[PROPOSAL #88] [ACCEPTED] Increasing Hub Community Tax

Hub Proposals Parameter Change
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Update 05/12: Post went on-chain and slight amendments made to fit the 5000 character limit

Update 28/11: After seeing that consensus is pretty much reached, we are pushing the date of when the vote goes on-chain to Monday 5th December (7 days from now).

Update 25/11: We are hoping to put this proposal On-Chain by the End of Year 2022 (could be before) with a proposed Community Pool tax rate of 10%.

Background

Over the past couple of weeks, there have been a lot of fruitful yet sometimes heated discussions regarding the ATOM 2.0 tokenomics.

‘Why do we need to create a treasury’ was asked regarding the proposed overhaul of the tokenomics model of the Hub and oftentimes the general consensus would be that it’s to future proof funding for the Cosmos Hub and anything that would need to be built or funded. The proposed solution was to have a direct mint of tokens to a treasury pool.

However, the Hub already has a Community Pool that has been used in the past for various community spend proposals. This pool is funded through taxation on a per-block basis. The current tax rate (as will be discussed further below) is 2%. By increasing this we can achieve a similar outcome of expanding the pool of funds available for public good funding, without the immediate creation of a new entity or the bulk minting of ATOM.

This proposal aims to increase inflows to the Community Pool to make it more in line with what we see around the ecosystem and to ensure that funding for future endeavours are secured.

Community Pools comparison

As a chain, the Cosmos Hub has a fairly small community pool compared to its market capitalisation:

Cosmos Hub - 1.24M ATOMs ~ $13M / Market Cap $3.1BN

Osmosis - 52.13M OSMO ~ $60.4M / Market Cap $560M

Juno - 15.73M JUNO ~ $37.3M / Market Cap $150M

Stargaze - 445M STARS ~ $20.5M / Market Cap $60M

Community Pool-2
Community Pool-2950×650 17.8 KB

Community Pool-3
Community Pool-3950×650 13 KB

Looking at other projects across the Cosmos Ecosystem, one can note that the Hub has a small community pool compared to its market cap at just 0.41%. What is even more surprising is that all other projects have a larger community pool in terms of monetary value. Take Stargaze for example, which has a market cap 1.95% the size that of Hub, yet, it has a larger community pool at $20.5M compared to $13M of the Hub.

Looking at other ecosystems similar to that of the Cosmos, we can find Substrate and the Polkadot (DOT) ecosystem. Polkadot has a market cap of $6.7BN dollars with a treasury pool of roughly 38M DOT which equates to $230M. This figure equates to 3.4% of its total market cap. This large pool of funds is used to fund the growth of the ecosystem through grants, development funding and also community building.

The Cosmos Hub these sorts of proposals are hard to come by due to the limited amount of funds of its community pool, and also social cost required to engage with the community. The ATOM 2.0 proposal suggested that a Treasury be created and be bootstrapped with 4M tokens every year for 10 years. Ultimately the idea of minting 4M to the community pool came into the limelight. However various community members were still uneasy about minting such an amount due to dilution effects.

The system as it is currently has its flaws but also works. Therefore, until a solution and consensus on that solution is found regarding the future of inflation and if / when ATOM becomes deflationary,

We, Simply Staking, are proposing to open a discussion for increasing the community tax from the current 2% to something that will help bootstrap the community pool organically without too much compromise to inflationary yield. This should be done sooner rather than later, to ensure the network starts accumulating funds into its pool as soon as possible.

Community Pool Tax

Current rate of Issuance: 9.6ATOM per block according to x/mint

Current amount of blocks per year: 4,360,000

Instead of the current 0.192ATOM (0.02*9.6) being transferred to the pool with the 2% tax, a proposed 0.67ATOM (if 7%) will be given to the community pool per block. Per day this equates to (according to minting parameters) ~8,025 ATOM directed to the community pool.

Yearly would add up to ~2.9M ATOMS to the pool which is significantly higher than the roughly 850K ATOM added yearly (according to current metrics).

If the community tax were to go up to 10% we would see around 11,460 ATOM per day (0.96 ATOM per block) get moved to the community pool. Over a year this would allocate around ~4.2M ATOM to the community pool.

How will this increase affect staking rewards?

With every block, staking rewards are minted. A percentage of those rewards are diverted to the community pool and then the rest to the stakers. Increasing the tax rate from 2% to 7% - 10% will decrease the rewards that stakers will receive by around 5-8%.

The premise here is that the value generated by a strong community pool, public good funding and ecosystem development will vastly exceed the yearly single digital % loss in rewards by stakers.

Looking forward to any discussions and suggestions.

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Thanks for putting this up, I believe is necessary to properly fund the community pool without minting more tokens than necessary, equally important is how to manage those, but thats a topic for another thread

I think we could try with a 5% tax, as a staker that is something I feel comfortable with and its justified.

What would be the plan in case community dont want a tax increase? would love to read other ideas but the goal is clear, we must have a well-funded community pool

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I don’t think its a good idea to reference the prop 82 debate in the final on chain proposal as this proposal is supposed to be a unified consensus. I also think the title should include something like ATOM 2.0 - part I, to kind show supporters of prop82 that this is being derived from the 2.0 WP.

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My other concern is are we publishing this proposal with code or would it be another signal proposal?

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Ideally once we discuss an ideal tax rate going forward, then this proposal can go up with the appropriate JSON file to change the param

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Increasing Tax means the burden of filling up the pool/treasury falls on the shoulders of stakers only whereas in the case of front minting this burden is shared among stakers and non-stakers equally.

The second concern is the timing. In the case of front minting governance gets to allocate those assets immidiately while in the case of increasing Tax governance would need to wait for whole 12 months before doing so or allocate smaller amounts periodically.

That said, both models are very similar. It’s hard to support one and be completely against the other. While I see many advantages in front minting I’m almost as equally supportive of tax increase. Community pool is seriously underfed at the moment.

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Hi @Damien, thanks for raising this.

I’m not opposed to a community pool tax increase, however I think that framing this proposal around relative $ value of community pool is slightly missing the point.

As a supplementary effort to this, we might ask ourselves why is the usage of the community pool so low on the chain that provides public goods for the ecosystem? Answering that question will help us further define an appropriate sized community pool for the Hub.

Additionally, rather than choosing an arbitrary dollar value to increase the pool by, it would make sense to outline what type of initiatives we would like to encourage and how we might go about doing so. The ATOM 2.0 whitepaper provides a strong start for thinking about that.

In the mean time, I fully support an initial proposal to raise this tax, though do note @Jazz 's point that in this case the burden for funding public goods (which support all) falls on the shoulders of validators and delegators, as opposed to a mint model which actually decreases inflation over time but equally spreads the cost across all ATOM holders.

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There’s also been some discussion about removing the lower bound of the dynamic inflation (currently 7%) as part of the effort to slow down Atom’s issuance model. Many seem to be in favor of that, in addition to the community pool tax, so we would need to account for that if we are hoping to have a sizeable community pool.

For example of why this matters: if the lower bound is removed and the staking rate rises with the release of Interchain Security and the liquid staking module, the nominal Atom value that ends up going to the community pool will be pretty underwhelming for giving the community some spending power.

So, I guess you need to account for these factors. Do we want to reach a specific # goal of Atom going to the community pool per year, or by removing the lower bound, leave it purely up to the will of Atom stakers who decide to stake/unstake as usual?

Also, another idea that can alter this idea is something Ethan brought up with AiB and the ICF possibly making a donation to the community pool:

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Hi @Damien Thank you for this.

Since it’s a part of 5 or maybe more subjects that are related to ATOM 2.0, could we get a more specific title for this? Just to make it easier to follow and differentiate it from other general topics.

Thanks.

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To the point about stakers taking the tax burden on their shoulders, it must be noted that staking rewards are composed of the inflation of the total supply, including the non-stakers’ portion. From my perspective, this means that stakers don’t take the fall for an increase in tax, as it is imposed on the total supply inflation.

A 5-10% tax would be beneficial for the sustainability of the community pool. A lot of work still needs to be done around deploying these funds, however I think this is a good start and great discussion to be had.

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The point on tax failing to raise sufficient atom was my main concern. I would like to see us review the tax rate at a frequency tbc to ensure we reach the target set in the initial wp within a year. If we are tracking behind tax should go up and if we are tracking ahead or the pool is not being spent then the rate should be reduced.

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Agree to an extent but would like to add that staking isn’t the only way to offset the inflation anymore. There are many reasons to hold liquid ATOMs. LPing or lending being obvious examples.

So in case of front minting all ATOM holders get “diluted” equally while in case of taxes, stakers carry most of the weight.

Point being, with a simple tax increase, staking could become less competitive against other DeFi applications basically undermining the security of the Hub. (assuming we support tax increase before the adoption of liquid staking)

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Interchain security go to market is dramatically underfunded at the current moment.

Teams who decide to partner with the Hub instead of being sovereign are going to need substantial amounts of bootstrapping funds and skin in the game from the ATOM stakers that will indicate likely passage of their deployment governance proposals.

Teams will need funding for security audits etc to convince ATOM stakers that their chains are ready to launch.

Some kind of permanent team for managing this will need to be deployed to manage these processes.

I would recommend increasing the tax rate asap.

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Hi guys, Kam from the Imperator team.

@Damien, thank you very much for this proposal.

It’s clear that there is an important issue with this Community Pool compared to other chains: Cosmos Hub is the most mature chain in the ecosystem and it’s not ok to have such a small community pool - we need to solve this as soon as possible. Increasing the tax is a great solution as the concept of tax is already built in the system and works well.

Now, the main point is to determine which percentage rate should we apply to it. There are few elements to take into account:

  • Find a rate that doesn’t bring more than what’s needed
  • Find a rate that doesn’t change the staking rate drastically

Currently, the community pool has 1.25M ATOM and a tax rate of 2%. I think starting with a conservative rate of 5% is a good start as 2.09M ATOM would go into the community pool throughout the year for a total amount of 3.34M ATOM, all things being equal. This would represent 2.6x the current amount we have in the pool.

Of course, this parameter is flexible: it’s easy to change it and adapt the rate if needed, and it is preferable to start conservatively.

Regarding interchain security, I don’t think there is a need to be dramatic @zaki_iqlusion. Most of the projects that will use ICS are already well funded for the major part, and the community pool still owns $13M of ATOM at the current price. I also think we should have a MVP ready first for ICS before bringing too many projects and thinking of a go-to-market strategy.

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I agree with Kam from the Imperator team.

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KalpaTech is very much in support of increasing the community pool tax to a level of 10%.
Part of our solutions proposed with the NWV vote was exactly this implementation, as the calculations show that applying a 10% community pool tax ( an increase from current 2%) will result in approx. 4 mil ATOM in the community pool/ year, the same amount which was proposed by the minting of the first tranche.

For reference, a calculation for the collection of ATOM in the community pool, with this new proposal, is showed below:

  • Bonded ATOM x Staking APR x Community Pool Tax
  • 203.06 M Bonded ATOM * 20.18% * 10% = 4,097,750 ATOM per year

Parameters such as Bonded ATOM and Staking APR are dynamic. The calculation that accounts for an annualized amount in the Community Pool is an approximate amount and its value can change over the duration of one year, as these two dynamic parameters change as well.

If we were to account for some future changes in the tokenomics, that relate to the proposed current discussions of removal of the minimum inflation rate of 7% (with the implementation of ICS, it is a high probability that the bonded ratio to increase close to maximum levels, which will bring the inflation close to the minimum level of 7%), then another solution would be to have the community pool collection tax be dynamic or at least for the community to be opened to reconsider a new adjustment of the community pool if the dynamic parameters ( Bonded ATOM and Staking APR) will suffer important changes as part of future implementation proposals.

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@Kam Do you know for sure of the ICS project participants are well funded? Does that mean that you are ready to back up those projects in governance and encourage community members to do so when the proposals go up? Either way good to see you and @Adriana support this draft proposal of the tax rate.

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the maximum bonded rate=7% inflation? how long do you estimate it might take for liquid staking to increase the bonding ratio to maximum?
is liquid staking popular amongst validators? i dont really see the appeal of LSDs for most people. i know people say its liquid and you can earn more yield or whatever, but it is a bit of a pyramid scheme.
same or longer bonding and just a farming token back if you LP and lock it up even longer in a token that isnt currently useful to sell because even if the price of atom drops by 90% the peg to atom/statom stays the same (if its true stride’s peg ratio is set to perpetually go up for stAssets?)
liquid staking reducing inflation also makes the tax system less productive for the community pool, i assume LSD providers will strand enough votes to more heavily subsidize themselves by delegating to “incentive aligned” validators to vote for bulk printing or other restructuring of the monetary framework.
I dont think that atom holders get enough out of the deal to compensate for the high risk of governance centralization under an LSD regime.
The monetary framework of ATOM shouldn’t change its structure at the expense of atom holders to accommodate a separate app chain just because it is going to provide at least half the initially anticipated ICS revenue that substitutes for the loss of inflationary revenue due to restructuring monetary framework.
the free market should decide if the various iterations of LSD app and consumer chains are useful. to do otherwise is the farthest from a neutral, aspirational, benchmark as you can get.

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Hi @Kam, thanks for the reply and discussion.

In response to the suggestion of a more conservative approach at first, wouldn’t it be more ideal to first front-load the pool at first and then propose a cut in the rate if deemed necessary?

This is purely down to human nature and it would be harder to convince if people see multiple proposals to increase tax rates rather than one tax rate proposal and then a possible tax cut in the future.

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The funding through tranche of 4M Atom was one of the main reasons why Prop 82 was rejected with Veto. So if the community pool Tax increase will help to reach community consensus, I agree with this model.

I think it could be interesting to consider a dynamic community tax based on the Atom bonded ratio. A community tax could incentives users/stakers to participate in Defi, in particular with upcoming launch of more Liquid Staking Providers that will likely set high early incentives.

It could be defined a goal of Atom to accumulate yearly in the community pool and define a dynamic community tax to pursuit that goal.

With the current Bonded ratio, 10% should be fine, but this percentage should be adapted to the increase or decrease of Atom staked.

I liked more the Tranche model because the community tax model could cause instability in the Bonded Ratio that follows already a dynamic model for inflation, but I assume that long term contributors that stake an high percentage of Atom will remain delegated by supporting the community tax model, so I don’t see the Bonded Ratio dropping too much.

But we can’t leave the creation of a budget to fund Hub development/expansion to casual numbers, like the previous Tranche model, it’s good to have a goal of Atom to accumulate in the community pool per year, that could be pursuit through a dynamic community tax.

This by considering multiple parameters like the current dynamic inflation and the importance of keeping an high number of Atom staked in anticipation of ICS, that will add another parameter to eveluate for funding the community pool.

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