The biggest problem IMO is the time it takes for the chain to lower/increase the inflation. When Atom staked sits at 66.7% it moves really slowly to 7% inflation. I think it was mentioned at Cosmoverse this year and if I remember correctly it would take about 5 years. And if was over 70% it would go faster.
So a solution would be to set a period in which inflation would reach min/max inflation but the periods should be different for reaching min and max inflation.
For example if there was more than 2/3 atom staked the period to reach min inflation should be 1 year. So if there was 66.7% or 90% staked it should not make any difference in the time it takes to lower the inflation.
But if there was lower than 2/3 of atom staked the period it should take to reach max inflation should be 2 years. That way inflation does not go up fast and there are some extra rewards for those faithful to securing the network.
This is an example if the inflation was at minimum(7%) or maximum(20%) so with the current inflation at 14% it would take about half a year to reach min inflation.
So what I am suggesting is to have an inflation with fixed time parameters and to set a proportion of some kind for achieving minimum or maximum inflation at 1:2 years (this proportion could be expanded for example to 2:4 if that was the plan for the long term or even 4:8). In this proportion system the important thing is that max inflation period should always need double the time it would take to reach minimum inflation.
But I do not know if this parameters are possible to be set on the blockchain.
Has anyone looked hard at how a sudden drop in ATOM inflation would have ripple effects out across the Cosmos?
Thatâs a lot of IBC collateral to just go throwing levers on.
For instance every ATOM & stATOM LP everywhere would shift, every stAtom loan would get called in faster. Every IST & USK would face sudden volatility.
Thatâs why it MUST be done very slowly. Systemic security requires it. This isnât Dexterâs Laboratory.
I want to post some numbers here to illustrate how inflation is important in valuing the ATOM token.
I know people are questioning Messari data, but Messari is a reputable and major crypto research shop and many institutional investors (the whales with the big bucks) go get their information there. If you are some Wall Street guy that wants to learn about crypto, the first thing you do is go find the top 2 or 3 research guys in the space and talk to them. Messari would be one of them for crypto (the other big one is Delphi Digital). That graph above is what people look at. Choppy supply increases that amounted to about 33% increase per year over the past 2 years. That is huge inflation.
The 2nd thing they will learn is that the token has 7% to 20% inflation depending on the staking percentage. Then they will make a ball park estimate - since no one really knows the future - and kind of assume that long term inflation will be the average of these 2 numbers - 13.5%. Then they will try to determine the risk parameters around this estimate - the volatility band. They will come up with a best case scenario and a worst case scenario.
Best case scenario is a combination of Jaeâs and Zakiâs proposal. Limit max inflation to 10% and lower the min inflation threshold to 0%. That will give one average inflation of 5%. The worst case scenario is the ATOM entities printing and dumping ATOMs like they have for the past 2 years and resulting in 33% inflation for the next few years.
I tend to calculate supply for the year 2030. Most pros do discounted future cashflows for 10 years ahead (that is why 10-year Treasury yield is THE benchmark for price of money) . I tend to think of investments as target date funds. Target dates 2030, 2035, 2040, etc. The next couple of cycles in crypto will be before 2030, the decision making of participants are usually for 1-2 years for retail and 5 years for professionals (hence 5 year plan by the communist parties) so 2030 is a good anchor here.
If you look at these numbers, best case scenario is a combo of Zaki and Jae proposal (5% inflation) which values ATOM at $4.28B FDV which is 1/3 of Polkadot - which makes ATOM cheap. But if I use the current projection of 13.5% inflation, I get FDV of $7.38B which is still cheaper than Polkadot but not all that cheap. If I use 20% inflation or 33% inflation then I get $10B or $22B. Obviously, plunking money into something that costs $4B is dramatically different than $22B. If I think that Cosmos Hub has $100 billion FDV upside, at $4B this is 25X investment. At $20B only a 5X.
So the inflation matters. It is very important to stabilize the long term inflation picture for the Cosmos Hub - that is one aspect where other coins are much more transparent and predictable and thus more capable of attracting the investment dollars. Stabilizing the inflation picture at 14% is also not enough - that is too high an inflation compared to monetary aggregates (2% for USD, 4% for global fiat issuance). It needs to be a more rational number that can ensure stability vs fiat - like 5% for example.
This is a good point. Predictable supply is really important and itâs much easier to do projections with. I think part of Blockworksâ upcoming proposals shifts Atom to a fixed supply with progressively decreasing inflation until a minimum after a few years.
There is a lot of maths to consider in reducing the inflation rate, and this is just a random idea, but what if we had say a certain percentage max e.g. 10/12/15 or whatever. But a small portion of that % was rewarded as vesting tokens over 1 year, users would still get the majority of their rewards immediately, but a small portion would be vested, and of course vested can still be staked, which would help to keep the threshold above 66% which in turn would help to keep us below the max inflation rate. This may also help to reduce sell pressure. But there may be some flaws in this idea I havenât considered.
Does Messari display how liquid staking tokens like Lidoâs stETH arenât impacted by any dilution of value from inflation of the base asset? Is there any guidance on the advantages of holding stATOM instead of ATOM if youâre worried about inflation? Should there be?
âcurrent inflationâ isnât a parameter. Inflation is recalculated dynamically every block based on 5 configurable parameters, two of which are InflationMax and InflationMin.
Do not forget big number of small stakers who donât use Levana or Mars or other defi protocols.
Low APR â> less stakers
Less stakers â> less security
Less security â> ATOM is no more the security citadel for ICS chains.
Maybe you donât care about small stakers but remember that small streams make big riversâŚ
The economic security design of the proof-of-stake system is to redistribute ownership from non-stakers to stakers via inflation over time. So non staked ATOM is an inferior holding vs stATOM as you are losing ownership in the network slowly over time.
If you want to use your ATOM asset as collateral in lending, stATOM is the better collateral, as far as you are concerned, because your ownership in the Cosmos Hub network remains the same. If you use regular unstaked ATOM, it diminishes which obviously goes against your economic interest.
Lack of marketing, lack of utility token â lower demand â people unstake â inflation raises â blaming max inflation rate. They thought changing the max inflation parameter will magically solve lacking issues. By the way, removing the min inflation rate and adjust the bond ratio sound good, but when is the right time to do it? During the bear market? Iâm not so sure.
To my mind, this proposal sounds like ââpump my tokenââ.
What you will do if atomâs price doesnât grow after the reduction of inflation ? Max inflation to 10% = possile big reduction of revenues for validators. Is the cost to validate the cosmos hub will also drop ? Some validators could cut it like they do on small chains where they operate at loss.
I agree that it could also happen in actual situation if the price go lower and lower but i will not bet on a Atom at 5$.
I would just point that inflation is not a bad thing even if the narrative of burn my token/reduce my inflation is appreciate in crypto sphere (the famous apple strategy to create an amazing bubble on apple action, i mean buybacks because they have financial gains for sure).
Could we just wait that the hub has financial gains before to put this question on the table ? The hub as a money multiplier seems to be the actual vision and money multiplier needs to create money to grow.
Moreover, the inflation on the cosmos hub nukes speculators but not stakers and operators.
Iâm not sure they have similar mechanism with us, but I guess because of high staking rate will lower the reward rates? From my point of view, demand and utility matters much more than inflation, since only a few precents of world population own crypto. We are just trying to blame all the inflation while we forget other things. I own some deflationary tokens and they still perform like shit.
Donât get me wrong, reducing inflation is good and sustainable in long run, but when is the right time to do it. I hope we will proceed this in pre-bull run or during the bull run when everybody is happy since we already had enough dramas so far. And if we would drop the inflation, I hope we would do it slowly to make sure everything is still under control.
