[PROPOSAL] [LAST CALL 2022-12-05] Increasing Hub Community Tax

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:

2 Likes

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.

1 Like

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.

4 Likes

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.

2 Likes

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)

2 Likes

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.

13 Likes

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.

5 Likes

I agree with Kam from the Imperator team.

1 Like

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.

4 Likes

@Kam_Imperator.co 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.

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.

Hi @Kam_Imperator.co, 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.

2 Likes

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.

2 Likes

Thanks for the reply @Adriana good to see you are supporting the draft.

I agree with your analysis about the dynamic parameters that affect the community pool tax. In its current form, the likelihood that further adjustments might have to happen to the tax rate every so often can be quite high especially considering if a large shift occurs.

I personally like the idea and agree with you on the 10% community pool tax. Initially I think it is a good idea to front-load the community pool so that it can reach a somewhat reasonable level of tokens to support funding endeavours. And plus, as I mentioned in a reply earlier on, if changes were to occur it will most likely be for a lower tax rate and most likely the community will be open to lowering the tax rate if deemed necessary.

1 Like

In the current game of chains, there are 4 projects: Stride, Duality, Neutron, Apollo.
Stride is already live and raised money, Duality raised money as well, Neutron raised money from the Hub to cover dev cost (prop 72 - we voted yes) and is raising, however I don’t know about Apollo - but this is still 75% of the current chains that don’t start from 0. I think it’s very important to help ICS chains, and depending on the conditions we will support them of course

2 Likes

Hey @Damien!

Yes that is right, on our side we’re totally open to any suggestions - what’s great with the tax rate is that it’s very flexible, let’s find something that suits most of us and go with one unique proposal otherwise it would be way too confusing.

It’s right that the current state of the community pool is alarming: starting with a high rate first to fill the pool and then reducing it when time comes is a great option.

@RobbStack
The current bonded ratio is ~60% according to Mintscan. If we decide to go for a dynamic rate with a 10% tax rate at the current bonded ratio, then the formula to get a linear dynamic tax rate would simply
be:
Tax rate = Bonded ratio/6

With a tax rate moving between 0% and 16.7%. For example, if the bonded ratio is 50, the community tax would be 8.3%.

I think I may be more aligned with increasing the tax first at 10% to fill the pool asap and reduce it once we believe that the pool is large enough. As we need to act asap, increasing it now to a fixed number might be the easiest solution. Let me know!

6 Likes

I’m very much in favor of this. I would propose to increase the community pool tax to 10%.

5 Likes

Tax raise is definitely a discouraging change for delegators and validators, but I agree that it is something that we need in order to move forward. I think we need to secure some funding that can be deployed for ICS development in a month or so. We can’t wait a full year for the community pool to be topped up.

Considering that we want to deploy 4M throughout the year, what about mixing the idea of community pool tax increase, foundation donations, and minting?

For example, let’s say we secure 2M through community tax raise; 1M through foundation donations; and 1M through minting new tokens.

This way, all groups of interest evenly share the pressure. Plus, we can secure some immediate funding from the donations and minting while preparing community pool for the future.

Hello Damien, tax rate may be one of the good options that we can suggest. However, we first need a place to gather real cosmos hub contributors to sit down and discuss on the tax rate before we submit a governance proposal. What is your opinion on gathering the contributors first?

1 Like

Am in favor of increasing tax rate to 10% and frontloading the community pool. It’s true that any increases will be harder to justify than any decreases.

Starting now would give us approx another 1M ATOM by mid Q1 2023, coinciding with the launch of ICS. Once ICS launches and we see how the economics behave, we might see an increase in teams applying for funding, it would be good to have some dry powder.