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. Weāve been assuming for pragmatism we need to essentially fork the inflation model of the hub for Regen, but we also prefer demurage and Iām very interested how this intersects with our current design work around bonding oracles and other network service providers.
1 Like
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 āincomeā or ācapital gainsā. 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 āstock or stock issuanceā. 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 cautionā¦
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 approachesā¦
1 Like
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 āinflating coinā is better than āburn unstaked tokenā scheme. (Donāt 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.
1 Like
Thanks for the insight. Reducing inflation will also make this issue insignificant, and maybe thatās the right solution anyway.
Another idea.
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.
2 Likes
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.
1 Like
howās 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 āinflationā (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 doesnāt 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 theyāre already operating in an ecosystem which has high price volatility and can have thin margins. And this isnāt 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, Iām 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 donāt stake your tokens, at least youāre not paying taxes on them.
Some might say, āwell, Iām earning income via those rewards.ā 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 āinflationā is actually useful, in that it at least infers that these additional tokens donāt actually add to the value of someoneās token holdings, even though the number of tokens theyāre 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 ādemurrageā 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 āinflationā 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.
2 Likes
Maybe have to stake after x amount of days to safeguard your coins. Great idea.
Kava is coming, powered by chainlink as an oracle
CDP for Atom XRP BTC as collateral with burn and mint as a core engine.
Is going to be a great time ahead for Defi
Their medium is stunning and full of promises.
This is not very complicated. If tokens are restaked they are not taxed. The staked ATOMs will not be taxed nor the rewards taxed if they stay with the staker and are used for network purposes. The taxable event is selling the ATOMs for US dollars.
If staking rewards were in USDC, then you can make the case that taxation is an issue. But they are not. They are in ATOM. ATOM is not shares of a corporation that entitles you to a share of its profits earned in US dollars. ATOM are voting shares in a multi-jurisdictional distributed computer network which does its transactions in ATOM, not US dollars. In other words, nothing happening on the ATOM network is taxable until somebody sells their ATOMs for US dollars. That is the only taxable event.
US taxation is measured in US dollars (hence the US dollar is āunit of accountā). Unless some activity is measurable directly in US dollars by being converted to US dollars, it is not taxable.
See this thread.
Taxation is different depending on who issues the staking rewards, where the staking happens and who and where the staker is. If you have a self-custody wallet like Keplr and you stake your ATOMs there and stake them and restake them, you have no tax liability. All of the economic activity happens on a multi-jurisdictional computer network and it is hard to determine in which jurisdiction the economic activity actually is and what tax law applies. The ATOM you are getting and re-staking is not converted or measurable in US dollars and as such there is no measurable economic activity which to tax. I may be an Italian and my validator might have his computers in Guatemala. Not sure why US tax applies here in any way.
However, if you bought your ATOM on Coinbase and you staked it on Coinbase and Coinbase is your validator and Coinbase issues your staking rewards and Coinbase is a registered/official exchange on which they can get a price for ATOM in US dollars easily, Coinbase can then issue you an annual tax form stating what is now your taxable income from your ATOM staking rewards. Even though, I would find even this somewhat questionable unless you convert your ATOM staking rewards to US dollars. Because then you would be paying tax on an asset that has a fluctuating value. Volatility of crypto assets is north of 100% in many cases which means they should be considered worthless for tax purposes.
In any case, I just want to point out that you are simiplifying greatly the taxation issue. This is a very complex matter and for the purposes of your argument you should assume that taxation is not a significant issue.
At present, there is no crypto tax laws in the United States. There are are regulations (and regulations arenāt laws) and those regulations at this stage in the game are somewhat experimental and infused with political ideology. I donāt think current regs will be what the laws will be in their final form. Biden admin and Sen. Warren are ābig governmentā ideologues which in the sphere of monetary policy means they are fiat maximalists and want to outlaw any non-sovereign currencies. But as you see - we still have gold around and gold is a non-sovereign currency so their ideology is not the law, as it were. I know for many it is difficult to distinguish between regulations and law but at this stage anything crypto related in the US is a regulation, not a law and as such it is subject to change based on the ideology of the administrator.
I know its hard to believe but there are other jurisdications than the US. So yes indeed its very complicated because everything you wrote would be absolutely wrong in my jurisdication, i will spare you the details though.