Introducing the Dynamic Liquid Staking Tax (Blockworks Research) - Cosmos Hub Fiscal Policy Part 1

[effortcapital]

TL;DR - As a follow-up to the Monetary Policy post laid out here, Blockworks Research is looking for community feedback on their recommendation of changing ATOM’s fiscal policy from a static 10% community pool tax to a multi-pronged tax approach. This is Part 1 where we introduce the idea of a dynamic liquid staking tax and a proposal to remove the 25% liquid stake cap imposed by the LSM, with another follow-up post related to additional tax ideas coming early next week.

Blockworks Research is also looking for feedback on the initial parameters mentioned in this post, with the understanding that the community will ultimately decide the final parameters.

Fiscal Policy (Current State)

Historically, the Cosmos Hub had a very simple fiscal policy where X% of ATOM inflation went to stakers and the remainder went to the Community Pool to be used for ad-hoc spend proposals. Prior to the rejection of ATOM 2.0 with Prop 82, 98% of inflation went to ATOM stakers and 2% went to the community pool. This left the Hub heavily underfunded to align developer teams, fund public goods and initiatives that could bring value back to the Cosmos Hub, and potentially leverage Protocol-Owned-Liquidity to align ATOM with the growth of the Interchain.

Although Prop 82 was rejected, it opened up much-needed dialogue on what the future of the Cosmos Hub should be and, at the very least, showed the glaring need to right size the community pool to fund initiatives that bring utility to the Cosmos Hub. With Prop 88, Simply Staking proposed to raise the community pool tax from 2% to 10%, effectively funding the pool with ~400k ATOM/mo at current inflation levels.

Below is an outline of the Cosmos Hub’s current budget distribution.

Due to Prop 88, the community has been able to fund initiatives like the ATOM Accelerator (AADAO), fund core teams like Notional to perform critical auditing work for the Cosmos Hub, and provide Protocol-Owned-Liquidity to Stride and Neutron to help bootstrap the AEZ’s onchain economy. While we are not here to argue the merits of these particular spend proposals since there will always be those “for” or “against” these types of initiatives, the point we want to drive home is that the community now has the ability to fund what it wants once social consensus is reached. Prior to Prop 88, the Cosmos Hub would have been hamstrung by the size of its community pool even if there was consensus on a given initiative.

But this current state of how the Cosmos Hub budgets its inflation and ICS revenue still leaves alot to be desired.

Should all spend proposals be done Ad-Hoc where the community has ~1 month to discuss via forums prior to be put to vote? Is the community pool tax, which everyone must bear, the best way to fund the community pool going forward? Should there only be one bucket that all tax revenue funnels to (like a slush fund)?

We are here to build the future of Onchain Institutions. Institutions that are transparent, accountable, and most importantly, strategic and effective. To do this, not only do we need to reform our governance processes to make them more agile, but we must also take best practices from corporations that reduce waste and introduce more accountability by properly budgeting strategic initiatives well in advance of their typical fiscal year. This will likely require, at the very least, yearly budget reviews for the community to decide parameters that dictate what percent of inflation and revenue go towards core development (future post from Binary coming soon on this), subDAOs where SMEs have term limits focused on specific verticals that could drive ROI for the Cosmos Hub (future post from RMIT on this subject), and Protocol-Owned-Liquidity to reinforce ATOM’s monetary characteristics and align the Cosmos Hub with the growth of the AEZ and wider Interchain via something like the ATOM Alignment Treasury proposed by Binary here.

Whats important to emphasize is that the community should ALWAYS have the ability to veto funding requests, pull funds from ongoing initiatives, or remove a service provider (core development team or subDAO member) and bring it back to the community pool in the event they feel they are not being properly served. This is non-negotiable in Blockworks Research’s opinion.

Ultimately, the combination of onchain governance with shared security service provision allows the Cosmos Hub to not only create better human coordination mechanisms internally, but externally as well with its consumer chains. The ATOM Economic Zone is the first multilateral network where chains are not only aligning with the Hub, but the Hub is aligning with those chains as well. We believe the intention behind these security and economic alignments have the potential to create more efficient and value accretive onchain economies in the long run and the Cosmos Hub should lean into this superpower moving forward.

While this post will not be diving into future governance structures of the Cosmos Hub, we felt it was important to outline our high-level thoughts before elaborating on our fiscal policy recommendations.

Introducing a Dynamic Liquid Staking Tax

We believe the introduction of the Liquid Staking Module is a monumental moment for the Cosmos Hub. As we elaborated on in our Monetary Policy post, the advent of liquid staking allows stakers to both secure PoS networks AND participate in DeFi activities. In doing so, PoS networks no longer need to compete with DeFi yields to maintain its security.

But liquid staking is not a silver bullet solution and comes with it its own set of problems.

Due to network and liquidity effects, liquid staking is likely a winner-take-alll market structure, which can cause centralization and security concerns due to intentional or unintentional activity by the dominant LST provider. To read more about the risks of liquid staking, we recommend reading this piece authored by @dannyryan on Twitter/X.

Because Ethereum attempts to be “credibly neutral” and has no enshrined mechanisms in place to limit LST protocols or create disincentive mechanisms around liquid staking, it has succumbed to these centralizing market forces as Lido, the dominant LST provider today, approaches the critical consensus threshold of 33%.

Luckily, the Cosmos developer community foresaw these concerns early on with the introduction of the Liquid Staking Module that was recently implemented on the Cosmos Hub with the v12 upgrade (shout out @zaki_iqlusion, the Iqlusion team, and all LST provider teams that brought that to the finish line). After all, liquid staking was essentially invented in the Cosmos by the GodFather of Liquid Staking, @FelixLts.

The liquid staking module allows the Cosmos Hub to be cognizant of how much of its staked supply is liquid staked and imposes a global cap of 25% LST market penetration.

The LSM unlocks ~$500M of staked ATOM capital to potentially be used in Cosmos DeFi. This not only provides much-needed liquidity in an ecosystem that has historically lacked liquidity, it also reinforces ATOM’s “moneyness” by allowing stATOM to become the predominant form of collateral in DeFi, the main base pair on DEXs, and a main gas token on the largest chains in the Interchain. The LSM doesn’t force Cosmonauts to choose between staking OR participating in DeFi - they can now do both!

Lets go back to the diagram that references the Cosmos Hub’s budget distribution and update it to include the LSM.

But is an artificial cap on liquid staking the final state?

What happens if the cap is reached and more people want to liquid stake? Should those that were the first to liquid stake, mostly the more sophisticated market participants, be the only ones that benefit?

Additionally, the LSM only limits onchain LST providers like Stride, Persistence, and Quicksilver. It does not limit offchain LST providers like CEXs, putting onchain providers at a structural disadvantage and potentially compounding the centralization risks LSTs have.

Would the Cosmos Hub community rather have Coinbase/Kraken be the dominant LST provider or a consumer chain like Stride that has intentionally decided to align with the Cosmos Hub as an economic partner?

While the 25% global cap is a governance-controlled parameter that can be changed in the future, we believe 80-100% liquid staking market penetration is inevitable on a long enough time horizon, either at the will of the community or by natural market forces where users choose to leverage offchain providers.

As an attempt to solve this issue, we are proposing to remove the LSM 25% cap and instead implement a dynamic liquid staking tax.

Liquid Staking Providers are effectively borrowing/lending protocols. Users lend out their native assets to the LST provider, and in return, borrow a pegged asset at a flat borrow rate (the provider’s take rate).

With this mental model for LSTs in mind, we looked at lending protocols like Aave that use an interest rate model as seen below to profit off of the demand for a given asset AND disincentivize too much demand for an asset that puts its LPs at risk:

In simple terms, the interest rate that someone pays to borrow an asset is a function of how much of that asset is being borrowed against how much is supplied to be lent out (“Utilization Rate”). With this model, there are four governance-defined parameters:

1. Base Rate (R0)
2. Interest Rate Slope 1 (R1)
3. Interest Rate Slope 2 (R2)
4. Optimal Utilization Rate (Uoptimal)

When the market Utilization Rate (Ut) of a given asset passes Uoptimal, the interest rate climbs at the steeper slope (R2).

Below is a simple visual of this interest rate model.

Blockworks Research proposes this model as a “v1” for the dynamic liquid staking tax.

This model would be a flat tax on all liquid stakers that would get steeper as the demand for liquid staking grows. This allows the market to find a natural equilibrium for liquid staking market penetration through disincentive mechanisms while also allowing the Cosmos Hub to generate meaningful tax revenue from the demand for liquid staking.

We consider this a “v1” of the dynamic liquid staking tax because there are theoretically multiple ways to implement this tax as the liquid staking market matures:

1. Implementing a flat tax on all liquid stakers equally (v1 - recommended)
2. Implementing a tax based on the market dominance of a given LST provider (not recommended today)

• Example: Stride LSTs would face a larger tax than Quicksilver since Stride has a larger market share of LSTs today

3. Validator-specific LST tax (not recommended today)

• The LSM could theoretically impose a tax at the validator level based on how many tokenized shares are held by that validator

To quantify how much revenue this can generate for the Hub, we use the following governance-controlled parameters:

1. Base Tax (R0) - 5%
2. Tax Slope 1 (R1) - 5%
3. Tax Slope 2 (R2) - 90%
4. Optimal Utilization Rate (UOptimal) - 33%

We’d also recommend adding a fifth governance-controlled parameter called the “0% tax Utilization threshold” (U0%). To encourage the growth of liquid staking early on, the first X% of liquid staking utilization should not see this tax. For this exercise, we propose U0% of 25%, meaning once 26% of all staked ATOM is liquid staked the tax kicks in on all liquid stakers.

Below is how much cumulative revenue the Cosmos Hub can generate (in ATOMs) by the end of the decade at different levels of liquid staking market penetration using the inflation schedule proposed in our Monetary Policy post (assuming the stated market penetration happened on day 1 of this tax being introduced):

This tax creates a yield spread between liquid stakers and non-liquid stakers. We consider this the “Liquid Staking Opportunity Cost”. Since the major reason to liquid stake is to generate additional yield via DeFi activities, this is the yield the average rational actor should hope to generate in DeFi to accept this additional liquid staking tax (note: this yield spread also includes the 10% take rate of Stride, as an example).

For example: if the proposed inflation schedule and LST tax parameters mentioned above were put in place, in August 2025 at 50% LST market penetration (aka the percent of staked ATOM that is liquid staked), the average liquid staker would have to generate ~2.2% yield in DeFi to make liquid staking a +EV opportunity.

Because the proposed inflation schedule lowers inflation over time, the yield spread between native and liquid stakers naturally compresses.

There are multiple ways to spend this tax revenue:

1. Burn the tax revenue
2. Fund the ATOM Alignment Treasury as POL
3. Funds core development or subDAOs
4. Distribute it to native (non-liquid) stakers

While the community will ultimately decide if it wants to pass this tax and what to do with it, we believe the right thing is to either burn the tax (1) or a mix of (2) and (3).

Burning the Tax Revenue (LSM-1559)

With EIP-1559, Ethereum’s supply is a function of its onchain economy (more activity = more burn). Without smart contract capability, we believe the demand for liquid staked ATOM is a close proxy for the growth of the wider Interchain economy. This creates an interesting dynamic where the Cosmos Hub’s fiscal policy can influence the monetary policy by lowering inflation further. While we did not propose a hard max cap for ATOM in our Monetary Policy post, burning the liquid staking tax could effectively put an artificial cap on ATOM’s supply if there was sustained demand for LST ATOM at 100% market penetration.

Fund the AAT or Core Development/SubDAOs

A liquid staking tax can be seen like a speculation tax akin to what states do in the US with a Lottery system. States use their significant lottery revenues to fund public infrastructure and reduce other tax burdens on the wider population. We believe the liquid staking tax could be a great source of revenue to fund core development or generate more POL for the Cosmos Hub, which can drive greater economic activity of the AEZ (and more revenue for the Cosmos Hub).

Although not a prerequisite for the dynamic LST tax, Blockworks Research also recommends Stride and other LST providers work on a dual governance structure whereby stATOM holders (or even the Cosmos Hub itself) has veto power over any governance proposals that potentially harm the sovereignty or security properties of the Cosmos Hub. Lido has done good research on a dual governance approach where stETH holders will have governance power in Lido to better align the LST provider with the protocol. You can read more about what Lido has been researching here.

Follow-Up Posts

Blockworks Research will follow this up with another post early next week where we highlight additional tax ideas that we believe could not only help bolster the Cosmos Hub community pool further but also may help with validator centralization risks and economics around Replicated Security.

Again, thank you for taking the time to read this, and we look forward to your feedback!

[Guinch_Roze]

i was waiting for it . great job . love the idea

[Cosmic_Validator]

Thanks for this interesting idea. Currently, the amount liquid staked is ~1.87%, before the LSM was introduced the amount liquid staked was very stable for months with a small increase mostly from Stride. After the LSM, there has been an increase and again mostly coming from Stride. So there is almost 58M ATOM that can still be liquid staked until the 25% limit is reached, I think we currently don’t know when or if this limit would be reached? I think the expectation was that once liquid staking staked ATOM directly was enabled 10M-20M ATOM would be quickly liquid staked, but it is actually a slower growth than expected and mostly from Stride, likely because of the security provided by the Cosmos Hub.
While I think this idea is interesting, it seems there are other priorities first? Finding ways to incentivize more those staking ATOM to liquid stake or educating more that now they can liquid stake directly without the unbonding period would be important. If this works then once the amount liquid staked grows to 10-15% or we feel that the 25% limit might be reached then we could discuss in detail your idea since it would be needed then if we want to allow more than 25%.
There is a discussion ongoing about the minimum commission or even a dynamic commission depending on # of consumer chains and their revenues, this is good to finally see some people thinking about validators and our costs. We see many grants and proposals for research, inflation changes, new taxes for the community pool, but validators seem to be forgotten from the equation. There was a discussion months ago about an idea for a universal basic income from the CP to support validators with consumer chain costs, but then nothing happened. We hope more research and efforts are put into thinking of ways to better support validators in the current circumstances of low ATOM price, decreasing APR and raising consumer chain costs, as well as research about how to improve the decentralisation in the Cosmos Hub that some people are also discussing currently in the forum.

[effortcapital]

Our follow up post is going to offer a potential solution to helping validators in the bottom half of the active set.

We think it could be a good way to make validators whole for the first 5-6 consumer chains (at current ATOM prices).

Validator expenses are extremely important!

I also think it’s very important to have this discussion around the LST tax now because we don’t want to be in a position of talking about this once we are up against the max cap. We need to be proactive (just like we need to be proactive regarding validator costs).

Next post is coming on Monday or Tuesday

[RoboMcGobo]

Thanks for this post! Lots of detail here to be picked through. I have some thoughts / questions:

@effortcapital

Additionally, the LSM only limits onchain LST providers like Stride, Persistence, and Quicksilver. It does not limit offchain LST providers like CEXs, putting onchain providers at a structural disadvantage and potentially compounding the centralization risks LSTs have.

A dynamic liquid staking tax doesn’t really resolve this issue though does it? Offchain providers would be exempt from this tax and could thereby provide competitive rates as compared with more incentive-aligned LST providers. Is there a solution to this issue that can be included within this broader framework to address off-chain actors? Otherwise we’re simply swapping one centralization concern out for another.

@effortcapital

We’d also recommend adding a fifth governance-controlled parameter called the “0% tax Utilization threshold” (U0%). To encourage the growth of liquid staking early on, the first X% of liquid staking utilization should not see this tax. For this exercise, we propose U0% of 25%, meaning once 26% of all staked ATOM is liquid staked the tax kicks in on all liquid stakers.

I love the idea behind this, and (I think?) this is proposed with incentive alignment in mind ensuring LST providers remain in at least as good of a position, if not better, as they would be if the hard cap remained in place. However, in practice because the tax switches on for all LSTs once the U0 threshold is crossed, there’s a decent potential for the optimal LST supply to find equilibrium at some number below 25% (as there’s a hard ramp up of sorts at 25.01%+)

If U0 was raised slightly this would likely not be the case. WDYT about 33% and eliminating UOptimal entirely (not eliminating so much as having U0 and UOptimal both set at 33%). The delta between them under the proposed model is relatively small as things stand anyway. Is there a strong need for that small delta to exist? If so, why?

@effortcapital

Since the major reason to liquid stake is to generate additional yield via DeFi activities, this is the yield the average rational actor should hope to generate in DeFi to accept this additional liquid staking tax (note: this yield spread also includes the 10% take rate of Stride, as an example).

The providers’ respective take rates are a good topic to discuss. I would assume the tax is levied in advance of any protocol-specific take rate. If this is the case, this would eat further into ATOM stakers’ ICS revenues which, while already small now, have a significantly smaller chance of growing, as the tax would eat into more and more of those revenues as the bonded rate rises.

From Stride’s end in particular, this also has an impact on incentive alignment. The Hub is already taking 15% of all of Stride’s revenues. This would eat into that further, and depending on the level of saturation that Hub’s TVL accounts for, could easily begin to hit the 50%+ mark of total revenue. This disincentivizes users from liquid staking sure, but also has the potential to disincentivize LST providers themselves (why focus on ATOM DeFi incentives when the ROI decreases parabolically as TVL rises, even when that TVL goes to your competitors).

Don’t want this to come off negative or hypercritical, but I think this incentive misalignment is just worth discussing at this stage to see if there’s anything that can be done to alleviate that friction.

One potential solution: What if the tax were held in the community pool in the form of the LST asset for the provider from which the tax was taken? Am unsure of the technical lift for something like this, but this would resolve potential incentive misalignment issues by allocating additional TVL to the entities paying the most taxes, increase the tax rate as the treasury grows, AND have the added benefit of allowing the treasury to hold yield-bearing assets.

Many different possibilities with a proposal like this but thought this potential outcome would be an interesting twist on the idea.

[WillB]

It’s a hard one.

I’d like to see all the on-chain parameters included in a future update with a near-zero tax at inception because having more liquid-staked tokens is incredibly more important than revenue or dominance check at the moment.

But at the same time, waiting too long could mean that a majority of stakers would be against taxing themselves ? Or maybe not, the vote to increase the community pool tax did pass afterall.

[effortcapital]

We propose 0% tax for the first 20-25% LST market penetration to get the engine going.

We would also like for any change to this LST tax to require a supermajority vote so it’s not easily changed.

[Wunderbernd]

Great post! I would like to add a whale tax for the LSM. Why? The recent events with stATOM.

Some whale withdrew a huge amount of stATOM with the LSM and swapped it instantly. In my opinion this creates a huge problem for the LST, because you can game the system.

For example you can withdraw a huge amount with the LSM, swap to ATOM, short ATOM perps with 50x leverage and you will make a good profit. In the meantime the LST depegs and people can get liquidated on lending protocols if they borrowed against LST. In my opinion this drastically reduces the utility of the LST, because you always have the risk that some whale dumps a huge amount with the LSM. With ATOM you have a 21 day waiting period and the market can go against you.

I would like to add a dynamic tax for the LSM unbonding too. You can withdraw a specific amount without any changes, lets say 100k ATOM, but if you want to withdraw more-> 200k ->5% fee, 300k->10% fee. In general this should be tied to the ATOM market cap. If the market cap doubles, you can absorb way more selling pressure and remove the fees/ increase the levels.

I just want to open the discussion, people can disagree

[Govmos]

Basic economic dictates and it tells me that there are quite some false assumptions here on the risk measurements. Making the analogy between liquid staking and lending-borrowing bears qui a lot of false assumptions. The main one being the risk associated with both activities. On a liquid staking the risk comes with the “depeg” that the LST can have with its native representation when supply and demand don’t come to balance.

In that sense this could be similar to lending protocols, but this is despite the natural arbitrage that can come with the protocol native redemption rate in the case of LSTs. The fact that the protocol offers a natural redemption that is always delivered if you accept to wait for the unbonding period. Therefore the risk isn’t the same. As LS brings a guaranteed and predictable return for arbitrageurs to step in and restore the “peg”. This mechanism has no replicate in the lending world. Therefore calling this a similar risk model is quite false imho.

Still, I think this tax idea isn’t bad but should be reassessed in a different context. Maybe to be implemented as we get closer to the maximum LS target set by the protocol, instead of calling it to replace the cap. That’s just my POV of course.

Overall I’m curious to see that debate expand over time, but I won’t support it’s current proposition of implementation.

[Cosmic_Validator]

@effortcapital

Our follow up post is going to offer a potential solution to helping validators in the bottom half of the active set.

@effortcapital

Next post is coming on Monday or Tuesday

Looking forward to the new post you mentioned

[effortcapital]

Thanks for the thorough response and the questions. We’ve been thinking about this idea for a while and are really excited about the potential it has for the Cosmos Hub!

A dynamic liquid staking tax doesn’t really resolve this issue though does it? Offchain providers would be exempt from this tax and could thereby provide competitive rates as compared with more incentive-aligned LST providers. Is there a solution to this issue that can be included within this broader framework to address off-chain actors? Otherwise we’re simply swapping one centralization concern out for another.

While the LST tax does not fully solve this issue, we believe it does create a better market structure for onchain LST providers to grow beyond the current 25% max cap that is placed. Offchain providers like CEXs historically have a much higher commission rate than other validators in the set and they will likely add an additional take rate for offering an LST derivative (example: Coinbase charges a 25% fee on cbETH in addition to charging fees for staking). If Coinbase (or another offchain provider) charges a similar fee on cbATOM, then with the parameters we show in this post, LST market penetration by onchain providers would need to hit 50%+ to offer a comparative yield to a Coinbase, putting them in a dominant position to retain market share.

Additionally, there is always the option to leverage social consensus to levy the LST tax on offchain providers on their validator. We are also posting an additional mechanism on the forums soon, called the “Vote Power tax”, that should not only help with distributing stake weight for the Cosmos Hub, but may also disincentivize delegating to offchain validators in the future.

If U0 was raised slightly this would likely not be the case. WDYT about 33% and eliminating UOptimal entirely (not eliminating so much as having U0 and UOptimal both set at 33%). The delta between them under the proposed model is relatively small as things stand anyway. Is there a strong need for that small delta to exist? If so, why?

We went back and forth as to where the U0 threshold should be and if there should be a difference between the U0 param and the Uoptimal param at all. We are not beholden to what we proposed, but our thinking was that its important to have the tax start prior to reaching the 33% critical consensus threshold so you can start disincentivizing earlier (although not too heavily). It is a very similar line of thinking as to why the LSM currently imposes a cap at 25% and not at 33%…the risk actually starts prior to reaching 33%. This allows the Cosmos Hub to benefit from the added risk between the 25%-33% levels, while also knowing that it is likely inevitable that we hit 33%+.

Again, we are not beholden to the params we laid out, but we thought it was important to ramp up the tax prior to 33%.

One potential solution: What if the tax were held in the community pool in the form of the LST asset for the provider from which the tax was taken? Am unsure of the technical lift for something like this, but this would resolve potential incentive misalignment issues by allocating additional TVL to the entities paying the most taxes, increase the tax rate as the treasury grows, AND have the added benefit of allowing the treasury to hold yield-bearing assets.

We want to figure out a way to levy this tax AFTER the LST provider’s take rate, if possible. We still need to think about the technical implementation of this tax, but we do agree that this does hurt LST provider top line revenue, which could create misalignment. Its possible to do the accounting on the Hub-side to include the LST take rate and then have the Hub send over the revenue to the LST provider. Another option is to not tax the user until after the staking rewards are claimed by the user (either the rewards are burned or the LST provider sets it aside for the Hub and sends it back to the Hub).

As for the idea of holding the tax in the form of the LST asset in the treasury, this goes into the concept we proposed of using the LST tax to drive increase POL for the Hub (i.e more tax revenue for the Hub → Hub liquid stakes the tax revenue → use as POL and increases revenue for LST provider). Its an interesting flywheel, but it also increases the tax burden on the individual LST holder while the Hub itself benefits as a whole. We see merit for either burning the tax or using it to liquid stake for POL benefits (we lean towards burning tbh)…ultimately we want the community to decide how it uses this tax revenue.

[effortcapital]

Hey Govmos, appreciate the feedback.While the LST provider-to-lending protocol analogy is not a perfect 1:1, I’m not sure that’s the reason to not accept the idea behind the LST tax, but would love to answer any questions you have to get your support!

While LSTs can “depeg”, an asset you borrow or lend against can also rapidly depreciate, causing your LTV ratio to go below a threshold, forcing you to be liquidated of your position. The risks from borrowing/lending are still quite similar to liquid staking, in our opinion.

We think its very important to start having these discussions now instead of waiting until we hit the max LST target because as we move closer to the 25% cap, offchain providers can start offering LSTs that completely go around the cap imposed by the LSM today. The LSM cap puts a structural disadvantage on onchain providers that could have serious consequences for the Cosmos Hub in the future.

[effortcapital]

Hey Cosmic!

Havent forgotten about the post - we knew the Informal post and another post by Binary was coming online this week and we didn’t want to overwhelm the forums with too many posts. We want to make sure each of our posts are given the right attention.

We will likely delay our post until early next week. Thank you for holding us accountable though! More to come from us shortly.

[Govmos]

I still maintain that the structural difference existing between the two economic models is more important than that ! Anyway we also believe some of your ideas are legitimate and worth debating. We also agree that we would be better having those discussions before reaching the cap. But for the time being we seems to have plenty of time on that front. Still, it’s always better sooner rather than later. On this front our standpoint is that the cap shouldn’t be removed, absolutely not actually, but we think your model could be used to remove the constraint of a straight-line cap level. We could introduce your model on the curve going from 20 to 25% LSTs, that would smooth out the excess demand at the end of the curve, making it less steep. That’s a proposition we would be happy to support. But expanding the cap or even removing it, that’s not even debatable for us at the moment !

[vixcontango]

I am firmly against this proposal.

To begin with, I think 25% LST is far too high. stETH is about 7% of ETH. stATOM is about 3.3 million which is 1% out of the current 292M in circulation. To even talk about breaching the 25% is a little bit insane given these fairly poor adoption statistics for liquid staking.

The poster seems to be thinking from the standpoint of a hedge fund or some other institution which wants to get stATOM and use it for professional trading purposes. Generally speaking market making activities normally account for about 5% to max 10% of the supply of given commodities. In fact, having 10% of the supply assigned for market making is the equivalent of “cornering” the market. Having so much of the supply of ATOM engaged in market making or professional activities will lead to an insane volatility of the ATOM price which is not good for the Cosmos Hub or its mainstream adoption (see Hunt brothers cornering silver). Last thing we want is professional pumps and dumps of ATOM. The author assumes that stATOM will be bound into DeFi protocols but that is bad assumption. It is far more likely that stATOM will be used for fast speculation and potentially high frequency speculation. I don’t think it is a good idea at all to have so much of ATOM supply available for speculation. Moreover, it will make it easy for institutions to price control ATOM. For example, 25-30% of the gold supply is held by central banks and that means they can peg the price of gold to any value they wish since the amount of new gold coming on market is about 1-2% per year. They can dump gold in coordinated fashion for 2 to 3 decades. The less LST there is, the less the power of financial institutions.

From a consumer perspective, I am not a fan of liquid staking AT ALL because the 3 week staking period provides me with critical security. I can have my hot wallet sitting on my browser and because my funds are staked, I am not worried that someone will come into my computer and send my funds to their wallet. First they have to unbond which takes 3 weeks during which I can take corrective action. If I were to convert my holdings to stATOM, then I would have the same fear as I have with ETH on Metamask. I will always be afraid which link I click on the web that could drain my wallet. I don’t inspect all smart contracts out there so the 3-week staking provides a critical security peace of mind when using smart contract apps. As a consumer (and also financial advisor), I would not recommend that regular investors use stATOM. They should just stake their ATOM themselves and get paid the staking yield. Also to aleviate the stealing problem on Ethereum, I have had hot and cold wallets and then moved money around which is very cumbersome and expensive since I have to pay and extra fee. Overreliance on liquid staking brings this problem back.

I would have preferred if the LST was at 5% and the LST is only used by market makers to enhance liquidity. I would prefer that market makers and hedge funds compete for stATOMs (driving the price up) instead of being awash in stATOM like now. The 25% cap has been ruinous for ATOM price which was $12-13 when that cap was introduced and it is $7 now. ETH for example has remained at the same price. I would urge that we go to 5% cap ASAP and introduce scarcity in the LST market the way Apple introduces scarcity artificially when rolling out its new iPhones. There is absolutely no reason to flood the market with stATOMs. I think most ATOM investors are long term investors and the LST cap should reflect that. I think we should be at 5% and then only once there is a huge demand for it, then go to like 6% or 7% and gradually increase it. The point is to always have the LST market operate in scarcity.

The author seems to think that every investor out there will want to gain staking yield and DeFi yield at the same time. This is a very sophisticated investing activity that only professional crypto hedge funds know how to do. Everybody and their brother has been burned in DeFi and its fake yields. The author seems to conflate lending activity and staking activity. These are fundamentally different activities - one activity is providing network security whereas the other is lending activity in which there is a huge operational risk (out of which yield is paid). To use real world analogy, staking yield is paying a bouncer at the club to protect it (or the defense budget for a country). DeFi yield is lending money to Trump to build a skyscraper. Trump might build it or might not build it, a building a skyscraper is one of the most complex activities out there that carries huge execution risk and for that reason Trump has to pay high yields. So the yields of DeFi and staking have dramatically different source and as such aren’t really comparable. It’s like comparing the growth prospects of a regulated electric utility and some obviously totally unregulated Silicon Valley start up - ie not comparable at all. Most mainstream investors understand staking yield (getting paid to provide security) but don’t understand DeFi yield (lending) due to the complexity of estimating execution risk.

To summarize: liquid staking market needs to operate at scarcity (LST cap should be reduced drastically for everybody’s sake) and while I appreciate the hard work that went into this proposal, I think it is off the mark entirely. It addresses an issue that doesn’t exist and moreover it is going to create an issue that doesn’t exist currently.

[common_spelling]

Making ATOM into a business turns it into an unregistered security. It seems like an obvious mistake to risk the most liquid token in the cosmos. Tokens should have a function, not a business model.

[Cosmic_Validator]

@vixcontango

I think 25% LST is far too high. stETH is about 7% of ETH

I think you are confusing a few things here.

1. The 25% liquid staking cap of the LSM refers to a % of the amount of ATOM staked, which is around 67% of the total supply, not 25% of the total supply

2. The current supply of ETH is around 120M ETH, and the total amount staked around 25M ETH, so the staking ratio is around 20%, far from the 67% in the case of ATOM

3. From these 25M ETH staked, around 9M ETH are liquid staked via Lido and other providers, so 9M ETH is around 36% of the total 25M ETH staked and most controlled just by one provider, Lido. So currently, looking at the amount of ETH staked, ~36% of this is liquid, and 36% is larger than 25%. You claim ‘liquid ETH is about 7% of ETH’, this is incorrect because rather than 7% is around 36%. You are getting 7% because you are dividing 9M/120M, but 120M is incorrect because this is total supply of ETH, you need to use 25M of staked ETH

4. The 25% limit is related to the risk of liquid staking providers collectively controlling one third of staked ATOM, so this limit is to prevent this risk

@vixcontango

stATOM is about 3.3 million which is 1% out of the current 292M in circulation

The total amount of liquid ATOM currently is not 3.3M, but 4.7M which is 1.91% of total staked ATOM. This refers to the 248M staked ATOM, not the 367M total supply including not staked ATOM.

[tom]

@common_spelling

Tokens should have a function, not a business model

they should have both actually.

[common_spelling]

Tokens should serve a function, if they perform that function well then businesses use them. When tokens LARP as businesses they become unregistered securities and are prone to corruption/rug.

Bitcoin doesn’t have a business model. If its function wasn’t useful it wouldn’t be used to conduct business. Business models are built around its functional attributes, not the other way around.

[Guinch_Roze]

do you have a master or doctorate in economics ?