Proposal: Improve the Nakamoto Coefficient through a 5% Bonus and Progressive Self-Stake
1. Context
The Nakamoto coefficient is a key indicator of the Hub’s decentralization. Unfortunately, it has been declining, which increases the risks for consensus security and reduces the network’s resilience against capture by a small number of validators.
Today, some validators, notably centralized exchanges and a few large incumbents, concentrate a disproportionate share of the voting power, mechanically reducing the Nakamoto coefficient.
The community agrees on the need to rebalance this distribution, while still preserving:
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the attractiveness of staking for delegators,
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the economic sustainability of validators,
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the simplicity of the governance and incentive model.
Capture d’écran 2025-09-21 1436542050×1056 283 KB
2. Problem Statement
Without safeguards, large validators will continue to accumulate ever more stake. Delegators, acting rationally, often favor the most visible or best-known validators, or those offering slightly higher yields, without considering decentralization.
Strict voting power caps are not a solution: they can be circumvented through duplicate validators (for example: Exchange1, Exchange2, etc.), which artificially inflate the Nakamoto coefficient without improving real security.
3. Proposal
I propose to combine two complementary mechanisms:
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Redistribution via a Nakamoto Bonus, inspired by the AtomOne model, set here at 5% of inflation.
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A proportional self-stake requirement, based on the 1/250 rule (≈ 0.4%), but introduced progressively over 24 months.
Together, these two mechanisms support smaller validators, raise the cost of Sybil behavior, and improve the Nakamoto coefficient in a balanced and sustainable way.
4. Mechanism 1 – Nakamoto Bonus (5%)
Today, Hub inflation (around 7–10% annually) is distributed entirely in proportion to voting power. A validator with 10% VP receives 10% of rewards, fueling a snowball effect in favor of the largest.
The Nakamoto Bonus changes this dynamic: a fixed fraction of inflation, here 5%, is redirected to a Nakamoto Pool. This pool is then distributed equally among all active and compliant validators.
Example with 100 units of annual rewards:
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95 units are distributed proportionally by VP.
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5 units fund the pool, shared equally among validators (≈ 0.0278 unit each if 180 validators).
Expected effects:
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Small validators gain a stable additional income.
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Large validators see their relative rewards slightly reduced.
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Delegators perceive more balanced yields, creating an incentive to stake outside the top 10.
5. Mechanism 2 – Proportional Self-Stake Requirement (1/250) and Progressive
Each validator must maintain a self-delegation equivalent to 1/250 of their total stake (≈ 0.4%).
Example: a validator with 1 million ATOM delegated must self-bond 4,000 ATOM.
Without this rule, an actor holding 10 million ATOM could split them across 10 validators with negligible self-stake, artificially inflating the Nakamoto coefficient. With the rule, the same actor would need to put 40,000 ATOM at slashing risk, making the maneuver far more costly and risky.
Progressive implementation (24 months)
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Phase 1 (0–12 months): non-compliant validators do not receive the Nakamoto Bonus but face no further sanction.
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Phase 2 (12–24 months): non-compliant validators are subject to progressive penalties on their rewards (e.g. 0.1% → 0.3%/month).
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Phase 3 (after 24 months): compliance becomes mandatory, with strict enforcement (slashing, exclusion, jail for non-compliance).
Example Cosmostation (July 2025):
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Stake: ~12.51 M ATOM
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Current self-bond: ~33,140 ATOM (≈ 0.26%)
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Requirement under the rule: ~50,040 ATOM (0.4%)
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Gap to cover: ~16,900 ATOM
This example shows that even a strong validator must adjust, while the constraint remains manageable.
6. Quantitative Impact: Comparative Study of Three Validators
To evaluate the mechanism’s effect concretely, let us compare:
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Cosmostation: large validator, ~5% VP
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Keplr : small/medium validator, ~1% VP
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Cosmosrescue : very small validator, ~0.2% VP (below the set average of 0.555%)
Projected revenues (base: 100 reward units)
| Validator | VP (s) | Old regime (100·s) | New regime (95·s + 5/V) | Absolute change | Relative change |
|---|---|---|---|---|---|
| Cosmostation | 5.0 % | 5.0000 | 4.7778 | −0.2222 | −4.44 % |
| Keplr | 1.0 % | 1.0000 | 0.9778 | −0.0222 | −2.22 % |
| Cosmosrescue | 0.2 % | 0.2000 | 0.2178 | +0.0178 | +8.89 % |
Translation into APR (if network APR = 14%)
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Cosmostation : 13.38% (−4.4%)
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Keplr : 13.69% (−2.2%)
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Cosmosrescue : 15.24% (+8.9%)
Interpretation
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Validators above the average lose slightly (Cosmostation more, Keplr little).
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Very small validators (cosmosrescue) gain net thanks to the relative weight of the fixed bonus.
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At equal compliance, APR therefore becomes Cosmosrescue > Keplr > Cosmostation, which incentivizes delegators to diversify.
Temporal evolution (N0 → N+1 → N+2)
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N0 (0–12 months): non-compliant Cosmostation loses the bonus (4.75 vs 4.78), while Keplr and Cosmosrescue already receive it.
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N+1 (12–24 months): non-compliant validators additionally face penalties. Compliant validators keep bonus + proportional share.
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N+2 (after 24 months): all must be compliant. Structural values are restored, with Cosmosrescue outperforming, Keplr slightly above Cosmostation.
7. Combined Effects
The Nakamoto Bonus sustains small validators, improving their viability and limiting the snowball effect of large ones.
The progressive self-stake requirement prevents Sybil farming and ensures every validator has capital at risk.
Together, these mechanisms increase the Nakamoto coefficient while keeping the model simple, gradual, and permissionless.
8. Risks and Limitations
The self-stake level (0.4%) must be calibrated: too low and splitting remains possible; too high and some small validators may struggle.
Large validators may feel pressure on their yields, though the loss remains moderate.
Opportunistic behaviors (splitting “just below the threshold”) must be monitored.
Technical implementation will require modifications to the staking module and audits.
9. Technical Implementation
The implementation of such a mechanism cannot be limited to simple parameter adjustments via governance. Certain aspects can indeed be handled by parameter variables, such as the fraction of inflation allocated to the Nakamoto Bonus (5%), the self-stake ratio (1/250), or the 24-month transition period with penalty thresholds. These elements should be defined clearly in the initial proposal and remain adjustable by governance if needed in the future.
Other aspects, however, require specific code developments. The staking and distribution modules of the Cosmos SDK must be modified to integrate a new logic of reward distribution. Concretely, a Nakamoto Pool must be created to automatically take 5% of inflation and redistribute it equally among eligible validators. Eligibility must be conditioned on meeting several criteria: sufficient uptime, no slashing, and above all, compliance with the progressive self-stake schedule.
It is also necessary to develop a time-tracking mechanism to handle the three planned phases: an initial incentive phase where only compliant validators receive the bonus, a second phase with progressive penalties for non-compliance, and a final phase where the rule becomes mandatory and strictly enforced. These checks must be applied automatically and visible to the community.
Finally, for transparency, clear metrics should be exposed in the API and relayed by explorers: for example, each validator’s current self-stake level, compliance status, and eligibility for the Nakamoto Bonus. This will enable both community monitoring and positive social pressure.
In terms of steps, the process should include a detailed specification phase, followed by development and integration into the Cosmos SDK, then a security audit and testing on a testnet. Only after this validation can a governance proposal activate the functionality on mainnet with defined parameters.
In summary, part of the implementation relies on parameter choices via governance, but the logic of equal redistribution and progressive self-stake does indeed require dedicated development within the Hub’s modules.
10. Conclusion
This proposal combines two complementary levers:
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a 5% Nakamoto Bonus, redistributed equally among all compliant validators,
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a proportional self-stake requirement, introduced progressively over 24 months.
The comparative study shows that:
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large validators lose slightly,
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medium validators remain viable,
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very small validators gain,
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and the overall set becomes more balanced, mechanically improving the Nakamoto coefficient.
By strengthening validator diversity without excluding anyone, we improve the security, credibility, and resilience of Cosmos Hub.
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Governance votes
The following items summarize the voting options and what it means for this proposal:
YES - A YES vote signals that you support asking Cosmos Labs or Hypha to scope, develop, and implement the features requested for the Cosmos Hub. This proposal does not activate any module directly but expresses the community’s intent to prioritize this work.
NO - A NO vote signals that you do not support requesting Cosmos Labs nor Hypha to work on this request at this time.
NO WITH VETO - A ‘NoWithVeto’ vote indicates a proposal either (1) is deemed to be spam, i.e., irrelevant to Cosmos Hub, (2) disproportionately infringes on minority interests, or (3) violates or encourages violation of the rules of engagement as currently set out by Cosmos Hub governance. If the number of ‘NoWithVeto’ votes is greater than a third of total votes, the proposal is rejected and the deposits are burned.
ABSTAIN - You wish to contribute to quorum but you formally decline to vote either for or against the proposal.