New governance proposal for Max Supply and Burn Rate

I would like to create a governance proposal, but I’m not technically advanced enough to know what I’m doing, so I will require assistance. If this proposal is interesting to anybody here and you want to pursue it further, please DM me.

The proposal would create two key changes to ATOM that will both reduce FUD, increase ATOM price, and have zero negative impact on ATOM:

1. Create a maximum supply of 500 million ATOM. Given the current rate of ~7% inflation, it would take ~10 years to reach this number of ATOM in circulation.

  • Risks - The risks are two fold, but both de minimis. The key risk is that ATOM isn’t able to carry out its vision and start receiving significant transaction fees within 10 years. IF that is the case, then we can always create a new governance to change it; it seems highly unlikely that this would occur unless ATOM is a total failure. The other key risk is that inflation increases significantly and we actually reach this level in ~4 years (fastest possible rate). This would only happen if staking dropped dramatically, which, again, would be incredibly unlikely. Also, 4 years isn’t a short period of time.

  • Benefits - a common FUD against ATOM is that there is no maximum supply and therefore infinite dilution. This will put this argument to rest and allow people to calculate a fully diluted market share for valuation comparison purposes.

2. Create an automatic burn mechanism - specifically, once transaction fees are over $1 million, utilize 10% of transaction fees to burn ATOM (i.e. if there are $3 million of transaction fees, then 10% of $2 million, or $200k worth of ATOM, would be burned. Burned ATOMs would reduce both the current circulating supply and maximum supply.

  • Risks - Are there any!?!?

  • Benefits - Given the inflation rate of ~$350 million per year right now, this would only create a deflationary environment once transaction fees are over ~$3.5 billion per year. This is likely several years away at least. However - it shows the world that ATOM is looking to offset inflation and eventually become deflationary in order to return value to ATOM holders and further capping the maximum supply of ATOM.

A common refrain to this proposal might be: “Both of these may support a higher ATOM price, but they don’t help ATOM succeed. Slow and steady wins the race!” I vehemently disagree with this. Success comes from developer interest and developer interest is directly correlated to excitement over ATOM price. As ATOM grows in value and creates excitement, it not only makes the whole network more secure, but it also makes ATOM become the default location for new blockchains / dApps to build (as opposed to ETH, DOT, or elsewhere).

Let me know your thoughts - I hope we can make this happen in order to further advance the future of ATOM, the Cosmos Hub, and the entire Cosmos ecosystem.

Going to edit at times with Q/A I have from other venues, as well as potential responses to comments in the forum here.

  1. Burning helps people who don’t stake, thus dis-incentivizing staking and weakening security.
  • It is important to note that I am only proposing a 10% burn. So while this will help all holders somewhat, stakers are still receiving the other 90% of transaction fees through staking rewards, and they also benefit from the burn. i.e. Stakers benefit 10x as much as non-stakers, so there is still plenty of incentive to stake. Furthermore, the more users and the higher the value of ATOM, the better the security (all else being equal). So it is to our benefit to help increase ATOM valuation from a security standpoint. In theory, it is better to have 65% staking with total staked value of $10bn then 70% staking with total staked value of only $5bn.
  1. Why do we need a supply cap? We’re still young and who knows what will happen?
  • This is true, and I understand why we didn’t have a supply cap previously. But we aren’t that young anymore (IBC is launched, no longer theoretical)! The same argument can be flipped - why not have a supply cap? The only risk is that we hit it, but given that it will likely take upwards of 10 years before we hit the supply cap, that is actually very little risk at all. The benefit, of course, is that it makes ATOM more attractive to potential investors which supports the price, thus increasing security, and further attracting developers.

Pretty big edit here

  • This is a major edit. I thought about editing the main proposal above, but I thought it would be more useful to keep it separate so that everybody can see the evolution of thought. It was brought to my attention that there can be potential Consensus Instability issues if the entire reward for validators is based on transaction fees and not the overall block reward. Essentially, some inflation is always necessary in order to create an additional, non-txfee reward for validators and maintain strong security. This is a major issue for a maximum supply, which necessitates inflation eventually going to zero once that supply is reached.

  • Therefore, I am removing the proposal to create a maximum supply.

  • However - it does not create an issue for a burn. While a coin burn effectively eliminates inflation as the burn amount grows larger than the inflation amount, from an incentive standpoint it is different. The validators will still receive inflation-based rewards, thus preventing a consensus stability error, however the overall supply will decrease as the burn increases. This is essentially exactly what Ethereum is doing with EIP-1559 - no maximum supply, but creating a burn mechanism to put upward pressure on the price of the coin while putting downward pressure on the overall supply.

2 Likes

I would be more in favor of a inflation reduction (not tied to fiat prices and have no supply cap) after we see enough activity on IBC that will acrure value for Atom holders .

Declaring a supply cap simply to attract more new people to the ecosystem does not seem ideal to me.

2 Likes

+1. I think it is important to incentivize staking first. Inflation “halvenings” could in practice achieve a soft cap, while being flexible enough to incentivize staking. There is potential for burning, but that should be addressed as a second topic when it is understood more fully what IBC fees will look like, because taking from IBC fees to burn while also reducing inflation will seriously hurt stake rate

Just keep in mind - the proposal isn’t to use fees to burn AND also reduce inflation… the burn is what reduces the inflation.

If there are only enough fees to burn 1% per year, then essentially the inflation rate would just drop from 7% to 6%. However, since only 10% of fees are used to burn, that means that the rest of the fees would be 9% per year, so staking reward would increase from ~10% (7% inflation divided by 70% stake rate) to ~22% (6% inflation divided by 70% stake rate + 9% IBC rewards divided by 70% stake rate).

1 Like

My main concern is reduced then. Still think it is not yet the time for this proposal until IBC expectations are firmer. Your proposal sounds good on paper

I’ll vote no.

I think I’d prefer to continue with lower value $atom to ensure that network fees are low so that we can grow the network effect of the Cosmos hub through IBC. Low fees lead to more connections and transactions which generates more revenue for stakers through an active hub liquidity pool. Hub with low fees and high liquidity > hub with high fees.

$atom can be valued through dividends from the hub. It doesn’t also need a deflationary mechanism.

Also I worry that burns created by slashing could incentivize bad behavior - such as for validators to choose to intentionally see their delegated funds slashed to increase the value of their separate wallet.

I appreciate the reply. However, I don’t follow the logic. Higher priced ATOM won’t necessarily result in higher fees (chains can be cloned to limit congestion). Furthermore, as staking dividends increase, the price of ATOM will naturally follow as more people want to buy ATOM for staking, so you’d have the same issue either way.

As ATOM holders, we should all want ATOM to go up in price, not only for our own wallets, but, perhaps more importantly, because it generates excitement and more developer activity.

As for the slashing - it doesn’t make any sense for a validator to intentionally slash as this hurts their own holdings as well as their reputation.

Good traction on removing the ask for the max cap.
I still do not subscribe to the notion of atom burns either , because the only thing it really does is enable short term time horizen minded holders to see multiples on thier cost basis and does nothing to incentivize more people to stake and secure the network.

Having said that , if there is a MEV type situation that can manifest itself into the cosmosystem and validators start requiring insane amount of fees to place tx’s in blocks then this might make sense .

I however do not know if that is something that can happen because , I believe that there will be active competition between validators to pick up lower fee tx’s to get one up over the other. The potential 10,000 TPS chain is far less likely to run into issues that a 17 TPS blockchain like Ethereum will run into .

There is a lot active development work to able new fee mechanisms in the Cosmos SDK. These change will accommodate the burn mechanism.