I have to throw this out here: the inflation rate change parameter should be set to -3.0
Why?
I think the incentive scheme right now is entirely wrong. The algorithm is incentivizing unstaking and for that reason we can’t achieve the bonding target. What do corporations do with their stock? If there is a bull market and their stock is expensive, they sell stock in the euphoria. If there is a bear market and their stock is cheap, they buy it back into the fear and reduce the amount of stock out there. This makes sense - buy low and sell high. Cosmos Hub should be doing the same thing.
What is the ATOM algorithm doing now? Let’s establish a relationship between staking ratio and bull/bear market conditions. If we are in a bull market, what will people do? They will unstake their ATOMs and sell them to lock in gains. If we are in bear market, what will people do? They will buy ATOM and stake it to get yield and thus lower their entry point over time if they made a mistake timing the entry well. As such what should the algorithm do? It should go against the market. When people are unstaking and selling ATOMs, it should decrease the inflation, punish the stakers for unstaking and make the ATOM scarcer as people are dumping. When people are buying and staking ATOM, it should increase the inflation and incentivize them to keep staking it. Let’s say, we are in a bear market and the price is tanking hard. What do people do then? They start to unstake and sell their ATOM. Well that is when the inflation should go to zero and make ATOM scarce thus stabilizing the price. If people are buying and staking ATOM, clearly there is demand for it so that is when you want to be selling more ATOMs into the demand.
For example, right now when we are below the staking ratio target, the inflation should start decreasing towards the min inflation. People are not staking and as such they get less rewards. How do people get higher rewards? They need to start staking. When the bonding ratio target is reached, then inflation is starting to increase towards the max inflation target. We should be rewarding with inflation when the staking ratio target is achieved. And we should be disincentivizing with deflation when the target is not achieved. We should be doing the opposite of what we are doing now.
Think about it. What is your reward for staking right now? Lower rewards. Who the hell wants to do that? So big ATOM holders are incentivized to keep some of their ATOM unstaked in order to keep the bonding ratio just below 2/3rds. If going over the target gave them the highest inflation, people will stake all their ATOMs happily and be well over the target. But even worse, just as people are unstaking and dumping, we are putting more ATOM out there to be dumped further hurting the price. We shouldn’t be doing that.
We have been doing this for 2-3 years now, ATOM has a very unique monetary policy compared to all other coins who mostly have fixed inflation schedules. In the real world, ATOM’s monetary policy is not working at all as it was designed prompting this reevaluation we have right now. I think a big part of the problem (in addition to the 20% max inflation target which was ridiculously high) is that inflation rate change parameter is positive instead of negative.