Cosmos Hub Tokenomics - Fiscal and Governance Policy (Blockworks Research)

TL:DR - As a follow-up post to our Cosmos Hub Fiscal Policy post here , where we introduce a Dynamic Liquid Staking Tax, Blockworks Research is proposing to change ATOM’s fiscal policy from a static 10% community pool tax to a multi-pronged tax approach that includes a (in addition to the LST tax): 1. Vote Power Tax 2. Dynamic Community Pool Tax Although outside of our scope for fixing ATOM tokenomics, Blockworks Research also proposes the idea of “Cubic Delegation”, which we go into more detail below. Cubic Delegation has the potential to fix the centralization concerns with respect to onchain governance while ensuring quorum can still be met. Pitfalls of dPoS with Onchain Governance Historically, the Cosmos Hub’s Nakaomoto Coefficient (number of validators required to reach 33% VP) has oscillated around 7 and 8, putting not only the liveness of the Cosmos Hub in the hands of a select few, but governance as well. This issue is not unique to the Cosmos Hub, but is inherent in dPoS systems as token holders vote with their feet via direct delegation. Although this incentivizes users to choose perceptually “good operators,” it is a major centralizing force since users…

Excerpt (1197 of 13667 characters). Read the whole post on the forum ↗

Huge but what is the process discussion? then draft proposal in the forum then vote?

How long does it take? I know it will depend on vote and what direction hub want to take but we need to have a roadmap or date for tokenomics change.

How do you plan to deal with sybils which will try to undermine their fair share of tax?
Ex - Binance Node and Binance Staking
stake.fish and grant.fish

The extent of this research is staggering. We will take the necessary time to read it carefully and propose feedback with as much depth as you putted into this post. We would just note that the quality of discussions in the Hub have improved significantly over the last few months and thank you for being part of the persons who greatly contributed to this.

can validators liquid stake their self-bonded stake?

The VP tax gives CEXs an advantage/exemption because they custody the majority of their delegations and can simply self-bond their customers staked assets.

Why are you recreating the same corrupt financial systems that the cosmos is intended to free us from? If I wanted to pay > 20% tax to support a welfare system I would just stay in the Dollar.

Firstly, I’d like to start off by applauding the effort that was put into this; this is a great piece of work and I do hope that this results in spearheading proposals to implement these changes. In a separate manner, the mechanisms proposed above will still add substantial value, however (and by way of a precusor), I am highly in favour of implementing this holistically as there are a lot of underlying benefits that would emerge therefrom. dPoS Pitfalls re. Centralisation All in all, the underlying mechanics that are implemented so as to cater for the principle-agent issue (which is, as stated, a susbstantial centralising factor in all dPoS blockchains), must strike a balance between the following principles of decentralisation (which is a very wide spectrum): • Incentivising users to disburse delegations to varied validators so as to i) Incentivise new validators to participate in consensus and ii) reduce reliance (or rather, over-reliance) on limited few validator operators (thus contributing to the progressive decentralisation of the Cosmos Hub (disbursement, new entrants, more validators in consensus = progressive decentralisation of the stack’s consensus…

Excerpt (1188 of 4479 characters). Read the whole post on the forum ↗

I guess because like with every other system, those who maintain, work for and bring growth and innovation to it have to be paid. But unlike the US welfare system, tax money spent on the Cosmos Hub system should directly benefit every $ATOM holder, rather than being wasted on unproductive expenses like funding military operations, secret agencies and feeding a corrupt and obsolete boreoarctic apparatus. In crypto, we the plebs, actually have a say on what happens with the taxpayers money and this proposal even strengthens this point by taking away voting power from the top of the validator set and distributes it more evenly thorough the active set. The same is true with validator earnings. Thus, to me it makes sense to initially increase the community pool tax to 20%, in order to bootstrap the growth of the AEZ, incentive align dev teams working on and for the Hub, and to fund novel primitives like the Atom Alignment Treasury, the DRIP Module and various SubDAOs. However, I agree, there should be checks and balances in place, so that ATOM holders can at any time revoke or amend the funding amount that goes out to certain parties, if they are deemed untrustworthy or don’t…

Excerpt (1197 of 1224 characters). Read the whole post on the forum ↗

thank you so much for saying this, it’s why I’m here

Seppmos:

But unlike the US welfare system, tax money spent on the Cosmos Hub system should directly benefit every $ATOM holder, rather than being wasted on unproductive expenses like funding military operations, secret agencies and feeding a corrupt and obsolete boreoarctic apparatus.

First of, thanks for all the thought and work put into these posts, great to see the Blockworks team getting involved in Cosmos governance like this! I found the liquid staking tax an intriguing deterrant to concerns about overreliance on liquid staking to consider but do also feel that the issue with these sort of models generally lies in workarounds that are available for custodial actors and larger operators. Especially the concern around custodial actors/CEXes being able to circumvent liquid staking limitations and via self-staking customer tokens additionally allowing them to earn higher yield than independent validators with the Vote Power Tax might have the opposite effect of what the goal of this mechanism is. It might be that centralized players will be legally constraint to do something like this (seems likely at least in the US given the actions against centralized staking products recently), but other jurisdictions might not impose such regulations. With respect to the validator self-bond, one thing to think about is the potential for operators to borrow ATOM to self-stake to maximize their capacity. A financially savvy and well-connected operator will be able to…

Excerpt (1199 of 1969 characters). Read the whole post on the forum ↗

effortcapital: If this Vote Power tax was implemented today, the Cosmos Hub would generate an additional ~900k ATOM in tax revenue in year 1. This revenue could be equally distributed back to all validators as a subsidy (~5k ATOM/validator/yr) to keep all validators afloat as Interchain Security scales, allowing the Cosmos Hub to benefit from the poor stake distribution. If the community decides to implement this tax, Blockworks Research recommends re-distributing this tax back to validators equally only if the Replicated Security soft opt-out is removed, as this tax alone should allow most validators to scale to ~5 consumer chains without running at a loss (at ATOM current prices). effortcapital: Those who delegate to validators with more Vote Power would be subject to a higher tax. This is an interesting idea and I hope it will be implemented, thank you, however regarding the other idea for the community pool tax, it was already increased from 2% to 10%, I think increasing it to 20% is excessive. But why would the top validators vote yes to approve this Vote power tax proposal? If the proposal is approved it is unlikely that delegators of the larger…

Excerpt (1199 of 2662 characters). Read the whole post on the forum ↗

Seppmos: But unlike the US welfare system, tax money spent on the Cosmos Hub system should directly benefit every $ATOM holder, rather than being wasted on unproductive expenses like funding military operations, secret agencies and feeding a corrupt and obsolete boreoarctic apparatus. The US welfare system uses this exact same argument to justify it’s corrupt and obsolete bureaucratic apparatus. Seppmos: n crypto, we the plebs, actually have a say on what happens with the taxpayers money and this proposal even strengthens this point by taking away voting power from the top of the validator set and distributes it more evenly thorough the active set. The same is true with validator earnings. Is this a joke? are you saying that you actually believe that validators voting to raise the minimum commission or raise CP tax was based on the will of the users? madness. Seppmos: Thus, to me it makes sense to initially increase the community pool tax to 20%, in order to bootstrap the growth of the AEZ, incentive align dev teams working on and for the Hub, and to fund novel primitives like the Atom Alignment Treasury, the DRIP Module and various…

Excerpt (1192 of 1707 characters). Read the whole post on the forum ↗

This research seems to align with principles reminiscent of wealth redistribution, a concept often associated with communism, where resources are taken from the affluent and distributed to the poor. The concern is that this approach discourage high-performing top validators and encourage smaller ones, some of which might not offer the same level of service quality. Furthermore, this incentivization might not motivate smaller validators to improve their performance, as they would receive more stake regardless. Meanwhile, larger validators might become disheartened due to reduced profits and consider redirecting their efforts to more democratic projects. As rightly mentioned, custody validators would have an advantage, as this scheme is unlikely to significantly affect their profitability, and they can self-stake a substantial portion of their holdings, unlike others. While self-bonding dependence may have its merits, the proposed proportion appears impractical. Regarding increasing CP tax, perhaps a more prudent initial step would be to judiciously manage the existing treasury and ensure that expenditures are both equitable and beneficial. What’s the point of funding CP…

Excerpt (1194 of 1725 characters). Read the whole post on the forum ↗

Lordi_Helson: The concern is that this approach discourage high-performing top validators and encourage smaller ones, some of which might not offer the same level of service quality. You seem to be associating large validator=top performance/uptime, this is totally not the case. Look at the data, some of the biggest validators have terrible performance, missing a lot of blocks and always late for upgrades, not to mention zero participation in governance or here in the forum. Many small validators have very high performance, for example we are a small validator and currently only Polychain missed fewer blocks than us in the last 3 months, 21 missed by us versus 18 by Polychain. Lordi_Helson: Furthermore, this incentivization might not motivate smaller validators to improve their performance, as they would receive more stake regardless. Meanwhile, larger validators might become disheartened due to reduced profits and consider redirecting their efforts to more democratic projects. Again, you are assuming big validator=top performance, and because of this top performance they got large delegation. This is absolutely incorrect, as mentioned above many small…

Excerpt (1199 of 2779 characters). Read the whole post on the forum ↗

Cosmic_Validator:

I disagree, the potential consequences of the vote power tax implemented are increasing the decentralization of the Cosmos Hub which is very positive especially now that replicated security is offered to consumer chains and providing the funds to smaller validators to run many consumer chains and scale the AEZ model, which is also very positive.

If delegators discover they get rewards in range 10-15% apr instead of 19% added to the local ATL atom price, they barely will not be happy. Who will care about decentralization when the chain will lose its audience & thus market cap?
Again, it’s not the right time for such changes during the bear. And even when the market eventually turns green, it’s crucial to carefully consider all elements to achieve a fair balance among participants, rather than creating a situation where one group benefits at the expense of another, making centralization just change the mask.

Lordi_Helson:

If delegators discover they get rewards in range 10-15% apr instead of 19% added to the local ATL atom price, they barely will not be happy. Who will care about decentralization when the chain will lose its audience & thus market cap?

It seems you are not understanding how the Vote Power Tax works. This tax is for the largest validators as described in the equation in the proposal. When active delegators of the largest validators become aware about this new tax and the lower APR in the largest validators, they will redelegate to smaller validators for higher APR, and this dynamics over time will lead to a much better decentralization in the Cosmos Hub. The delegators who are not very active will be paying this tax until they are aware and then they can choose to support decentralization and earn higher APR, or keep delegating to large validators and pay the tax for this.

Governance is ATOM’s unique feature, quadratic voting protects minority rights and prevents whale manipulation.

Cosmic_Validator: It seems you are not understanding how the Vote Power Tax works. This tax is for the largest validators as described in the equation in the proposal. When active delegators of the largest validators become aware about this new tax and the lower APR in the largest validators, they will redelegate to smaller validators for higher APR, and this dynamics over time will lead to a much better decentralization in the Cosmos Hub. Anyway LP tax 20% would affect the whole set, and lower apr by 1,9%. Bottom validators under the median, not all of them of course, but apparantly a substantial part, have a small public presence and poor experience in cosmos. Quality of such might be questionable when the whole entity consists of two people literally, with no backups, without cosmovisor, while replicated security adds comlexity to the maintenance process. And delegators will have a choice between proven quality & higher yields with higher slash risk. Such experiments could be trialed in better market conditions with gradual raising the tax to have a chance to assess the short term effect & make minor corrections if needed. In the current version the difference…

Excerpt (1193 of 1233 characters). Read the whole post on the forum ↗

Lordi_Helson: Anyway LP tax 20% would affect the whole set, and lower apr by 1,9%. I mentioned before that we don’t support this further increase of the CP tax from 10% to 20%, why are you mentioning this if what I’m discussing with you is the vote power tax, not the CP tax increase? Lordi_Helson: Bottom validators under the median, not all of them of course, but apparantly a substantial part, have a small public presence and poor experience in cosmos The median of 0.17% VP corresponds to the rank ~88/180. There are validators above the median and below the median with great performance and adding a lof of value to the Cosmos Hub. You are suggesting that most validators above the median are great, and most validators below the median are poor quality, this not true. What do you mean by ‘poor experience in Cosmos’? If you take objective data such as uptime, governance participation and more as the definition of ‘proven quality’, you will see that your statement ‘most validators above the median have proven quality, and most validators below the median don’t have proven quality’ is incorrect. Your argument for not implementing the vote power tax is ‘the…

Excerpt (1198 of 1751 characters). Read the whole post on the forum ↗

Cosmic_Validator:

If you take objective data such as uptime, governance participation and more as the definition of ‘proven quality’, you will see that your statement ‘most validators above the median have proven quality, and most validators below the median don’t have proven quality’ is incorrect.

somehow slash events were more frequent for smaller ones. And I’m not saying that all top are good & all bottom are bad, but main trend takes place.

Cosmic_Validator:

Delegators will have a choice between:
-Maintain the centralization of the Cosmos Hub by delegating to the largest validators and pay a tax for this
-Support decentralization by delegating to smaller validators and don’t pay the tax, and no higher slash risk since they can choose the small validators with great performance

Some of stakers don’t even realize aspects of validators, apr and centralization. They may discover their earnings suddenly fell by 30% in pair of poor price and just leave.

I do not understand what will stop big validator from launching 10 small validators to avoid VP tax. If you want to distribute stake to smaller validators I recommend to implement dynamic commission same like offered in this proposal on Terra Classic: Commonwealth

Did you check the equation? There are two scenarios here: • Most/all delegation is self-stake, example: a validator with 5% VP launches 5 validators of 1% VP each. Well, he doesn’t have to do it in the first place, because according to the formula 5% (VPi) - 5% (the VPsb^2/VPi), so the VP tax would be 0 • Most delegation external, not self-stake: this other 5% VP validator could try to launch 5 new validators, but good luck attracting this 5% VP to the new validators out of the active set. If he manages to do this, according to the formula VPsb would be almost 0 so can be ignored, now let’s assume median is 0.17% and honestly with this 5 new validators the median is unlikely to change much so. 5% - 0.17%= 4.83%, and in the case of 5 new validators, 5*(1%-0.17%) → 5*0.83=4.15%, not very different Edit: I checked also what you mentioned about dynamic commission @Sephiroth , what this does is forcing a high minimum commission on the largest validators. The idea here with VP tax is similar, since this tax would be like a higher commission for the largest validators with low self stake. The difference is that in the case of the VP tax, this tax is then distributed equally…

Excerpt (1198 of 1772 characters). Read the whole post on the forum ↗

VP Tax idea is not similar. This idea is about expropriation, while idea with dynamic commission is win/win for all parties.

About your math I still do not understand. Lets say there is 5% VP validator with 0 self stake but loyal delegators. So according to proposal this validator will pay 4.8% VP tax. If same validator launch 10 nodes with 0.5% VP each he will pay 0.3% tax in total. Compare 4.8% with 0.3%.

Sephiroth:

If same validator launch 10 nodes with 0.5% VP each he will pay 0.3% tax in total. Compare 4.8% with 0.3%.

Incorrect, he would pay 10*(0.5%-0.17%)= 3.3%, and considering the costs of running 10 validators vs the costs of running one, this 3.3% is likely closer to 4%, so not so different.

Sephiroth:

VP Tax idea is not similar. This idea is about expropriation, while idea with dynamic commission is win/win for all parties.

The dynamic tax idea can also be called ‘expropriation’, since you are expropriating rewards from stakers to be given to large validators with a higher minimum commission. In the case of VP tax, instead of these rewards being earned by the largest validators, they are distributed across the whole set, this is to support the costs of many consumer chains and hence the growth of AEZ.

Can you please explain your math. Why does 0.33% become 3.3%?

1 validator scenario (5% VP)

VP Tax is 4.8%. Current APR is 22% so it will be 22% - 4.8% = 17.2% APR

1 validator scenario (0.5% VP)

VP Tax is 0.33%. Current APR is 22% so it will be 22% - 0.33% = 21.67% APR

10 validators scenario (10 x 0.5% VP)

VP Tax is 0.33%. Current APR is 22% so it will be 22% - 0.33% for each validator. 21.67% APR for each validator.

Dymamic commission cannot be called expropriation as every delegator can instantly redelegate their stake to any other validator with lower commission. In contrast, the VP Tax leaves no alternative for a validator except to lose rewards and delegators simultaneously without any other options.

Sephiroth: 10 validators scenario (10 x 0.5% VP) VP Tax is 0.33%. Current APR is 22% so it will be 22% - 0.33% for each validator. 21.67% APR for each validator. Haha bro, it is not 10 validators scenario, it is 1 validator entity splitted in 10 smaller validators, so he pays the total combined tax of 10*(0.5%-0.17%)=3.3%, and again, now he has 10x the infra costs and more for the 10 validators, so considering this the tax would be closer to 4%, so splitting validators like this cannot really avoid the VP tax, even if the ‘loyal’ delegators you mention quickly redelegate to his 10 new validators Also, the highest APR currently of validators at 0% fee is around 19.1%, from where do you get that 22% APR Sephiroth: Dymamic commission cannot be called expropriation as every delegator can instantly redelegate their stake to any other validator with lower commission. In contrast, the VP Tax leaves no alternative for a validator except to lose rewards and delegators simultaneously without any other options. In VP tax is similar, every delegator can instantly redelegate their stake to any other validator with less VP and hence no VP tax, and in doing this…

Excerpt (1198 of 1599 characters). Read the whole post on the forum ↗

Seems like there are two potential centralization risks with a higher tax:

• Becoming less competitive with CEX staking services which can bypass the tax entirely by being 100% self-bonded (this isn’t likely to be a problem, given Coinbase currently charges 35% on staked ATOM rewards)

• Encouraging any validator with large amounts of delegated stake to attempt to take up multiple ‘validator’ slots, knocking real independent validators out of the active validator set

Cosmic_Validator:

total combined tax of 10*(0.5%-0.17%)=3.3%, and again, now he has 10x the infra costs and more for the 10 validators, so considering this the tax would be closer to 4%, so splitting validators like this cannot really avoid the VP tax, even if the ‘loyal’ delegators you mention quickly redelegate to his 10 new validators

If you pay a 0.33% tax on $10 ten times, you’ve still only paid 0.33% on $100. The absolute value increased by ten, but the 0.33% tax percentage stayed the same.

And is there a reason a validator can’t cheaply spin up 9 extra ‘validators’ that don’t actually run a node, and just sign the same votes that the one real validating node does?

Why are you multiplying by 10? 0.33% from 100 ATOm is 0.33 ATOM. 10 x 0.33% from 10 ATOM is again 0.33 ATOM.

Regarding APR current APR with 0% fee is 22.2%. I recommend to use reliable sources.

Regarding VP Tax it is communism at its best. Choose wisely.

You can take a look at Polkadot type staking. Best examples are Moonbeam and Moonriver. Most of the small community validators were kicked out by big entities who can afford stake to get in active set.

For a long time I wondered why there is no mechanism in place that reduces rewards for the top validators to combat centralization of voting power. I like both the vote power tax and the quadratic voting idea. Though some have rightly pointed out loop holes that must be taken into consideration, what you proposed is a step in a good direction in my opinion!

Great post! Thank you. The VP tax seems like an appealing option. Here are a few thoughts:

• I’m not entirely convinced about reducing the tax for self-staked ATOMs.

• Without this reduction, the CEX can’t avoid the tax, as mentioned earlier.

• Additionally, a validator will have a reason to re-delegate their self-staked position to another validator. This somewhat reduces the incentives for Sybil attacks (a validator may find redelagatng more profitable than the Sybil attack), but doesn’t eliminate them entirely.

• If the VP tax also increases with self-stakes, Sybil incentives become even weaker. Validators creating new nodes with some of their self-staked ATOMs will still face a high tax (since the new node will basically have self-stakes).

• Validators looking to re-delegate to another validator will do so if the commission fee with the new validator is lower than the additional tax. This would lead to more competition for lower commissions.

jBQ: • I’m not entirely convinced about reducing the tax for self-staked ATOMs. • Without this reduction, the CEX can’t avoid the tax, as mentioned earlier. • Additionally, a validator will have a reason to re-delegate their self-staked position to another validator. This somewhat reduces the incentives for Sybil attacks (a validator may find redelagatng more profitable than the Sybil attack), but doesn’t eliminate them entirely. • If the VP tax also increases with self-stakes, Sybil incentives become even weaker. Validators creating new nodes with some of their self-staked ATOMs will still face a high tax (since the new node will basically have self-stakes). • Validators looking to re-delegate to another validator will do so if the commission fee with the new validator is lower than the additional tax. This would lead to more competition for lower commissions. The VP tax is 0% if you’re one of the below-the-median validators. Where is the incentive to delegate to someone else (and pay a commission), when you can simply become several tiny validators? And what stops a CEX from doing a Sibyl attack and evading the tax, too? Taxing self-stake would incentivize…

Excerpt (1195 of 2704 characters). Read the whole post on the forum ↗

thanks for your response. Good points! dynstatic: The VP tax is 0% if you’re one of the below-the-median validators. Where is the incentive to delegate to someone else (and pay a commission), when you can simply become several tiny validators? And what stops a CEX from doing a Sibyl attack and evading the tax, too? Taxing self-stake would incentivize more validators to evade that tax, and validators who are mostly self-staked are the best-equipped to perform a Sibyl attack. It’s mildly difficult to co-ordinate a large chunk of your 3rd-party delegators to re-delegate to entirely new, smaller “validators,” but it’s trivially easy to split up your own ATOMs. A Sybil attack has its cost. My point was just that, in some cases, a validator could be better by redelegating and paying the commission than assuming the cost of running new nodes. I agree that this would not be the case if you have to relegate too many ATOMs (in which case you would pay too much commission). That is why I said that there would be less incentives to do a Sybil attack (at least, for some validators, and comparing with the Syibil attacks incentives in the main post) but it does not kill…

Excerpt (1194 of 1524 characters). Read the whole post on the forum ↗

jBQ:

the cost of running new nodes

Why do they need to pay this cost? They only need one real validating node, and can just add several extra signing keys for the extra validators, which all vote for the same blocks.

jBQ:

Many participants mentioned that, with the scheme proposed in the post, a CEX could just self-stake and avoid the tax. If the tax is not reduced with self-staking, they cannot follow that strategy. However, as you said, they can still do a Sybil attack and split in many validators below the median validator.

Maybe I’m thinking too simple here, but aren’t the CEX validators known? Can’t we implement the vp tax in a way that it excludes staking as a service providers like CEXes from the self-stake vp tax reduction?