It makes the bonds an appreciating capital asset where gains can be realized without destruction. I think it strengthens that case that native staking rewards are not income.
So if I understand correctly, the differences from the current system basically boil down to:
- inflation is auto-bonded
- delegations can be transferred to another delegator
And the goal of (2) is to convert the bond from a non-transferable and income generating account to a transferable and appreciating capital account.
It’s a cool idea, but I’m not sure the transferability really makes the case for it not being income. For instance the closest analogy I can think of are shares where the dividends are paid in the shares themselves. I believe those dividends are still treated as income. So it seems that so long as there are increases in the native denomination of an asset, it may be deemed as income. Unless I’m missing something?
Also, I’d be a bit concerned that transferable bonds might have unintended consequences on the economic security since it means they can change hands without going through an unbonding period, and what was once a commitment to wait before you could liquidate becomes no longer so.
It solves the liquidity problem with earlier versions of the demurrage design where voting power becomes too expensive to purchase.
Are these designs written up anywhere?
But there is no increase in the native denomination of the bonds. 1 bond always equals 1 bond. It’s just the denomination of unexercised liquidation option that is increasing.
Transferable bonds do not weaken economic security because the bond is still attached to the validator and still slashable. Liquidation is the only way to recover a fungible asset with no potential slashing risks.
Isn’t the voting power increasing?
And maybe not the economic security per-se, but something about it’s time preference. If 100% of atoms were bonded, you’d have to wait 3 weeks (at least in protocol) before you could acquire any stake. If bonds were liquid, you could get them right away. Not sure exactly how this should be interpreted w.r.t some definition of security. Possibly it’s irrelevant, but just pointing it out.
you can’t change the validator that bond is attached to in my proposed construction. So selling bonds doesn’t change voting power.
I’d probably suggest removing redelegation in this design.
Some reasoning that this might not help.
You have to pay income taxes on imputed interest if nothing actually pays out.
https://www.sec.gov/fast-answers/answerszerohtm.html H/t Arthur Breitman
This seems like it opens up another layer of social challenges around deciding what validator to bond to. Wrapping my head around the implications of that.
Following closely. We’ve been assuming for pragmatism we need to essentially fork the inflation model of the hub for Regen, but we also prefer demurage and I’m very interested how this intersects with our current design work around bonding oracles and other network service providers.
There are number of assumptions on tax side being made here. To design a system based on these assumptions will have have a number of unintended consequences when IRS (and other tax authorities) decide how to treat PoS awards. Assumptions in this conversation that are by no way obvious: 1) Awards will be treated as “income” or “capital gains”. See here for a good discussion https://www.gibsondunn.com/wp-content/uploads/2019/01/Hamano-Staking-Out-New-Territory-Taxation-of-Proof-of-Stake-Protocols-Tax-Notes-01-28-2019-.pdf There are decent arguments for neither, at least until disposition of the rewards into fiat. 2) Cosmos/Atoms are like a “stock or stock issuance”. Or they could be a SoV. Or Utility token. Or ? Each one will have potentially different impacts on tax treatment. 3) How regulatory authorities view the original issuance of Atoms will effect #2, which will effect #1. And on and on. Further, every change made and how that change is made will potentially effect other regulatory aspects i.e. securities regulation. We may be solving one problem while creating larger problems in other regulatory areas. Proceed with caution…
This covers a very narrow and specific area of tax law as it pertains to zero coupon bonds. Tax law is incredibly complicated. Think better approach then picking one analog example would be complete survey of possible approaches…
I t will effectively eliminate short-term traders who will create trading volume. Without volume, atom price will fluctuate like crazy. without trading volume, some big malicious capitalist can crash Atom price. Laws of economic is simple. we have to lower interest rate. we have to let market choose number of validators.
I agree, any design making assumptions about tax treatment should be run by tax attorneys from many different countries before being implemented.
This discussion will also probably be more productive in about a year once everyone has paid taxes from staking.
Interesting take- are you saying that people selling Atoms to pay their income taxes every year will create volume, which is good in and of itself?
What I mean is “inflating coin” is better than “burn unstaked token” scheme. (Don’t get me wrong, I think low inflation is better.) What I mean is paying validating income tax is better than punishing speculators. Because speculators are extremely valuable asset to chain ecosystem since they provide volume that is essential for token price. if you burn unstaked token, there will be no trading volume becuase short term traders will leave!
I really think inflation should much lower then now. that will create more trading volume.
one more tip : if you want to punish short-term traders in order to focus on long term investors , short term traders ( speculators) avenge will find chain. This is lessons learned from previous chains.
If cosmos want to learn not from history, but from experience, it will be sad thing.
Thanks for the insight. Reducing inflation will also make this issue insignificant, and maybe that’s the right solution anyway.
Whenever unstaked coins are moved, a percentage is burned promotional to the number of blocks the tokens have immobilized.
Bonded tokens can be unstaked and moved without incurring any burned.
No inflation is necessary. The curve of the burn on move is determined by amount of total coins bonded.
Great idea! No technical issues since all systems are designed to take a variable tx fee into account anyway.
This is awesome. Slight optimization, the validators can calculate when account owes more than its worth and remove the account from the various DBs.
how’s the situation? Are you in control?
Just read through this thread. What is current sentiment about this topic, and what are the current blockers from moving forward?
@Gregory, Ethan Frey and I have been continuing this discussion with Regen Network, concerning our own token economics (currently our tokenomics are basically a fork of the ATOM).
Here is how I would summarize on a non-technical level:
For optimal network security, Proof-of-Stake systems rely on a high percentage of the total supply of staking tokens to be staked. Tokenomically, it was originally proposed (in systems such as Cosmos) that this would be achieved by disincentivizing non-staked tokens. By the time this theory was turned into practice, mechanism design morphed such that, rather than punish non-staked token holders, the chain would reward staked token holders through a mechanism erroneously dubbed “inflation” (inflation actually refers to the value of a currency, not its supply). Game-theoretically, these two mechanisms (demurrage of non-staked tokens and supply increase of staked tokens) have identical outcomes of incentivizing staking. In the real world, they have some notable differences.
As tax law doesn’t take into account the nuances of the economics of money supply, governments currently consider token rewards as income. This is detrimental to the bottom lines of validators, as they’re already operating in an ecosystem which has high price volatility and can have thin margins. And this isn’t just an issue for validators; the same can be said for anyone else staking tokens in the network.
I am not attempting to make an ideological argument here about tax efficiency. Rather, I’m calling attention the the fact that, if the intention of the mechanism is to punish non-staked token holders, introducing additional bureaucratic and tax overhead on those with staked tokens actually furthers the negation of this mechanism; if you don’t stake your tokens, at least you’re not paying taxes on them.
Some might say, “well, I’m earning income via those rewards.” Again, the original intent of the mechanism design was to minimize the number of unstaked tokens; economically, whether those tokens are taken via a total supply reduction via those with unstaked tokens (through a demurrage mechanism), or by increasing the supply and giving that supply increase to those with staked tokens, the theoretical economic results are the same. In this regard, the term “inflation” is actually useful, in that it at least infers that these additional tokens don’t actually add to the value of someone’s token holdings, even though the number of tokens they’re holding have increased.
I will also note that I am not attempting to make a general case against supply increase. In the case of developer grants, I think a supply increase is merited. That said, well-designed economic mechanisms work on as isolated an aspect of behavior as possible. The more complex and intermingled these mechanisms become, the less effective they can be.
For those of you unfamiliar to the use of the term “demurrage” in economic terms, it refers to the cost of holding a currency. Why would we want to impose a cost on simply holding a currency? The value of a currency is collectively generated; if you were the only person holding Bitcoin, it would be utterly worthless. The value of a currency is dependent upon the economy which it enables. Currency just sitting around doing nothing detracts from the utility of an economy. On the other hand, there are numerous uses of currency that add to the value of an economy, (or at least maintain current levels of viability). In Proof-of-Stake networks, this utility, or service one can provide with the native currency is staking. Although token “inflation” and demurrage instruments can achieve the same results in theory, the psychological story of demurrage is much more consistent with the underlying narrative here.
If this sounds interesting to people, Ethan Frey has said he could supply an overview of one path to technical implementation in the Cosmos/Regen context.