Cosmos Inflation Adjustment Controversy: Narrow Advantage Passes Proposal, Founder "Furious and Bifurcated"

Author: Haibo Jiang, PANews

The price of ATOM has been criticized by the fans of the Cosmos ecosystem, and a series of projects with high valuations have emerged on the basis of the Cosmos SDK, such as the former Terra, and the current Celestia, dYdX, etc., however, the valuation of Cosmos Hub (ATOM) is not as good as these ecological projects.

Or in order to increase the valuation of ATOM, a proposal was recently put forward on the Cosmos forum to adjust the ATOM inflation rate, aiming to reduce the maximum inflation rate from 20% to 10%, which also means that the current annualized yield of staking will be adjusted from about 19% to about 13.4%. We might have subjectively thought that such a proposal would have passed without controversy in favor of boosting the price of ATOM, but the reality is that the proposal sparked unexpectedly heated controversy and was passed by a narrow margin, a process that clearly reveals the divergence between different interest groups.

After Cosmos’ proposal to adjust the ATOM inflation rate was passed, Cosmos and Tendermint co-founder Jae Kwon tweeted his displeasure with the outcome and proposed a fork of ATOM. He believes that the current governance mechanism may not adequately represent the views of all coin holders.

Jae Kwon and the rest of the team have a long history of feuds, having resigned from his position due to disagreements over issues such as governance and project direction, and later splitting Ignite (renamed Tendermint) into two separate entities: Ignite and NewTendermint, with Kwon as CEO of NewTendermint.

Kwon’s proposal sparked a lot of discussion within the community, with many people questioning the possibility of a fork and its impact on the Cosmos ecosystem. The fork of ATOM could represent a major change in the Cosmos network, with important implications for both its long-term development and the interests of coin holders. This also reflects the governance challenges within the Cosmos community.

Cosmos is overpaying when it comes to maintaining cybersecurity

ATOM’s high inflation has been criticized for a long time, and according to Staking Rewards, the 14.97% inflation rate was almost the highest among the native tokens of major PoS public chains before the proposal was passed. It sets a target pledge rate, which is generally 67%, and the inflation rate is dynamically adjusted in the range of 7%~20% according to the actual pledge rate and the target pledge rate. If the actual staking rate is lower than the target staking rate, the inflation rate will increase, encouraging users to staking, and if the staking rate is higher than the target staking rate, the inflation rate will decrease to reduce inflationary pressures. Staking Rewards shows that the staking rate before the proposal is approved is 65.4%, which means that even if the inflation rate is already high, the inflation rate itself is still on the rise.

Research from Blockworks Research suggests that Cosmos may be paying too much for maintaining its cybersecurity, hence plans to transition to a fixed inflation rate. The study found that at a maximum inflation rate of 10%, almost all 180 validators were able to break even or make a profit on commission income alone, and validators also had the option to increase their commission rates to help cover operating expenses.

Based on this research, Zaki Manian, co-founder of decentralized asset management protocol Sommelier, came up with this proposal to reduce the maximum inflation rate of ATOM to 10%. Voting on the proposal begins on November 12 and closes on November 26.

94.97% of the voting accounts support it, but the voting rights support rate is not high

The proposal ended voting on November 26 and narrowly passed. In terms of the number of ATOMs participated, the turnout reached 72.6%, 41.1% in favor, 31.9% against, 6.6% against and 20.4% abstaining.

The conditions for the approval of the Cosmos proposal must be at least 40% of the votes, more than 50% of the votes in favor of the voting rights (excluding abstentions), and 33.4% of the votes against (excluding abstentions). According to the final voting results, the proportion in favor was 41.4%, and the proportion in favor, against, and no (excluding abstentions) was only 51.63%, which was slightly higher than the minimum requirement of 50%.

In contrast to the above voting results is the proportion of support from the number of voters, although for PoS public chains, this condition does not affect the voting results, but it can reflect the proportion of supporters to a certain extent. Of the 173,000 accounts that voted, 164,000 chose to support it, accounting for 94.97%. It has also been pointed out that among the voting accounts, there are many accounts with a pledge of less than 0.1 ATOM to participate in the voting and choose to support it, resulting in a high proportion of supported accounts, which may come from airdrop hunters. However, according to incomplete statistics, the number of accounts in support of the vote is more than the number of votes against in each coin holding range. For example, out of the 143 validators who voted, 54.55% were in favor, 27.27% were against, and 0.7% were rejected.

The voting results are more influenced by validators, with 70.43 million ATOM coming from validators out of the total 73.16 million ATOM support votes, with validators such as ZKV, GAME, and Sikka choosing to support them, and validators such as Allnodes, DokiaCapital, and Cosmostation choosing against. It should be noted that the validator’s votes will be counted in the ATOM delegated to the validator by other users. If the user disagrees with the validator’s vote, they can also choose to participate in the vote themselves, overwriting the validator’s vote.

Views of supporters and opponents

The Cosmos community’s proposal to reduce the inflation rate of ATOM sparked a lively and in-depth discussion. Proponents believe this will lead to a range of long-term positive effects, while opponents have also expressed concern and opposition to the potential impact of the proposal, a disagreement that reflects the challenge of the Cosmos community to balance different interests in decentralized governance.

A portion of the community members who supported the proposal are bullish on reducing inflation to drive the adoption of the Liquid Staking Module (LSM), believing that it will increase the liquidity of ATOM, introduce more funds for DeFi applications on Cosmos, and promote the growth of the Cosmos DeFi ecosystem. Proponents also point out that increasing the scarcity of ATOM by reducing inflation could potentially boost its market value. This strategy is considered beneficial to long-term investors. Based on research by Blockworks Research, proponents believe that validators will remain economically viable even if maximum inflation falls to 10%, which provides financial support for the proposal.

However, community members who oppose this proposal are concerned that lowering the inflation rate may reduce the incentive for users to stake ATOM, thus affecting the security of the network. Some naysayers are particularly concerned about the impact of lowering inflation on small holders, arguing that this could lead to a further concentration of ATOM holdings. In addition, there are naysayers who fear that such a change could bring uncertainty to the market, especially in the short term. Opponents are skeptical of the positive impact of lowering inflation on LSM adoption and the development of the DeFi ecosystem, arguing that more evidence is needed to support this view.

However, judging from the voting results, it seems that small holders are more inclined to support the proposal to reduce the inflation rate, and if passed, it may immediately form a positive feedback on the price of ATOM. And self-interested validators and some large players seem to have more reason to oppose it in order to keep inflation higher. According to incomplete statistics, the number of supporting accounts is several times that of the voting accounts holding less than 5,000 ATOM as the number of opposition accounts (including rejection), and the number of supporting accounts is about twice that of the opposing accounts above 5,000 ATOM. But the lead in the final number of votes in favor was not significant.

Assuming that the market capitalization of ATOM remains unchanged, while maintaining high inflation, the nominal reward rate (the yield provided by the network to stakers) and the actual reward rate (nominal reward rate - inflation rate) obtained through staking are higher, and the income of large stakers and validators is higher than that of users who only hold ATOM.

Summary

Cosmos’ proposal to reduce inflation caused a lot of discussion and was finally passed by a narrow margin. According to the voting results, 94.97% of the voting accounts supported the proposal, but according to the voting weight, only 41.1% of the votes were in favor. While many of the backers may have accounts with a small number of tokens coming from airdrop hunters, there are more supporters than opponents in all ranges, indicating that the proposal is supported by more people.

The final result of the voting is mainly influenced by validators, with 70.43 million ATOM support votes coming from validators out of the total 73.16 million ATOM support votes. This also gives us a revelation that when delegated staking, in addition to considering factors such as the rate of return and the commission ratio charged by the validator, we should also consider whether the interests of the validator and ourselves are the same. If there is a disagreement, you can also choose to self-vote to override the validator’s vote.