Discussion: AEZ Growth & the ATOM Alignment Treasury

Designing the Financial Infrastructure for AEZ Growth: the ATOM Alignment Treasury Author: Noam Cohen , with support from Aleksandr Bezobchuk . Over the past few months some very interesting ideas have come up around how the Cosmos Hub can support the ATOM Economic Zone (AEZ), how it should utilize its available funds, and how we can do so sustainably without generating significant selling pressure on the ATOM token. In this forum post, we’d like to start brainstorming about how we can create the infrastructure to enable this in a more structured manner. The designs we’re approaching fall under something we’d like to call the ATOM Alignment Treasury (AAT). But first, a little about us: our company Binary Builders is the primary development team for the Cosmos SDK. We also run the Interchain Builders Program on behalf of the ICF, started a data analytics firm called Numia and have been a validator on the Cosmos Hub for several years now. We recently received a grant from the AADAO in order to research, design and propose several modules that would benefit growth of the AEZ and help the Cosmos Hub reach a more mature and financially sustainable future. This forum post…

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Now that’s one hell of an essay. Thanks for putting it together @Noam, there’s too much to discuss here for me to reply at this time (3am ) but I’ll try to chyme in asap. Maybe we should organize a space to break these things down as well? Might help introduce some of these ideas and invigorate the conversation.

Amazing read, kudos to everyone who contributed to this essay. I haven’t read a forum post with as much pleasure as this one in a while. To mee it seems that the Hub has found a new direction and purpose, core values and clear objectives to pursue. I’m super aligned with the three stated objectives a) AEZ growth, b) Financial Alignment with Consumer Chains and c) Increased decentralization of the Hub’s Voting Power. Also concepts and features such as the Atom Alignment Treasury, Liquidity as a Service, Token Swaps or active Treasury PF Management are compelling ideas and definitely worthwhile to further explore. For the first time I feel that the Hub is moving into uncharted territory, drives innovation and pushes the envelope. We as the Cosmos Hub community can’t rest on our laurels and watch other protocols and chains out-innovate us. The features proposed in this essay have massive potential imo, and the Hub is in an unique position to execute on them. There are no other chains that have such a vibrant on-chain governance system in play and a high market cap to exploit ideas like LaaS or AAT to grow it’s very own ecosystem (AEZ). I was not happy at all with the…

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Thank you for this very detailed post, it is so long, I think I will have to read it a couple of times to get a detailed picture Lending Out Liquidity (Liquidity as a Service) I really like this idea, liquidity is one of the biggest issues in the Cosmos defi ecosystem right now. It would be great if we pair ATOM with stables, BTC, other L1s and diversify the treasury. IF we want IBC to become the bridging standard for the blockchain ecosystem, we might want to think about building up a stake in other ecosystems. As someone who is a defi degen since 2020 I saw and experienced a lot of hacks (especially in the ETH ecosystem), my question is how do we mitigate potential exploit risks? There is always a risk in Defi and if a pool gets exploited, we can lose the entire amount and get additional sell pressure. So if we want to use this service, we need to implement additional security measures. Unfortunately I am not too familiar with the technical details, but in an ideal world it should only be possible to move the funds back to the specific hub address. To give you an analogy: If you are in a car chase and try to flee from the police, the only road which is not blocked,…

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Intro A huge thank you to Binary Builders for this thoughtful and detailed post! We are strongly in favor of the three stated objectives in this post, namely 1) growing the ATOM Economic Zone through liquidity deployments, 2) financial alignment with consumer chains, and 3) increasing the decentralization of Cosmos Hub voting power. We are also broadly in favor of the strategies suggested to achieve these objectives. Now that ICS and the AEZ exist, Cosmos Hub governance should be more active and assertive than it has been in the past. Start small But what concrete steps should Cosmos Hub take today? We believe it would be best for Cosmos Hub to begin by taking small, simple, well-defined steps - and then gradually progressing to some of the more advanced strategies described by the original post above. Beginning with small steps is the best way to build consensus. Taking a quick look at the history of Cosmos Hub, the recent proposal to deploy 450K ATOM was the first Cosmos Hub DeFi proposal to achieve consensus. Previous Cosmos Hub DeFi proposals, such as the Osmosis proposal from 2021 and the ATOM 2.0 proposal from 2022, did not achieve consensus. The lesson here is…

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Think that both @Noam’s post as well as the @Stride addition are great moves forward for the AEZ

Thanks @Spaydh! Would love to do a space of course. Need to give people some time to digest the forum post lol.

Let’s sync on TG.

Stride:

to move the Cosmos Hub forward (:

omg i’ve finally found someone using “(:” as i do! \o/

great post, thanks Noam, and great answer from Stride.

will re-read all of this to see if i have something to add, but… glad we are moving forward that way.

for now i would say start small, with clear and well distinguished steps is the way.
and i’m really looking forward to what will be proposed to enhance the Nakamoto coeff of Atom chain.

Thanks again, this discussion is going to be very cool to follow.

Thanks for your constructive feedback @Wunderbernd ! Just wanted to reply on the topic of security & volatility. Security: When lending out liquidity as a service, you can start with relatively risk free LPs like stATOM / ATOM, i.e. the pairs that are basically pegged to each other. However, there is no way to de-risk from the protocol you’re using. If there was some kind of major hack on any of these DeFi platforms, then the assets the Hub would have posted there would be at risk. Imo this reality requires a few things: • Due diligence on every proposal. Never use unaudited protocols. Give protocols some time after launch before committing tokens. Most likely we’d want to get a DAO set-up with experts who deliver a report on each proposal, covering the risks and benefits that token holders might not have time to research. • Diversification, don’t keep all your eggs in one basket. • When possible, keep assets on the Hub. Volatility Yes, I think active portfolio management without any limits is a bad idea. However, there are ways to limit the downside risk by using concentrated liquidity on a DEX, or setting up custom logic. This could potentially also prevent…

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Thanks guys, appreciate the thoughtful feedback and great ideas.

I’m a big fan of starting simple and taking is as it goes. I think high level vision and conversation is necessary to help create a shared narrative around the Hub’s future, but I definitely want to avoid over-engineering something without seeing how things stick in reality.

I’m keen to see how the community responds to future proposals on using the Hub’s PoL. Your suggestion definitely has my support!

Practically speaking, I also see the AAT moving in small steps. Firstly just a slight modification to the community pool & gov module to enable multiple balances on the CP and some specific gov proposal types, then interfacing with something like Timewave’s covenants and other systems, all based on how we see demand arise and behaviour take shape in the AEZ.

Firstly I would like to say that I am delighted to see this sort of detailed thinking being presented - thank you Noam. Secondly I would like to commend the Stride team in coming up with their suggestions. I am always drawn to practical suggestions that push forward big ideas. It is better to take a good small step than wait for a large perfect one. My own thoughts in response to Stride are as follows: I think that moving towards further POL is useful in bootstrapping economic activity in the AEZ giving the community pool purpose while governance retains control of it. While I think that there needs to be some further discussion about the quantities and the mechanisms involved, I would be in favour of starting with a relatively small investment in NTRN/ATOM that could be grown by future proposals - I suggest this as the hub has/will have both tokens but is not making that liquidity useful. I am deeply in favour of a token swap with Stride (and indeed Neutron too) but appreciate that such a proposal would be more complex. I am in favour of moving away from multisigs because we should be looking to minimise trust. As ATOM Accelerator we have funded work in this…

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I want to point something out, and this is something that @effortcapital pointed out to me- Protocol owned Liquidity (at least using assets held by the community pool) is never going to drive a lot of revenue for the Hub in the form of direct fees, so it has to be applied in areas that have a lot of leverage for the Hub. How much will AAT make directly? (not much) Even with a heavy community pool tax lasting several years, the community pool is not going to have more than 5% of the supply of Atom in it. So any revenue from fees or appreciation will be on this 5%. So for example, if the AAT is getting “Risk-free” yield of 8% (optimistically) from interest on loans, DeFi, etc., that’s 8% of 5%, or a yield to ATOM holders of 0.4%. If the AAT is doing more direct investment where it takes a position on another chain’s tokens by buying them outright or LPing them, the ATOM token holders will still only be getting 5% of whatever the gain is, unless the community pool had more than 5% of the supply in it. What should the aim of the AAT be then? Due to the factors above, I think it is a very bad idea to treat the community pool as a VC fund or a money manager. It just…

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I think we all agree that Cosmos lacks of DeFi interest and implication. The overall approach which is highlighted by @Noam is clear and will lead us to a brighter future for Cosmos. But, as @Stride mentioned, we should try to create a low-level executive plan and move forward.

Even if returns are " not much " deploying/managing liquidity and helping DeFi to settle could bring a lot of activity to Cosmos coming from other blockchain participants looking for opportunities.

The POL aspect of the plan is probably one of the best ways to align interest and provide value at a lower cost for the projects involved. I like to think about OlympusDAO which used this kind of initiative to bootstrap liquidity and create a robust ecosystem around them.

Fully supportive of the overall message and direction that was put forth by @Noam!

Also fully supportive of the practical, digestible process set forth by @Stride!

Feels great to see some sort of consensus and direction, with actionable steps being proposed!

Thank you for posting this. Seems everyone is quite excited after reading it. Need to catch up soon!

Liquidity as a Service Hey everyone, Max here posting on behalf of my team at Timewave . We’re a new team formed by several experienced cosmonauts, including Sam Hart (formerly Board of Management, Grants Manager, and Cosmos Stack Product at ICF), Udit Vira (Co-founder of Hypha), me ( interchain maxi since 2017 and former financial services management consultant at Oliver Wyman), and several DAO DAO engineers. We appreciate the conversation that Binary Builders, Effort Capital, and numerous other Cosmos teams have kicked off. Timewave has been developing similar perspectives. We’re sharing some of those here so we can build upon each others’ ideas together with the community. Since Binary’s original post above is open-ended, here we will attempt to complement that open-ended approach by providing an opinionated approach for the AAT. Also, since Stride’s post above provides a short-term approach, we will focus this post on a long-term approach. Our goal is to provide additional color on the potential for the Liquidity-as-a-Service (LaaS) point mentioned in the original post above and equip the Hub community with mechanisms and a narrative that could help make ATOM the preferred…

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Great stuff. All of this can run on Neutron. There is absolutely no need to complicate the Hub technically now that you have Neutron.

This Treasury functionality should be limited to the AEZ. Cosmos needs some sort of a “walled garden” to generate value for ATOM and its investors. Then that value can be used to finance services for the interchain. Cosmos has had the opposite approach for the past 5 years and I don’t think that is working. I mean free is a good way to get market share, but ATOM will head straight to zero if it doesn’t have value accrual mechanisms. I feel like Cosmos’s great devs are grossly underpaid relative to others in the crypto world given their impact. The reason is lack of a value accrual mechanism. People should get paid for the great work they do and for that you need a “walled garden” of your own.

If you want tomatoes, you need a garden

Thanks for this elaborate reply Max! I am curious to hear about more practical examples, especially within the context of borrowed liquidity and how the Hub could set requirements such as the interest that is charged, or how it would enforce its senior debt position. In my mind, two use cases seem apparent for V1 of the AAT: • LPs like stATOM / ATOM or amATOM / ATOM with little to no impermanent loss (relatively risk free) • LP positions like ATOM / NTRN as a way of bootstrapping liquidity while maintaining an active portfolio, using concentrated liquidity to minimize IL at the extremes. I am wondering what other specific cases of borrowed liquidity you have had in mind that made you consider focussing on the security guarantees the Hub could place on these loans. On a side note, I actually fully agree with @jtremback in that this is not about ROI, (or ROL), but rather a tool to further increase alignment and bootstrap liquidity in the AEZ. I want to stress that the primary function of the AAT is not direct revenue generation, but rather reducing the economic friction and increasing the attractiveness of the DeFi landscape in the AEZ as well as making ATOM the…

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Sell 1/3 on a triple and let the rest run with a trailing stop loss.

BOOM! Love this extrapolation.

maximus:

It is very important to note that in this case, the Hub is NOT lending ATOM—it is lending ATOM liquidity. This means that the Hub continues to own the underlying ATOM used for the LP positions. The risk that ATOM faces is primarily via impermanent loss (IL) and smart contract risk.

That’s the best phrasing for LaaS.

LaaS can be a value proposition for teams to join the AEZ. We need that as there are teams migrating away, or at least double pivoting, such as the announcement of CANTO today with Zkevm.

Good questions. Before getting into my answer, I want to reiterate that my proposal is a long-term strategy. In the short and medium term, I believe that the Hub should prioritize maximizing distribution of ATOM by significantly increasing the amount of ATOM liquidity lent to all ATOM-aligned and potentially ATOM-aligned endeavors. The meme/narrative value of ATOM being the reserve asset of the interchain will almost certainly be worth far more than the interest it could possibly extract. The Hub should charge little-to-no interest and not require burdensome security guarantees until the meme of ATOM as preferred reserve asset of the interchain has fully sunk in. No unnecessary obstacles should be placed in the way of maximizing distribution of ATOM liquidity where strategically relevant. As for specific short-term deals to pursue, Stride’s proposed next steps and the two use cases Noam proposed above are good places to start. All that said, I still believe that the Hub should set expectations that it will eventually charge interest on the liquidity it lends so that liquidity borrowers are not surprised when the time comes. I also believe that it should begin investing now…

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Excellent inputs! Commencing with incremental, well-defined steps is indeed the prudent path forward. Stride’s pragmatic approach outlines a clear trajectory with actionable measures, marking a substantial advancement for the AEZ.

The use of $ATOM as a denominator for LPs merits serious consideration, while revising the Community pool architecture, as suggested by Noam, appears judicious to fostering improved coordination between cc and the Hub.
Big thanks to @Noam and @Stride for their contributions. Looking forward to seeing what unfolds following this discussion.

For those interested, there’s a Twitter space happening today on this topic.

Thank you for the proposal! In general i am in favour of more tooling in the departement Noam and Stride are thinking but think this proposal is way too large to also include strategic decisions on the actual deployments. I think we should first push for a so called “AEZ-module” and think about features we want included there and how it can collaborate with solutions like DaoDao and Timewave. From that we can then make more strategic decisions on actual deployment. In its current form i am quite hesitant about deployments to Astroport, mainly for 1 reason - usage. For now usage is low and Astroport also has no significant integrations further into the Cosmos ecosystem or Neutron defi space. There is no money market using it for liquidations, the LP tokens cant be leveraged further, its not a hotspot for aggregators or abstraction UIs etc. Although building liquidity can be seen as a first step i think we should be hesistant deploying significant capital to a Dex that has found little PMF/usage in the AEZ so far and does not properly leverage IBC to combine its multiple deployments currently. So my general feedback is Please split up the potential proposal later down…

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Thanks for this reply! So, I want to make it clear this forum post is not a proposal , but rather a research paper to start the dialog around Liquidity-as-a-Service and financial alignment. I agree the actual first step is a phase one proposal that configures the Hub to enable to plug into the AEZ more effectively. Specifically, this would include the following: • Enabling the Community Pool to hold multiple addresses • Making sure x/gov is the true owner of the Community Pool so that it can do more than just a spending proposal (e.g. IBC Transfers, contract calls, etc) • Enabling the ICA host module so that the Hub can create Interchain Accounts on other chains and interact with them After this, AEZ members can make specific proposals that ATOM holders assess on a case by case basis. Other entities like Timewave could build the infrastructure (that would likely sit on Neutron I assume) to make sure our proposals get executed in a secure, automated and decentralized manner. Phase two of this work would be focussed on enabling ATOM holders to vote with their ATOM on Consumer Chains in case the AAT holds funds (e.g. the Neutron Airdrop. I want to be clear that this…

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This is an excellent write-up on protocol value accrual

It’s specifically relevant to this thread in a number of places so I hope it’s OK to link to it here.

At the every end it talks about behaving like Amazon (big first, then profit), the potential of dApps with no tokens, and sort of rolls out the red carpet for the Hub’s competive advantages, doing so seemingly with no knowledge that the Hub even exists.

Value Accrual

Should protocols make money?

CONTEXT: Looking at the history of @Noam we were expecting quality and depth on this post and we must admit that we have been served. The context of this study shows great improvement on the initial vision that was kickstarted by the ATOM 2.0 proposal and it’s Treasuries ideas. We must also stress our great pleasure to see discussions around the LaaS (liquidity as a service) finally seeing ground within a broader part of the community. At Govmos (the governance arm of PRO Delegators’ validator) we have always emphasized the need to shift the narrative toward financial services in the Hub instead of sticking to the existing political debates & community pool spending. Of course these two are essential, but our models also predict that the Hub will evolve to resemble more and more to a decentralized bank. That is a topic we explored with greater detail in our ATOM Tokenomics - Currency Types Modeling in Markets post. On this front we must say that we have been pleased to read the replies from @maximus which clearly shows that they are also understanding the mechanisms through which the Hub’s financialization path could begin to exist beyond SaaS (Security as a Service).…

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It’s great to hear about the initiatives and ideas you’re exploring for the Cosmos Hub and the ATOM Economic Zone (AEZ). The concept of the ATOM Alignment Treasury (AAT) sounds intriguing, and the transparency in sharing your design process for community feedback is a commendable approach.