[PROPOSAL] Set Max Inflation at 10%

[vixcontango]

Everything you say here is speculation. If the monetary characteristics of ATOM stabilize at max 10% inflation, it may lead to higher staking percentages as people would want to stake a token that is increasing in value. That is the experience at other blockchains like Solana and Avalanche. For some reason you view 20% as some magic number that is the correct number and so far you haven’t given justification for it.

I can tell you why 7-8% inflation would be a first principles correct number. I already made this argument elsewhere in this thread, but I will make it again, for one last time:

Population grows at 1-1.5% per year for big countries. Population + productivity growth gives you about 2-3% GDP growth per year. Notice this number includes all people in the population - old, young, productive and unproductive, public and private sector. The most productive part of the economy - the best of the private sector - S&P500 - grows at 8-10% per year. The most productive part of the S&P500 is the tech industry which grows 15-20% per year.

If you are building a system that wants to reach 1 billion people, you are most likely going to able to support only 2-3% inflation since 1 billion people is 3x the US. If you make assumptions that globally only the most productive 1 billion people will use Cosmos, then you can make the case for 7-8% inflation - productivity comparable to the S&P 500. This is a very aggressive expectation, BTW. When you set inflation at 15-20% you are saying that only the most productive part of the S&P500 will use Cosmos. That’s a very unrealistic long term expectation. Thus if the ATOM inflation remains at 14% as it has so far over the past 2 years, the ATOM price will trend towards zero given that global monetary aggregates grow at 4%.

As far as what will “ATOM halving geniuses” going to do, they can always put another proposal in to increase max inflation back to 20% if this settings change does not work out. What we do know however over the past 2 years is that 20% max inflation has not resulted in achieve 2/3 bonding target and the reason why it hasn’t is because ATOM is not a fiat currency. It’s monetary characteristics are clearly being eroded by a supply setting featuring too high inflation.

This is going to be my last post on this thread because I feel like I am going around in circles arguing with imbeciles. You are not presenting any arguments of substance other than “I am a Jae Kwon follower and the prophet has said 20%”. A lot of ATOM holders think the tokenomics aren’t well designed because they are losing money in a year where everybody else in crypto has doubled their money.

If fiat monetary value does not matter to the people who issued ATOM, why is ATOM being sold for fiat on exchanges? If I am going to lose all my money in this investment because of the issuer is a lunatic who doesn’t understand economics - or worse yet - defrauded me on purpose, you might want to look where that attitude got SBF and Do Kwon. When I bought ATOM first in 2020 it had 7% inflation, that 7% inflation was set by the dev teams. Then 4 years later in 2023, I find myself holding a 14% inflation token and the self correcting mechanism that Jae Kwon was selling is not working to bring inflation down to 7%. We have a problem here. If tokens are sold for fiat and are listed on exchanges, there are economic promises that are being made that currently aren’t being fulfilled.

Long story short, I don’t think there is any network that can grow 20% in perpetuity and for that reason max inflation setting of 20% makes absolutely no sense from an economic perspective and I want it lowered to a number that has economic justification.

[vixcontango]

Good points but I think you forget that ATOM price is not fixed in fiat. If 20% rewards cause ATOM price to tank, then you are not actually getting the 20% rewards you were expecting. You could be making far more money as a validator at 7% levels. That is certainly what is happening right now for Solana and Avalanche validators. They are getting only 7% rewards but their income has doubled. In Solana’s case, income has actually quadrupled.

10% inflation * $20 ATOM price = $2 > 20% inflation * $7 ATOM price = $1.4

[vixcontango]

Oddly enough, it is the big validators voting against this proposal so far. Clearly they are less sensitive to the monetary value of ATOM because they make enough in rewards even at $7 ATOM. The small validators obviously want ATOM price to go up so that they can pay their bills.

[vixcontango]

I want to point out that when ATOM hit $44, it’s inflation rate was 7%. I have been an investor in ATOM since 2020, so I am certainly not a fly-by-night investor. I don’t think anybody who invested in 2020 and 2021 when the inflation rate was more or less hardcoded to 7% thought that they are investing in a token that will end up with 14% inflation at the end of 2023. Pretty much everybody believed Jae’s reasoning then. The difference between 2021 and today is that we have 2 years of data of how the self-correcting inflation mechanism works and the problem is that it is not working. We are not on track to get to 7% inflation anytime soon.

Finally, to those who think that inflation reduction will decrease the bonding ratio, Sentinel chain lowered its inflation a couple of times over the past year with governance proposals, the last one being in July. Today its bonding ratio is 70%. The forced reduction in inflation ended up INCREASING the security of the chain.

[vixcontango]

Jae has been talking on Twitter about ATOM and this proposal. I don’t have a Twitter account and I don’t want to have one. But I want to address a couple of his comments here because I think it is relevant.

If the ATOM token is not a monetary token, why is it traded on exchanges for fiat and why did Jae sell ATOM for fiat during his initial fundraising round. Why can I go on Coinbase and buy ATOM? Has Jae tried to get ATOM off Coinbase and other exchanges? How many sales of ATOM for USD or other fiat has Jae himself made? Was ATOM not sold to Bain Capital for US dollars? Jae is admitting here to defrauding investors and should be investigated.

Moreover, Jae should absolutely be prevented from defrauding other people again if he tries to create another token to dump on people.

Bitcoin does not have 7-20% inflation. Bitcoin has fixed future supply of 21 million. ATOM does not have fixed supply. There is already a dramatic difference between the tokens. In fact, the current ATOM inflation guarantees a price trending towards zero in the long run. Jae can’t compare ATOM to Bitcoin as there isn’t a single investor out there that views them as the same type of financial instrument. He is, frankly, delusional on this matter.

If the current inflation of ATOM stays and its price goes towards zero, I will seek damages for my losses because this token was misrepresented. When I bought it had fixed 7% inflation for 2-3 years and the mechanism was sold as being corrective to bring inflation back to 7%. That is not working and Jae doesn’t want to make any modification to ensure it working as advertised. So I feel like I have been lied to. 4 years later is too late to start making claims ATOM is not a monetary token after many millions in sales of ATOM for US dollars. How did a token that is not supposed to have monetary value end up on exchanges where I can buy it with my US dollars?

[Ronin]

同意，生态最好长期保持利率在低水平，必须立即降至10%以下。

[Alice]

With so many conflicting opinions. I think it would be better to go for something in the middle.

Decrease max inflation to 15%, and continue to decrease this by 1% every 3 / 6 months, down to 10% Giving stakeholders ample time to assess if this is the right path forward, and allowing them time to adjust and submit proposals in the future to revert or suggest a better solution if needed.

[vixcontango]

Looking at who is voting for and against this proposal, it is pretty obvious why the staking ratio never goes above 2/3rd. The big validators are acting in cartel like fashion to keep the rewards high by keeping the amount staked just below 66.66%. The big validators are the ones voting against this proposal. It appears that they are simultaneously spamming the message boards with advocates making it sound as if small validators want higher inflation. The voting pattern, however, clearly shows that small validators want an ATOM to have lower inflation.

Simultaneously big validators are dumping ATOM they get on the market for US dollars. With this entrenched behavior happening, it is not very likely ATOM inflation will ever go down towards 7% min threshold. We have seen repeatedly over the past 2 years that ATOM miraculously gets unbonded when the inflation starts declining. By lowering the price of ATOM, the big validators are acting against the small validators and trying to take them out of business. When small validators go out of business, big validators get the orphan delegations.

What is going on here clearly isn’t a decentralized ecosystem, but an elaborate centralized scheme to dump worthless tokens on the public by constantly making false statements and running psyops on the Cosmos community. In addition, we have some unethical business practices aimed at getting rid of competition. Whoever is running Allnodes and Dokia capital and the other big validator Nos and Jae Kwon should buckle up for federal investigations. Knock. knock.

[tknox35]

I do think it’s interesting how many of the small validators are a Yes on this so far. A big part of the justification some have given for a no is the cost of running infrastructure.

Well, obviously if shaving off ~4-5% of the current inflation rate is a death knell for these small validators, they’re not voting in their best interest.

The largest No is a validator who doesn’t charge a commission and will soon be forced to charge 5%. Wonder why they’d be so concerned about costs for these poor little validators. Hmmmm…

[jacksteroo]

We see the point where the point of the proposal is to increase adoption of Liquid Staking Derivatives (LSDs) / LSMs here, but premise in doing so by changing the tokenomics may not be worthy of drastically changing a core fundamental “parameter” of ATOM tokenomics.

Tokenomics affect Investors opinions

We don’t think it’s lowering the max inflation to 10% is the main driver to help shift stakers out of staking security and into LSDs adoption. Tokenomics change is a highly sensitive topic to not affecting the economics only validators but how investors evaluate their investments also.

@TargetD

A final issue is instability in tokenonomics. What investors want is stability. A long-term goal/path to reducing APR could be a good thing, but suddenly changing it overnight will make the chain look erratic and uninvestable.

This is not the first time I’ve heard from token investors. Very true across the board.

Comparative Analysis with other chains

While we can have tunnel vision within one ecosystem @vixcontango brought up a really good point comparing tokenomics and inflation rates of other chains. Setting a max inflation will likely not move enough stakers out of staking in an ecosystem to make a difference.

@vixcontango

How do you explain chains with much lower reward rates like Cardano and Solana having significantly higher staking rates than ATOM?

Staking behavior is a very “sticky” behavior. Even a really low reward or inflation rate like in Cardano will not “move” users out of staking. Having a more attractive activity outside of staking will naturally move stakers out to undelegate, and then use their tokens to “do something” with.

A recent example of what people can do with even ETH is friend.tech – it “moved” a lot of ETH holders to shift some ETH into BASE to engage with the crowd there as one can “invest in your friend’s social network … to tokenize their credibility”

Increasing Adoption vs. Increasing Price

There’s a chicken and egg correlation here. Price increase drives attention, hence drives speculative behavior, which then drives adoption in DeFi and everything else. However, increased adoption and activity might not necessarily drive the price up.

@malgotas

• The very first priority should be to raise the price of ATOM. From this, all other things precipitate. Go back and review what led to ATOM’s $44 ATH and DO THAT AGAIN. If that means waiting for the next bull market to gear up, then wait. Do nothing else. Don’t touch a thing. Price is all that matters at this vulnerable point.

So if we wish to increase the adoption of LSDs, let’s look at all the use cases plausible to do so. ATOM is a recognizable token where all the underlying liquidity plumbing is all done (wallets, exchanges, AMMs, aggregators, lending, etc.)

Summary

Now it may be time to have AADAO consider bringing in highly recognized brand names from gift cards to T-bonds as RWA to be backed DeFi / LSDs, or re-staking from BTC via Babylon Chain, or bringing in IoT or gaming use cases with LSD requirements. We should focus on product market fits for next generation use cases such as the ones we saw from friend.tech (for BASE) and Web3 Socials like Farcaster and Lens Protocol (for MATIC).

That’s when real adoption goes up. It’ll then drive high velocity traffic into the ecosystem powered by all chains within the Cosmos ecosystem.

[vixcontango]

Tokenomics is “sensitive” issue when the supply is fixed and someone wants to increase it thereby devaluing the asset. In this case, we have programmed devaluation of 14% per year, making ATOM an uninvestable financial asset no matter its fundamentals and market adoption. No activity grows 14% in perpetuity. Tokenomics absolutely must be changed here to make them more rational and in line with the economic performance of Cosmos. You can’t be printing 14% inflation if your transactions and revenues is going down -15% quarter over quarter.

The issue here is that I purchased ATOM when inflation was SET to 7% in 2020 and 2021 and bonding ratio was 70% and now I find myself holding a 14% inflation asset with bonding ratio of less than 66% because the self-corrective bonding/inflation mechanism does not work as intended. More specifically is being rigged by large validators to take out small validators out of business by dumping the token on retail. Validators are professional investors and know that 14% inflation is unsustainable and they are selling their tokens for fiat as soon as they get them.

People’s business plans about increasing ATOM adoption are speculative. Last year we talked about introducing ICS as way to increase ATOM adoption. Now it turns out ICS is not profitable for validators because it costs money to run each new consumer chain and the consumer chains like Neutron don’t generate enough in revenue to compensate the validators. So now even more ATOM has to be sold to subsidize Neutron creating even bigger selling pressure. The answer here is not to rush headlong and spend more ATOMs to fund somebody’s multi-level marketing scheme. The answer here isn’t to add any good sounding consumer chain to the validator burden because someone thinks it sounds cool and will go big, but to add chains that have established revenue streams that don’t have to be subsidized by validators.

The chief reason for the DECLINING ATOM price is because its tokenomics are bad, bad, bad. ATOM is not being adopted precisely because it has 14% inflation. There is no other major chain with such insanely bad tokenomics.

One last word on why bonding ratio is 65% at 14% inflation and 70% at 7% inflation. If you are an income investor, you usually try to get about 7-8% yield out of your investments - whether bonds or stocks. 7-8% is the average long term return of stocks. That yield is in US dollars. If you have ATOM with 7% rewards, you will stake everything to get every last ounce of reward. If you have 20% rewards, now you have room for maneuver. You can stake half of your ATOM to get about 10% on your investment and then keep the other 50% of your ATOM to trade. If the market crashes (and crypto markets are volatile), you can trade in and out of ATOM and preserve your $$ capital. You can sell that 50% of ATOM and keep it in cash and if ATOM goes down you can opportunistically acquire more ATOM. In other words, the too high yield is what is causing investors to NOT bond their ATOM and keep large parts of it liquid.

I understand what Jae Kwon wants to do and how he designed the system. But here is his problem - ATOM is a monetary token. It has a price and sells on exchanges. As such it is being used by professional investors as a financial asset and it is being managed as a financial asset. Pretty sure Jae Kwon has never managed money for other people and has no idea what asset managers do and why they do it.

Because ATOM is a monetary asset, asset management considerations are driving its usage and its bonding ratio. Those asset management formulas don’t fit Jae’s model. Jae thinks heavy inflation and dilution will force token holders to bond but instead what we see is partial bonding and hedging with the rest because such high yield is offered. And every professional investor knows high yield is unsustainable and thus the asset must be hedged.

It is not unusual for someone’s product to grow bigger than them. Go watch the movie about McDonalds and Ray Croc. McDonald’s founders didn’t make money out of their burger because they are cooks - they make a nice burger. They are not real estate managers buying real estate all across the US which is what it takes to make McDonalds are big hamburger chain. It is similar now with ATOM. To take Cosmos Hub mainstream, its product offerings will need to change and its creator will never understand why the changes are needed because they will be beyond his comprehension.

[vixcontango]

A chart of how things work in practice is “not how thing work”?!? I don’t think Jae can confront what is happening in reality with his design.

Here is how things work - big validators acting in concert have the power to affect the bonding ratio so as to maximize the rent they extract from this chain. As such they have pegged inflation to the unsustainable level of 14% and are dumping on retail like maniacs because Tendermint consensus doesn’t cost all that much to run ($1000 per month, fkn really, so cheap) and their profits from dumping ATOM are insane. None of these big validator guys want this gig to end and that is why they are voting YES on this prop. If you look at the voting pattern, it is basically 2 big validators outvoting something like 30 smaller validators. It is the big validators who are extracting windfall profits out of this gig. The smaller validators can’t make ends meet with a tanking price of ATOM.

Instead of non-stakers subsidizing stakers Jae’s incentive scheme has morphed into small validators and retail stakers subsidizing big validators.

That’s how things work in the real world. I wonder how long it will take Jae’s genius to figure out simple economic cartel behavior. lmao

Maybe you should go work in a financial company for a change before you start issuing tokens listed on exchanges, pal. Don’t worry, I was an idealistic anti-finance rebel when I was 25 as well. All of these finance laws exist for a reason, however.

[serejandmyself]

I think you are missing one vital ingredient out of the equation, on the result of which you seem to base a lot of your judgements and opinions. particularly when it comes to validators and devs (and there is no steb in my words) - balls (you may read courage if you get offended by the use of that word). I’m serious. That changes perspectives.

[liquidityflow]

I don’t get why this issue is so controversial, 20% inflation is not necessary and a complete outlier from the rest of POS and DPOS chains.
WE are however lucky that ATOM has now entered a bull market and will price up regardless of this particular proposal.
What is getting more and more clear to me is that ATOM holders and validators have often opposite incentives, Jae didn’t think the governance process through its a clear failure, same as his stance on this particular proposal, we shouldn’t be have such a high inflation, but i guess the argentine peso and turkish lira beat us.

[waqarmmirza]

@vixcontango Very respectfully in my opinion you are spamming the topic with your redundant posts. I am sorry if you are related to OP to propagate in that case it is completely okay what you are doing.

Additionally, everyone here has an ethical right to NWV on this prop just on the basis that OP has abandoned the idea and not cared to reply to people’s questions.

[vixcontango]

@waqarmmirza I have watched this board for a few years without any participation. I am only getting involved with this topic because it is extremely important in my opinion. I am sorry if my 10 posts look like spam to you, I have simply chosen to add more significant input at this juncture. I like to discuss the issue from various angles with everybody and people have raised various issues that need addressing. I know you probably like to solve the Pythagorean theorem in 1 way and be done, but I solve it in 44 different ways.

I am not related to OP or Jae or anybody else. I like all the devs in Cosmos as they are great technologists. However, I think many of them have not worked on Wall Street and lack deeper knowledge of some aspects of finance and economics. I want what is best for the Hub and for me as ATOM holder. I am trying to articulate what that means to other people. It means articulating a strategic vision for the Hub that is perhaps different than what others have had to so far - the Hub being a buyout fund of successful products that is engaged in mainstreaming them instead of a VC fund that is subsidizing moonshots without product market fit. And it means articulating tactically how to get there - changing the criteria for onboarding consumer chains and right sizing the max_inflation parameter to strengthen security and attract institutional capital for this effort.

Finally, this is the cleanest proposal so far - asking to change a single parameter. No with Veto is an abuse of the option. OP doesn’t owe you the most extensive analysis on the planet. He has provided his own. You can make your own analysis and vote your way. BTW, you should be grateful for everything I have said here instead of calling it “spam”. Spam is personally attacking me instead of presenting arguments to enhance our understanding of the subject.

Please feel free to provide the missing analysis that the OP hasn’t presented instead of complaining. Why should the OP do all the work? This is a collaborative effort, right?

[vixcontango]

Looking at how this is playing out so far - 42 small validators YES and 15 big NO resulting in NO vote winning despite 73% of the validators voting YES - tells me that we definitely need to switch to quadratic voting at some point. Of the validators that are voting, supermajority (defined as more than 2/3rds) are YES and yet the proposal is failing so far. Small validators and stakers have a right to complain that this governance process is “rigged”.

[BlocksUnited]

There are 2 proposals set to follow this one that address the upper and lower bounds of the curve. They mention it at the bottom of the proposal text. I wish they had mentioned that up top, so people were more aware.

[Mitosis]

It’s really the 2 big "No"s that account for more than 60% of the “No” votes.

[vixcontango]

What’s frustrating about this is that the validators are using the staker’s voting power to exert their opinion over the network. The validators didn’t pay for these ATOMs. This is not their economic stake in the network. And I am pretty sure their stakers don’t agree with their viewpoint if the account stats are any indication. The voting is even more lopsided in the account category (which represents the stakers) where 94% of the accounts (73K out of 77K) are voting YES. Most people when selecting a validator usually pick a big validator that has low costs since the user wants to maximize his staking rewards. They really don’t think about governance and I am sure many are not even aware that their voting power is being abused this way.

I have been thinking about how to address this issue today and I will make a bigger post on governance reform in another thread tomorrow.