Tokenomics Idea n°2

Tokenomics Tokenomics Ideas
1

Native hATOM, Lock-Based Staking, Reduced Inflation (2–6%)

1. Summary

This proposal introduces a new tokenomics design for the Cosmos Hub centered around hATOM, a native Liquid Staked ATOM that replaces traditional staking rewards paid in liquid ATOM. Instead of distributing inflation directly into users’ wallets, the Cosmos Hub would channel inflation into the value of hATOM itself, causing it to appreciate automatically through its exchange rate. This eliminates the continuous selling pressure created by liquid reward emissions and transitions the system toward a model that is simpler, more sustainable, and more aligned with long-term value.

With this approach, hATOM becomes the only yield-bearing asset tied to ATOM staking. Users who want flexibility can hold liquid hATOM and earn the base yield embedded in its exchange rate. Users who want higher returns can lock their hATOM for a chosen duration, one, three, six or twelve months, to receive a boosted APR. The longer the commitment, the greater the reward. This lock mechanism ensures that additional yield flows only to those who contribute actual economic security to the network, not to traders or opportunistic buyers on secondary markets. Purchasing hATOM on Osmosis or any DEX provides liquidity but does not grant access to the reward boosts.

Overall, this model strengthens network security, reduces inflation-driven selling, consolidates liquidity around a single native LST, and provides the Cosmos ecosystem with a clean foundation for DeFi integrations.

2. Problems in the Current Model

The current ATOM staking design suffers from several structural issues that negatively affect the token’s economic health. The first and most fundamental problem is that staking rewards are distributed in liquid ATOM. Most users sell these rewards shortly after receiving them, creating a constant, mechanical flow of tokens hitting the market. This introduces significant sell pressure that is entirely detached from user conviction or market conditions.

Another issue is the inflation band itself. The current 7–10% range is high for a network of Cosmos Hub’s maturity and conveys an impression of monetary looseness. A more moderate and predictable inflation range would better support ATOM’s long-term positioning.

Additionally, staking today offers only one commitment level: a 21-day unbonding period. This does not allow the system to distinguish between short-term participants and those willing to provide long-term economic security. Both receive the same APR regardless of their level of dedication.

Liquid staking adds a final layer of complexity. Multiple LSTs dilute liquidity, split incentives, and complicate DeFi integrations. On top of that, existing LST models permit reward “free-riding,” where secondary-market buyers instantly gain yield even though they never contributed to securing the network. This is economically unfair and inefficient.

These shortcomings make clear the need for a unified, commitment-based, and economically coherent tokenomics architecture.

3. A More Sustainable Inflation Framework (2–6%)

Under this proposal, the inflation band of the Cosmos Hub is reduced to a more responsible and predictable range between 2% and 6%. The dynamic bonded ratio mechanism remains unchanged: inflation rises if the network needs more stakers and falls when staking participation is strong.

What fundamentally changes is the distribution mechanism. Inflation is no longer emitted as liquid ATOM that can be immediately sold. Instead, inflation increases the value of hATOM itself. This is achieved through an exchange-rate mechanism in which each unit of hATOM becomes redeemable for an increasing amount of underlying ATOM over time. Users earn yield not by receiving tokens but by holding a token that appreciates automatically. This eliminates sell pressure, improves monetary stability, and aligns staking rewards with long-term value creation.

4. Introducing hATOM: The Native Liquid Staked ATOM

hATOM becomes the Cosmos Hub’s single canonical Liquid Staked ATOM. It is fully liquid, fungible, and easy to integrate across all DeFi environments. Its value grows automatically as inflation and staking fees increase the exchange rate. No rewards are distributed directly to hATOM holders, meaning that yield is embedded inside the token rather than sent out in separate transfers. This ensures that no one can exploit the network by purchasing hATOM at the last moment to access rewards they did not earn.

In short, hATOM is the yield-bearing representation of staked ATOM, and its growth is tied entirely to the protocol’s internal economics rather than to user behavior.

5. Eliminating Free-Riding Through a Clear Separation Between Liquidity and Commitment

One of the biggest challenges in any LST system is preventing free-riding. If anyone can purchase an LST on a DEX and immediately begin earning boosted rewards, the system unfairly benefits traders at the expense of actual long-term stakers.

This proposal addresses the issue decisively. Liquid hATOM only earns the base yield that comes from the exchange-rate increase. To access any boosted APR, a user must explicitly lock their hATOM in the Hub’s Lock Module. Buying hATOM on Osmosis or elsewhere does not grant access to reward boosts. Only committed participants, those who accept a period of illiquidity, benefit from higher returns.

This separation preserves fairness, strengthens security, and prevents economic leakage. Liquidity remains available to those who want flexibility, and higher rewards remain available to those who provide long-term stability.

6. Lock-Based Staking With Built-In Reward Boosts

The lock-based staking system is simple. Users who want flexibility can keep their hATOM liquid and earn the base yield associated with the exchange-rate increase. Users who want higher returns can lock their hATOM for fixed durations. The longer the lock duration, the higher the reward weight and the higher the APR.

Locked hATOM continues to appreciate through the exchange rate like any other hATOM, but also receives an additional reward boost based on its commitment level. This incentivizes long-term participation, improves economic security, and naturally segments users by their level of engagement. It also does so without requiring an increase in inflation. The system simply redistributes the existing yield more effectively.

Illustrative examples of hATOM APY with dynamic inflation and lock multipliers

To make the mechanism more concrete, we can look at two simple scenarios. In both cases, we assume the bonded ratio is compared to a target of 67%, and inflation moves between 2% and 6% according to this target. For the sake of illustration, we take:

  • 6% inflation when the bonded ratio is at 50% (below target)
  • 2% inflation when the bonded ratio is at 90% (above target)

and we reuse the lock multipliers already defined in Tokenomics idea n°1:

  • 1 month: 1.10×
  • 3 months: 1.25×
  • 6 months: 1.50×
  • 12 months: 2.00×

As in the previous analysis, we approximate the base staking yield as:

Base APY ≈ inflation / bonded ratio

These numbers are illustrative only, not fixed promises. They help show the shape of the system.

Scenario A – 50% bonded, 6% inflation (under-staked network)

If only half of the ATOM supply is staked, the protocol moves inflation up to its upper bound of 6% to attract more stakers. With 6% inflation and 50% bonded, the base yield for non-locked hATOM is roughly:

Base APY ≈ 6% / 0.50 ≈ 12% for liquid hATOM (no lock).

Applying the lock multipliers to this base yield gives, approximately:

  • 1-month lock (×1.10): about 13.2% APY
  • 3-month lock (×1.25): about 15% APY
  • 6-month lock (×1.50): about 18% APY
  • 12-month lock (×2.00): about 24% APY

This is the “high-yield, low-participation” regime, similar in magnitude to the 14–16% APR ranges that were highlighted in Tokenomics idea n°1 under favorable conditions.

Scenario B – 90% bonded, 2% inflation (over-staked network)

If 90% of the supply is staked, the protocol reduces inflation to its lower bound of 2%, because the network is already very secure. With 2% inflation and 90% bonded, the base yield becomes:

Base APY ≈ 2% / 0.90 ≈ 2.2% for liquid hATOM (no lock).

Using the same multipliers:

  • 1-month lock (×1.10): about 2.4% APY
  • 3-month lock (×1.25): about 2.8% APY
  • 6-month lock (×1.50): about 3.3% APY
  • 12-month lock (×2.00): about 4.4% APY

In this “high-participation, low-inflation” regime, base yield is naturally lower, but long-term lockers still enjoy a clear premium over liquid hATOM.

Important clarification about equilibrium and long-term locks

These examples assume, implicitly, that only a fraction of the staking participants chooses the longest lock durations. In reality, the system is self-balancing: the total amount of inflation is fixed (for a given bonded ratio), and the lock multipliers only control how that fixed pool of rewards is shared between different classes of stakers.

This means that the more people choose to lock for longer periods (especially 6 and 12 months), the more the boosted APYs for those buckets will tend to decrease over time, because a larger share of participants will be competing for the same fixed reward pool. Conversely, if very few users choose long locks, their effective APYs will be higher than the simple “base × multiplier” intuition.

In other words, these numerical examples should be read as order-of-magnitude illustrations, not fixed guarantees: in equilibrium, the system will naturally adjust, and long-term lock yields will converge toward levels that reflect both the global inflation setting and the actual distribution of stakes across the various lock durations.

7. How Rewards Are Distributed in Practice

Rewards in this model consist of two components. The first is the base yield, which comes from the gradual increase in the hATOM exchange rate and is earned by all hATOM holders. The second component is the bonus yield, available exclusively to users who lock their hATOM. The bonus is determined by each lock’s reward weight and ensures that longer commitments receive proportionally higher returns.

This system aligns incentives with security contributions while preventing opportunistic exploitation from secondary market buyers.

8. A Unified Liquid Staking Module

To ensure coherence across the ecosystem, the Liquid Staking Module is redesigned to issue only hATOM. This eliminates the fragmentation caused by multiple native LSTs with slightly different properties. Third-party systems like Stride or Neutron can still wrap hATOM to fit their platforms if needed, but the Cosmos Hub remains the single source of truth for the underlying yield-bearing token.

This simplifies integration for DeFi developers, reduces complexity and arbitrage vectors, and consolidates liquidity around a single, deeply integrated asset.

9. Implications for the Cosmos DeFi Ecosystem

The introduction of hATOM as the unified LST of the Cosmos Hub streamlines the entire DeFi landscape. Osmosis can center liquidity around a single hATOM/ATOM pair and provide fast unstaking through market-based mechanisms. Neutron gains a clean foundation for building structured products such as fixed-rate vaults, tranching systems, and restaking abstractions. Stride and Neutron retain their roles in the ecosystem by wrapping hATOM rather than creating competing base assets.

The entire interchain ecosystem benefits from reduced fragmentation, deeper liquidity, simpler oracles, and a clearer economic foundation.

10. Expected Outcomes

This new tokenomics structure promises a more sustainable monetary policy, stronger network security, a much cleaner DeFi environment, and a significant reduction in inflation-driven selling. ATOM becomes more attractive to long-term stakers, easier to integrate across DeFi, and more aligned with the expectations of institutional users and high-value participants.

The network gains predictability, durability, and a long-term value proposition that is easier to understand and to justify.

11. 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.

12. Conclusion

This proposal lays out a modern, sustainable, and commitment-driven tokenomics model for the Cosmos Hub. By directing inflation into the value of hATOM, rewarding long-term participants through lock-based staking, consolidating liquidity around a single native LST, and eliminating free-riding, the Hub adopts a more secure and stable economic foundation.

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If I understand correctly, the idea is that every staked ATOM would mint hATOM, and all liquid staking rewards would be automatically restaked, increasing the value of hATOM.
This means all current stakers would receive hATOM, and every future staking action would trigger the minting of new hATOM.

In my view, a major component is missing and needs to be redefined: governance.
With this system, we effectively lose the native voting power, since only the hATOM module would remain as the actual staker.
The most intuitive solution would be to grant governance power to users who lock their hATOM.

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You have also to keep in mind that If hATOM minting becomes mandatory for all staking, slashing risk is fully socialized.
Since all staked ATOM is pooled under a single hATOM delegator, any validator’s slashing event is absorbed by the entire hATOM supply. Users can no longer choose their own validators or control their individual risk exposure. What used to be validator-specific risk becomes a collective loss for everyone, turning staking into a shared-risk product rather than an individual security decision.

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Slashing, Validator Accountability & Risk Management under hATOM

In the hATOM model, slashing still applies strictly to the native ATOM staked on validators, not to hATOM itself. Users receive hATOM as a liquid representation of staked ATOM, but only the underlying ATOM is exposed to slashing risk. If a validator commits a slashable offense, the pool of staked ATOM is reduced accordingly, and this impact is reflected through a small decrease in the hATOM exchange rate. No hATOM is ever burned or removed from user wallets; instead, the backing value per hATOM adjusts, just as with established LSTs such as stETH.

Because hATOM consolidates all staked ATOM into a unified pool, slashing risk becomes partially socialized across all hATOM holders. This is a natural property of any pooled liquid staking model. To prevent validator complacency and to maintain a high-quality validator set, the Cosmos Hub’s governance can introduce several mechanisms that reinforce accountability and decentralisation.

  • governance can establish curated validator-set criteria ( delegation program could help + set reduction ) defining the minimum standards for inclusion in the hATOM staking set, such as minimum uptime, maximum commission, and historical performance requirements. Validators failing to meet these standards can be excluded or deprioritized.

  • the Hub can implement a dynamic delegation allocation system, where validators who exhibit poor performance, high downtime, or increased slashing risk automatically receive reduced delegation from the hATOM pool. Conversely, top-performing validators can be proportionally favored. This preserves competition and discourages complacency. Compatibility with the Nakamoto Coefficient Bonus

    This feature remains fully compatible with the “Nakamoto Bonus” system that I proposed for improving validator decentralization ( [SIGNALING PROPOSAL] [DRAFT] Improve the Nakamoto Coefficient ). Both mechanisms operate on different layers of the protocol and can coexist without interfering with each other, as long as their responsibilities are kept separate.

    The dynamic delegation allocation system optimizes for validator performance and network safety. It automatically adjusts the distribution of hATOM-backed stake toward high-quality validators and away from those presenting excessive slashing risk or poor uptime.

    The Nakamoto Bonus, by contrast, is concerned with decentralization rather than performance. It modifies validator rewards, not delegation, by granting increased income to validators who contribute to a higher Nakamoto coefficient (less power concentration), and reducing rewards for those who increase stake centralization.

    Because the two systems operate on two different axes, performance vs decentralization, they do not compete or create instability when combined. Dynamic delegation maintains network reliability, while the Nakamoto Bonus provides economic incentives to strengthen decentralization. Together, they form a complementary mechanism that improves validator set quality and validator distribution at the same time.

I think these measures ensure that even though hATOM creates a consolidated staking system, validators remain accountable, decentralisation is preserved, and users maintain meaningful influence over validator selection. With transparent dashboards, performance reporting, and on-chain risk signals, the Hub can operate a highly secure, responsibly curated validator set that aligns with the needs of both the network and the long-term hATOM holders.

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We agree that it’s not hATOM itself that gets slashed.
What I mean is that in a PoS system, when you delegate you choose a validator and you take on the slashing risk if that validator misbehaves.
With hATOM, you still choose a validator, but the slashing risk is actually shared by everyone. That’s fine for a typical LST, but hATOM is special because it represents all ATOM. That means no one really takes the slashing responsibility alone, and choosing a validator becomes less meaningful.
I don’t think hATOM should have preferred validators. All ATOM will be staked through hATOM, so you can’t pick a subset of validators — it would essentially kill all the others.
hATOM should remain as neutral as possible.

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A common concern with native liquid staking designs, including hATOM, is the fear that “one address stakes for everyone,” that “everyone shares slashing losses,” or even that “nobody can vote anymore because the staking is pooled.” These concerns describe how a naïve, unmanaged liquid staking pool might behave, but they do not apply to the hATOM model proposed here. The Hub’s design introduces two essential elements: a curated and actively managed validator set behind hATOM, and a governance system rooted not in liquid, unstaked ATOM, but in hATOM, the asset that truly secures the network.

When users stake ATOM, they receive hATOM, which represents their staked position. hATOM is liquid, but it always corresponds to ATOM that is actively securing validators. Because of this, hATOM becomes the natural basis for governance power. Holding hATOM reflects real participation in network security, and locking hATOM for longer periods represents a deeper commitment that can justifiably grant enhanced governance weight. In contrast, unstaked ATOM contributes nothing to the consensus and therefore should carry minimal or no governance power. This model preserves the fundamental principle of Proof-of-Stake: political influence must arise from economic security.

The concern that a single module delegating for everyone is a weakness is understandable, but it misunderstands the core purpose of liquid staking. Pooling stake is not a flaw, it is the operational foundation of any competent LST. Instead of millions of users each choosing validators (often poorly), the hATOM module aggregates stake and delegates across a validator set according to transparent, governance-defined rules. This improves not only usability but security: delegation becomes systematic, predictable, and aligned with network goals rather than fragmented and error-prone.

It is true that slashing becomes socialised within a pooled system. If a validator in the hATOM set is slashed, the underlying ATOM pool is affected and the hATOM exchange rate decreases slightly. Every hATOM holder bears a very small part of the loss. While this may appear worrying in theory, the curated nature of the validator set makes the actual slashing risk lower than in today’s fully manual delegation model. Validators included in the hATOM delegation set must meet performance standards, satisfy decentralisation criteria, and maintain low risk profiles. Those who fall short can be automatically down-weighted or removed through the dynamic delegation allocation system. Governance can further shape the validator distribution through mechanisms such as a Nakamoto Coefficient bonus, incentivising decentralisation at the validator level.

The often-raised concern, “if I pick good validators but others pick bad ones, their slashes hurt me”, becomes irrelevant in this model. Users are no longer responsible for optimising validator choice individually. Instead, the protocol and governance curate a high-quality, diversified validator set on their behalf. Automatic reallocation protects the pool against persistent underperformers, and the resulting validator mix is typically safer than what most users would achieve alone. In other words, socialised slashing becomes safer precisely because it is paired with curated, actively managed validator selection.

In summary, the hATOM model does pool delegation and socialise slashing, but it does so within a controlled, governance-driven system designed to improve security rather than weaken it. Governance weight flows naturally from hATOM, the asset that contributes to consensus, and is amplified for users who lock their hATOM long-term. Validator selection is curated and dynamically optimized, ensuring that pooled slashing risk remains low and that users benefit from professional, protocol-level validator risk management. Far from diminishing governance and validator diversity, hATOM strengthens both by rooting influence in real economic security and aligning incentives with the network’s long-term health.