Greetings community,
Over the last 9 months, a variety of research has been done across multiple organizations (i.e. Binary Builders, Blockworks Research, RMIT University) on potential tokenomic & decentralization tooling that can help improve the state of the Cosmos Hub. Those researches were commissioned by AADAO as part of the Tokenomics & Governance RFP. This post will help simplify & outline for the community a variety of recommendations that have been made from the research. This post also serves as a summary location that aggregates all of the collective research thus far completed.
The original goals of the research were as follows:
- Create better long-term alignment with the top developers in the ecosystem.
- Bring value to the ATOM token by aligning it with the growth of not only the AEZ but the Interchain as a whole.
- Develop smarter budget allocation strategies to ensure the Hub’s influence grows despite future boom and bust cycles.
- Establish a governance framework that enables smaller working groups to responsibly and effectively execute on behalf of the wider community.
- Offer insight into the economics behind Replicated Security with suggestions on how to create a more value-accretive relationship with Consumer Chains.
1. ATOM Inflation Recommendations
The original inflation schedule of the Cosmos Hub was designed in a pre-liquid staking token environment when there was more of a competition between DeFi activities vs security via staking. The Blockwork’s research outlined that the dynamic nature of inflation tied to bonded ratios can have a dramatic impact on long term supply issuance — this supply issuance entropy introduces additional unknowns to long term tokenholders & stakers. The research advocated for lowering the target minimum inflation rate to 3% using a 0.50% decrease in inflation year over year until the 3% target is hit, at which point there would be a long term slow transition to 1.5% using a 0.25% decrease in inflation year over year. Key to all of this is that inflation would no longer be a function of the bonded ratio. The research also recommends that the Cosmos Hub ossify its issuance schedule in a way that acknowledges the Cosmos Hub’s desire to solidify its positioning as sound Interchain Capital.
The primary pushback & feedback on this research is the decrease in incentives for stakers and validators, as well as concerns about a lack of offsetting revenue from the AEZ.
Learn more about the ATOM Inflation Recommendations.
2. Vote Power Tax
Another piece of core research presented advocates for a validator vote power tax for nodes that are higher up the list so as to encourage decentralization. The concept here is that staking APR would automatically be lower for nodes higher up the list, with a large piece of the tax being tied to self-bonded ratios. This would lower APRs on centralized exchange nodes and reduce their overall value extraction on the Cosmos Hub validator set. Ultimately, with the Cosmos Hub positioned as a security provider, the research recommends a continued focus on ensuring that the Cosmos Hubs security remains properly decentralized and well set up for the future in terms of stake concentration. Pushback on this idea has primarily been around free market advocacy and sybil attacks that occur with large nodes potentially launching multiple nodes to potentially get around the vote power tax.
Learn more about Vote Power Tax.
3. Dynamic Community Pool Tax
This research concept is focused on the idea of taking a “dollar cost averaging” esque approach with respect to how much ATOM goes into the community pool. In this model, the delta between the historical moving average value of ATOM from the current price of ATOM would inform the amount of ATOM being pushed into the community pool. If the current price of ATOM is greater than the moving average there would be less ATOM pushed into the community pool. If the current price of ATOM is less than the moving average there would be more ATOM pushed to the community pool.
Learn more about the Dynamic Community Pool Tax.
4. Community Pool Reserve Management
This research advocates for the community pool to slowly convert a % of its ATOM to stablecoins overtime so as to build up a treasury during the bull market that can be used to fund initiatives and operations for key growth initiatives (i.e. ATOM Wars, ICS, key development organizations, etc.). Naturally, this dollar cost averaging could be slowed down in a bear market so as to not put undue pressure on the ATOM token. General pushback on this research is the community being uncomfortable with ATOM in the community pool interacting with the open market in a way that creates sell pressure.
Learn more about the Community Pool Reserve Management.
5. ATOM Alignment Treasury
This research pushes for a mechanism whereby the Cosmos Hub has the ability to vote on consumer chain proposals as well as participate in controlling liquidity (controlled by the community pool) on other chains. The AAT module would consist of Interchain Account Management, Governance on Consumer Chains, and an ICA queue system. This system may be important as protocol owned liquidity deployments become larger, more complex, and frequent across the broader cosmos ecosystem; it will also become imperative for the Cosmos Hub to have a voice in governance as a result of airdrops to its community pool.
Learn more about the ATOM Alignment Treasury.
6. Developer Revenue Incentivization Program (DRIP)
This research acknowledges that the Cosmos Hub is limited in its ability to issue milestone based grants to key core development efforts. Because proposals tend to have 100% of funding up front, this creates both execution & pricing risk where the Cosmos Hub has no way to retrieve funds (outside of social pressure) from organizations or community pool initiatives that do not follow through on their commitments originally (successfully) voted upon. The pricing risk is tied to the fact that the Cosmos Hub may grossly overpay or underpay without having milestone based payments tied to a pricing oracle. By creating a more stable system for payments and interactions with the Cosmos Hub, this public good software would create more stability for both ATOM tokenholders and those that interact with Cosmos Hub funding. With the recent passing of CosmWasm, there may be open source candidates and maintainers that could help implement solutions to the above execution & price risk.
7. Quadratic Voting
An emerging concept in the world of governance is the use of quadratic voting as a means to nerf vote centralization (while not necessarily directly cutting into the staking APR of those delegated to validators with larger stakes). Similar to the “Vote Power Tax” it was recommended that self bond ratios could have a positive impact for the underlying node voting. Quadratic Voting is currently empowered by Axelar to help protect against vote centralization. General pushback on this type of system is that it gets rid of the 1 ATOM = 1 vote paradigm, which can add additional complexity to active governance stakeholders.
Learn more about Quadratic Voting.
8. Liquid Staking Tax
The liquid staking tax research is the concept that as ATOM LST adoption expands, as opposed to having a direct minting cap in place the Cosmos Hub could instead begin to monetize LST minting beyond a certain threshold (similar to how certain money markets work where higher utilization = higher interest payments). This research appears to be more relevant for once LST adoption has a much stronger grip on overall ATOM circulation, but is still an interesting mental model / research regardless. General pushback on this concept is there is not enough demand / adoption of ATOM LSTs to justify monetization of the adoption.
Learn more about Liquid Staking Tax.
9. Conclusion
The culmination of research efforts conducted by various organizations, including Binary Builders, Blockworks Research, and RMIT University, has yielded insights into potential tokenomic and decentralization strategy proposals that if passed by the community may enhance the Cosmos Hub. This post serves as a comprehensive summary, simplifying and outlining recommendations aimed at achieving long-term alignment with developers, bolstering the value of the ATOM token, optimizing budget allocation, and establishing effective governance frameworks. From proposals such as adjusting inflation rates and implementing validator vote power taxes to dynamic community pool management and the Developer Revenue Incentivization Program (DRIP), each recommendation addresses critical aspects of the Cosmos Hub ecosystem’s sustainability and growth. While some proposals may face pushback, particularly regarding their impact on incentives and market dynamics, the collective effort signifies a proactive approach towards fostering a robust and resilient Cosmos Hub poised for future success.
We look forward to hearing from you, the community, on which potential proposals you believe should be pursued.
