Clever By Halving

Polkachu Intern | 2023-11-20

The voting period for CosmosHub Prop 848 is set to end this week. At the current pace, the prop will pass by a wide margin. Polkachu is the first validator to vote "Yes", and we are here again to help make sense of it all if the prop indeed passes.

InFlAtIoN DoEs NoT MaTtEr

People have a wide range of opinions on what is the optimal inflation for CosmosHub. The proposer of Prop 848 has written a detailed justification on why we should lower the max inflation to 10%, and Chjango wrote an equally reasonable rebuttal in favor of keeping the inflation as is.

But hear me out: Inflation does not matter. It does not matter in 3 ways:

1. Inflation does not matter in terms of the staking rate, and by extension, the blockchain security. Data analysis shows that "the bond ratio will likely not be impacted. There is a no correlation between the APR and the bond ratio in Cosmos". See tweet.
2. Inflation does not matter in project valuation. One common misconception is that inflation dilutes project valuation. However, Inflation has nothing to do with a project's intrinsic value determined by its future cashflow. Extra tokens from inflation will reduce the value per token, but token holders get the exact amount of tokens to compensate for the per-token loss.
3. Inflation does not matter in sell pressure. Crypto influencers love to take a populist stand: "Look Ma. Whales/Validators are dumping!" Looks, nothing stops a motivated seller if a project is NGMI. They can sell extra tokens from inflation, or sell the existing tokens. Tokenomics cannot save a doomed shitcoin, neither can it rekt a good coin that people want to HODL.

Sacrifice and Change

"Okay intern, if inflation does not matter, what's the point of Prop 848?" I am so glad that you've asked. For me, it is about two things: sacrifice and change.

Both stakers and validators are making a sacrifice by voting "Yes". While inflation does not dilute the overall project valuation , it does redistributes the value from non-stakers to stakers. For every staker who votes "Yes", they are willing to forgo a small portion of future wealth redistribution. For every validator who votes "Yes", they are willing to forgo even more, as validation can be regarded as a leveraged play in inflationary wealth redistribution.

The sacrifice is worth it as it signals change for CosmosHub. For the longest time, the CosmosHub community has exercised the "precautionary principle" and voted down transformative proposals like CosmWasm and ATOM 2.0. It is with good intention, but it leads to the stagnation of CosmosHub.

Celestia has passed CosmosHub as the largest market-cap coin in the ecosystem, Noble USDC is likely to become the canonical fiat on/0ff-ramp, and ICS is by no means the runaway success that many have hoped for. It is time for CosmosHub to rethink its market position and make some changes. I do not know what these changes should be, but this inflation adjustment is the first baby step. With a lower inflation rate, maybe ATOMs can proliferate into DeFi applications more, which would make ATOM the interchain money along with Noble USDC? Maybe, maybe.

This "Ninja Turtles Evolution" meme often strikes a nerve in the CosmosHub community, as if people have resigned to the belief that this is a natural lifecycle of any project, including CosmosHub. However, it does not need to be. The only projects that walk into the sunset are those that do not change in this fast-evolving space. Prop 848 is the beginning of these changes. I look forward to these changes, because they are good changes Brent!