[Governance] Signal Proposal: Adopting the Budget Module and Farming Module on Cosmos Hub

With active pipelines of new features, the Cosmos Hub now includes the Inter-Blockchain Communication protocol (IBC) and the Gravity DEX protocol that enables DeFi across multiple chains. As the Cosmos ecosystem continues to grow, it is clear that the Cosmos Hub will benefit from attracting more delegators and increasing user adoption. Therefore, a generalized incentivization mechanism for the growth of user activities on Cosmos Hub is necessary.

1. Introduction

1.1. Farming is a Modern Blockchain Incentivization Scheme

Many modern blockchain ecosystems and decentralized applications distribute rewards to provide incentives to their platform users. The distribution of these rewards is based on user activities that help bootstrap the growth of the user base. Generally, this incentivization methodology is called “farming”. The source of the farming rewards is various, but the most popular way is to utilize the native tokens for current and future platform users.

To achieve this growth, the Tendermint team is building these modules for the Cosmos Hub:

  • Budget Module: To define and execute budget plans of ATOM inflation for multiple objectives
  • Farming Module: To define and distribute incentives for various utility users on Cosmos Hub.

2. Features

2.1. Budget Module

Budget Plan

The budget module manages a list of budget plans that describe each proportional distribution of ATOM inflation to different destinations. The budget module distributes ATOM inflation according to the existing list of budget plans.

Governance Process

The list of budget plans can be added, removed, and modified by a parameter governance proposal.

2.2. Farming Module

Farming Plan

A farming plan is a definition of a reward distribution plan with two types:

  • Public Farming Plan
    • Creation: A public farming plan can be created only by the governance process
    • Farming Pool Address: The source of a public farming plan is an existing module account
  • Private Farming Plan
    • Creation: A private farming plan can be created by anyone who submits a transaction
    • Farming Pool Address: A new farming pool address is assigned to the farming plan. Anyone can fund this farming pool by sending tokens to this address. Projects that wish to fund liquidity mining programs can send their own tokens to this address for farming distribution.

Reward Distribution

A farming plan defines a list of staking token weights that are used to calculate the proportional distribution of rewards to each farmer. From the total reward distribution, each staking token gets the weight proportion defined in the weight list. Then, each farmer who staked this token receives the amount of corresponding rewards based on their proportion of the staked token amount from the total staked amount.

Reward Harvest

A farmer can harvest (withdraw) accumulated rewards anytime they want. Rewards are calculated based on a predefined epoch, therefore farmers can harvest rewards accumulated until the last epoch.

3. Gravity DEX Liquidity Incentivization Use Case

Staking Tokens as Pool Tokens

Staking tokens in a farming plan can be defined as a group of pool tokens to distribute the farming plan rewards to pool token holders. Because every liquidity provider on Gravity DEX gets pool tokens as evidence of liquidity providing, this methodology naturally provides the Cosmos Hub with a way to incentivize liquidity providing on Gravity DEX.

Governance Processes

Two governance processes are required to activate Gravity DEX liquidity incentivization:

  • Budget: A governance process to decide
    • percentage of ATOM inflation to be used for Gravity DEX liquidity incentivization
    • time period of the budget plan created by this governance process
  • Farming: A governance process to decide
    • list and weights of staking tokens (pool tokens) to be incentivized
    • time period of the farming plan created by this governance process

Note

Gravity DEX liquidity incentivization use case is just a possible future use case of Budget/Farming modules, and such decision making process is not related to “this” signal proposal. Practically it requires several more governance procedure to actually decide and execute the liquidity incentivization.

4. Detail Spec

For detailed specs, see:

We look forward to Cosmos Hub’s community vote to approve these features. By voting yes to this signal proposal, the voter agrees to adopt the budget module and farming module on Cosmos Hub to allow an incentivization mechanism for user base growth on Cosmos Hub. After this signal proposal passes, the budget module and farming module will be included in a future Gaia upgrade when both of the modules are ready to be deployed. If the signal proposal does not pass, it implies that the Atom delegators do not want two new modules to be adopted on Cosmos Hub.

3 Likes

I really love the private farming plan idea. It is fantastic.
(Though, I am a bit worried about vampire attacks.)

I want to know about more information about budget module, though.
I think budget module is awesome, because it empowers governance.
However, I wonder (1) why its distribution is from inflation not from community taxes. I think it is simpler way that send atom inflation to community taxes and budget module control the community tax account. If this is more complicated because of difficulty of future budget control, at least I think it is not bad idea to choose the budget source of a plan between inflation or community pool.
(2) I worried about that the governance is the only option in case that we want to discontinue or modify the subsidy, because it takes time. I think “pausing (suspending) function” could be helpful in case of we needs to decide whether we discontinue or modify it or not.

Thank you for your great work!

I’m glad that this is finally a topic that is being actively discussed, as it’s incredibly crucial to begin to bootstrap the Cosmos network as competition is beginning to increase between L1’s. My biggest concerns are in regards to the timing and magnitude of this implementation.

The timing and magnitude of this launch will be incredibly important and a poorly managed incentive model can set you back quite a bit (see AVAX w/ their recent Rush launch vs. FTM). I also worry that the magnitude of the rewards is not going to be enough incentive for all the various pools that are launching. I think for starters, we need to look at Osmosis and see if we can match their incentives or at least in the same ball park. On top of that, there’s also many cross-chain bridge protocols that are coming to market, all of which have their own incentive structures.

These are two things that I hope we consider carefully. Too slow and we risk missing the trend, too small and we risk not moving the needle on anything, and I think we only get one shot at grabbing people’s attention.

2 Likes

Thank you for your support on the plan. Let me explain about your questions.

Budget module is to give the ATOM holders ability to decide where the inflation ATOM should be spent. The holders already acquired control on community fund, so there exists no necessity of control functionality for community fund.

Of course, community fund can be spent for liquidity incentives of Gravity DEX, by just sending funds to a created farming pool address. It is very simple and one step process which will be allowed.

The signal proposal itself is only suggesting adoption of new functionalities, budget and farming, but not requesting any decision on how ATOM inflation should be spent yet. It is up to followed up governance processes. Before such decision processes, there will be no fund allocated from ATOM inflation because there exists no budget plan decided by governance.

Governance takes time until execution, yes. But it deserves such waiting because we respect the governance process and its voters. We can sacrifice minor spending of fund to protect the governance process.

I agree that the inventivization plan should be well organized and planned, but also should be very flexible when market situation and competition changes.

When two modules are adopted, we will follow up with more detail spending plans for Gravity DEX incentivization. We will suggest smaller incentive fund from beginning, and we will suggest larger budget when we see significant inflow of users and liquidity providers, to accelerate our chance to grow the userbase.

The fund should be well timely spent to maximize the effectiveness of the incentivization. We don’t think now is a good time to spend maximized fund. With more ibc connected, with various bridges from other networks connected, we will have better timing to increase the incentivization, and I expect it will be about 1 year from now. Compared to then, now is just a very early beta stage with minimal real usecases yet. Time will come when we need real boost.

1 Like

I think it is critical to have a well planned incentive program to be able to compete with the other dex on IBC ( osmo and SIF) as well as other dex on other chains if we are planning to bring on more TVL and adoption to emeris.

In my opinion Emeris and IBC are brand new protocols and we need to take an aggressive yet strategic, approach in increasing the TVL and adoption for the longer term success of gravity dex, IBC and the overall cosmos ecosystem.

The proposal in its current form is risking the staking rewards and risking exodus of guys who are delegating atom in lieu of the inflation rewards.

Emeris and IBC are brand new protocols and it is quite unfortunate that barely 5-10% of the crypto community even know about them even though the tech is superior to most out there.

In my opinion we should not try and scrape LP incentives from the current inflation rewards and try and raise inflation to 11-12% for the first 6-9 months from the current 7% and use the additional 4-5% for the LP incentives for emeris.
A mere 4-5% in 6-9 months would not be a whole lot at all and will not affect circulating supply too much.
The additional incentive will bring more eyes and visibility to atom IBC and emeris without risking delegators to exit and find yields some place else.

The TVL should go up enough which will increase the token price and market cap of atom. So the extra 4-5% inflation for the first 6-9 months will not even be felt as the price will go up substantially and new adoption will come into the cosmos ecosystem especially to the hub.

This is not the time to be conservative in my opinion. We need more eyes, visibility and adoption for emeris and IBC and don’t want to get lost in this race to legitimacy. We need to do things strategically and in line with what the market wants currently. And the market right now is willing to reward and adopt ecosystem which are willing to reward early users.
Once emeris and IBC gains momentum over the 6-9 months then it will be a domino effect and TVL will continue to stay and even grow without having to continue with the 4-5% extra inflation. At that point the inflation LP incentives can be decreased.

The more the TVL and more the volume and liquidity on emeris, the more probability that other chains listed on emeris dex will wanna do a dual LP incentive program along with atom which will further grow the TVL and adoption.

Thought?

Hi. Thank you for sharing your thoughts.

I want to elaborate this matter in several directions as below

  1. Budget Module : Is it about allocating ATOM ? Or, decreasing reward for stakers?
  • The Budget Module only allows allocation of ATOM inflation for other purposes than staking rewards.
  • If we want to actually allocate proportional amount of ATOM inflation to other purposes, there should be another governance proposal to be submitted. Therefore, the adoption of Budget Module does not automatically result in reducing staking rewards.
  1. How long is incentive mechanism?
  • I expect that Cosmos Hub will need incentive for many utilities and its users. I don’t think incentives will last only less than 1 year. It should serve indefinite time for new utilities to come.
  1. Is it better to share ATOM inflation for liquidity incentives? or is it better to have additional inflation for that purpose?
  • The inflation system of Cosmos Hub has its own rebalancing mechanism. If the reward rate becomes lower, then stakers will unbond ATOM, hence result in lower staking ratio. Lower staking ratio ultimately result in higher reward rate. Therefore, we do not need to worry about partial reduction of reward rate because we have the rebalancing system.
  • Historically, there existed very negative opinions about higher inflation rate. I think holders prefer not to increase inflation rate by sacrificing part of their staking rewards. And also, reward rate will be higher if staking ratio drops. But I hope to hear more about this from the community.
  1. Budget&Farming for general incentive mechanism
  • Although one of the most important use-case of two new modules is liquidity incentive for Gravity DEX, it definitely is not limited to the use-case.
  • Two new modules are more general incentive functionality for different kinds of utilities to come into the Cosmos Hub.

Can we not just create a token for GDEX itself and reward that token to ATOM stakers?

This would

  1. Solve the problem of driving up inflation (which is bad) as well as using existing inflation to incentive liquidity (which seems like if would be difficult to have large atom stakers agree to)?

  2. Allow for much easier and efficient liquidity incentives because we are essentially creating money out of thin air

Thank you for your questions. Let me describe my thoughts here.

  1. APY for ATOM stakers is about 10%pt as now. Practically we will utilize 1~3%pt for Gravity DEX liquidity incentives. When we think about the price volatility of ATOM, I think this amount is relatively very small, but the impact of incentive to ATOM price will be much larger. Therefore I think most holders will agree. Also, I am against raising inflation rate, and this signal proposal does not suggest any inflation hike.

  2. Creating Gravity DEX Coin is possible anytime. We can imagine that significant portion of Gravity DEX Coin will be distributed to ATOM stakers. Therefore its market value will be crucial factor for ATOM stakers. If we launch Gravity DEX Coin without serious user-base, TVL and trading volume, initial market cap will be low, hence it is not a good strategy for ATOM stakers. When we assume Gravity DEX Coin creation, I think it is smarter decision to incubate the DEX with ATOM inflation for a while, and then launch Gravity DEX Coin later so that it can possess much larger marketcap from starting.

→ it does not mean that I am agreeing with Gravity DEX Coin creation. it is a logical review of plans “if” we assume Gravity DEX Coin creation.

→ Please keep in mind that this signal proposal has more general purpose than liquidity incentives. Cosmos Hub will have various utilities in near future, and these two new modules can help bootstrap user-base of new utilities on Cosmos Hub by incentivization mechanism. Therefore this is much broader topic than liquidity incentives itself.

1 Like

This makes sense. I completely agree with building the tools needed to implement a nice time mechanisms on GDEX as it’s pretty crucial infrastructure that needs to be built. It would be great to have a GDEX token model in mind as we build it out, such that if/when we need to pivot, we can do so easily without hitting any roadblocks.

I’m pretty new to cosmos governance, but what’s the next step to get things going?

Next steps

  1. Submit signal gov proposal
  2. Signal proposal passes
  3. Internal/external code Audit for both modules
  4. Two new modules Included in next hub upgrade
  5. Governance proposal for budget plan for liquidity incentivization
  6. Governance proposal for farming plan with list of pools to be incentivized

I would like some additional time to comment on this thread before there is an on chain proposal for this protocol change.

Ideally I would be able to write up my comments by Oct 19.

My preference would be to break up this signaling proposal to two proposals.

The first signaling proposal would cover section 2.

The second signaling proposal would cover section 3.

The first question concerns whether or not we should have a budget and farming module included in the Hub.

I think virtually any business model for the Hub will benefit from the ability to lock up tokens and reward them with ATOM.

The second question is does the Cosmos Hub want to market the Gravity Dex through liquidity incentive? I have a few reasons for thinking the Cosmos Hub might not want to market the Gravity Dex via liquidity incentives.

  1. It potentially undermines the success of Interchain Security/ Shared Security for the Hub if ATOMs are being spent to market a specific application on Hub.

  2. There are a number of IBC connected chains which are extremely focused on DEX applications that have gotten traction like Osmosis and Sifchain. It isn’t clear that the Hub can have comparative advantage in the IBC DEX market and thus ATOM spent on marketing Gravity liquidity pools may be wasted.

Hi @zaki_iqlusion . Thanks for your question.
I want to clarify the range of decision for the suggested proposal.

The proposal only asks whether we should adopt budget/farming module.
Third section only describes “possible” use-case of two modules, but not implying any decision making.
Practically it needs several more governance steps to execute the liquidity incentives plan.

Let me clarify the range of decision in the proposal text! (done)

Note

Gravity DEX liquidity incentivization use case is just a possible future use case of Budget/Farming modules, and such decision making process is not related to “this” signal proposal. Practically it requires several more governance procedure to actually decide and execute the liquidity incentivization.

So…any updates on this, let’s signal already lol.