In case you haven’t heard, the Cosmos Hub team has recently released their V2 whitepaper which outlines some pretty significant changes to the tokenomics of ATOM.
First things first, issuance. The current dynamic adjustment system based on staking ratio is being replaced with a more conservative approach that involves capitalizing the treasury up front within the first nine months. Yes, you heard me right they’re gonna dump 4 million ATOM into the treasury all at once!
The latest version of the proposal suggests a one-time issuance of another 4 million ATOM to the Community Pool. That’s a whopping total of 8 million ATOM being issued in just nine months talk about inflation!
Now, I know what you might be thinking: “But wait, isn’t this going against everything we stand for as crypto enthusiasts? Don’t we want disinflationary tokens that follow the ultrasound money ideology?” Well, my friend, let me tell ya these guys have got a plan!
According to their proposal, instead of capitalizing the treasury up front within the first nine months, they now propose segmenting the process into ten equal tranches (of 4 million ATOM) to occur annually. Each of which would be subject to a separate governance vote. That’s right we get to decide whether or not we want to keep dumping more ATOM into this treasury!
But wait, there’s even more! The latest version of the proposal suggests that the distribution of future monthly steady-state tail issuance will be up to the discretion of the Hub based on:
1. Strength of interchain security (which is a fancy way of saying how secure all these appchains are) and extent of liquid staking adoption at the time, and
2. Whether there’s sufficient validator compensation for the staking rewards that may be diluted by the tail issuance.
Now, let me tell ya this is some serious stuff! The Hub will have complete control over whether or not they want to keep dumping more ATOM into circulation based on how secure their appchains are and whether or not validators are getting paid enough for staking rewards. It’s like having a central bank that can print money whenever it wants, but with blockchain technology!
But wait, there’s even more! The proposal also suggests that the determination of ATOMs steady-state monetary policy will not be put forth by the Hub until they’ve garnered enough reliable data on the dynamics of the new revenue sources introduced by the broader proposal. That means we might have to wait a while before finding out exactly how much more inflation is coming our way!
However, there are concerns about these proposals that have been raised by the Cosmos community. While the updated issuance schedule eventually tapers to a steady-state annualized issuance of less than ~0.1%, the proposal equates to ~88M ATOM (~US$1.1B) being issued over the 3 year period, with ~55M ATOM (~US$678M) being directed towards the Cosmos Hub Treasury. Importantly, the bulk of this new issuance (~65%) will occur in just the first 9 months of the proposal.
Current ATOM holders are rightly concerned about near-term dilution and have also scrutinized the manner in which the Cosmos Hub Treasury funds will be deployed. Certain community members, including the co-founder of Tendermint, have expressed the view that in order to entrust the Treasury with such a meaningful amount of capital, the tooling for community coordination to deploy that capital sensibly must be more well-defined and rigorously tested. Without a reliable model for coordination and deployment of capital, ATOM holders will be diluted in the near-term and effectively bear the bulk of the risk associated with deploying the Treasury capital at high rates of return.
Another feature proposed by the ATOM 2.0 paper is the Interchain Scheduler, which facilitates an interchain MEV marketplace on-chain. Assuming cross-chain activity continues to grow, the opportunity for MEV across the Cosmos ecosystem will be significant. However, the Cosmos development community also recognizes that not all forms of MEV are created equal and oftentimes MEV is subject to off-chain cartelization, advantaging a small minority of market participants. While taking advantage of unsuspecting users transactions by front-running or constructing sandwich-attacks could be considered malicious, other forms of MEV such as arbitraging prices between pools, DEXs or CEXs could be viewed as efficient. Therefore, the goal of the Interchain Scheduler is to create a rational, transparent, trust-minimized marketplace for MEV, allowing appchains to voluntarily sell blockspace in an auction format in an effort to incentivize the efficient forms of MEV and minimize the more malicious forms.
Another related proposal is the Interchain Allocator, which allows the Cosmos Hub Treasury to fund new Cosmos chains through on-chain agreements. In theory, the Interchain Allocator will function in tandem with the Interchain Scheduler to create a positive feedback loop wherein a portion of proceeds from the onchain MEV marketplace are directed towards the Interchain Allocator. The funds will then be deployed by the Interchain Allocator to fund appchain development and grow the Cosmos ecosystem, which in turn should create incremental opportunities for MEV.