Tokenomics idea n°1 [DRAFT]: ATOM Lock-Based Staking + Narrowed Inflation Band (2%–6%) + LSM improvement
1. Summary
This proposal introduces a lock-based staking system for ATOM, combined with a reduction of the inflation range from 7–10% down to 2–6%.
The goal is to strengthen network security, stabilize monetary policy, and better align incentives between stakers and the Liquid Staking Module (LSM) over a longer time horizon.
A key point is that ATOM inflation continues to penalize non-stakers: choosing not to stake results in a natural dilution of their relative share of the total supply.
However, thanks to the redistribution mechanism based on lock duration, stakers capture a larger portion of the inflation.
This means that even if the ATOM unit price decreases, as long as the overall market cap remains stable, stakers are protected:
- their relative share of the supply increases,
- their rewards offset dilution,
- and their net economic position remains stable or improves.
This model preserves the existing bounded ratio mechanism (target at 66%) and ensures that inflation stays dynamic, but within a narrower and more sustainable band.
2. Current Situation
Today, Cosmos Hub automatically adjusts its inflation between 7% and 10%, depending on the proportion of staked tokens.
When the bonded ratio exceeds 66%, inflation gradually decreases toward 7%.
If it falls below 66%, inflation increases up to 10% to encourage staking.
Currently:
- Bonded tokens: approximately 57%
- Inflation: around 10%
- Average APR observed: ≈16%
The network is therefore below the equilibrium point, maintaining good security but at a relatively high issuance rate.
While effective, this model puts long-term pressure on token value due to continuous inflation.
3. New Inflation Framework
The proposal keeps the same dynamic mechanism with a bonded ratio target of 66%, but narrows the inflation range from 7–10% down to 2–6%.
This means:
- If the staking ratio is below 66%, inflation increases up to 6%.
- If the ratio is above 66%, it gradually decreases toward 2%.
This narrower band enhances monetary stability while keeping the system’s self-balancing nature intact.
At the same time, staking rewards would no longer depend solely on inflation but would vary according to each staker’s commitment duration, through the new lock-based reward mechanism described below.
4. Lock-Based Reward System
The idea is simple: the longer you lock your ATOM, the higher your rewards.
The total network inflation remains fixed (for example, 4% at equilibrium), but its distribution depends on how long each participant commits to staking.
A delegator who keeps the minimum 21-day unbonding period receives the base rate.
Locking for 3 months yields roughly 25% more rewards.
Locking for 6 months gives around 50% more, and locking for 12 months can double the base yield.
In practice, with an average 4% inflation and 67% bonded ratio, a short-term staker would earn about 6% APR, while someone locking for a full year could earn around 12%.
If only a few participants choose long-term locks, their yields rise significantly.
If everyone locks long-term, bonuses disappear naturally, and APR converges to equilibrium at inflation / bonded ratio (≈6% in this example).
The system therefore self-balances:
- higher commitment boosts security, but total token issuance never increases.
- This design creates strong economic incentives for long-term alignment while preserving predictable inflation.
The chart below compares staking APRs under the current 10% inflation rate and a hypothetical 4% inflation scenario to illustrate how rewards would be redistributed rather than reduced under the proposed lock-based model.
5. Liquid Staking Module (LSM) Improvements
To complement this system, the Liquid Staking Module should evolve to reflect lock-based logic and discourage short-term liquidity exploitation.
Key improvements include:
- Minting fee for LST creation – a small cost applied when tokenizing staked ATOM, compensating for instant liquidity.
- Burn / redemption bonus – a small reward for burning LSTs and returning to native staking.
- Lock-based LSM tiers – each Liquid Staked Token (LST) would represent a specific commitment level (e.g., stATOM-3m, stATOM-6m, stATOM-12m), allowing DeFi protocols to choose their preferred liquidity profile.
- Reward distribution in LST or staked ATOM only, never in liquid ATOM, reducing sell pressure and strengthening long-term token dynamics.
This creates a clear liquidity hierarchy:
short-term LSTs remain flexible but less rewarding, while long-term ones capture more value and better reflect staking commitment.
Such a model aligns the LSM with the Hub’s monetary policy rather than diluting it.
6. Expected Impacts
This reform combines monetary sustainability, enhanced network security, and better economic alignment:
- Reduced and predictable inflation, between 2% and 6%.
- Higher network security, as more ATOM are locked for longer periods.
- More stable APR, driven by commitment rather than inflation swings.
- Lower sell pressure, with rewards distributed as staked or liquid-staked assets.
- Bullish long-term dynamics, through controlled issuance and perceived scarcity.
- Deeper DeFi integration, with differentiated LSTs offering distinct yield and liquidity profiles.
7. In addition of that, we discussed about more topics which would be related
Validator Set Reduction : A Balanced Approach
While the idea of reducing the validator set aims to improve network performance and efficiency, a drastic reduction to 50 active validators would, in my view, harm the Cosmos Hub’s decentralization and concentrate governance power among the largest validators.
Validators ranked between 51 and 180, despite holding smaller stakes, play a vital role in ensuring:
- Network diversity and regional distribution
- Security resilience through decentralization
- Adherence to the Cosmos ethos of inclusivity and open participation
Rather than a severe cut, a moderate reduction to 80–120 validators would provide a more balanced outcome, achieving performance improvements while maintaining a healthy degree of decentralization.
By lowering the inflation range to 2–6%, the total amount of newly issued tokens and staking rewards naturally decreases. However, reducing the validator set by roughly 50% counterbalances this effect. With the same overall delegation base distributed across fewer validators, combined with the minimum 5% commission, the remaining validators capture a larger share of staking rewards.
As a result, validator revenues remain stable or even increase despite the lower inflation rate. In other words, while reduced inflation decreases token issuance, a smaller validator set maintains the economic equilibrium for validators, ensuring that the network’s security and economic incentives remain intact.
Furthermore, I propose introducing:
A “Nakamoto Bonus” mechanism, designed to incentivize stake distribution toward smaller validators and enhance the overall Nakamoto coefficient
These measures would strengthen both validator efficiency and fairness in stake allocation, ensuring that governance power remains widely distributed, a cornerstone of the Hub’s credibility ans resilience.
Preservation of the Community Pool Commission
The Community Pool (CP) is the financial backbone of the Hub’s autonomy and collective governance. Proposals suggesting to remove the Community Pool takerate (commission) would critically weaken this independence.
The CP ensures that the Cosmos Hub can:
- Fund community initiatives without reliance on external entities
- Sustain independent development aligned with community priorities
- Preserve sovereignty over its own economic and governance trajectory
Eliminating its funding source would mean that all future community-driven initiatives become dependent on private or external actors, such as Cosmos Labs (CL), effectively transforming the Hub from a sovereign ecosystem into a dependent one.
Maintaining (and potentially reforming, rather than removing) the CP commission is essential to uphold the principle of governance independence that defines the Cosmos Hub’s role as a decentralized, self-sustaining network.