Discussion: Dynamic Community Pool Tax & Reserve Management

This work was funded by the AADAO.
Author: Noam Cohen / Binary Builders

Dynamic Community Pool Tax & Reserve Management

Blockchain protocols are micronations, each with their own citizens, culture and goals. With the Cosmos Hub we are currently participating in one of the most interesting decentralized governance experiments in Web3. Every ATOM holder is part of this journey where we’re figuring out how to steer the ship together.

Nations and corporations alike practice rational financial management; when times are good we (hopefully) put money aside, and when times are bad, we ideally make sure we use those reserves to cover our costs.

With this post, I’d like to start a discussion on how, by partially transitioning to a USD-based expense model, the Cosmos Hub can practice automated rational financial management to increase the available resources to cover its operational expenses in the long term.

The Problem

While kickstarted at Tendermint and maintained by the ICF, the Hub is transitioning to an independent, ATOM-led community that’s now able to fund it’s own future path. With the AADAO in full motion, research & development being funded directly through the Community Pool, and liquidity deployment a common occurrence, we need to start gearing up to guarantee the necessary funds for the years to come.

With over $100m worth of ATOM and NTRN sitting in the community pool, things are looking relatively bright, but we must remember that not long ago this was a very different scenario. Most protocol foundations actually practice some form of asset management: in bull markets they tend to spend more to accelerate growth and convert some of their assets to fiat to guarantee resources during bear markets.

It’s time for the ATOM community to consider the same. There are two complementary approaches to this:

  • Create a variable Community Pool tax based on the price of ATOM: If ATOM does well, a higher percentage goes to the CP. If ATOM is performing badly, a lower amount is taxed.
  • Design mechanisms to convert some tokens to stablecoins: This does not have to be a huge percentage at all, and we must take care not to affect the price of AEZ tokens. But a combination of manual & automated conversions can help us achieve longevity. Potentially, these stablecoins could be used to buy back ATOM when some conditions are triggered during a bear market, driving the price up when needed most.

A significant amount of our expenses can actually be expressed in fiat. Developers can’t pay their rent with ATOM and funding requests from Informal/Hypha & the AADAO took a fiat-first approach to assessing how much was needed. Partially transitioning to a USD-based cost model allows us to offer more long term stability in operational expenses while still offering a reasonable amount of ATOM upside to incentivize developers.

How would we go about doing this? First we need to address the problem of trying to time the market. Because:

You Can’t Time The Market…

That’s correct, but let’s use an analogy to understand how we can still optimize for longevity:

Imagine a fisherman who fishes to feed his family. The amount of fish he catches each day varies because of circumstances beyond his control, such as the weather and seasonal migration. There are days of abundance and days when he won’t have enough to feed his family. Without knowing what will happen in the next few months, the fisherman is incentivized to keep some amount of fish in storage for bad days. As such, on a day where he catches more than his family can eat, he keeps some of the fish and preserves it through freezing. In days of unexpected abundance, he might even sell some to the open market so that he can buy other foods to feed his family in times of need.

The fisherman cannot “time” the sea, but he can assess daily whether his catch was sufficient to keep some in stock. There is no guarantee this will work forever, but he keeps his family well-fed for longer while also learning how much to ration over time. Similarly, the Cosmos Hub can assess daily whether its “catch” (i.e. inflation + revenue) was more than usual over a certain period and potentially set some ATOM aside for later, or even convert some to stablecoins if the excess was overwhelming.

So what would this Fisherman’s Protocol look like?

Part 1: Dynamic Community Pool Tax

If we read the price of ATOM through an oracle, we can calculate a moving average (MA) of the price over the last several hundred days (I’m using a 655-day MA). Based on the distance between the current price and the MA, we can calculate whether today was a good day or not.

If we then take a minimum tax percentage that goes to the CP (let’s say 5%), and a maximum in case of peak bull market (20%), we can calculate a dynamic CP tax that depends on the delta between the price and the MA like this, where the blue area in the bottom indicates the CP tax rate:

Note: to illustrate my point, all my examples assume this model has been running since genesis.

Approaching it this way should guarantee two things:

  • There is slightly more ATOM available for validators and delegators in the bear market.
  • There is a higher total of ATOM available in the CP during bear markets. For example: based on the above parameters and my calculations that you can check in the interactive chart below, there would have been a 33% increase of available ATOM in the CP during the market low in June 2022.

While this does mean that ATOM rewards decrease slightly during a sustained market rally, the USD income is still increasing because the price of ATOM is going up. This is particularly relevant for validators who need to make sure they can pay their operational bills in fiat.

Part 2: CP Reserve Management

Converting some of the CP’s assets to stablecoins would guarantee that we have more assets available in the long term, although we obviously should only convert when ATOM is performing well. We can consider two approaches:

Manual Conversion

Through a governance proposal, a certain amount of tokens can be transferred to a multisig that is tasked to convert them to a basket of stablecoins. This can be done through OTC deals, trade on the open market over an extended period of time, or by providing collateral for algorithmic stablecoins like IST (and actively managing that position to prevent liquidation), the latter of which could be automated to some extent using protocol covenants.

Organizations like the AADAO or similar minded groups are well positioned to execute on the above. For example, the AADAO has already managed the deployment of the Stride POL request in prop 800.

While manual conversion require trust assumptions that we’d all be keen to avoid, they are a stepping stone towards a fully automated and decentralized future.

Automatic Conversion

There are two parts to converting some amount of the CP automatically to stablecoins:

How much and how often to convert

Two parameters are needed here:

  • The token / stablecoin ratio for each asset: E.g. for ATOM we could say, we’d like a maximum of 15% to be available in stables.
  • The maximum percentage of tokens that can be converted on a single day: E.g. setting the parameter to 1% would mean that of the 15% that we want allocated to stablecoins in the long term, we’re converting up to 1% per day. I.e. 1% of the 15%, not 1% of the total CP! This number is modified by how well the ATOM price is doing.

We can use the same performance indicator we use to calculate the dynamic CP tax. If the price of ATOM is above the moving average, the Hub attempts to convert up to its maximum allowed percentage on that day (anywhere between 0 and 1%). If the price is below the MA, we assume it’s a bad time to convert ATOM.

If we assume the above suggested parameters, the treasury would accumulate stablecoins like this, where the light green color indicates the USD in the treasury:

If we compare that to not converting at all, we can see that the total available funds expressed in USD during a bear market is considerably lower:

The difference is very significant. If we again take the bottom of the bear market on June 19th, 2022, we see that 15% conversion leads to a total of $123m USD being available in the CP, compared to $61m USD at 0% conversion. The general outcome of this mechanism is that the volatility of the CP stabilizes over time.

You can experiment with this spreadsheet and the charts here. I encourage you to duplicate the document and change the parameters on the first sheet to test out various outcomes.

Please note that this spreadsheet is a simple approximation to this mechanism to illustrate the point. There are a few details to mention:

  • It only covers ATOM, there is no NTRN in this example.
  • There is no outflow from the CP. I.e. the money isn’t being spent.
  • It assumes this mechanism was in place since genesis.
  • There is some historical data missing about inflation rates and I’ve made several assumptions before 02/17/2021 and after 07/17/2023 that are noted in the document.

Where and how to convert

This is the tricky part. There are several approaches possible and they all have their pro’s and cons:

  • Interfacing with DEXes and selling on the open market: While simple in theory, there’s significant complexity around connecting to a multitude of exchanges and managing the trading across them based on the available liquidity. It’s also extremely easy to be front-run and likely has the largest price impact, which is something we want to avoid.
  • Automated stablecoin minting through posting AEZ tokens as collateral: This is not the most capital efficient method because we’d need to overcollateralize the position. Additionally, there’s significant complexity involved in making sure we reduce the position in the case of price volatility. It won’t allow us to maintain the reserves during a bear market.
  • Using an auction-based system: By offering a daily auction that operates within certain bounds, we can significantly reduce the complexity of converting tokens as we can leave it to the arbitrageurs in the open market to find the most capital efficient way to convert. This secondary market enables us to indirectly access both centralized and decentralized exchanges. Furthermore, it offers an attractive location for traders to accumulate ATOM. This is the least complex solution with the lowest price impact while still enabling long term USD reserves. This mechanism could also be used if the community decides it would be preferable to convert some of the USD back to ATOM during a bear market.

Timewave is building out an auction based system that could accommodate our goals of maintaining a USD reserve. This would mean the Hub would contain some logic that automatically sends the desired amount of ATOM to convert to a contract on Neutron, on a daily basis. The auction has a starting price and a minimum price, below which no ATOM would be sold. If the auction does not completely convert all the funds, it will be returned to the Hub and we try again the next day.

I encourage the Timewave team to elaborate on the workings of their model to illustrate how this can be achieved.


By enabling a dynamic Community Pool tax rate, and converting some amount of the CP’s assets to stablecoins, we can assure that the Cosmos Hub will be able to maintain funding longevity for our core development teams, grants and protocol owned liquidity deployments in the many years to come.

As the financial markets are recovering, I believe now more than ever is the time to open the debate around this topic. We are at a critical point in time where the ATOM community can decide whether the Hub is ready to mature to a sustainable token-based economy that can set a standard for the hundreds of autonomous decentralized communities in the Interchain and beyond. My hope is that we can get a governance proposal going in the near term and that Binary Builders and Timewave can build out the required logic for this as soon as possible.

I appreciate your time in reading this post made in collaboration between Binary Builders and the AADAO, and look forward to discussing this with our community :pray:


Good work. If the selling is continuous, it can’t be front run.

This is great work, and I’m excited to see what the community thinks about the idea.


Sounds reasonable !

Appreciated the well-written post + charts and tools to experiment various scenarios


My only request atm would be to make sure the selling volume goes through the AEZ (a DEX on Neutron most likely) keep the volume and fees in house.


In general think this is the wrong approach and will hurt atom

Just a couple questions for now:

How much do you think needs to be liquidated in the treasury?

What are the real world tax implications of such proposal?

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I don’t think any AEZ dex could withstand the kind of selling the hub does to fund herself.

There’s $27m in NTRN-ATOM LP alone on Astroport. It could handle sizeable swaps just fine.

The price of ATOM in general while programmatically nuking itself is a different topic. :joy:

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This is a great idea, and a really well-written analysis!

If committing to a “sell off ATOM as its price rises, buy ATOM off the market when it falls” strategy is acceptable, in the short-term can you just deploy a ATOM-USDC PCL pool on Astroport, start LPing, then hold ownership of the LP shares in the Community Pool? The LP shares would continuously stay at 50% ATOM and 50% stablecoin in value. There wouldn’t be any brakes on how fast this strategy buys and sells, but as a stopgap it could technically be done right now, without writing any new code.

Are other, non-standard tokens with stable value worth considering, like buying and holding SILK instead of a token strictly pegged to USD? Or to the degree that bridge risks are acceptable, there are tokens bridged from Ethereum like sDAI and wUSDM.

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It’s an interesting topic that we already started discussing in Juno a few months ago (you can search on Discord in our Cross-Department channels).

I think you first need to show the community all the invoices and expenses in fiat/stablecoins to justify the amount you are selling. You don’t want to become a managed fund, but only cover planned/budgeted/recurring expenses quoted in stablecoins, when it doesn’t make sense to pay them in ATOM (and you should keep that at a minimum, while sponsoring adoption of ATOM to merchants so that suppliers can slowly accept & spend more of them directly).

It’s much easier & efficient to leave fiat taxation and regulatory compliance to the single recipients (based on their residence country) than to the blockchain as a whole (who would be responsible otherwise?!).

I like the concept of price stability, but that’s a different topic that should consider prices against everything else, not just 1 other denomination. If instead you target the specific denominations that you accept in invoices (ie. on-chain contracts, that the community can verify), you really cover the need you alluded to and it starts to make sense to me. This way you are only covering costs, doing procurement for a public good, and not being a security that targets fiat profits by buying low & selling high.

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I agree. Being a liquidity provider in a ATOM-USDC pool accomplishes this task automatically. Whoever buys ATOM with USDC would be stuffing the Treasury with USDC. So maybe pursue an LP strategy instead?

On the other hand, if we pursue a selling on DEX strategy, the question then becomes why don’t we also augment the selling with selling on Binance which is by far the most liquid ATOM pool. While we need to promote selling on DEX, the haircuts (ie losses for Treasury) are pretty large there so we need to cut the haircuts by doing some selling on Binance (by far the most liquid CEX). I understand this is creating an API hooking into Binance which is not generic, but generally speaking we can’t be blind to liquidity realities out there. If the large pools of liquidity are on Binance, we have to incorporate that into our trading strategy.


I don’t think we should interface directly with DEXes and sell on the open market like that, it would affect the price too much. It’s also really tricky to plug into dexes directly because they can have API-breaking changes, liquidity can move around, it can be front run, and generally they require a bit too much coordination on the protocol level to get right.

What I’d rather see happening is some kind of auction based system. But I also really like the idea @dynstatic proposes where we just LP the tokens. The main issue with that is that you still need to figure out how to get the other half of the LP on the USDC side.

Perhaps there’s some mixture of auction (to get 50% of the stablecoin) and LP-ing that would be the most effective. The great thing about LP-ing the tokens is that you could increase ATOM’s liquidity quite a bit, which should further reduce price swings.

Great to hear about the Juno perspective, thanks for sharing!

I’m curious about the tax situation. Because we’re already deploying PoL, earning rewards, we swapped ATOM to stATOM. All of these are taxable events. How is stablecoin conversion any different?

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Once again, you’ve delivered high-quality content and provided a thorough analysis of the situation. Here at Govmos, we’re fortunate to have a team member with over 13 years of experience in finance, trading, and market making. Consequently, this topic falls squarely within our area of expertise. To be more precise, this particular action falls under the category of volatility arbitrage, a topic far more complex than simply buying below average and selling above.

Despite the intricacies of financial arbitrage, you’ve managed to pave the way for a fruitful community debate on the matter. As you correctly identified, within the realm of professional arbitrage, discretionary arbitrage and public strategies represent two distinct methodologies which need to be addressed separately.

Discretionary Arbitrage:

  • Description: Discretionary arbitrage involves making trading decisions based on the discretion and judgment of the trader or team. This method relies heavily on qualitative analysis, intuition, and market expertise.
  • Approach: Traders employing discretionary arbitrage typically delve into fundamental and technical analysis, alongside considerations of macroeconomic factors and qualitative insights. Their trades are guided by subjective judgment to identify market mispricings or inefficiencies.
  • Execution: Trades in discretionary arbitrage are rooted in the trader’s interpretation of market conditions and risk-reward assessment. This approach demands substantial experience and market acumen, often entailing a degree of subjectivity in decision-making.
  • Flexibility: Discretionary arbitrage offers adaptability to changing market dynamics and allows for the inclusion of qualitative insights beyond quantitative models.

Public Strategies:

  • Description: Public strategies, also termed systematic or quantitative strategies, rely on predefined rules, algorithms, and quantitative models to identify and exploit market inefficiencies. These strategies are typically more automated and rule-based.
  • Approach: Public strategies are grounded in quantitative analysis, statistical models, and algorithmic trading techniques. These models leverage historical data and may incorporate machine learning to identify market patterns and signals.
  • Execution: Trades in public strategies are executed automatically or semi-automatically based on signals generated by quantitative models. These strategies aim to minimize human biases and emotions, relying on systematic rule execution.
  • Consistency: Public strategies strive for consistency and scalability by adhering to systematic rules and processes. They offer transparency and replicability compared to discretionary approaches.

In essence, when it comes to discretionary strategies, this is exactly what the post suggests when referring to the AADAO to process arbitrage. Unfortunately we regret to say that the AADAO does not have the required personnel to properly execute on this front. This could easily be outsourced via grants allocation or considering an additional recruitment targeted to this particular skill.

Regarding public strategies, you also proposed a basic approach with a few variants. On this front, we would like to bring our financial experience to the table and say that much more efficient strategies can be offered covering the key aspects of value assessment:

  • Volume: Professionals never use simple arithmetic moving averages, on the contrary we generally use VWAP (volume weighted average price) as it better represents an efficient liquidity allocation than regular “time-based” strategies.

  • Time: Markets are cyclical by nature, but to keep it simple, public strategies generally deal with the time constraint via maximum monthly/quarterly/yearly spending caps and we recommend to include this in the final design.

  • Volatility: due to the inherent chaotic nature of speculation, element in the design should include standard deviations to manage the liquidity provisions’ release into the open-market whilst properly accounting for the volatility factor.

Once the public strategy has been designed and the parameters defined by the community (we will be happy to offer our support on this journey), we definitely think the actual implementation is where the most challenging part is. To quote the author’s on this matter:

According to our model using a combination of VWAP + standard deviations + spending caps, we recommend to allocate to the above three option based on the volatility derivation. A simple design proposition could look like this:

  • Below 1 standard deviations to the (x) months VWAP or if the (y) cap has been reached: do nothing.
  • Above 1 but below 2 deviations: execute daily DEX operations by depositing single-sided liquidity to the ATOM/USD pair in Neutron. Daily Amounts should be defined according to the (x) and (y) parameters.
  • Above 2 deviations: switch to a daily auction system towards market makers and arbitragers or consider using the AADAO’s discressionary strategy instead, if any.

This proposes a very simple public arbitrage strategy yet very efficient to adapt to different market conditions. The only parameters to define are the (x) to set the time based variable, and the (y) which sets the capped amounts. We can also imagine multiple programs overlapping each other on different duration. For example: a long term program with a (y) set to 1-2 years, alongside a smaller but more more regular monthly program.

We are looking forward to receive both @noam and the community feedback on our proposition. If anyone needs further explanation to some of the technical words we’ve used, please let us know.
On behalf of the entire PRO Delegators’ validator team, we want to thank you for reading this long post!


Yeah, to avoid slippage, since we can’t currently use the auction smart contract that doesn’t (yet) exist today, I guess you can indirectly rely on arbitrageurs by placing a few big limit orders on an on-chain orderbook like Kujira’s FIN, or else just directly arrange some OTC deal off-chain as a one-time thing.

Will the future Neutron smart contract for the auction system hook into a price oracle like Pyth to make decisions about what price range to offer? It’s already deployed on Neutron mainnet since July, Mars Protocol uses it.

agree. let’s make the cosmos reserve sustainable.

Thanks for all the feedback everyone. Going to comment in bulk here:

This is a good question. There are 4 main items to cover:

  • Grants programs like the AADAO
  • Core teams like Informal, Hypha & others that might show up
  • POL deployments, potentially through the ATOM Wars (or AAT). I believe this to likely be the bulk usage.
  • Other unexpected fund deployments (e.g. maybe the Hub wants to invest in a consumer chain or something)

How much do we need? That really depends. Like you, I am keen on keeping development costs low. I have no interest in a war chest of hundreds of millions meant for developers (that seems like a waste of money). However, I do think we need enough to cover several years of development, grants & marketing and business development costs. I think it would be wise if we could come to some consensus on what the yearly burn rate for the ATOM project should be (under $10m?), and aim to have reserves dedicated to that for the next 5 to 10 years.

POL deployment and strategic investments that boost the AEZ seem like the primary use of this fund. That could theoretically range into the hundreds of millions, but again that depends on the PMF for ATOM wars and the AEZ in general. The beauty here is that nothing is sold immediately and we can push the breaks on things whenever we’d like.

I don’t know, but I do know that it’s essentially the same as the Hub swapping ATOM to stATOM (a taxable event), or earning rewards while LPing.

There’s a lot to unpack in your post. I’d love to hop on a call with the author if possible. I think there’s a lot of merit to what you’re saying and I would love to take a closer look at that feedback. Please send me a DM on Twitter if you’re up for it :pray:

This is pretty tricky. Let’s say we want to maintain something like 15% of the treasury in USD. We’d need to get 15% of the current treasury swapped to USD before we can put it in an LP. The thing is, right now would be a terrible time to swap to USD obviously. So there still needs to be this method of selling just the right amount at the right time so can get to 15% (at some point). My guess is that we might not even get there quickly without hurting the price too much (if ever). Just putting a massive 10-20m order in the orderbook in one go seems like a very painful way to keep ATOM pegged to $10 (lol).

I think an ideal scenario would be to have an auction based system for the initial ATOM > USD conversion (so we can do it slowly, based on the ATOM price), and then to post the USD & ATOM we have to an LP to make sure we maintain the correct ratio.

Yes, something like this would be needed. We haven’t gotten as far yet as to which oracle system to implement. We’ll need an oracle on both the Neutron side (for the auctions) as well as on the Hub’s side (to determine how much ATOM to send over).

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Feel free to reach out via email at contact@pro-delegators.com. We’ll find a way to set up a meeting and discuss the details.

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I have been an advocate of the community pool reserve management since 2019. Would be nice to look at examples of treasury management on ETH and start asap on ATOM.

Of course, any solutions, must, imo, give the final decision powers to the chain