Recap of the 8 ideas from the Tokenomics RFP

Greetings community,

Over the last 9 months, a variety of research has been done across multiple organizations (i.e. Binary Builders, Blockworks Research, RMIT University) on potential tokenomic & decentralization tooling that can help improve the state of the Cosmos Hub. Those researches were commissioned by AADAO as part of the Tokenomics & Governance RFP. This post will help simplify & outline for the community a variety of recommendations that have been made from the research. This post also serves as a summary location that aggregates all of the collective research thus far completed.

The original goals of the research were as follows:

  • Create better long-term alignment with the top developers in the ecosystem
  • Bring value to the ATOM token by aligning it with the growth of not only the AEZ but the Interchain as a whole
  • Develop smarter budget allocation strategies to ensure the Hub’s influence grows despite future boom and bust cycles
  • Establish a governance framework that enables smaller working groups to responsibly and effectively execute on behalf of the wider community
  • Offer insight into the economics behind Replicated Security with suggestions on how to create a more value-accretive relationship with Consumer Chains

1. ATOM Inflation Recommendations Research

The original inflation schedule of the Cosmos Hub was designed in a pre-liquid staking token environment when there was more of a competition between DeFi activities vs security via staking. The Blockwork’s research outlined that the dynamic nature of inflation tied to bonded ratios can have a dramatic impact on long term supply issuance - this supply issuance entropy introduces additional unknowns to long term tokenholders & stakers. The research advocated for lowering the target minimum inflation rate to 3% using a 0.50% decrease in inflation year over year until the 3% target is hit, at which point there would be a long term slow transition to 1.5% using a 0.25% decrease in inflation year over year. Key to all of this is that inflation would no longer be a function of the bonded ratio. The research also recommends that the Cosmos Hub ossify its issuance schedule in a way that acknowledges the Cosmos Hub’s desire to solidify its positioning as sound Interchain Capital.

The primary pushback & feedback on this research is the decrease in incentives for stakers and validators, as well as concerns about a lack of offsetting revenue from the AEZ.

2. Vote Power Tax

Another piece of core research presented advocates for a validator vote power tax for nodes that are higher up the list so as to encourage decentralization. The concept here is that staking APR would automatically be lower for nodes higher up the list, with a large piece of the tax being tied to self-bonded ratios. This would lower APRs on centralized exchange nodes and reduce their overall value extraction on the Cosmos Hub validator set. Ultimately, with the Cosmos Hub positioned as a security provider, the research recommends a continued focus on ensuring that the Cosmos Hubs security remains properly decentralized and well set up for the future in terms of stake concentration. Pushback on this idea has primarily been around free market advocacy and sybil attacks that occur with large nodes potentially launching multiple nodes to potentially get around the vote power tax.

3. Dynamic Community Pool Tax

This research concept is focused on the idea of taking a “dollar cost averaging” esque approach with respect to how much ATOM goes into the community pool. In this model, the delta between the historical moving average value of ATOM from the current price of ATOM would inform the amount of ATOM being pushed into the community pool. If the current price of ATOM is greater than the moving average there would be less ATOM pushed into the community pool. If the current price of ATOM is less than the moving average there would be more ATOM pushed to the community pool.

4. Community Pool Reserve Management

This research advocates for the community pool to slowly convert a % of its ATOM to stablecoins overtime so as to build up a treasury during the bull market that can be used to fund initiatives and operations for key growth initiatives (i.e. ATOM Wars, ICS, key development organizations, etc.). Naturally, this dollar cost averaging could be slowed down in a bear market so as to not put undue pressure on the ATOM token. General pushback on this research is the community being uncomfortable with ATOM in the community pool interacting with the open market in a way that creates sell pressure.

5. ATOM Alignment Treasury

This research pushes for a mechanism whereby the Cosmos Hub has the ability to vote on consumer chain proposals as well as participate in controlling liquidity (controlled by the community pool) on other chains. The AAT module would consist of Interchain Account Management, Governance on Consumer Chains, and an ICA queue system. This system may be important as protocol owned liquidity deployments become larger, more complex, and frequent across the broader cosmos ecosystem; it will also become imperative for the Cosmos Hub to have a voice in governance as a result of airdrops to its community pool.

6. Developer Revenue Incentivization Program (DRIP)

This research acknowledges that the Cosmos Hub is limited in its ability to issue milestone based grants to key core development efforts. Because proposals tend to have 100% of funding up front, this creates both execution & pricing risk where the Cosmos Hub has no way to retrieve funds (outside of social pressure) from organizations or community pool initiatives that do not follow through on their commitments originally (successfully) voted upon. The pricing risk is tied to the fact that the Cosmos Hub may grossly overpay or underpay without having milestone based payments tied to a pricing oracle. By creating a more stable system for payments and interactions with the Cosmos Hub, this public good software would create more stability for both ATOM tokenholders and those that interact with Cosmos Hub funding. With the recent passing of CosmWasm, there may be open source candidates and maintainers that could help implement solutions to the above execution & price risk.

7. Quadratic Voting

An emerging concept in the world of governance is the use of quadratic voting as a means to nerf vote centralization (while not necessarily directly cutting into the staking APR of those delegated to validators with larger stakes). Similar to the “Vote Power Tax” it was recommended that self bond ratios could have a positive impact for the underlying node voting. Quadratic Voting is currently empowered by Axelar to help protect against vote centralization. General pushback on this type of system is that it gets rid of the 1 ATOM = 1 vote paradigm, which can add additional complexity to active governance stakeholders.

8. Liquid Staking Tax

The liquid staking tax research is the concept that as ATOM LST adoption expands, as opposed to having a direct minting cap in place the Cosmos Hub could instead begin to monetize LST minting beyond a certain threshold (similar to how certain money markets work where higher utilization = higher interest payments). This research appears to be more relevant for once LST adoption has a much stronger grip on overall ATOM circulation, but is still an interesting mental model / research regardless. General pushback on this concept is there is not enough demand / adoption of ATOM LSTs to justify monetization of the adoption.

Conclusion

The culmination of research efforts conducted by various organizations, including Binary Builders, Blockworks Research, and RMIT University, has yielded insights into potential tokenomic and decentralization strategy proposals that if passed by the community may enhance the Cosmos Hub. This post serves as a comprehensive summary, simplifying and outlining recommendations aimed at achieving long-term alignment with developers, bolstering the value of the ATOM token, optimizing budget allocation, and establishing effective governance frameworks. From proposals such as adjusting inflation rates and implementing validator vote power taxes to dynamic community pool management and the Developer Revenue Incentivization Program (DRIP), each recommendation addresses critical aspects of the Cosmos Hub ecosystem’s sustainability and growth. While some proposals may face pushback, particularly regarding their impact on incentives and market dynamics, the collective effort signifies a proactive approach towards fostering a robust and resilient Cosmos Hub poised for future success.

We look forward to hearing from you, the community, on which potential proposals you believe should be pursued.


Authored by @Carter_Lee_Woetzel
Strategy Committee
Atom Accelerator DAO (AADAO)

8 Likes

Have been curious what the hold-up has been on getting some of these on-chain or advancing beyond prototype stage. Tokenomics/monetary dynamics have always been a hot topic for Atom.

Personally, I like this approach. It’s much easier to budget for anything when there’s a known emissions schedule, and the correlation between emissions and bonded ratio seems to be pretty weak- according to the data, at least.

For this, I believe it’s a nice middle-ground and worth a try. The validator set is sticky at the top end, and reducing the effects on those who actually have skin in the game is a better approach than simply taxing all of them. This one could be contentious, but I’d like to see this pursued and conversations with validators would be needed.

This one’s probably more complicated than it needs to be. The Hub now has a sizeable war chest and (hopefully with various POL deals, things like the Neutron clawback, etc.) I think it might simply be time to lower the tax and work toward revenue from other sources. After all, rewards to stakers are already thinning out through various other initiatives, both in the past and in the future, potentially.

I don’t have much of an opinion on the rest right now, but would be nice to see some initiative taken on getting some of these ideas in to the public discourse and see what the consensus becomes.

4 Likes

Thank you for compiling all the tokenomics propositions into a single, comprehensive summary. With various entities, teams, and individuals coordinating research from different angles, having a complete overview is crucial to grasping the big picture.

Quick Note: We welcome these reforms with excitement, but there is one important caveat. It is evident that the Hub has learned from past proposals that attempted to pass “bundled” reforms. Therefore, we hope to see this complex reform process refined and rolled out over multiple quarters, with each part subjected to individual on-chain votes to allow the community to vote on each aspect independently. Gathering as much feedback as possible before proceeding is also essential.

A second important takeaway from recent tokenomics reform relates to the inflation modification fiasco. We hope lessons have been learned from this painful experience. The key takeaway is that tokenomics reforms have many interdependencies among the parameters we seek to adjust, necessitating a global perspective rather than addressing them piecemeal. Assuming we can’t bundle them in a single proposal, it is clear that ordering them correctly is of utmost importance.

Our Suggested Order for the Reforms:

1. Vote Power Tax + Cubic Delegation

We believe this should be the first piece presented to governance because it has the simplest design and the fewest dependencies. This presents an excellent opportunity to kickstart the reform process. Additionally, this feature is relatively neutral: it serves more as a decentralization safeguard than an actual modification of the token economy itself. We also believe this proposal should pass governance easily if the initial parameters are defined through extensive community debate to ensure a common consensus before proceeding. We also stress the importance of passing this proposal quickly to align with an on-chain deployment alongside ICS v2 or Partial Set Security (PSS) expected with the v17 upgrade. PSS will introduce validator-specific rewards, potentially causing new centralizing forces, making the Vote Power Tax a timely preliminary safeguard.

2. ATOM Alignment Treasuries (AATs)

Introducing new consumer chains will significantly amplify partnership opportunities within the Atom Economic Zone (AEZ). Each new partner entering the AEZ creates exponentially growing cooperation opportunities. Therefore, AATs are essential to regulate and formalize these agreements in a scalable way.

3. Liquid Staking Tax

Following the addition of a validator centralization protection mechanism and programmable contracts to regulate economic cooperation, the next major task should be activating safeguards for liquid staking before we face a surge in demand. This reform will take time to fine-tune, and waiting to see the problem before acting would be risky. Currently, there is a fixed maximum limit on liquid-staked tokens, but research from @effortcapital and Blockworks shows we can take a more dynamic approach. We support this idea and believe it offers a durable way to control liquid staking.

4. Inflation Reforms

After the debacle of previous attempts, we hope a comprehensive debate will be reactivated on this complex topic. We also encourage the community to wait a few quarters after the introduction of PSS and the rise of Liquid Staking Tokens (LST) usage in the Cosmos before tackling inflation. We proposed long ago that the amount of liquid-staked tokens should be factored into the inflation formula, which could complement the Liquid Staking Tax. This is why we deem it reasonable to start this inflation reform right after. Moreover, validator economics will be transformed after PSS, and moving inflation without a comprehensive understanding of validator reward economics could disturb their ability to operate profitably, with potentially devastating effects on decentralization.

5. Community Pool Reform (Dynamic Tax + Reserve Management)

These two elements are intrinsically related and should be grouped in a single reform, even though we still encourage passing two individual on-chain votes to avoid controversies. This part of the Hub’s economy is the most sensitive to tackle, as balancing revenue and taxes is complex. Therefore, we believe it is necessary to wait until we have a fully functioning economy of PSS and liquid staking. We also think that some of the previously introduced taxes (vote power and liquid staking) could be redirected to the community pool. Being able to size these flows before a comprehensive reform makes sense.

6. Developer Revenue Incentivization Program (DRIP)

With all safeguards and dynamic taxes in place, the final piece of this puzzle is one of the most difficult to design: a new model to fund the Hub’s dedicated development for the decades to come. To quote the author @Noam: “development will likely only be completed somewhere in 2024.” This is why we think this is the least pressing issue on the list. It is still very important, but we believe the other reforms should be addressed first.


Conclusions:

In summary, we believe it is important to prioritize the tasks we face. Some need urgent attention as they are essential to the release along with the PSS introduction. This should be our immediate call to action to finalize specifications and vote on the Vote Power Tax as soon as possible. After the V17 release, the most needed feature is to get the AATs up and running to structure economic coordination effectively. In parallel, the community should quickly iterate on the vote power tax discussion and work to fine-tune the liquid staking tax parameters and specifications following the Cosmos Hub Improvement Proposal (CHIP) process. Only when these core new components of the economy are fully designed do we believe a real inflation debate can begin. Lastly, once safeguards, taxes, and inflation are sorted out, we should focus on reforming how we finance our community pool and support our builders and other public-good contributors in the AEZ.


Thank you for your attention! We look forward to gathering community feedback on our proposed order of reforms. We also welcome other ordering proposition to confront against ours.
Govmos
pro-delegators-sign

6 Likes