Initially supported the inflation cut to 10%, but now considering this. I think it makes more sense to remove the inflation floor. Jae, any ideas on what ranges it would be? Personally, I’d like to see inflation at single digits if >66% of atoms are staked. I want defi on cosmos to thrive, but it’s not gonna happen until atom staking rates fall. I prefer using native atoms over stATOMs, I’m sure you agree with this.
I most certainly have a few opinions to add into the discussion, and would love to hear the community feedback and what you all are thinking. However, to start it off, I believe that lowering inflation to 10% impacts the security of the token in a potentially major way, but that doesn’t have to be the case if we make necessary adjustments, which I will outline now.
Here are the things that we need to discuss before lowering inflation:
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a change to 10% inflation could significantly impact the bonded ratio, or make liquid staking a must, in order to earn further yields on $ATOM.
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how will the LSM cap affect chain security in a lower inflation environment. Will a 25% liquid staking cap, encourage people to unbond if we hit the cap, and how will the use of $ATOM in Defi affect chain security. The thing to remember is, the Hub is selling itself as the security Hub of the Cosmos, can we afford to risk chain security for lower inflation?
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would a canonical liquid staking chain, owned by the Hub, like Stride, allow for the LSM caps to be raised? If the Hub owns Stride, then that eliminates the need to export risk to other sovereign liquid staking zones, giving the Hub full control of it liquid staked $ATOM and more ability to control its economic security.
My opinion
It’s obvious to me that we need the inflation lowered, as it clearly impacts the token price and could potentially hyper inflate $ATOM out of relevance. However, we cannot afford to sacrifice network security, so how can we alleviate inflationary pressures while retaining a bonded ratio of over ⅔.
I believe that we could lower the inflation to 10%, that would be great for the value of the network overall. However, if we do that, the it solidifies the fact the the Hub needs to acquire Stride. If the Hub acquired Stride, this allows the Hub to rely on itself to control its liquid stake, thereby allowing for a higher percentage of $ATOMs to be liquid staked, if they are liquid staked via Stride.
If we decide to lower inflation, while retaining the LSM caps, this could lower the bonded ratio dramatically as people opt to liquid stake and utilize their native $ATOM for higher yields in Defi. This could dramatically reduce network security, which invalidates the main service that $ATOM provides, a security provider for the Interchain.
That’s just my two cents, happy to hear further opinions on this subject.
If lowering the hurdle rate is desirable, there’s an alternative to drastically lowering the InflationMax parameter: you can drastically raise the communitytax parameter instead.
The Community Tax parameter is 10% right now, so 90% of newly minted ATOM goes to staking rewards. Why not keep inflation parameters the same, but raise the tax rate to 40% or even 50% for a similar result?
We can revisit inflation parameters and the high tax rate after waiting and seeing how the market responds and if the lower staking rewards actually do result in stakers moving into stATOM and DeFi yield-chasing. (How long is reasonable to see if this change has any effect?)
Price:
The price is currently suppressed because stakers/validators constantly sell their rewards.
If we reduce the selling pressure, the price can stabilize and potentially rise.
Price Inelasticity:
In stocks, a $1 sell pressure can decrease the price by $3 due to price inelasticity.
In crypto, this effect is even more pronounced.
By reducing inflation to 10%, the price could increase by multiples over time assuming same demand.
ATOM as Currency & DeFi:
DeFi struggles because a 20% return on ATOM staking is too high to compete.
Reducing it to 10% could significantly boost LSM as current stakers would be forced to look for extra yield.
We want cosmos to be an interesting place and financial infrastructure is a must. Reducing inflation potentially:
- significantly reduces sell pressure
- changes narrative for atom inflation (gets closer to market avg but still on higher end)
- pushes for LSM adoption
- gives a lot more room for defi growth, that leads to more liquidity and more participants, more utility for atom as asset
Most think in terms of what happens to them (validators/stakers), but the growth comes from attracting
new participants. Lets focus on that.
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Folks, I believe @zaki_iqlusion is only taking a temperature check here, and it does look like it’s quite heated 
… there are a lot of points which @jaekwon and all others made, but if you take the emotions out of play and really read into what’s said, the staking economics is working beautifully.
We have a lot of adults in the room and many whales are quietly reading here, so hear me out.
Is the thesis founded?
I have my doubts that these communities overlap. Staking is for an audience that seeks for “safe play” returns, while Liquid Staking is more of a “defi degen” play. Though there are overlaps amongst some investors, but my hypothesis is that I don’t believe there’s much of an overlap. Liquid staking is an even bigger tax nightmare than staking. They could be different crowds.
Staker impact and Validators 2x impact
The staker impact is pure and simple… nearly 20% APR turned into 10%. Pure and simple. It’s a shock to their system, alternatively this could be designed to decrease over time.
But for validators’ it’s a double whammy.
If the thesis works, then the impact on validators are doubly so (or more) – when yields drop from ~20% to 10%, returns decrease for the validators, PLUS when stakers move their stakes out, it’s doubly so.
Validators earn via commissions charged only on the staking returns, so having a reduced yield compounded by undelegations out will hurt the validators drastically, if the thesis holds to move stakers out to liquid staking. Also the thesis also states that this param change will increase liquid staking activity to generate activity (and fees) to circle back into the ecosystem. It’s likely a long shot that it goes back to the validators in a fair manner, since it passes through multiple channels.
Alternatives
There might be other ways to bring more liquidity and action into liquid staking, such as several IBC initiatives (Toki and Composable) could be the healthier approach in bringing in liquidity into Cosmos DeFi ecosystems.
Closing Thoughts
We should play this hand carefully since we should survey to understand who the “customers” are in this simple param change. Many thanks for everyone here pitching in their opinions (and more to come). I hope we can grow and mature our discussions here and on every other social media outlet. Cosmos ecosystems has one of the most active governance participation in this industry. We are on the verge of breaking through to the next level, and all we have to do is to take it one step and a time to grow and respect one another with clearly thought out responses.
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Effort Capital endorsed this effort
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No, this is a security business, like a bank.
We should make people stake more instead, to have this number go down.
I didn’t see any marketing to make people stake for a long time, and never since a year.
Pushing LSM like this adds a few layers of risk. There is a big security risk. I understand why you do it. But if Atom loses enough stakers it won’t be a security hub anymore.
IBC needs those stakers. And people don’t want a single point of failure, of risk. Otherwise, they can use plenty other chains.
Just let devs build useful things on ICS.
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Of course Zaki, since it would be a head start to his suggested annual inflation rate of 1.5% for perpetuity as a “minimum security budget.”: ATOM Tokenomics Update (Blockworks Research - AADAO Grant) - Monetary Policy
We respect EffortCapital and he has great ideas like the VP tax, and we will be supporting him to implement this VP tax. However, other ideas that he has like bringing inflation to 1.5% we don’t support and he is already aware of this.
stakers can afford the decrease, but can the valoperators
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The bottom 50% in the set can not.
These proposals don’t make sense at all, and during this bearish cycle, it is outrageous to do this type of experiment. These proposals look more like a symptom treatment rather than the diagnosis of an actual illness.
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A question, one inherent tradeoff in the LSTs, is that retail forfeits the voting right, now the retail may or may not use these LSDs in the DeFi but the voting power is concentrated from thousands of people to a few dozen people. Do we need to think governance decentralization is less important than liquidity? it can not be quantified. But we can not deny the effect. Why do we want to keep pushing for the success of these LS derivatives, when we know we are concentrating the VP in fewer hands?
This should be an organic process, but we are here trying everything possible to put an axe on our own foot.
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I don’t personally think the impact on this will be significant. This is because:
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The overwhelming majority of retail ATOM holders do not vote their tokens
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The ones who care more about governance than yield can simply just keep their tokens staked.
All of that said, Stride is working on liquid governance that will allow you to vote with your LSTs. The challenge around this is ensuring that you dont create a situation in which aomeone can vote their tokens and then just sell their ATOM afterwards (which can lead to governance manipulation)
I read a lot of comments that small validators will be affected if inflation % drops (less earnings).
Majority of stakers last 2 years are just seeing their wallet value dropping . But they continue staking their nice money because they have a long tern view that atom will be profitable. Maybe validators should have that long view too.
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Validators do have a long term view, doubly so.
ATOM stakers lose a % of their ATOM value. Validators have negative cashflow every month for a long time, esp the lower quadrants. Hence validators are paying $$$ for their hosting service (plus DevOps time), plus holding ATOMs and/or staking at the same time. Double/Triple committed 
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Full support! enough is enough. atom is getting mocked and is one of the worst performers in L1s. just do what kujira does.
Thank you for sticking to a discussion of the issue instead of character assassination attacks. We are all in this forum from different cultures and we are using terms which some of us may understand differently because there is no legend somewhere that defines the terminology exactly (like for example LST percentages, etc). But with good faith discussion we will always get to the bottom of the problem.
Regardless of whether the ATOM printed comes from only the stakers, the fact remains that the money printing rate (inflation rate) is in excess of monetary aggregate printing rate (currently negative BTW, as M2 supply in the US is decreasing). For ATOM to be held and for the printed ATOM to be an incentive and for the inflation percentages to function as incentive, ATOM needs to have a stable price. That stable price is denominated in the world’s reserve currency (US dollars). So it needs to have a stable dollar price. If US dollar M2 has negative inflation (Fed balance sheet went from 9 trillion to 8 trillion this year and is projected to decline by $900 billion for at least 2 more years by some estimates) and ATOM is at 14%, ATOM price is headed straight to zero because the validators need to sell their tokens to pay their electricity bills (denominated in US dollars or some derivative fiat currency). Slow rug. You are watching it unfold all throughout 2022 and 2023.
You have to consider this slow rug an attack on the ATOM security mechanism, which was built assuming constant increase in the monetary aggregates. Jae Kwon has lived his entire professional life in a world where there has been insane money printing (QE) so the ATOM tokenomics design of 7% to 20% inflation is built using that as a reference point, whether he realizes this or not. But now that background monetary policy environment has changed. Yet the incentive mechanism of ATOM hasn’t changed. The reason why you are getting big whales to unstake their ATOMs and dump them is because ATOM is not keeping its fiat monetary value. Everybody buying ATOM is an investor, not a not-for-profit activist who is subsidizing the Cosmos Hub. They need to show profit in their ATOM holdings at the end of the year or at minimum have a projection for profit in future years. I have worked in the financial industry and at the end of the year the investment committee is looking at its investments and regularly clears out the losers in the portfolio. They don’t want their clients to see them holding losing investment because then they will lose the clients. There is also tax benefits for selling the losers. So any crypto investment fund has very strong incentive to dump their underperforming ATOMs. So when investors survey their portfolio in 2023 and see Solana up 150%, BTC up 70% (which is the crypto benchmark), Ethereum up 33%, Monero up 6%, Cardano flat on the year and ATOM -33%, they are like - unbond, sell and get this line item out of my portfolio. It is as simple as that.
As much as I love Jae Kwon engineering, tokenomics is financial engineering and it is not working very well. ATOM has a minimum inflation of 7% which is very very high. Moreover, I have been investor in Cardano and Polkadot and those projects are achieving 67% bonding at much lower staking rates. So the claim that you need to pay 20% to get 67% bonded is simply not true. Effort Capital’s case that we are overpaying for bonding is true. (again may be 20% wasn’t overpaying when monetary aggregates were going up 20% per year, but it is true now that monetary supply is declining)
To recap: you are concerned about the classic crypto buyout attack. I am concerned about a very different type of attack - change in the overall monetary policy regime that destabilizes the price of the ATOM token and causes the investors that currently stake it to unstake it and dump it.
I think variable inflation rate from 0% to 7% in a negative M2 world would be just as effective as 7% to 20% rate in 4-8% M2 growth world.
Ultimately I think the ATOM inflation rate should have some linkage to the growth of fiat monetary aggregates for as long as Cosmos Hub validators are paying their electricity and equipment bills in fiat.
I need to add one more thing. The $900 billion in Fed QT in 2023 was 10% reduction. The $900 billion QT in 2024 would be 12% reduction and in 2025 would be at 15% reduction. If you think the bear market was bad so far, it could get significantly worse. Without tokenomics change ATOM will be below $1 next year. Nobody owes you a $2 billion market cap.
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Real returns for ATOM stakers are -15% this year. 20% is a mirage because the principal is declining in value in excess of the staking return. If you have 10% inflation but ATOM price remains stable that will be a much bigger return for ATOM stakers compared to what they are getting now.
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I was against the previous community tax increase. If there is one more community tax increase, I will have to get out of ATOM. Find somebody else to finance you.
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Resetting the inflation rate represents a viable approach to imbuing ATOM with inherent value. As we anticipate a fundamental resolution to this issue, exemplified by the adjustment of API fees, we draw parallels with the Uniswap UI charge. Notably, the IBC service emerges as the linchpin infrastructure, bestowing unparalleled value upon the entire ecosystem at this juncture.