Prop 848: ATOM Halving: Set the max. Inflation Rate to 10%

This proposal seeks to reduce the max_inflation param from 20% to 10%, which would bring ATOM’s current inflation from ~14% to 10% and adjust the Staking APR from ~19% to ~13.4%. Adjusting the inflation schedule has been an important topic for the ATOM community over the past years which is why this proposal is being voted on.

Context: Dynamic Inflation Model

ATOM currently implements a dynamic inflation rate that ranges between a floor of 7% and a roof of 20%. The rate is pegged to a bonded or staked-ratio of ⅔.

If less than ⅔ of all ATOMs are staked, the inflation rate increases in order to incentivize staking aka. securing the chain. The velocity at which the inflation rate adjusts on a block-by-block basis is set by the inflation_change param and based on the following formula: (1 - [bonded ratio]% / 66% ) * 1 = [inflation rate change]% per year

At the time of writing, the bonded ratio for ATOM is 65.7% which means it is below the threshold of ⅔ and hence the inflation rate is currently increasing at a rate of +0.45% per year. Currently the inflation rate is at 14.24% and on track to reach 14.69% in 12 months from now.

Strengthening the AEZ & IBC DeFi

The Atom Economic Zone (AEZ) currently consists of Neutron (cosmwasm smart contract platform) and Stride (liquid staking provider). Noble (native asset issuance) is scheduled to be up next to transition into a Cosmos Hub consumer chain. As the AEZ gains steam, consumer chains rely more and more on the security that the Cosmos Hub provides.

Right now, the Cosmos Hub still offers the highest level of economic security in the interchain (staked tokens x current price) with $2.26 billion, followed by recently launched Celestia ($1.46 billion at 39.2% bonded ratio and > 8% annual inflation rate). For ATOM to maintain its value proposition as a security provider and attract more cutting-edge consumer chains, it must ensure sustainability and predictability of the future ATOM supply.

Reducing ATOMs inflation rate could also positively impact the adoption of IBC DeFi protocols and money markets across the interchain. As one of the most liquid- and widely-known assets in the Interchain, ATOM is best positioned to be utilized as collateral and liquidity gateway. However, due to the high inflation rate of ATOM, DeFi yield can hardly compete which slows down user growth and adoption.

Ensuring Network Security

With ATOM’s historical inflation being much higher relative to its peers, this has not only harmed the perception of ATOM’s monetary premium, but it has also led to constant sell pressure that has hurt its price performance. Research performed by Blockworks Research shows that the Cosmos Hub is overpaying for security and that high issuance is not a pre-requisite for >60% supply staked to the network, with most PoS networks issuing <7% of supply annually while maintaining over 60% supply staked. In the forum post ~here~, Blockworks Research recommends the transition of ATOM to a set supply schedule instead of dynamic inflation as a function of bond ratio.

Although it was not their initial recommendation, they also reference the lowering of both the max and min bounds of inflation as a near-term option while the community reaches consensus on this more drastic change in ATOM’s supply schedule in the future.

Validator Costs

At $9/ATOM, 10% max inflation, 5% commission, 67% bonded, and assuming ~$600/mo to run a validator per chain:

Validators 1-107: Profitable or break-even if this went through running 2 consumer chains

Validators 108-114 would break-even or run at a small loss since they cant soft opt-out with 2 consumer chains currently active

Validators 115-175: Can soft opt-out and are profitable running just the Hub

Validators 176-180: Unprofitable today and would be slightly more unprofitable if this went through

When combined with the soft opt-out mechanism and the recent increase in min_commission, at current ATOM prices nearly all 180 validators are break-even or profitable at 10% max inflation off of commission alone. ~At any point, validators have the option to increase their commission rate to help with their operational expenses.~

This will be the first of 3 proposals, where the other subsequent proposals will be used to reduce the min_inflation param and increase the inflation_change param that affects the speed at which inflation changes on a block-by-block basis.