The past few days brought a flurry of conversation on whether validators charging 0% are harmful to the success of the Cosmos Hub. I would like to present one critical element missing from most of these conversations - that of preserving the business prospects of the Cosmos Hub. What does success even mean if we don’t talk about the business prospects of the network as a whole?
At stake, in this conversation, is the fundamental question of the network security budget - the total amount of atoms earned (and kept and re-invested) by its entire validator set. As Zaki Manian mentioned in a conversation, validators charging 0% (or 4%), shift the network security budget toward zero. Other validators, will need to lower their rates to stay competitive, accentuating the effect. The end destination of this competition is a network security budget of near zero. The fundamental question is whether Cosmos Hub should go down that path of a zero budget. Or whether some reasonable effort be made to stall that eventuality?
The consequences of a zero security budget validation ecosystem
In this scenario, the only validators that survive are ones that can up-sell other services by validating. For example, a centralized exchange prices validation at zero, but makes money from trading commissions on delegation vouchers. Or, a custodian like Anchorage could offer free validation in order to entice hedge funds to consume its custody product. In these cases, validation is the free sample/teaser, and the money is made someplace else. A zero security budget Cosmos network is full of players like these with large delegations. Majority of the current validator set does not survive - these people will end up bankrupt or pivot. A few that depend on AIB or ICF for majority of their delegations could cling to life.
Implication for business prospects
Cosmos’s business prospects in the future are shaped by its validator set. The best business model the network has is shared security. In that model, Cosmos sells its validator set to other zones by developing programs such as Interchain Collateralisation, Validator Set Projection Protocol etc. A future with hundreds of blockchains buying security from the Cosmos Hub, to the tune of billions of dollars in network revenue, will make atoms very valuable. This future is the embodiment of success for me.
In contrast,being a router for IBC messages, as indicated in the whitepaper, is less critical - that business model is dependent on transaction fee revenue, and the incipient scalability of PoS networks (Solana at 100k tps) will mean that transaction fee revenue models are sub-optimal.
Since validator set is the main asset being sold in shared security, it is important for the protocol to actually look after its validators, and keep them enthusiastic + decentralized. If Cosmos ends up having a validator set full of exchanges and custodians, why would any other zone buy security from Cosmos Hub? The ability to sell the validator set is dependent on the quality of the set itself. Cosmos will be rationally out-competed by a different Hub, that looked after its set better, and was therefore able to get more customers for shared security.
Stated differently, Cosmos can’t function as “a labor union for validators” if the only laborers that survive are large exchanges or people up-selling validation for other services. (The phrase “labor union for validators” is generally attributed to Sunny Aggarwal)
In colloquial terms
Selling security first requires decently good wages for the security guards.
If the protocol pays its validators peanuts, it will attract monkeys. And few zones will buy a set of monkeys for their security.
Shared security is as much about looking after your people, than making some fancy technical computer science innovation. I would say the human element is way more material than the technology - the technology is indefinitely forkable, the human element is not.
The interdependence between network security budget and future business prospects, must be front and center in this conversation.