how is inflation a drawback? you stake and make your capital illiquid for 21 days and in return your liquid capital is returned to you through inflation. the higher, the faster you get made liquid and capable of putting capital back to use around the ecosystem.
ATOM has no value proposition. No reason to buy it. reducing inflation provides one more reason to sell ATOM. where is the benefit to reducing max inflation to 10% that makes up for how much less attractive risking capital in ATOM?
Could it be because it includes the locked-up amount in the staking ratio?
The most crucial issue to consider is whether adjusting inflation will diminish the attractiveness of staking and impact security. If the DeFi rewards are significantly higher than before, the staking ratio is likely to decrease significantly depending on the ratio between STATOM and ATOM.
This can be seen by looking at Ethereumâs staking ratio. However, the real reward excluding inflation from the staking reward is similar for both.
If the locked up amounts are staked, they are included.
So 5000% inflation then?
One argument I havenât seen here is that high inflation itself reduces the staked ratio. Letâs take an example with 1 user who has staked all his principal tokens which are 100. He has 100 tokens on Blockchain A which has 20% inflation rate. And he has 100 tokens on Blockchain B which has 10% inflation rate. This user invests in these tokens for yield which means he converts the rewards to cash immediately. (For example, validators are users of that type since they have to sell rewards for fiat in order to pay their electricity and cloud infra expenses). Letâs say that the person who acquires the tokens as a result of the sale does not stake them either. Letâs say the buyer is an exchange and needs the tokens for its active trading liquidity pools.
What happens?
After 1 year, Blockchain A has 100 staked tokens and 20 unstaked one for staking ratio of 80%.
After 1 year, Blockchain B has 100 staked tokens and 10 unstaked ones for staking ratio of 90%.
If majority of a chains users sell their rewards and those rewards end up sitting in the liquidity pools of various exchanges, a higher inflation chain will underperform a lower inflation chain in the staking ratio characteristic.
I think a market dynamic along those lines is the reason why ATOM is underperforming ADA or other in terms of staking ratio.
BTW, on Cardano all tokens are effectively liquid staked. Cardano doesnât have slashing, doesnât have bonding and your tokens there are movable at any point and yet they give rewards every epoch. Unbonding period is much lower on above mentioned chains. On Cardano your staked tokens are instantly liduid. On Solana, the unbonding period is about a week at most (25% per epoch which are 2 to 3 days each).
If individuals A and B each invested 100 units in inflationary coins Alpha (20%) and Beta (10%) respectively, letâs assume A compounds his rewards annually to enjoy the compounding effect, while B sells his rewards.
After one year, A holds a 50% stake in Alpha rewards (120/240), and B has a 41.66% stake (100/240). After two years, Aâs compounding effect increases his Alpha stake to 50% (144/288), whereas Bâs stake decreases to 34.7% (100/288).
This is based on game theory, encouraging staking for long-term security by providing more rewards to stakers than non-stakers. Understanding this concept is crucial. When comparing to Beta, if the compounding gap diminishes, everyone might seek alternatives like DeFi, potentially posing a security threat that concerns me.
I completely understand the game theory aspect of the design. The only problem is that price of token A and B are not fixed in terms of USD or fiat. Yes, network ownership declines but if the price of the token of the network keeps going down then actually the more profitable (in fiat) strategy would be to continously sell the rewards since you are selling at higher prices of the token.
Ultimately, the incentive to own more of the network is the implicit assumption that network value increases and even more specifically that the price of the network token is at minimum stable (in fiat) and at best increasing. If the network and token loses value, the incentive becomes the exact opposite - you need to sell the rewards for fiat asap.
Network ownership in itself is not an incentive. See, I am 100% network owner of Stevie Vixx network and that hasnât made me any richer⌠lol
Youâre right. If the value declines, thereâs a possibility it could act in the opposite direction. However, we believe weâve endured a sufficient bear market. In my opinion, it might be worth considering a swift passage or adjusting inflation values based on the current price relative to high and low points.
Apart from concerns, if I were to say yes or no, I support this proposal because I believe more holders should receive greater benefits.
The current inflation is ~14.5% but this is not the max inflation, this is the current balance between 7-20%. If the inflation range is halved to 3.5-10%, then I suppose the inflation wouldnât be reduced to 10% but to ~7.25% since that would be the balance between 3.5-10%. So this wouldnât be an already abrupt decreased from ~14.5% to 10%, but lower to around 7%. If the current inflation was 20% because the bonding ratio was low and the inflation range is halved then it would decreased from 20% to 10%, and stay there at the max inflation 10% while staking ratio is low. But given current staking ratio, why would inflation stay at the max new value of 10% if the bonding ratio is around 67%, seems it would stay at the new equilibrium of around 7%, so this would halve the current APR from around 19% to like 9%. It seems this is being sold as max inflation halved from 20% to 10%, but the actual current decrease would just be from ~14.5% to 10%, when actually it would be from 14.5% to around 7%, the new equilibrium in the range 3.5-10%, the new max 10% inflation would happen only with a very low bonding ratio which is not the case currently and very unlikely to happen, as the max 20% had also never happened so far until now.
In the proposal it is written:
âThis proposal seeks to reduce the ATOM inflation rate from ~14% to 10%, which would bring its Staking APR from ~19% to ~13.4%â â this seems to be highly misleading, because inflation wouldnât be reduced to 10%, the MAX inflation parameter would be reduced to 10%, but we are currently not at the max inflation of 20% but lower around 14%, so the inflation seems wouldnât be reduced to 10%, but much lower to the new equilibrium of around 7%
âNearly all 180 validators are break-even or profitable at 10% max inflation off of commission alone, and validators have the option to increase their commission rate to help cover operational expenses.â â this is an absolute lie. Even at the current inflation many validators are at a loss, the costs to run validators is not just the infra costs, there are plenty of other costs involved. Increasing commission is not an option because it leads to losing delegations
The suggestion to reduce inflation was because the price was around $6 and the idea is that by reducing inflation the price would increase. I said before the price is much more related to macro economic factors and BTC price than inflation, and the last 2 weeks just proved what I said: BTC and markets recovered, and without any change to ATOM inflation the price recovered from around $6 to over $9. I understand that for speculating about ATOM price it sounds like a good gamble to try reducing inflation in such an abrupt way, but validators are businesses with fixed and raising costs with more consumer chains so apologies but we are not here to gamble with our revenues. And if your plan doesnât work and validator revenues are halved without any price increase are you going to compensate and send us these revenues to cover the costs? No, of course you wouldnât care if many validators go out of business. As @Damien @Vadim_Everstake and many other said, we all agree reducing inflation is good, but this has to be done slowly and considering many factors affecting all stakeholders, not this wild west idea of suddenly deciding to halve inflation and validator revenues. While @jtremback and others have been supporting validators during the bear market with the soft opt-out and other ideas, @zaki_iqlusion has just been saying âsmall validatorsâ was never a viable business, introducing quietly and without previous discussion a 50% individual validator liquid staking cap limit in the LSM that we had to disable because it was setting the current centralisation of the Cosmos Hub in stone and restricting liquid staking delegations to the smaller validators, and now he is trying to abruptly halve validator revenues in a bear market and with increasing consumer chain costs since Noble will be joining soon as a consumer chain this month likely
In the L1 market, I consider the top competition to Ethereum to be Solana, Avalanche and Cosmos based on size of market cap and developer adoption. Solana and Avalanche have inflations of around 7% currently. Halving min/max inflation to 3.5-10% with equilibrium around 7% simply brings ATOM to what could be considered âindustry standardâ if you think of Solana and Avalanche that way. I personally think 7% is much better number for fiat pricing than 14% because global fiat aggregates increase about 4% per year (the official inflation target. US is 2-2.5% band (2.25% long term average), Europe is 1.80%. US is half the money supply, Europe, Japan and England is the other half and they print more than ECB). 14% inflation leads to instability of the fiat price of the ATOM token. 7% will go a long way to solve that problem.
While macro is indeed the main driver of crypto asset prices, there is also great dispersion of performance inside the crypto industry. The benchmark - Bitcoin is up 100% this year. Since Oct 19th when ATOM was 6.5, ATOM has increased about 50% (from 6.5 to 9.5). In that time frame, Solana has increased from 21 to 58 or 176%, Avalanche has gone from 9 to 18 or 100%. Cosmos is a clear laggard not only over the past month but over the past year. YTD Cosmos is negative while Avalanche is up 31% and Solana 450%.
The underperformance is entirely due to high inflation because the Cosmos Hub has had great chain specific drivers - introduction of interchain security, adding Neutron and Stride as consumer chains and now Noble. Cosmos Hub has had a ton of accomplishments this year, has a lot going for it, adoption is up.
There is only one clear reason for the underperformance of the token - the too high inflation relative to fiat monetary aggregates. Or as Effort Capital says âoverpaying for securityâ.
Sorry but Avalanche, Solana and others donât offfer ICS so validators donât have exponential costs in addition to the costs of the main chain as in the case of the Cosmos Hub now. Moreover, you only use isolated data that benefits your argument, show also the data of many chains with lower inflation and also significantly lower bonding rate that the Cosmos Hub.
Once more, validators have high fixed costs and rising costs due to consumer chains, stakers DO NOT have any costs even if 100 consumer chains are added, so of course you see the situation very differently. If this gambling doesnât work for you it is not such a big impact, but you would leave validators with the same fixed costs, raising consumer chain costs and half of their revenues, but of course you donât care about this.
Ok, what about Injective vastly outperforming BTC this year? It has similar inflation as ATOM now if you have the right sources of information, and it has been one of the best performant crypto asset in 2023, so clearly your argument absolutely fails here.
If your costs are $600 per month to run a validator and you lose all of it every month, it will take you about 10 years to lose as much as I have lost in ATOM over the past 2 years as an investor. So donât talk to me about gambling. My incentives to turn this situation around are far bigger than yours. There are many professional investors here sitting on far bigger losses so frankly your $7K losses a year arenât really comparable.
Second, you keep equating 14% inflation with 14% fiat yield as if you are getting 14% on a US treasury or a corporate bond. Both of these have their yields denominated in USD. ATOM yield is not denominated in USD.
Injective has inflation of 10% and bonding ratio of 57%. I am not sure what your point is. Its inflation is lower than ATOMâs. As far as its performance, it is a small token and its performance was built off small base. I am not sure anyone outside of Cosmos ecosystem has ever heard of Injective. I am not here to debate random shitcoins that were on the hot list this week. I donât think Injective is an adequate comparable to Solana, Avalanche, Cosmos Hub or Polkadot.
Go to stakingrewards.com website and find me a single L1 token in the Top 20 with 14% inflation and 67% bonding ratio that has price history of at least 2 years⌠You wonât find one. I donât think tokens that went live on mainnet 3 months ago are time tested enough to take any conclusions from.
The issue here is that a setting of max 20% inflation is not giving you 66.67% bonding ratio for years. If we donât change the inflation settings, we are doing the same thing over and over and expecting a different result.
Iâm a relatively small-time and medium-term investor since about 2020.
I doubt the narrative that reduction in APR will achieve price growth and maintain staking ratio. If the staking APR comes down, I have less incentive to stake. If it reduced to 5% I might stop staking and put in some limit sell orders waiting for the top of the current phase of fomo. I donât see why the price would rise, either, as other chains have done the same and not seen this happen.
Iâm not impressed with the liquid staking module approach. To me this looks like ponzi economics, with additional third-party risk thrown in (not to speak of technological vulnerabilitiesâŚ). Not attractive.
But the real issue, compared to, say, Osmo, is that there the reduction in staking rewards has been compensated nicely by a new economic model; thereâs incentive to stake and invest. This is what I donât see in Atom without adequate APRs. Shared security has led to none of the promised benefits. Iâve accrued 0.0155 NTRN & 0.2374 STRD through shared security, on what some people can live off over a year in Atom. I mean, this is a crap deal for investors as far as I can see.
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. I vote no to this proposal, but would consider more favourably a proposal that reduced APRs gradually over the longer-term and referred to non-ponzi means of improving the tokenomics.
are you just pointing out that inflation is an arbitrary rate of repayment for lending your capital to the protocol?
Just out of curiosity, how did Jae Kwon determine that 20% is the correct setting for InflationMax? To date I have not heard a single first principles argument from anybody for why that setting needs to be 20% and why that would achieve 2/3 staking ratio. If 20% was the correct setting, why was ATOM inflation set at 7% during the lockup period? Why not set it at 20% then? Actually if higher yield is the incentive, why arenât we INCREASING InflationMax to 5000%?
ATOM inflation was fixed until the team let the market work at the start of 2022. 2 years later the market has not been able to achieve 66.66% bonding ratio because the token keeps slowly rugging and big investors keep unboding and dumping the token and the investors who acquire it donât bond it.
The reason why 20% is too high is because that is the same number that LUNA and Do Kwon used to attract capital in Anchor. Look what happened to Anchor and LUNA. It sounds to me both Kwons think the rest of the world are pretty stupid and 20% yield will attract them like the stupid little fish that they are.
For any person that has done professional investing in any capacity (or as a matter of fact is licensed to be a professional investor), the first warning sign for fraud is when issuers start advertising unrealistic yields. Generally speaking double digit yields (10%+) are unrealistic. On Wall Street, if a central bank has to raise rates to 15% that is effectively considered a bankruptcy. There is a thin line between yield and fraud and once you get above 15% it is almost always fraud.
so your whole thing, the reason you are so sure that lower inflation is beneficial, is because other protocols have a lower inflation than ATOM? Thats it?
I think you should read my first principles arguments above. Inflation is not a random number. It is something that accounts for productivity improvements. Technology that is making productivity improvements ahead can have inflation. Technology that doesnât have productivity improvements canât. The problem with ATOM is that its inflation is too high for the amount of productivity improvements it is producing.
And yes. Other staking protocols of similar size, technological ability and maturity do provide a good study group/set from which to determine what âthe marketâ thinks that the correct settings should be. At least it is a reference point.
I am very open to hearing for what reason Cosmos Hub thinks it can charge double the inflation of
a Solana or an Avalanche.
who is being charged inflation? cosmos issues debt, repayment of that debt is the inflation.
cosmos is a validator slush fund and oligopoly, it is not as trustworthy as other untrustworthy protocols like solana or avalanche. your entire argument relies on an apples and oranges analogy.
Investors in the token are being charged inflation.
I donât see how comparing Cosmos Hub to Solana and Avalanche are apples and oranges comparison. These are all proof-of-stake consensus protocols that issue a inflationary token to compensate validators.
Comparing Bitcoin or any other proof-of-work token to Cosmos Hub would be an apples and oranges comparison.
