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.

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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.


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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ATOM is money whether you define it that way or not. Money is Medium of Exchange, Store of Value and Unit of Account. As presently constructed, ATOM is a Medium of Exchange and Unit of Account for the Cosmos Hub network because you need it to get a transaction executed and move ATOMs from one account to another. As such every blockchain token is by definition “money”. The different tokens obviously perform the function of Store of Value differently - some communities don’t want to do it like Jae suggests ATOM shouldn’t and other like Bitcoin’s focus on that property almost exclusively to great effect (hence trillion dollar valuation).

Whether we like it or not, every single L1 blockchain token is money, the only question is how valuable that token is and whether the value of the token is important. My view is that value is very important because if the token is valueless then it won’t perform its security function properly. “Security” by definition is an expenditure of energy and that energy is only expended if there is some value being captured. In other words, an army doesn’t roam around aimlessly because the soldiers need food (and not to mention equipment) and that food needs to come from somewhere. An army is put together to protect something valuable - at minimum to feed the soldiers and hopefully a lot more. So if ATOM is valueless, it won’t generate security and thus it will be meaningless for the Cosmos ecosystem. Some other chain will do what Cosmos Hub fails to do in terms of generating a valuable token and all the investors will move there. Then Jae will talk to himself in some message board and there will be nobody answering. Which is perhaps what Jae wants and that can be very easily done - Jae can open up a Telegram channel, block subscriptions to it and talk to himself. But obviously there is a lot of people here who have spent a lot of time coding various parts of Cosmos Hub and they need to eat to and as such value MUST be generated somehow from this ATOM token.

So value must be created. The question is how. An inflation of 17% means that Cosmos Hub needs to grow in its effective usage at 17% in perpetuity which is not an easy task. Some companies like Amazon, Microsoft and Google have accomplished such heroic feats but being like the Top 5 companies in the world is an ASPIRATION not a real world objective and certainly you can’t model your inflation based on such ultra aggressive growth rate in perpetuity. Stock market indexes grow profits at 8% per year on average over the last 100 years with brutal turnover of over 90% of companies inside those indexes. Large economies like US and Europe grow at 3% per year of which 1.5% is population (real growth) and 1.5% is inflation to keep people incentivized to do work. So about 3-4-5% is what a large scale system grows like, 8-10% is what super motivated corporate systems grow like and 20% is what the most exception corporations in the world grow at. If we aim for Cosmos Hub to secure 1 billion person economic ecosystem, the ultimate growth rate should be about 3% per year. So the Cosmos Hub needs to get its inflation to that target which is what Effort Capital suggests and agree with.

In the world there are 200 different countries each of which had their toilet paper money and as you can see now many countries are ditching their currencies voluntarily. Why? Because the national currency is always at risk from every single administration which can make a unilateral decision to devalue the currency (ie print a lot of it). That means every single generation of people is at risk of losing their life savings - the left over from a lifetime of hard work. Governments have robbed their people using fiat for so long and so many times that now the population (including the bureacrats) themselves want to ditch their worthless tokens in favor of supra-national currencies like the US dollar or the Euro where other people can save them from themselves.

While I agree that the point of Cosmos is to have 1000 different shitcoins powering various types of computing activities, what I think will happen eventually is that few of those shitcoins will turn into great investments and will find a great product market fit. The other 995 shitcoins will have a value that goes to zero and people will get tired of being dumped on and will seek a similar arrangement where they can invest and save in a supra-blockchain currency. The Replicated Security design and IBC makes ATOM that supra-blockchain currency. So ATOM already has a very well defined purpose that has parallels in the real world (I think of ATOM as the Euro of cryptocurrencies) and we simply need to align its monetary policy with its real world usage. Currently that alignment is totally out of whack as the end game for Cosmos Hub is not a perpetual 20% hypergrowth business. Maybe Cosmos Hub will deliver that type of performance over the next few years, but then it will have a hard time keeping up and that would mean the token’s value will be trending towards zero. Which in turn would destroy the growth of the ecosystem.

Long story short I agree with the Effort Capital proposal. I personally am a big fan of the Monero tail emission and as an investor that would be my preferred monetary policy (ie network adoption gets diluted less by inflation which means number go up more than otherwise). I think that was the original ATOM 2.0 proposal last year. Maybe we can work towards that, but for now the Effort Capital proposal is a great improvement over the status quo and I like it.


Una mas:

Slashing ATOM from validators doesn’t mean that ATOM isn’t money, the way the SEC or DOJ fining JP Morgan for bad banking doesn’t make the US dollar not money. Slashing is penalty for bad behavior which in the real world is called “fine”. The token being slashed remains just as much money after being taken away from somebody as before when it was being accumulated by that somebody.

I really don’t want to hear stuff like “sell your ATOMs and leave the ecosystem” because whether you like it or not, you issued this financial instrument ATOM and if people invested money in it (whether they understood or not what they were buying) and they lost the money then you are on the hook, no matter how many legal barriers you have built around to protect yourself. If you screw enough people, then the government starts prosecuting the people’s grievances and then at minimum you have to spend all your fortune on lawyers to defend yourself from various lawsuits (or on personal guards guarding you from assassins and mobsters). As you have seen over the past couple of years, a lot of very smart guys like SBF are on the run or in jail already including another guy with the Kwon last name. Koreans are too clever by half but other people are too dumb by half and tend to miss their empathy neural pathways.

Jae should be very grateful for the likes Ethan Buchman, Jack Zampolin and Zaki Manian for continuing to work on the Cosmos Hub and pushing out Replicated Security and adding value to it because if ATOM goes to zero and a whole bunch of people lose money that will not be a good development for Jae at all. Those guys are keeping you out of jail. You know, all of you guys should be grateful for each other because each one of you has fucked up and the other is keeping you afloat. That’s what I like about Cosmos is because the people in this ecosystem all have serious shortcomings and they keep saving each other from the abyss. It’s like a ship full of rag tag crew of pirates. The Black Pearl. I love it.

At this point, when many are with negative investments in ATOM, it is a really, really bad idea to be going around and spreading “SELL ATOM” rumors and participating in short seller activities, especially if you issued the ATOM.

Finally, the only reason why ATOM is not $1 today as it should is because the “market” is still under the impression that the ATOM inflation issue (which is huge) would be taken care of as it was outlined in the ATOM 2.0 proposal. I would discourage blocking of efforts to fix ATOM’s inflation issue because then jail would arrive a lot sooner. The world is a big place but it can get reduced down to a prison cell in Montenegro rather quickly. ATOM’s market cap was around $12 billion at some point and losing all of that is not pocket change.


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