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Cosmos Hub Votes to Cap ATOM Inflation at 10%, Lowering Staking APR

On November 26, the Cosmos Hub community voted to approve a proposal significantly reducing the maximum inflation rate of its native cryptocurrency, ATOM, from 20% to a cap of 10%.

Cosmos Hub Votes to Reduce ATOM Inflation and Staking APR

On November 26, the Cosmos Hub community passed a significant proposal to lower the maximum inflation rate of its native cryptocurrency, ATOM. This decision will decrease the maximum inflation parameter from 20% to 10%, directly impacting the current inflation rate of ATOM, which stands at approximately 14%.

Additionally, this change will affect the Annual Percentage Rate (APR) for staking, reducing it from an estimated 19% to about 13.4%.

The voting process for this proposal was closely contested, with 41.1% of votes in favor and 38.5% against. The proposal, which initially appeared likely to fail, witnessed a dramatic shift at the eleventh hour. A sudden influx of votes and some validators changing their positions resulted in a narrow victory for the reduction in inflation and staking APR.

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This move comes as part of a long-standing discussion within the Cosmos community to refine the inflation schedule for ATOM. The cryptocurrency currently uses a dynamic inflation model, with rates oscillating between a minimum of 7% and a maximum of 20%, based on the proportion of ATOMs staked.

Under this system, if the staking ratio falls below two-thirds, the inflation rate increases, thereby encouraging more staking to enhance network security.

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Cosmos Hub’s Strategic Move to Enhance ATOM’s Stability

Continuing with the recent developments in the Cosmos Hub, the bonded ratio for ATOM currently stands at 65.7%, which is slightly below the two-thirds threshold necessary to stabilize the inflation rate. As a result, the inflation rate has been gradually increasing.

This situation is governed by a dynamic formula that will continue to drive the inflation rate upward unless a greater proportion of ATOMs are staked. The recently approved proposal addresses this issue by aiming to make ATOM’s future supply more sustainable and predictable.

A key consideration in this adjustment is its potential impact on the Atom Economic Zone (AEZ) and the burgeoning decentralized finance (DeFi) ecosystem within the Cosmos network.

By lowering the inflation rate of ATOM, the proposal seeks to bolster ATOM’s attractiveness as a security provider for consumer chains that are part of the Cosmos Hub. This move is especially critical given the expansion of the AEZ, as evidenced by the growing prominence of projects like Neutron and Stride within the Cosmos network.

Cosmos Hub Proposal Addresses Security, Validator Costs, and Inflation Dynamics

The recent proposal by the Cosmos Hub not only aims to adjust ATOM’s inflation but also underscores the need to ensure optimal network security. Historically, ATOM has maintained a higher inflation rate than its counterparts, which has presented challenges in building a strong monetary premium.

Research from Blockworks indicates that the Cosmos Hub might have been overcompensating for security, a concern that this proposal seeks to address by reducing the inflation rate to alleviate the constant sell pressure on ATOM’s price.

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Another critical aspect of the proposal involves the costs incurred by validators. Detailed analyses within the proposal consider different scenarios for validators, particularly those operating multiple consumer chains.

With the proposed reduction in inflation, validators’ profitability is expected to be affected. The document provides insights into how these changes might influence validators financially, taking into account factors like commission rates and the number of consumer chains they manage.

Significantly, this proposal is just the first in a series of three planned adjustments. Future proposals are anticipated to focus on lowering the minimum inflation parameter and increasing the inflation change parameter, which dictates how rapidly the inflation rate can vary on a per-block basis.

These cumulative proposals are designed to refine the inflation mechanisms of ATOM, thereby contributing to a more sustainable and secure ecosystem for the Cosmos network. This strategic recalibration is essential for the network’s long-term health and its positioning within the wider cryptocurrency market.


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Donald Haymatter

Donald Haymatter is an expert broker with 15+ years of experience. He stays up-to-date with the latest financial news and trends to help clients make informed investment decisions. Donald is known for his analytical approach and personalized investment advice. Outside of work, he enjoys reading and mentoring young professionals.

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