Strategic guidelines for allocating the Hub's NTRN

ATOM Economic Zone Neutron
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Introduction

Proposal 835 approved the transfer of ~42,727,950 NTRN tokens from Neutron DAO to the Cosmos Hub Community Pool, in respect of the unclaimed NTRN airdrop to ATOM stakers and voters.

These NTRN tokens, valued at ~$50m at current prices, represent the most significant return for the Hub’s (an initial funding of 50,000 ATOM ($500,000)) in it’s entire history, and a significant voice for the Cosmos Hub in the future direction of the first ICS consumer chain.

It was established in prop 835 that use of these tokens should be governed by two basic principles.

  1. Do no harm : The Cosmos Hub, its governance and community pledge to only use or deploy the NTRN tokens in ways that do not harm the Neutron network or DAO.
  2. Cooperation : The Cosmos Hub, its governance and community pledge to use or deploy the NTRN tokens in ways that benefit both the Cosmos Hub and the Neutron network and DAO.

Under these two guiding principles, the Cosmos Hub’s governing community pledge to only use or deploy the NTRN tokens in ways that do not harm Neutron, and benefit both the Cosmos Hub and Neutron. The incentive alignment between Hub and Consumer Chain means the success of each is arguably a function of that of the other. By doing no harm to Neutron, the Hub helps itself, and by cooperating, both chains benefit.

Finding Balance

Guidelines are valuable because they help us make better decisions faster. The best way to reach good guidelines for how the NTRN should be used to further the partnership between Cosmos Hub and Neutron is to consider their respective objectives and align guidelines with them.

What are Neutron’s objectives?

  • Maximize ecosystem growth, liquidity and activity on Neutron,
  • Maximize the long term alignment with the Cosmos Hub,

What are/should be the Hub’s objective?

  • Winning the shared security market : being the most appealing security provider so that it attracts the most and best protocols to launch their projects using the Hub’s services.
  • Accrue value from shared security : command larger airdrops and/or revenue share agreements to the Cosmos Hub moving forward.

Based on this, the following use cases can be considered mutually beneficial:

  • Leaving ample runway to incentivize and align Neutron’s ICS operators for years to come.
  • Fund grants and/or incentivize use cases for ATOM on Neutron
  • Deploy POL on Neutron for any asset.
  • Funding grants for :
    • Making ATOM the default gas token on Neutron
    • High Quality Interchain Security Research
    • ATOM Economic Zone Events, Initiatives and Marketing
    • Governance tooling to improve efficiency and expand capabilities
    • Building use cases for ATOM liquidity on Neutron

To uphold the conditions of ‘Cooperation’ and ‘No Harm’, the Hub should attempt to seek the Neutron DAO’s approval before deploying the NTRN in other ways, especially when controversial. Not doing so would risks weakening the alignment between the two communities and deterring future consumer chains from aligning with the Hub as deeply as Neutron has.

Rationale

Interchain Security Resources

The Cosmos Hub has pioneered Interchain Security, by bringing the first restaking product (Replicated Security) to market in Cosmos. After almost a year of Replicated Security being live, Eigenlayer is proving the value and demand of great shared security offerings - so much so that pre-launch, Eigenlayer has ~$10b of ETH TVL staked to secure future consumer chains.

Given it’s head start and expertise, the Cosmos Hub is in a great position to capitalize on the growth of this sector, however it must stay focused and reserve resources to ensure its own success.

Security Budget

As the first Interchain Security partner of the Cosmos Hub, Neutron has a shared goal of building a long, mutually beneficial relationship with strong community alignment and ample runway. In this spirit, Neutron recently proposed to allocate 10,000 NTRN (~$11k) over 12 months to all Neutron operating Cosmos Hub validator to align incentives and subsidize operation. The total amount being allocated to validators is 1.8m NTRN (~$2m).

If the Cosmos Hub’s security offerings are to be sustainable and well received by all community members, it’s imperative that it leaves ample room to support it and continue bolstering alignment between Neutron and the Cosmos Hub. At the current validator set size and prices, in order to preserve runway for the next ~20 years, Cosmos Hub would need to reserve about 1.8m NTRN x 20 years = 36m NTRN.

Protocol Owned Liquidity

When done properly, Protocol Owned Liquidity can be used to reinforce mutually beneficial goals between platforms. To help accomplish this goal, Neutron seeded Timewave with .5% of the NTRN supply in order to help bring covenants (mutually beneficial token swaps) to market in a secure and efficient manner, with a large reduction in the heavy lifting that usually comes with DAO operations, and pioneered interchain diplomacy with Manta and Kujira.

Nevertheless, it’s worth noting that proposals should be treated with caution: since smart contract vaults are less sophisticated rebalancers than active market makers and arbitrageurs, without farming rewards, liquidity providers are generally expected to lose money on volatile pairs. Stablecoin and Staked Asset are exceptions to this rule as they are sufficiently correlated for automated market makers to fare well.

Since providing POL for volatile pairs is generally unprofitable, the main reason for an entity such as the Cosmos Hub or Neutron DAO to enter such a position is strategic: it can sometimes be sensible to accept monetary losses in exchange for bolstering the platform’s ecosystem growth.

This can be illustrated by the Neutron DAO’s POL proposals with Nolus, Apollo and other projects: while the Neutron DAO does not expect to generate profits from these positions, they helped secure integrations and bolster activity on the network.

Similarly, the Cosmos Hub should only consider entering volatile liquidity positions if they directly contribute to the Hub’s strategic objectives: bringing new consumer chains, reinforcing the incentive for projects to become consumer chains, or strengthening existing consumer chain’s economies.

Furthermore, the Hub should position itself as a responsible steward for consumer chain tokens. The more reliable a partner the Hub is, the lower the risk allocating large portion of a token’s supply to its treasury becomes. Long-term, this empowers the Hub to command higher allocations when bringing projects onto its security offering. On the flipside, handling consumer chain tokens recklessly could create a deterrence for future consumer chains to align with the Cosmos Hub in the same way and magnitude that Neutron did.

Protocol Owned Liquidity Guidelines

A thoughtful approach to NTRN Protocol Owned Liquidity spends is to restrict NTRN POL to only be deployed on Neutron (strategic value), and to otherwise include the Neutron DAO or its representatives in the Hub’s decision making to ensure alignment and meet the conditions of ‘No Harm’ and ‘Cooperation’. It is reasonable to assume that future consumer chains would also appreciate these guidelines.

Mutually Beneficial Grant Programs

Funding grants which meet shared objectives between the Cosmos Hub and Neutron are a great, positive sum way to allocated Community Pool funds. For example, the seeding of Timewave which was a collaborative effort between Neutron and AADAO will allow for future POL spends to be done securely across the Interchain. Similarly the Atom Accelerator DAO, and the jointly funded AEZ Accelerator, have funded and accelerated a number of projects to launch use cases for ATOM on Neutron.

Grants Programs

We think that doubling down on this direction can prove valuable to both the Cosmos Hub and Neutron. Some ideas for mutually beneficial funding avenues using NTRN that come to mind are funding :

  • Making ATOM the default interchain capital and gas token on Neutron.
  • Launching additional use cases for ATOM on Neutron.
  • High Quality Interchain Security Research
  • ATOM Economic Zone Events, Initiatives and Marketing
  • Governance tooling to improve efficiency, reliability and capabilities of Cosmos Hub governance

This list is not exhaustive, but does show that there are a lot of directions to explore and double down on.

Conclusion

As a contributor to Neutron, I am incredibly proud of having contributed to launch the first chain fully secured by the Cosmos Hub, and I look forward to being a key partner in making the Cosmos Hub win shared security in the Interchain.

Continuing to strengthen the alignment between the Cosmos Hub and its consumer chains is a critical component of the Hub’s success as a security provider. I believe the above guidelines help ensure the allocation of NTRN strategically strengthen the Cosmos Hub’s relationship with Neutron and the Hub’s position as the premier Interchain Security Provider.

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Great writeup thanks Spaydh. Excited to see these funds start to be deployed strategically, especially to expand liquidity, use cases, and activity on Neutron.

Curious what kinds of thing you would prioritize in terms of ICS research and governance tooling?

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Here are a few thoughts we have regarding the ideas shared above:

We are fully aligned with that statement. The Hub has pioneered shared security with a significant head-start. Now that competition is about to hit the market, we already have pioneered innovation beyond economic security sharing, as we now share a cooperative framework within ICS (InterChain Security). The forthcoming arrival of Partial Set Security (PSS) will be the more flexible option without this additional flavor.

This isn’t that simple as to assume profit and loss. One should see this as a mutual financial agreement doubled by a strong tool in the decentralization theme. We can also imagine that Neutron could enable special voting options for the vaulted tokens, allowing governance to be attached to them. This is the kind of services that largely compensate the impermanent loss risk. Most people largely underestimate the importance that decentralization & governance has.

This sounds like a no-brainer and should be the de-facto choice for all consumer chains as well.

This is something we have discussed many times with @Youssef and the AADAO. There should be more of these joint programs in the future. We expect them to grow even further as new partners eventually join the AEZ in the future. We often take this example: every new partner in the group grows the number of potential agreements by 2^n where (n) is the number of total participants.

To conclude, this post further demonstrate the strong alignment there is between the Hub and Neutron. It has existed for quite some time already but it seems like this is only getting stronger, as evidence to this new post by @Spaydh. Creating cooperation around the Hub is in stark constrast to the rest of the crypto industry which is mostly trying to “sell a token” and “grow the pie” which ultimately ends up fragmenting the ecosystems further and further. We are among those who believe that cooperation is the key to advance further in the public blockchain world.

Thanks for reading,
Govmos
pro-delegators-sign

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Any updates about the above @Spaydh? You claimed on the 31st January 2024 that the transactions and smart contracts were being prepared to allocate the NTRN vesting to Cosmos Hub validators, and this was approved by both Cosmos Hub (proposal 867) and Neutron governance. It has been almost 2 months since your last update regarding the allocation of NTRN vesting which has to be implemented asap since it was approved by on-chain governance at both the Cosmos Hub and Neutron

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In my opinion…

Governance :

  • Timewave’s covenants
  • Voting vault technology
  • Work that clearly defines the Cosmos Hub’s primary objective. In my opinion this should be winning shared security, and everything downstream should reenforce that.
  • Work that clearly defines how to mobilize a decentralized community around a primary objective.
  • Work that clearly defines what policies need to be in place to achieve that objective.

ICS Research :

  • Sustainable economics and standardizing ICS “SPAs”
  • How to do POL in a way that reenforces the Cosmos Hub’s key objectives (instead of rushing into ATOM Wars)
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All of these suggestions sound good in principle but now that NTRN is in the Cosmos Hub treasury it needs to manage the pot of NTRN intelligently.

I don’t see any reason why the NTRN in the Cosmos Hub POL should be deployed to fund grants for projects running on Neutron. This is essentially the Cosmos Hub treasury turning into a Neutron system venture capitalist which I don’t think is a good idea given that Neutron is going head to head against Solana (and Polkadot to a far lesser extent) in the WASM execution engine market. I wouldn’t fund anything against Solana. Solana is a formidable competitor, it’s not an Ethereum, which is like beating a dead horse (from technology perspective). If projects can’t raise money in the market, I don’t see why Cosmos Hub should be fronting money.

The only 2 situations in which I see the Hub Treasury investing in a Neutron smart project is IF:

  1. Project raises money on its own in the market from independent (from the Hub) VCs who are fronting their own money and then the Hub Treasury participates in a syndicated deal with them.

  2. A project is deciding between Solana and Neutron, HAS NO COMPETITORS on Solana, and needs a financial incentive to land on Neutron

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Hi, yes indeed. We’ve faced a number of issues with 4 different multisig UI implementation for cosmos sdk multisigs and signer coordination limitations which delayed the process, but have since then worked with the UI maintainers to get issues addressed, which has allowed signers to proceed. The allocations should be done shortly. We’re also working on monitoring/automation solutions to update the allocations dynamically based on validators joining/leaving the active set to make the operations smoother going forward.

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I don’t think Neutron is competing with Solana, and I don’t think ecosystem adoption is primarily driven by development language. Working with entrepreneurs and developers has consistently shown that the primary considerations of teams choosing the right stack to build on are primarily driven by (by order of importance):

  1. Economics: What is the total market/opportunity size, how easy will it be to attract capital?
  2. Narrative: Will launching on one stack/ecosystem give the project an advantage in G2M/fundraising/marketing of the project?
  3. Network: Does the team have relationships with key partners in the ecosystem that could meaningfully support them?
  4. Technology: does the product/vision require a specific technical stack to be realized?

In reality, competent teams will simply learn to use a new stack if it enables them to deliver their vision or give themselves better chances of success. We’ve seen this with Duality, dYdX (coming into the eco) Vertex and other Terra protocol leaving for the EVM world, and countless other projects over the years.

Based on this, I think it is on the contrary extremely justified for the Hub to allocate resources to boosting the economic appeal of Neutron’s ecosystem and the AEZ as it is the most efficient way to improve the onboarding rate of the ecosystem and therefore the Hub’s upside.

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What you think about Neutron is not what the rest of the world thinks about Neutron. In this case, what matters is how smart contract developers think about Neutron. For developers, they look at Neutron as a place to deploy WASM smart contracts. Well… Neutron isn’t the only blockchain to offer WASM smart contract execution. Solana does, Polkadot does, etc. After that a dev team would look at how expensive are transactions and what the throughput is, etc. On that account, Solana is both more decentralized (800 validators vs 180) and faster. Or at minimum the discrepancies aren’t as large. After that, devs would look at how big the market place is. How many Neutron wallets are installed (Keplr has 1 million downloads) vs how many Solana wallets are installed (Phantom is at 3 million I think). By many measures, Solana is a bigger system than Neutron and has network effects and that makes devs sign up there. Obviously, Neutron has an advantage in that it is in an IBC chain but in the long run Solana will be implementing IBC connectivity so that won’t be a huge advantage either.

You may not be competing with Solana but Solana is competing with you.

Comparison to DYDX are not applicable here as DYDX built its own chain and Neutron doesn’t offer customized chain solutions. Neutron offers a WASM smart contract engine. So Neutron competes directly against Solana and Polkadot’s WASM engines and indirectly against Ethereum and its EVM engine and Jae Kwon’s Gnoland and its Gno smart contract engine.

Of all these, WASM uses Rust which is the most difficult of all smart contract programming languages. The other languages are Solidity which is the most popular as it is C based, Move (Aptos, Sui), Go (Gnoland), Haskell (Cardano). I guess Haskell is more difficult than Rust but still… WASM has a huge barrier to entry for developers and those who do enter face a choice between Neutron and Solana and many have been choosing Solana as it is now the older engine. People are choosing Solana despite its freezes.

The last thing I want to see here is Treasury funding Solana knockoffs which will have 99% failure rate. As I mention before, I think devs need to find funding from outside sources first - somebody independent evaluate if their stuff is worth taking a flyer on - and then Treasury can then go along and match the outside investment to some degree.

I would deploy Treasury funds for a cross over - some Solana project that chooses to move to Neutron (the way DYDX moved over to Cosmos SDK from Ethereum Starknet). That would be a better way to scale Neutron. Think buyouts and hostile takeovers. I would pay an established app to move to Neutron over funding ground zero startups with unproven market, unproven product, etc.

I would think Neutron DAO should be doing angel, Series A &B investing and Cosmos Hub Treasury should be doing buyouts, M&A & Series C+ VC investing.

Ultimately, we are disagreeing on the approach to grow the ecosystem. You have some cash and you want to fund a bunch of devs with good sounding but unproven products. On the other hand, I want these guys to go talk to a bunch of investors outside of Cosmos and convince them that Cosmos is a good system to build apps on. This has an important effect you are not thinking about - this is marketing Cosmos to a new audience. Pitching your project is marketing. Beating the pavement increases knowledge about Cosmos which ultimately will lead to higher adoption. When you want to grow an ecosystem, you need to start to have “business development”. What you focus on here is “product development”. Which is fine, but the people need to know about the product to use it.

Generally speaking, I think Cosmos Hub Treasury should be dealing with “business development” as opposed to “product development”. You have the Neutron DAO for product development

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Solana, more decentralized ? hub is not juste 180 … but more than 600 but 180 are rewarded

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That’s how people perceive it. Whether its right or wrong doesn’t matter. Perception is reality. As far as I am concerned 180 is decentralized enough. So long as you have a deep bench of validators ready to step in, that’s all that matters. The chances of Cosmos Hub going out are far less than Solana. In fact, Cosmos Hub has never shut down whereas Solana shuts down a few times a year. I am not a Solana advocate, I am just saying how other people think about this (judging by their behavior).