ATOM Tokenomics Update (Blockworks Research - AADAO Grant) - Monetary Policy

TL;DR - Blockworks Research is looking for community feedback on their recommendation of changing ATOM’s monetary policy from a dynamic inflation model (as a function of % bonded) to a static supply schedule due to the advent of liquid staking. We also request feedback on the parameters outlined for this new supply schedule. Blockworks will have a follow-up post around the Cosmos Hub’s fiscal policy sometime next week. Introduction In the AADAO grants process, the committee chose Binary, RMIT, and Blockworks Research to lay out a new vision for the Cosmos Hub as a security provider of the ATOM Economic Zone and the natural Schelling point of the wider Interchain. I suggest reading the Medium article here to understand better what the three teams are working on individually. To introduce ourselves, Blockworks Research is a multidisciplinary team of protocol-specific analysts that cover the entire crypto space. We have extensive knowledge across all ecosystems, and are taking best practices and lessons learned to help inform and guide our thoughts on the future of the Cosmos Hub. Additionally, as Cosmos Hub community members ourselves, we have also long followed the…

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Blockworks Research is initially proposing that ATOM move towards a more set supply schedule that is no longer a function of bond ratio.

Will reduction in the inflation rate and elimination of bond ratio result in less ATOM being staked, thereby hurting the security of the network?

What do Hub transaction fees currently pay for? Where do they even go? I can’t believe I don’t even know this.

I guess I assumed they were being burned.
Up the fees, up the burn, thus room for higher emmision to those providing the S in PoS?

They show up in your staking rewards

jtremback: Will reduction in the inflation rate and elimination of bond ratio result in less ATOM being staked, thereby hurting the security of the network? Exactly, the security of the Cosmos Hub, which is also provided to consumer chains, is measured by the value of the staked ATOM. When the amount of ATOM staked is reducing then the inflation increases to encourage more staking and more security for the network. Important to notice is that those staking are not being diluted even the inflation increases, only those not staking get diluted and hence are encouraged to stake and secure the network, because wealth is being transferred from those not staking ATOM to staked ATOM. The dynamic inflation rate is a security measure to maintain a high staking ratio and hence the security of the network. Those staking ATOM and validators won’t be happy with a very low inflation, because the inflation is there to encourage and compensate staking. Those not staking don’t seem to care about being diluted even with the current inflation rate, so I don’t think this change to the inflation dynamics is just to dilute less those not staking and hurt those staking? I’m assuming the…

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Good ideas. However, if inflation is reduced without seeing a corresponding increase in staking rewards from AEZ revenue, then there isn’t an incentive to stake. Airdrops are dust and individual stakers typically don’t participate in governance.

It is worth debating what the acceptable reward for staking should be. Maybe 10%. This lets us reduce the inflation without having to wait for AEZ revenue. Then we wait for AEZ revenue to kick in before reducing inflation further ?

Basically, we need to ensure that stakers get around 10% return to ensure that enough people stake to maintain the number 1 Cosmos Hub product - security.

ATOM isn’t money. Using language of fiscal policy and monetary policy just confuses the matter when the fact of the matter is, if you knew ATOM economics and its business model, you wouldn’t be using these terms. So maybe try writing about what the vision for ATOM is without using these terms, at all, first. The metric that matters is TPS of the ICS system and what token is used there as the dominant monetary fee token doesn’t matter a blip to what ATOM is and who should use it. Anything but unification around this core, is just bringing confusion to Cosmos and what it already is and was always meant to be. We don’t need to pitch ATOM as money for this to work. Rather, to conflate ATOM with money is completely counter productive. Whatever primary monetary token we use (call it hypothetically PHOTON) we can provide ICS bonding with such tokens. There is no need to, and it is counter-productive to, pitch ATOM has a monetary token because our customers are blockchains with their own monetary token and why would they want to use the Cosmos Hub as a Hub if we are competing with them? So to tie ATOM with monetary language and to pitch ATOM as interchain money is completely…

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Man if you have a serious objection to what I wrote above,
I tell you, you have no idea what ATOM is, and you had better
sell your ATOMs and leave the ecosystem before you get hurt,
because this is one slashy token and you can get slashed,
and no money behaves that way or incentivizes inflation to keep 2/3 slashable thusly at all times.

that’s no money,

and if you don’t get that, you have no business writing anything about economics.
truly, ATOM is not for you.

(Emissions + fees = staking rewards) sounds like pricing for speed & scaling. I.e. The more speed & scaling stakers can provide the more fees they can collect. But stakers provide & resell security. It’s not a Proof-of-Scaling ledger. Validator hosts provide speed & scaling. Currently if fees are sent directly to staking rewards that means when the network is busiest only the stakers get paid more. It incentivizes validators to vote for emmisions increase before fee increase so they can get paid enough & keep their stakers happy. That then means a busy growing network has to keep charging more & more Atom, unbounded, in order for the validators to keep getting paid to scale. When the bear comes, since emmisions were high & fees were low, there’s nothing to adjust. You can’t up the fees for a slower bear network. That’s a race to the bottom. Stakers are paying validators to bring their Proof of Stake to market. Stakers should be buying more speed & scaling as needed via validator commission rates. Commission rates should go up as usage goes up. Validators should charge stakers for hosting their proof of stake. That’s the directly sustainable market relationship:…

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jtremback: Will reduction in the inflation rate and elimination of bond ratio result in less ATOM being staked, thereby hurting the security of the network? The economic security ‘on paper’, I guess ? I tried to find a relevant example of a PoS chain getting attacked for this reason but couldn’t. I’ve been very critical of the gravity bridge chain because their economic security is quite bad. They have a staking ratio of 42%, the value of all staked tokens is $672,000 and the bridged USDT/USDC are worth $28,000,000. And yet, no one has succeeded at stealing those (maybe it happens someday), even if they’re the most liquid tokens to liquidate after a hack. Ethereum has a staking ratio way below that (25%) with inflation rewards at 2%, and yet the main conversation is not security, but decentralization. With that said, I’m with EffortCapital when it comes to assuming that liquid staking skips that conversation. In my head we have 80% of the supply liquid staked 5 years from now, but of course I might be completely off the mark. Cosmic_Validator: When the amount of ATOM staked is reducing then the inflation increases You don’t need an increase in…

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Value of atom:

• expected gain if staked
• participation in the network and its information flows
• governance

Concerning Cosmos governance tokens, I have always said that they have characteristics of money but clearly aren’t money.

• Money does not secure anything.

• Money doesn’t have a purpose beyond transfer of value.

• Money does not let you participate in networks intrinsically

• Money does not confer weight in governance decisions

I believe the phrase that I have used in the past is “valuable, but not itself money”

• Getting more Atom doesn’t count as adding any value to Atom. Emissions are just practical means of payment for providing PoS. Emissions decrease the value of Atom by printing more of them. • It’s not even validating ledger transactions that create value. That can be done much more cheaply by 30 yo tech running on a bank server. • Governance itself isn’t providing any value unless it’s governing something of value. So what is that something? That something is the unique value of the services the Hub provides. That’s it. Any additional value isn’t value, it’s just speculation demand at best. Demand is not value (see meme coins, beanie babies, Franklin Mint “collectibles”, Thomas Kincaid paintings, etc). More precisely that value is what customers receive when they pay for Hub services with outside coin. The way to pay for Hub services with outside coin is to buy service tokens. Aka ATOM. Nowhere else is the Hub creating value. It’s all in how those services are valued in fiat over time. Great UX, secure as heck, fast, ubiquitous, safe, trusted, shared, reliable, easy, non-volatile, long lived, all that. ** The Hub is a service provider providing a service. That…

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+1 for a set supply schedule, as all (almost all ?) other PoS blockchains do. As Cosmos was one of the first PoS, it was maybe thought that it’s required to have a bonding curve but other blockchains seem indeed to show it’s not required

Especially because what counts in the economic security so the number of staked ATOM * the value of staked ATOM. And it’s easier to have a 50% increase of the value of ATOM instead of trying to have a +50 increase of number of staked ATOM. So it makes sense to focus on economic value of ATOM

And for ATOM as money, I think it makes sense at least as “common token fees payment” and it would also greatly improve the UX of the cosmos multi-chains usage, if we were able to pay with the same token everywhere

effortcapital: here So Jae’s point that the hub and Atom’s purpose is not primarily money -though obnoxiously stated - is probably correct, at least now. But does that matter, and would adding “moneyness” to Atom be a positive? At first glance, for any asset to inflate at roughly 17% is problematic if you care about that asset’s value. Since most of us on this forum care, it would seem that adding “moneyness” to ATOM’s value would be beneficial, unless you take the position that other Cosmos chains want their token to be money and you don’t want ATOM to compete with them. But looking at other Cosmos token, there’s nothing that comes close to being money and I don’t expect that to change for a while. So I don’t buy the competition argument. At second glance, will reducing inflation make ATOM price go up? Almost definitely yes – this is just plain supply and demand. But if I hold staked ATOM I get the same effect, with STATOM at $8.4 now vs ATOM at $7.1. Inflation has its winners and losers, and the losers are those who don’t stake or hold LSTs and the winners are the LST holders and stakers and validators. Selfishly, I’m happy taking value from non-stakers & non-LST…

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we should add no new feature to Atom
actually we should just let it die slowly and let it be replaced by a perfect meta-system that only god can have created

and @effortcapital you should sell everything and leave.

but before that you should repent and recognize every single thought you had to enhance Atom soundness was an evil wish.

repentance from being one step closer to becoming a financial terrorist.

/me leaves the chat

On the Moneyness of Atom Money is a Medium of Exchange that is also a Store of Value and a Unit of Account. Atom shouldn’t seek to be the primary Medium of Exchange in terms of ICS or IBC Tx volume on any one chain. That does compete with the function of other tokens. However the dependability of being widely exchangeable, of being a secure store of value, of being perceived as Stable Growth, and possibly of an easier “accounting ability” those are all moneyness features that can be encouraged by building on the Hubs primary mission - Security. People should want to hold Atom because it’s a better value proposition. It should be less volatile (more financially secure) over the months & years than app chain tokens, but more useful & growth oriented than stable coins. It should be where you put your capital when you don’t know what else to do with it because it’s Safe & Secure, but is still cheaper & faster to access & exchange than BTC. Since the Hub (hopefully) provides a growing comprehensive suite of security services maybe you think it’ll grow faster than BTC as well. (Sidenote: this probably makes Babylon somewhat of a direct competitor unless it comes to the AEZ)…

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Thanks for sharing your thoughts with us. I really like the idea of moving away from the dynamic inflation model towards a more static one and simultaneously lower inflation gradually over the course of the next few years. I think the dynamic inflation model is outdated, too complicated and not straight forward, it makes the ATOM supply unpredictable, and hence shies away investors. The current inflation rate is way to high and should indeed come down in the coming months and years. I like the approach of reducing inflation on a block by block basis by 50% every year until we reach the threshold of 3% in late 2026. This should give both validators and stakers enough time to adapt to the lower emission schedule and the AEZ (AAT, LaaS, atomic IBC ect) to thrive and generate revenue for ATOM holders. At this point I think it makes good sense to further lower the ATOM inflation to the targeted 1.5% (might also be 2%) which can be kept at that level for perpetuity to guarantee the Hub’s security and a living for validators. The argument that lower staking APRs will deter investors from buying and holding ATOM is very week imo. Quite the opposite I guess, folks are sick of…

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Thanks for sharing your ideas. Very interesting. I celebrate that there is people studying and discussing these topics. Some thoughts: • How did you set those boundaries in the inflation rate (3%, 1.5%)? • One important thing to think about is how the new inflation will affect the earnings for those who stake their assets. I understand that (in your scheme) the inflation rate is gradually decreasing, but let’s assume it’s currently at 3%. With 250 million ATOMs being bonded and 364 million ATOMs in circulation, a 3% inflation rate translates to a APR of around 4%. So, the net yield is roughly 1% per year. For most validators, this won’t be enough to cover their expenses, and potential delegators might not find it attractive either. For instance, a delegator could opt for US Treasury bonds with a 5% interest rate and significantly lower risk instead. • Although less inflation may be desirable, as was pointed above, we need first to have other revenue sources to reward validators/delegators. • I understand that your idea is that, once the inflation rate reaches 3%, these alternative sources of revenue will be already replacing it. According to your projection, this…

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I’m a big fan of reducing inflation and stepping away from tying the inflation rate to the bonding ratio. The primary reason why this was tied in the first place was because ATOM inflation had to compete with DeFi yields.

Firstly, Liquid Staking will partially eliminate this competition as people can now stake and earn yield elsewhere at the same time. More importantly though, the initial premise was flawed:

There is no correlation between inflation and the bonding ratio in Cosmos!

source: Numia Data

Screenshot 2023-09-18 at 19.51.592044×1496 311 KB

Regardless of the conversation about whether ATOM is or should be money, the fact of the matter stands: more inflation = higher supply. Higher supply = lower ATOM price.

Noam: the fact of the matter stands: more inflation = higher supply. Higher supply = lower ATOM price. It is important to make the distinction of how inflation affects those not staking ATOM vs ATOM stakers and validators. As mentioned above, inflation alone is only diluting those not staking, wealth is being transferred from those not staking to ATOM stakers and validators, so ATOM stakers and validators won’t be happy if things are changed to dilute less and support more those not staking ATOM by reducing inflation. I mean think about how the Fed works, what is inflation really? By printing money they are not creating value from thin air, what they are effectively doing is transferring wealth silently from the general population to themselves. So, given that reducing inflation alone benefits only the subset of those not staking ATOM, and hurts revenues of ATOM stakers and validators, the argument is then based on the ATOM price which impacts all stakeholders. Maybe you could prepare a similar graph showing the correlation between the inflation rate and the ATOM price? According to you, there should be strong inverse correlation between ATOM inflation and price, but I…

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That’s a great point about transferring wealth from non-stakers to stakers & validators.

The Hub needs stakers & validators.
And who’s doesn’t like have wealth transferred to them.

But hyperinflation is death, & nobody wants to buy into having wealth transferred away from them. Price goes down.

Sustainable balance is very likely somewhere in the middle.

Change slowly & predictably enough and balance can be found. Like tuning the sensitivity on a brand new game controller; big changes are the opposite of helpful. Make tiny changes, play for awhile, repeat.

Nice graph. Do you have historical data for the Cosmos Hub? That is, how bond ratio changes with inflation rate.
I do not think you can compare chains. E.g., the Hub tokenomics is very different to Osmosis tokenomics. Osmosis needs to use part of its inflation to reward liquidity providers and dev. teams. Therefore, a large part of it do not go to stakers and they do not find very attractive (in APR) to stake. Hence, you see there a low bond ratio even with high inflation.

Cosmic_Validator:

wealth is being transferred from those not staking to ATOM stakers and validators

I fully agree with this view. New tokens do not change the market cap by itself. The total wealth remains constant. The overall wealth in the system remains the same. The current tokenomics design has a dual purpose: it penalizes those who don’t stake their tokens by reducing the value of their holdings, and the value “taken” from non-stakers is given to those who do stake. By reducing inflation, even when we keep the net yield unchanged, we lessen the penalty for non-stakers. This means there are fewer incentives for people to stake their tokens.

If the market-cap doesn’t change when new tokens are minted, then the price of the token must decrease (everything else equal). So, inflation does have an impact on the token price. However, it doesn’t seem like it is the primary reason for the drop in ATOM’s price. or it is? how much of the price drop can be attributed to inflation? It would be very interesting to see an economic analysis that examines the correlations between the price of ATOM, inflation, and the price of Bitcoin, as suggested by @Cosmic_Validator.

Cosmic_Validator: According to you, there should be strong inverse correlation between ATOM inflation and price, but I don’t think this is the case If you’re referring to USD value, this is not what I’m suggesting. Macro economics are far too powerful for that. But it is exactly what I’m suggesting if you are referring to ATOM’s performance compared to other tokens. Just not within the timeframes you’re suggesting (e.g. not as a direct response to inflation a few months ago), but over multi-year periods . Cosmic_Validator: reducing inflation so drastically will 100% hurt revenues for ATOM stakers, for validators and likely affect the security of the Cosmos Hub This is a valid concern, but there are several ways to address this: • Increase minimum commission rate • Slow down the speed with which inflation decreases (i.e. give us more time) • Build a stability reserve fund for operational costs during a bear market with funds saved from a bull market (working on it!) • Tie inflation rate to a minimum USD ATOM price: e.g. if inflation is 3%, but lowest ~20 validators earn only 50$ a month on average, start increasing inflation until a max cap is…

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Noam:

Tie inflation rate to a minimum USD ATOM price: e.g. if inflation is 3%, but lowest ~20 validators earn only 50$ a month on average, start increasing inflation until a max cap is reached (somewhat controversial ideal, not a fan)

If the price of ATOM is already low, and you decide to raise the inflation rate to support the bottom 20 validators, this increased inflation might actually cause the ATOM price to drop even further. In response, this scheme implies to increase the inflation rate even more, and this cycle could continue until it reaches the cap. This appears to be a negative pattern. I might be missing something here. Could you please provide more details and explanation on this matter?

jBQ:

Could you please provide more details and explanation on this matter?

It was really just a brain dump. And probably a very bad idea. lol.

But you would have to set up a max inflation rate on this obviously, and would only apply this for operational costs like validators (not delegators), to minimize price impact. But I don’t think the idea has much merit tbh.

I think tying inflation rate to price might be a good idea but in the other way around. If ATOM price increases too much, then you can raise the inflation rate. By doing this, you have your mechanism to

Noam:

Build a stability reserve fund for operational costs during a bear market with funds saved from a bull market

I would use this reserve to finance new projects.

The increment in the inflation rate should be lower than the increment in the price, to not kill that increment.

In any case, we are far away of having this problem.

hey @Cosmic_Validator really appreciate your feedback! I don’t have much more to add than what @WillB already said. The Cosmos Hub is paying way too much for security when compared to almost every other PoS network in the space. Additionally, while inflation can be seen as a tax on non-stakers, it also causes large supply overhangs that negatively affects ATOM price. If everyone re-staked their inflation, ATOM bond ratio would continue to trend above 70%, but we have only seen this happen a select few times in the Hub’s history. The dynamic inflation security model is outdated with the advent of liquid staking, but you have a valid point about the 25% global limit! We encourage you to read our new post here that seeks to remove this max cap. It is important to note that we took some inspiration from the supply schedule of SOL while also looking at the issuance rate of ETH (which is a function of how much ETH is staked to the network). SOL is planning on reaching 1.5% base inflation rate by ~2029 and ETH will issue ~1.2% if/when ~67-70% supply is staked (assuming ~120M ETH supply). Its important to compare ATOM to other assets in its vertical, and a minimum bound of 7%…

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effortcapital: that negatively affects ATOM price effortcapital: we took some inspiration from the supply schedule of SOL Thanks for the reply @effortcapital , I think we appreciate your efforts and ideas to increase ATOM price. You mention that most other PoS networks are paying less for security, this is actually great data to confirm or not your hypothesis about inflation and token price. Did other PoS networks with lower inflation manage to increase the price of their respective tokens because of this? If there is enough data proving this then your idea would be backed with historical data and more certainty, however looking at most PoS chains it seems token prices are more correlated with BTC price and macroeconomic factors than with inflation. Osmosis, Juno and other projects recently had major inflation reductions and the expectation was that this would lead to a higher token price, however, the opposite happened. effortcapital: but you have a valid point about the 25% global limit! Thanks, I’ll read and reply regarding your new post. effortcapital: our supply schedule would actually kick out the time to reach that…

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Cosmic_Validator:

Did other PoS networks with lower inflation manage to increase the price of their respective tokens because of this?

Historically, and I don’t mean only crypto but with other monies too : it’s not really about the price but more about liquidity. If you have a big and constant flow of newly minted tokens hitting the markets at some point there isn’t much bid interest to sustain the market and it has to reprice lower. This doesn’t mean that less supply means a higher price, but just marginally better market conditions.

There was a time when big supply and big APRs were the trend (especially in the 2018 era of masternode coins). What would often happen would be that the bids to buy more of the coin would rapidly disappear, leading exchanges to pair the coin against litecoin (litoshi markets) leading to even less liquidity.

Stable, predictable rates of inflation are also necessary for defi to work efficiently.

Osmosis did reduce their inflation rate, but they did it at the same time they reduced the liquidity provision incentives.

ATOM is money whether you define it that way or not. Money is Medium of Exchange, Store of Value and Unit of Account. As presently constructed, ATOM is a Medium of Exchange and Unit of Account for the Cosmos Hub network because you need it to get a transaction executed and move ATOMs from one account to another. As such every blockchain token is by definition “money”. The different tokens obviously perform the function of Store of Value differently - some communities don’t want to do it like Jae suggests ATOM shouldn’t and other like Bitcoin’s focus on that property almost exclusively to great effect (hence trillion dollar valuation). Whether we like it or not, every single L1 blockchain token is money, the only question is how valuable that token is and whether the value of the token is important. My view is that value is very important because if the token is valueless then it won’t perform its security function properly. “Security” by definition is an expenditure of energy and that energy is only expended if there is some value being captured. In other words, an army doesn’t roam around aimlessly because the soldiers need food (and not to mention equipment) and that food…

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Una mas: Slashing ATOM from validators doesn’t mean that ATOM isn’t money, the way the SEC or DOJ fining JP Morgan for bad banking doesn’t make the US dollar not money. Slashing is penalty for bad behavior which in the real world is called “fine”. The token being slashed remains just as much money after being taken away from somebody as before when it was being accumulated by that somebody. I really don’t want to hear stuff like “sell your ATOMs and leave the ecosystem” because whether you like it or not, you issued this financial instrument ATOM and if people invested money in it (whether they understood or not what they were buying) and they lost the money then you are on the hook, no matter how many legal barriers you have built around to protect yourself. If you screw enough people, then the government starts prosecuting the people’s grievances and then at minimum you have to spend all your fortune on lawyers to defend yourself from various lawsuits (or on personal guards guarding you from assassins and mobsters). As you have seen over the past couple of years, a lot of very smart guys like SBF are on the run or in jail already including another guy with the Kwon last…

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