[Proposal 996][Voting Period] Revert Community Pool Tax Rate to 2%

Hub Proposals Parameter Change
1

Changelog

04/09/2025: pre-proposal
04/23/2025: proposed final copy of on-chain text
04/25/2025: clarification that 2% is the default value for community_tax
05/01/2025: Proposal 996 on-chain

Title: Revert Community Pool Tax Rate to 2%

Authors: Atom Accelerator DAO & Oversight Committee

Summary

This param-change proposal aims to revert the community_tax parameter from 10% (0.10) to 2% (0.02), reinstating the baseline default rate that was in effect prior to Proposal 88.

Parameter Change

The proposed change affects the “distribution module” in the Cosmos SDK.

Parameter: community_tax

community_tax: Defines the percentage of block rewards (including transaction fees and inflation rewards) that is allocated to the community pool before the remainder is distributed to validators and delegators.

The community_tax has these key characteristics:

  • The value must be greater than 0 and less than or equal to 1.00 (100%).
  • The default value is set to 0.02 (2%) in the distribution module’s default parameters.
  • Cosmos Hub governance can adjust this parameter through on-chain param-change proposals.

Parameter and Proposed Value

Module Parameter Current Value Proposed Value
x/distribution community_tax 0.10 (10%) 0.02 (2%)

If the parameter is set to:

0.02 → 2% of minted rewards go to the Community Pool

0.10 → 10% of minted rewards go to the Community Pool

Background

Proposal 88 raised the community tax from 2% to 10% to enable long-term funding of the Atom Accelerator DAO (AADAO) and similar initiatives. This tax increase facilitated allocations of 588,000 ATOM via Proposal 95, and an additional 975,811 ATOM (plus 100,000 bonus ATOM) via Proposal 865.

As of Q1 2025, AADAO has entered “maintenance mode” and has declined to renew or revise its mandate; the conditions that warranted the 10% tax rate increase have become obsolete.

Rationale for Reversion to 2%

  1. The Circumstances That Justified the Tax Rate Increase Are No Longer Valid

    As the AADAO’s funding mandate approaches its end, the basis for sustaining a 10% tax rate has ceased to be relevant.

  2. Avoid Capital Oversupply and Misallocation

    An excessive buildup of idle capital can attract value-extractive or poorly scoped spending proposals.

  3. Decouple Tax Policy from Broader Governance Discussions

    The Community Pool tax rate should reflect the network’s actual operational needs, not serve as a default placeholder for unresolved Treasury discussions or opportunistic funding demands.

  4. Preserve Hub Autonomy with Fiscal Discipline

    A 2% tax rate maintains a credibly decentralized funding stream while keeping governance of the Hub’s public resources independent, sovereign, manageable and reasonable.

  5. Return More to Stakers

    Assuming ~9.6 ATOM minted per block and ~4.36 million blocks/year:

    • Reducing the tax from 10% to 2% returns 0.768 ATOM per block to stakers.

    • This results in approximately 3.34 million additional ATOM/year in staking rewards.

Clarification on Scope

This proposal does not eliminate or reduce existing Community Pool funds, which currently holds approximately 9.37 million ATOM. Decisions concerning the active balance, usage, governance structure, or potential reforms of the Community Pool should be addressed through subsequent and separate governance proposals.

Conclusion

Reducing the community tax rate to 2% is a prudent adjustment in the absence of an active, governance-ratified funding mandate or mandates for the Cosmos Hub. This parameter change helps mitigate inadvertent capital accumulation, improves validator and staker economics, and strengthens fiscal discipline, while preserving the Hub’s ability to fund public goods and services independently of its founding organizations and core teams.

It also sets a more appropriate baseline to guide future governance discussions concerning long-term treasury management and strategic capital deployment from the Community Pool.

Links

Voting Options

  • YES – Supports the proposed parameter change, reducing the Community Pool tax rate to 2%.

  • NO – Opposes the proposed parameter change, supports maintaining the Community Pool tax rate at 10%.

  • ABSTAIN – Chooses not to take a position, due to a conflict of interest or a wish to participate without expressing a preference.

  • NO WITH VETO – Opposes the proposed parameter change on the grounds it is (1) irrelevant to the Cosmos Hub, (2) malicious and or unjustly harms minority interests, or (3) violates Cosmos Hub governance rules and or norms.

10 Likes
2

Easy yes. Only logical path forward after AADAO sunset good interim solution.

3 Likes
3

I am in strong support of this - give this yield back to stakers.

I am going to follow up with a proposal from the ICL to put the community pool funds to work in a way that actually drives value to ATOM and aligns with the Hub’s roadmap (most folks have already seen it).

Tired of seeing the community pool pillaged for no gain to ATOM and us as the community, let’s put this to bed.

16 Likes
4

Yes, but also wouldn’t mind seeing it go to 1%.

2 Likes
5

I support reducing the rate to 1%, and have suggested the same in different forums. However, considering voter deliberation dynamics, I thought the immediate context provided by “reverse Proposal 88: revert to 2%” neatly conveys why the rate was initially increased and why a reversal is warranted. That said, if the community here strongly supports reducing the tax rate to 1%, happy to amend.

4 Likes
6

Personally I’d support a reduction to 0%, eliminating any community tax.

Until future plans for Community Pool assets are finalized there is no point in directing any future issuance to the CP, especially when considering the significant amount of ATOM it currently holds.

2 Likes
7

I support all three options 0%, 1% or 2% , what ever the consensus think it’s best :+1:

2 Likes
8

does Hydro benefit from this position it seems to me. In this case it seems logical to keep enough 2% seems good to spread the CP assets across the interchain thanks to Hydro

2 Likes
9

Change tax rate to:

  • 0%
  • 1%
  • 2%
0 voters
1 Like
10

Great proposal. Easy YES

1 Like
11

Long overdue. The initial tax hike to 10% was ridiculous to begin with. We need communities that develop products that use ATOM (ie buy ATOM), not communities that sell ATOM and then deliver products that sell ATOM even more (like Hydro). Hydro isn’t an ATOM buyback program, it is “sell” ATOM and buy all other tokens program. Cosmos Hub has been around for more than 5 years now. There is no evidence the community pool is effective in bootstrapping products that use ATOM (ie “buy”).

The reduction to 2% is an easy YES and after that there has to be a discussion of whether to go down to 0%.

4 Likes
12

A commodity, like ATOM, needs to be purchased in order to demonstrate “value”. If you are giving ATOM in exchange for even more worthless tokens, you are demonstrating daily its lack of value by selling it. “Spreading the CP assets across the interchain” is not how monetary transmission works. You need something that people need to purchase, the act of purchase is what gives it value. If it is given away, it has no value.

Acquisition of ATOM with tokens from smaller chains that don’t have demonstrated value is not a “purchase”. I mean anybody can create a meme coin and then swap it for ATOM using a couple of phony trades. This is a giveaway - horse for a chicken. Hydro is one giant automated “horse-for-a-chicken” giveaway.

5 Likes
13

I will support this proposal, we already have a bloated community pool. and the easier way to fund the community project is to mint new tokens on a need-to basis.

2 Likes
14

Looks like the poll says 65% in favour of 0% or 1% (albeit only 20 voters)

Maybe there should be 2x onchain props - one as a simple reversal to 2%, and one to 0%?

1 Like
15

Yea, will do.
We should wait to hear from ICL wrt to their suggestions for how community pool can be used before chaser props reverting “rate to 0%” and or “nuke cp” go up.

2 Likes
16

Thank you for your support.

One could argue that minting new tokens every time governance approves spending leads to bloated governance. In my view, that’s not a viable long-term approach.

Instead, we should aim to keep the community pool lean while introducing essential safeguards. For example:

  • Prohibit “cost-plus” agreements.
  • Set a hard cap on spending requests—no proposals exceeding e.g., $250,000 (example).
  • Limit total funding to any single grantee or project to e.g., $300,000 within a 12-month period.
  • Require full transparency and reporting at the pre-proposal stage, including clear budgets, objectives, KPIs, clawback conditions, and disclosure of any potential conflicts of interest.

Imo if the community chooses to preserve pool – irregardless of size, there must be clear oversight of how those funds are deployed/managed. To be clear, not lobbying to do that job, and such responsibility doesn’t need to fall to me. But we need it.

17

Hydro is not selling any ATOM.

It is only providing liquidity in single-sided pools or against ATOM derivatives, and the trading & borrowing activity generates fees from market participants. You can confirm that by checking the size of the active deployments on https://hydro.cosmos.network/tracking and comparing it with the auction results on https://hydro.cosmos.network/metrics - you will notice it’s always more. Hydro & the Hub could choose to burn the excess which would reduce ATOM supply.

It is true that if Hydro were to imprudently pair ATOM with an underperforming asset into a volatile LP position, the “impermanent loss” that occurs is effectively the same as selling over a continuous price range. But this is why we have built Vortex - the deployment will instead be clawed back and the other side of the LP will be auctioned off for ATOM. And again the excess can be burned or used for other purposes.

Also, protocols use their own tokens to pay tributes to ATOM stakers. So I’d say Hydro actually gets you a bigger horse and a free chicken.

About the tax rate, I do think it is currently exaggeratedly high. That said, reducing the tax is equivalent to increasing the Hub’s security budget, which I also find exaggeratedly high. The Hub’s inflation (and later the Hub’s revenues) would ideally be assigned and invested towards more productive goals such as funding the protocols launching on the Hub’s VM, deploying it as PoL via Hydro, onboarding new users via incentives program and so on.

3 Likes
18

I’ve thought people would have this concern. There is ways to over collateralize ATOM supply for financing. Obviously if it dropped below the loan threshold the bank would liquidate it, but has anyone explored financing using ATOM as collateral?

Any other token for that matter. I might consider this a more sophisticated use of funds. Anyone had any experience using Crypto as loan collateral? Maybe not the most appropriate on-topic question…

To be on-topic - I’m not sure why others would want to lower the community pool revenue stream. Even for whale stakers - essentially what the proposer is signaling is that they don’t have a risk appetite for investing revenue. Not all investments are super successful - VCs are something like 1 out of 10 or 20 investments caputre the bulk of their profits.

If the community pushes these kinds of invetments to VCs then it’s VCs that capture all the revenue — not the stakers, ie - investors.

Although I’m not opposed to the foundation reviewing those kinds of investments and being more hands on in them - it still doesn’t directly translate to revenue captured from this “tax” and the community evaluating proposals and profit share opperunities that directly effects stakers. The most common historic use case is funding new projects and airdrops, which isn’t revnue - per sey.

There’s some valid points here, but DAO-DAO would make the perfect venue for more granular control of the current tax rate. That’s my two cents.

Instead of 4.2M ATOM a year
The 2% Tax rate is 840,000 ATOM a year.

So I’m guessing this is 10% of the inflation rate - goes to the community pool. Having it in the community pool reduces the sell pressure some what. From a business perspective - I’m not confident this reversion comes from any reasonable business vision.

I like professionals that know what they’re talking about.

Why don’t we fund a real analyst for $20,000 to do a in depth review of the pros and cons of reducing the “tax” rate? Let’s see if his analysis provides more points of reflection then what I offered up for free here.

The current tax rate actually leaves a nice buffer zone for overcollateralized investments - With ATOM at $4.00 - a 400% over collateralized rate would equate to $1.00 of investment loan value. What that accomplishes is those loans (ATOM) not being sold. If the value of token goes up - in that situation - the appreciation of the underling asset can cover the principle on the loan … I’ve already covered the other scenario…

Could use:

  • UMI
  • IST from Inter Protocol
  • Perhaps - the upcoming Noble asset…
  • Silk

Use of funds transparently tracked and reported in DAO-DAO - this is why I’ve suggested services/seasonal businesses - lawn mowing, tree trimming, agriculture, (there’s more) ect…you often get contracts for crops before planting occurs - these’s are reasonalbe investments. I highly suggest experimenting with these kinds of concepts as a community - on an international scale - who ever is successful, have them train other people with similar passions in other regions…ect…

  • Outcome (Positive):
    • Appreciation Covers Principal: As you noted, the appreciation alone ($700,000 current value - $400,000 initial value = $300,000 gain) is now much larger than the loan principal ($100,000).
    • Increased Borrowing Power/Safety: Your collateralization ratio has increased ($700,000 / $100,000 = 700%). You are much safer from liquidation and might even be able to borrow more against the increased value if needed.
    • Strategic Options: You could potentially sell just a portion of the appreciated Atom (e.g., sell approx. 14,286 Atom at $7.00 to get ~$100,000) to pay back the loan principal, while still holding the vast majority (approx. 85,714 Atom) of your original stack. This would trigger capital gains tax only on the Atom sold at that time.
    • Tax Deferral Continues: As long as you don’t sell, you continue to defer capital gains tax on the appreciation.

Scenario 2: Value of Atom Decreases

  • Market Change: The price of Atom goes down, let’s say to $2.50 per token.
  • Collateral Value: Your pledged 100,000 Atom are now worth 100,000 * $2.50 = $250,000.
  • Loan Status: Your loan principal remains $100,000 (plus interest).
  • Outcome (Negative):
    • Reduced Safety Margin: Your collateralization ratio has decreased significantly ($250,000 / $100,000 = 250%). While still overcollateralized, your buffer against further drops is smaller.
    • Margin Call Risk: If the price continues to fall, you approach the platform’s liquidation threshold. This is the minimum collateralization ratio allowed (e.g., maybe 150% or $150,000 worth of collateral for your $100,000 loan). If your collateral value drops below this, you’ll likely face a margin call.
    • Margin Call Action: You would need to either add more collateral (deposit more Atom or other accepted assets) or pay down a portion of the loan principal to restore the required collateral ratio.
    • Liquidation Risk: If you fail to meet the margin call, or if the price drops very rapidly, the lending platform will automatically sell a sufficient amount of your pledged Atom (at the current low market price) to recover their $100,000 loan plus any fees/interest.
    • Forced Sale & Tax Event: Liquidation is a forced sale. This defeats the original purpose of avoiding selling. It likely occurs at an unfavorable price, and it triggers a taxable event (capital gain or loss calculation) on the Atom sold, potentially realizing losses. You would lose a significant portion, or potentially all, of your collateral.

Summary:

I think there should be more deliberation, and processing of motives for the inflation mitagation community pool “tax.”

We can reasonalbly assume 8.59 ATOM per block get minted - as of right now 10 % of those atom get diverted to the community pool - abt. 0.95 ATOM - the rest go to stakers…
…reducing this tax to 2% would see abt. 0.19 ATOM diverted to the community pool.

That’s what this proposal accomplishes.

  • Calculating ATOM Per Block:
  • To find the approximate ATOM released per block at this moment, you need three pieces of information:
    • The current total supply of ATOM.
    • The current annual inflation rate (which will be somewhere between 7% and 10%).
    • The number of blocks expected per year (this is a parameter within the protocol, historically adjusted based on average block times, e.g., values like 4,360,000 or 4,855,015 have been used).
  • Formula: Approx. ATOM per Block = (Current Total ATOM Supply * Current Annual Inflation Rate) / Blocks Per Year
  • Example Estimation (using plausible current figures):
  • Let’s assume the current Total Supply is around 395 million ATOM.
  • Let’s assume the current staking ratio is below 67%, so the inflation rate is at or near the maximum cap of 10% (0.10).
  • Let’s use an estimated Blocks Per Year figure of 4,600,000 (based on an average block time of roughly 6-7 seconds).
  • Calculation: (395,000,000 ATOM * 0.10) / 4,600,000 blocks ≈ 39,500,000 / 4,600,000 ≈ 8.59 ATOM per block
2 Likes
19

Support this. Give most back to stakers.

20

Thank you for posting this @Cosmos_Nanny !

I’m in favor of reducing to 2%, or lower, or even just removing the community pool tax entirely.

With AADAO out of the picture and ICL funding the majority of the work on the hub now, 10% isn’t justified, nor was it effective over the last 2 years.

I have also come to pivot on my thoughts around the Hub investing it’s community pool for exposure to other Cosmos chains. I think there are higher impact things we can achieve like directly incubating teams to build consumer-facing applications, or deploying liquidity on key asset pairs in our upcoming DeFi ecosystem that we’re building on top of Eureka.

Let’s start with going back to 2%. @Cosmos_Nanny, when were you thinking of putting this on-chain?

7 Likes