and token price. Did other PoS networks with lower inflation manage to increase the price of their respective tokens because of this? If there is enough data proving this then your idea would be backed with historical data and more certainty, however looking at most PoS chains it seems token prices are more correlated with BTC price and macroeconomic factors than with inflation. Osmosis, Juno and other projects recently had major inflation reductions and the expectation was that this would lead to a higher token price, however, the opposite happened.

Thanks, I’ll read and reply regarding your new post.

Here also I think this is an assumption regarding the consumer chain revenues, what data or certainty do we have regarding future revenues of consumer chains? Based on existing data for several months, current revenues for all consumer chains combined is negligable.


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Historically, and I don’t mean only crypto but with other monies too : it’s not really about the price but more about liquidity. If you have a big and constant flow of newly minted tokens hitting the markets at some point there isn’t much bid interest to sustain the market and it has to reprice lower. This doesn’t mean that less supply means a higher price, but just marginally better market conditions.

There was a time when big supply and big APRs were the trend (especially in the 2018 era of masternode coins). What would often happen would be that the bids to buy more of the coin would rapidly disappear, leading exchanges to pair the coin against litecoin (litoshi markets) leading to even less liquidity.

Stable, predictable rates of inflation are also necessary for defi to work efficiently.

Osmosis did reduce their inflation rate, but they did it at the same time they reduced the liquidity provision incentives.

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