Introducing the Dynamic Liquid Staking Tax (Blockworks Research) - Cosmos Hub Fiscal Policy Part 1

TL;DR - As a follow-up to the Monetary Policy post laid out here , Blockworks Research is looking for community feedback on their recommendation of changing ATOM’s fiscal policy from a static 10% community pool tax to a multi-pronged tax approach. This is Part 1 where we introduce the idea of a dynamic liquid staking tax and a proposal to remove the 25% liquid stake cap imposed by the LSM, with another follow-up post related to additional tax ideas coming early next week. Blockworks Research is also looking for feedback on the initial parameters mentioned in this post, with the understanding that the community will ultimately decide the final parameters. Fiscal Policy (Current State) Historically, the Cosmos Hub had a very simple fiscal policy where X% of ATOM inflation went to stakers and the remainder went to the Community Pool to be used for ad-hoc spend proposals. Prior to the rejection of ATOM 2.0 with Prop 82 , 98% of inflation went to ATOM stakers and 2% went to the community pool. This left the Hub heavily underfunded to align developer teams, fund public goods and initiatives that could bring value back to the Cosmos Hub, and potentially leverage…

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i was waiting for it . great job . love the idea

Thanks for this interesting idea. Currently, the amount liquid staked is ~1.87%, before the LSM was introduced the amount liquid staked was very stable for months with a small increase mostly from Stride. After the LSM, there has been an increase and again mostly coming from Stride. So there is almost 58M ATOM that can still be liquid staked until the 25% limit is reached, I think we currently don’t know when or if this limit would be reached? I think the expectation was that once liquid staking staked ATOM directly was enabled 10M-20M ATOM would be quickly liquid staked, but it is actually a slower growth than expected and mostly from Stride, likely because of the security provided by the Cosmos Hub. While I think this idea is interesting, it seems there are other priorities first? Finding ways to incentivize more those staking ATOM to liquid stake or educating more that now they can liquid stake directly without the unbonding period would be important. If this works then once the amount liquid staked grows to 10-15% or we feel that the 25% limit might be reached then we could discuss in detail your idea since it would be needed then if we want to allow more than 25%. There is…

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Our follow up post is going to offer a potential solution to helping validators in the bottom half of the active set.

We think it could be a good way to make validators whole for the first 5-6 consumer chains (at current ATOM prices).

Validator expenses are extremely important!

I also think it’s very important to have this discussion around the LST tax now because we don’t want to be in a position of talking about this once we are up against the max cap. We need to be proactive (just like we need to be proactive regarding validator costs).

Next post is coming on Monday or Tuesday

Thanks for this post! Lots of detail here to be picked through. I have some thoughts / questions: effortcapital: Additionally, the LSM only limits onchain LST providers like Stride, Persistence, and Quicksilver. It does not limit offchain LST providers like CEXs, putting onchain providers at a structural disadvantage and potentially compounding the centralization risks LSTs have. A dynamic liquid staking tax doesn’t really resolve this issue though does it? Offchain providers would be exempt from this tax and could thereby provide competitive rates as compared with more incentive-aligned LST providers. Is there a solution to this issue that can be included within this broader framework to address off-chain actors? Otherwise we’re simply swapping one centralization concern out for another. effortcapital: We’d also recommend adding a fifth governance-controlled parameter called the “0% tax Utilization threshold” (U0%). To encourage the growth of liquid staking early on, the first X% of liquid staking utilization should not see this tax. For this exercise, we propose U0% of 25%, meaning once 26% of all staked ATOM is liquid staked the tax kicks in on…

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It’s a hard one.

I’d like to see all the on-chain parameters included in a future update with a near-zero tax at inception because having more liquid-staked tokens is incredibly more important than revenue or dominance check at the moment.

But at the same time, waiting too long could mean that a majority of stakers would be against taxing themselves ? Or maybe not, the vote to increase the community pool tax did pass afterall.

We propose 0% tax for the first 20-25% LST market penetration to get the engine going.

We would also like for any change to this LST tax to require a supermajority vote so it’s not easily changed.

Great post! I would like to add a whale tax for the LSM. Why? The recent events with stATOM.

Some whale withdrew a huge amount of stATOM with the LSM and swapped it instantly. In my opinion this creates a huge problem for the LST, because you can game the system.

For example you can withdraw a huge amount with the LSM, swap to ATOM, short ATOM perps with 50x leverage and you will make a good profit. In the meantime the LST depegs and people can get liquidated on lending protocols if they borrowed against LST. In my opinion this drastically reduces the utility of the LST, because you always have the risk that some whale dumps a huge amount with the LSM. With ATOM you have a 21 day waiting period and the market can go against you.

I would like to add a dynamic tax for the LSM unbonding too. You can withdraw a specific amount without any changes, lets say 100k ATOM, but if you want to withdraw more-> 200k ->5% fee, 300k->10% fee. In general this should be tied to the ATOM market cap. If the market cap doubles, you can absorb way more selling pressure and remove the fees/ increase the levels.

I just want to open the discussion, people can disagree

Basic economic dictates and it tells me that there are quite some false assumptions here on the risk measurements. Making the analogy between liquid staking and lending-borrowing bears qui a lot of false assumptions. The main one being the risk associated with both activities. On a liquid staking the risk comes with the “depeg” that the LST can have with its native representation when supply and demand don’t come to balance. In that sense this could be similar to lending protocols, but this is despite the natural arbitrage that can come with the protocol native redemption rate in the case of LSTs. The fact that the protocol offers a natural redemption that is always delivered if you accept to wait for the unbonding period. Therefore the risk isn’t the same. As LS brings a guaranteed and predictable return for arbitrageurs to step in and restore the “peg”. This mechanism has no replicate in the lending world. Therefore calling this a similar risk model is quite false imho. Still, I think this tax idea isn’t bad but should be reassessed in a different context. Maybe to be implemented as we get closer to the maximum LS target set by the protocol, instead of calling it to replace…

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effortcapital:

Our follow up post is going to offer a potential solution to helping validators in the bottom half of the active set.

effortcapital:

Next post is coming on Monday or Tuesday

Looking forward to the new post you mentioned

Thanks for the thorough response and the questions. We’ve been thinking about this idea for a while and are really excited about the potential it has for the Cosmos Hub! A dynamic liquid staking tax doesn’t really resolve this issue though does it? Offchain providers would be exempt from this tax and could thereby provide competitive rates as compared with more incentive-aligned LST providers. Is there a solution to this issue that can be included within this broader framework to address off-chain actors? Otherwise we’re simply swapping one centralization concern out for another. While the LST tax does not fully solve this issue, we believe it does create a better market structure for onchain LST providers to grow beyond the current 25% max cap that is placed. Offchain providers like CEXs historically have a much higher commission rate than other validators in the set and they will likely add an additional take rate for offering an LST derivative (example: Coinbase charges a 25% fee on cbETH in addition to charging fees for staking). If Coinbase (or another offchain provider) charges a similar fee on cbATOM, then with the parameters we show in this post, LST market…

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Hey Govmos, appreciate the feedback.While the LST provider-to-lending protocol analogy is not a perfect 1:1, I’m not sure that’s the reason to not accept the idea behind the LST tax, but would love to answer any questions you have to get your support!

While LSTs can “depeg”, an asset you borrow or lend against can also rapidly depreciate, causing your LTV ratio to go below a threshold, forcing you to be liquidated of your position. The risks from borrowing/lending are still quite similar to liquid staking, in our opinion.

We think its very important to start having these discussions now instead of waiting until we hit the max LST target because as we move closer to the 25% cap, offchain providers can start offering LSTs that completely go around the cap imposed by the LSM today. The LSM cap puts a structural disadvantage on onchain providers that could have serious consequences for the Cosmos Hub in the future.

Hey Cosmic!

Havent forgotten about the post - we knew the Informal post and another post by Binary was coming online this week and we didn’t want to overwhelm the forums with too many posts. We want to make sure each of our posts are given the right attention.

We will likely delay our post until early next week. Thank you for holding us accountable though! More to come from us shortly.

I still maintain that the structural difference existing between the two economic models is more important than that ! Anyway we also believe some of your ideas are legitimate and worth debating. We also agree that we would be better having those discussions before reaching the cap. But for the time being we seems to have plenty of time on that front. Still, it’s always better sooner rather than later. On this front our standpoint is that the cap shouldn’t be removed, absolutely not actually, but we think your model could be used to remove the constraint of a straight-line cap level. We could introduce your model on the curve going from 20 to 25% LSTs, that would smooth out the excess demand at the end of the curve, making it less steep. That’s a proposition we would be happy to support. But expanding the cap or even removing it, that’s not even debatable for us at the moment !

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I am firmly against this proposal. To begin with, I think 25% LST is far too high. stETH is about 7% of ETH. stATOM is about 3.3 million which is 1% out of the current 292M in circulation. To even talk about breaching the 25% is a little bit insane given these fairly poor adoption statistics for liquid staking. The poster seems to be thinking from the standpoint of a hedge fund or some other institution which wants to get stATOM and use it for professional trading purposes. Generally speaking market making activities normally account for about 5% to max 10% of the supply of given commodities. In fact, having 10% of the supply assigned for market making is the equivalent of “cornering” the market. Having so much of the supply of ATOM engaged in market making or professional activities will lead to an insane volatility of the ATOM price which is not good for the Cosmos Hub or its mainstream adoption (see Hunt brothers cornering silver). Last thing we want is professional pumps and dumps of ATOM. The author assumes that stATOM will be bound into DeFi protocols but that is bad assumption. It is far more likely that stATOM will be used for fast speculation and potentially high…

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Making ATOM into a business turns it into an unregistered security. It seems like an obvious mistake to risk the most liquid token in the cosmos. Tokens should have a function, not a business model.

vixcontango: I think 25% LST is far too high. stETH is about 7% of ETH I think you are confusing a few things here. • The 25% liquid staking cap of the LSM refers to a % of the amount of ATOM staked, which is around 67% of the total supply, not 25% of the total supply • The current supply of ETH is around 120M ETH, and the total amount staked around 25M ETH, so the staking ratio is around 20%, far from the 67% in the case of ATOM • From these 25M ETH staked, around 9M ETH are liquid staked via Lido and other providers, so 9M ETH is around 36% of the total 25M ETH staked and most controlled just by one provider, Lido. So currently, looking at the amount of ETH staked, ~36% of this is liquid, and 36% is larger than 25%. You claim ‘liquid ETH is about 7% of ETH’, this is incorrect because rather than 7% is around 36%. You are getting 7% because you are dividing 9M/120M, but 120M is incorrect because this is total supply of ETH, you need to use 25M of staked ETH • The 25% limit is related to the risk of liquid staking providers collectively controlling one third of staked ATOM, so this limit is to prevent this risk vixcontango: stATOM is about…

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common_spelling:

Tokens should have a function, not a business model

they should have both actually.

Tokens should serve a function, if they perform that function well then businesses use them. When tokens LARP as businesses they become unregistered securities and are prone to corruption/rug.

Bitcoin doesn’t have a business model. If its function wasn’t useful it wouldn’t be used to conduct business. Business models are built around its functional attributes, not the other way around.

do you have a master or doctorate in economics ?

Guinch_Roze:

do you have a master or doctorate in economics ?

is that a question for me or the teams pitching business schemes to validators that alters the function of an established token with promises of future profit/revenue based on the work of third party teams like stride?

Changing ATOM’s supply schedule and implementing a LST tax is not a business scheme.

The function of ATOM is to secure the Cosmos Hub and offer shared security to consumer chains.

ATOM is also an asset that some people may decide to use as collateral or as a liquidity pair in DeFi.

the Cosmos is a validator business scheme.

if LSDs were natively issued through the LSM to any user 1:1, rewards claimable by bearer, it would just be a function of the token and not part of the AEZ business model.

Thanks for clarifying the numbers. I am using the CoinGecko circulating supply which is at 292M. I see that you are using the CoinMarketCap and Mintscan number which is 367M. I should use that too, but in my database right now I get my data mostly from CoinGecko. That’s a pretty big difference and I am not sure why CoinGecko is so far off from Mintscan. I understand better what the 25% LST cap means now but still my point stands. We need to run the LST market at scarcity the way Bitcoin runs its bitcoin space at scarcity. LST should be 5% of total in circulation. The current cap of 25% LST means that 25%* 67% = 16.7% of supply can be liquid staked. That is far too high. To bring this down to 5%, that means the LST cap should be about 10%, not 25%. I get my stAtom number from Stride on Mintscan: Mintscan . Where do you get the 4.7M? I looked at stkAtom on Persistence but it doesn’t add up to 4.7M. Adding that I still get about 3.7M. There is an extra million I can’t locate. Cosmos doesn’t have the Bitcoin problem where its blockspace is full. Cosmos has the opposite problem - blocks aren’t full. Objective #1 is to fill the blocks. I view LST as a B2B product - it will be used…

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