Cosmos Community Divided Over Proposal to Halve ATOM’s Inflation

The Cosmos community finds itself at a crossroads as a pivotal proposal to cut the maximum inflation parameter of ATOM, the network’s native cryptocurrency, sparks intense debate among stakeholders. The proposal, if passed, aims to slash the maximum inflation from 20% to 10%, resulting in a substantial drop in the current inflation rate from approximately 14% to 10%. This move would also reduce the staking Annual Percentage Rate (APR) from about 19% to approximately 13.4%.

At present, the proposal faces stiff opposition, with 41.4% of votes against it. The voting period continues until November 26, adding mounting tension and speculation about the potential outcome.

Source: mintscan.io

The proposal, central to the network’s dynamics, delves into the heart of ATOM’s inflationary model. Cosmos employs a dynamic inflation rate that fluctuates between a floor of 7% and a ceiling of 20%, tethered to the bonded or staked-ratio of ATOM. If less than two-thirds of all ATOMs are staked, the inflation rate escalates to incentivize staking and bolster chain security. Currently, the bonded ratio for ATOM hovers at 65.7%, teetering below the critical threshold, prompting an increase in the inflation rate at a rate of +0.45% per year.

The proposed reduction in ATOM’s inflation rate carries broader implications, particularly in fortifying the Atom Economic Zone (AEZ) and enhancing the Inter-Blockchain Communication (IBC) DeFi protocols. The AEZ, comprising platforms like Neutron and Stride, seeks to solidify its foundation with the Cosmos Hub serving as a linchpin of security for emerging consumer chains. However, maintaining ATOM’s value proposition as a security provider necessitates ensuring sustainability and predictability of its future supply.

This reduction could potentially invigorate the adoption of IBC DeFi protocols and money markets across the interchain. ATOM, as a highly liquid and recognizable asset in this ecosystem, stands poised to function as collateral and a liquidity gateway. Yet, its high inflation rate impedes DeFi yield, hindering user growth and adoption.

The proposal also aligns with concerns about network security and ATOM’s price performance. Historically, ATOM’s higher inflation rate compared to peers has eroded its perceived monetary premium, contributing to constant sell pressure and lackluster price performance. Research from Blockworks Research advocates for a transition to a set supply schedule, positing that the current dynamic inflation mechanism overshoots the necessary security requirements, ultimately harming ATOM’s value.

Moreover, the proposal has implications for validators within the Cosmos ecosystem. At the current ATOM price, the proposal could impact the profitability of validators, especially those at the lower end of the spectrum, potentially forcing them to operate at a loss or break-even point.

This proposal marks the first step in a series of initiatives, with subsequent proposals expected to address the minimum inflation parameter and the speed at which inflation changes, signifying a broader reevaluation of ATOM’s supply schedule.

As the community continues to cast their votes, the outcome of this proposal will shape the trajectory of Cosmos and reverberate across the wider blockchain ecosystem. The debate rages on, encapsulating the pivotal choice between balancing network security, fostering adoption, and maintaining ATOM’s value proposition in an ever-evolving landscape of decentralized finance.

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