Increase Community Pool Tax Rate

Summary

The aim of this proposal is to increase the community tax rate from the current 2% to 10% with the aim of increasing inflows to the community pool in order to help with future funding that brings utility to the Cosmos Hub.

Background

Over the past couple of weeks, there have been a lot of fruitful yet sometimes heated discussions regarding the funding model for the Cosmos Hub.

‘Why do we need to create a treasury’ was asked regarding a proposed overhaul of the tokenomics model of the Hub and oftentimes the general consensus would be that it’s to future proof funding for the Cosmos Hub and anything that would need to be built or funded. The proposed solution was to have a direct mint of tokens to a treasury pool.

However, the Hub already has a Community Pool that has been used in the past for various community spend proposals. This pool is funded through taxation on a per-block basis. The current tax rate is 2%. By increasing this we can achieve a similar outcome of expanding the pool of funds available for public good funding, without the immediate creation of a new entity or the bulk minting of ATOM.

This proposal aims to increase inflows to the Community Pool to make it more in line with what we see around the ecosystem and to ensure that funding for future endeavours are secured. This is merely just a first step and more improvements will come later.

Community Pools comparison

As a chain, the Cosmos Hub has a fairly small community pool compared to its market capitalisation:

Cosmos Hub - 1.24M ATOMs ~ $13M / Market Cap $3.1BN

Osmosis - 52.13M OSMO ~ $60.4M / Market Cap $560M

Juno - 15.73M JUNO ~ $37.3M / Market Cap $150M

Stargaze - 445M STARS ~ $20.5M / Market Cap $60M

Looking at other projects across the Cosmos Ecosystem, the Hub has a small community pool compared to its market cap at just 0.41%.

Looking at other ecosystems similar to that of Cosmos, we can find Polkadot (DOT). Polkadot has a market cap of $6.7BN dollars with a treasury pool of roughly 38M DOT which equates to $230M. This figure equates to 3.4% of its total market cap. This large pool of funds is used to fund the growth of the ecosystem through grants, development funding and also community building.

On the Cosmos Hub these sorts of proposals are hard to come by due to the limited amount of funds of its community pool, and also social cost required to engage with the community. The ATOM 2.0 proposal suggested that a Treasury be created and be bootstrapped with 4M tokens at with every approved vote up to a maximum of 10 tranches. Ultimately the idea of initially minting 4M to the community pool came into the limelight. However, various community members were still uneasy about minting such an amount due to dilution effects.

The system as it is currently has its flaws but also works. Until consensus on that solution is found regarding the future of inflation and if / when ATOM becomes deflationary, we, Simply Staking, are proposing increasing the community pool tax from the current 2% to 10% as that will help bootstrap the community pool organically without too much compromise to inflationary yield.

Community Pool Tax

Current rate of Issuance: 9.6ATOM per block according to x/mint

Current amount of blocks per year: 4,360,000

Instead of the current 0.192ATOM being transferred per block to the pool with the 2% tax, with a tax rate set at 10% we would see around 11,460 ATOM per day (0.96 ATOM per block) get moved to the community pool. Over a year this would allocate around ~4.2M ATOM to the community pool.

How will this increase affect staking rewards?

With every block, staking rewards are minted. A percentage of those rewards are diverted to the community pool and then the rest to the stakers. Increasing the tax rate from 2% to 10% will decrease the rewards that stakers will receive by around 8% (from roughly 21% right now to 19.4%)

The premise here is that the value generated by a strong community pool, public good funding and ecosystem development will vastly exceed the yearly single digit % loss in rewards by stakers.

Link to the Forum discussion - Increasing Hub Community Tax

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