# Proposal 82: ATOM 2.0 FAQ (treasury, liquid staking, allocator, scheduler)

_This is a living document meant to provide clear and succinct answers to questions that have been frequently asked about ATOM 2.0._

## Why do we need a new direction for the Cosmos Hub?

Up until now, the Hub has not solidified its place as a major schelling point in the ecosystem.

In particular, new projects don't necessarily hold ATOM and therefore are not incentive-aligned with the Hub.

ATOM 2.0 aims to solve this problem.

The idea is to move ATOM from a purely monetary asset with speculative premium and only loose ties to the rest of the IBC economy, to a reserve asset for the Interchain -- one which is held by a multitude of incentive-aligned projects, and backed by tangible value and revenues.

In sum, the aim is to tie ATOM's value to the growth of the ecoystem as a whole, without infringing on Cosmos' values of sovereignty and non-coercion.

## Was everything presented at Cosmoverse "official"?

No, this is a community driven project. The paper authors have been speaking to validators and community members for almost a year, and have continued to do so after ATOM 2.0 was published.

Significant changes have been made to the paper since first publication to directly address community concerns around issuance, and the accountability and transparency of the Treasury. Moreover, the Cosmos Hub Charter, described in the paper, is intended as a living document allowing the community to continue giving direction to Cosmos Hub.

## What changes have been made since the original paper?

The change to the tail issuance rate (impacting staking rewards) has been removed from the [paper](https://gateway.pinata.cloud/ipfs/QmdC3YuZBUq5b9mEr3bKTDRq4XLcxafe3LHqDNFUgUoa61).

The paper now suggests that the community should eventually have a dialogue about transitioning from from exponential to linear issuance but the timing and details of that transition will require more data, discussion, and analysis.

In light of this, voting on the paper in prop 82 is not a commitment to a specific numerical reduction in staking rewards, but rather a commitment to a comprehensive community-driven process of evaluating a transition away from the exponential regime in a manner to be determined in the future by charter/governance.

The Community Pool has been topped up. First to ensure the community has the resources necessary to govern effectively, but also to build out the technical components described in the paper, and bootstrap the entire Treasury and Assembly system on a community-controlled basis.

4M ATOMs will be minted directly to the Community Pool, before anything happens with the Treasury.

There is a fixed number -- 10 -- *possible* future mints to the Treasury, and each mint should require ATOM vote to pass. Given that these require ATOM votes, some of them may never come to pass.

All of the changes outlined above are to the Issuance section.

The only other addition is a single line to the Assembly section, which reads:

> Prior to final budget proposal, the Cosmos Assembly must give ATOM holders the opportunity to provide positive signal on budget subcomponents

This gives tokenholders a formal mechanism to signal their approval or disapproval over specific parts of the yearly Treasury budget.

## What are we agreeing to if this proposal passes?

In short, a general shift in direction.

After the delivery of Interchain Security, core teams no longer have a mandate to work on specific initiatives. ATOM 2.0 describes several subsequent workstreams that can be initiated.

With respect to issuance, voting is a commitment to begin a dialogue about moving issuance away from the exponential regime in a manner to be determined in the future by charter/governance.

With respect to governance, we are agreeing on a general direction with a commitment to process (creation of Charter, Councils, Assembly).

Notably, the charter and subsequent proposals can make refinements to the governance structure and accountability process.

Any new idea not currently contained in the paper, and every code change, will have an additional governance process around it.

## How does the need for a large treasury feed into the ATOM 2.0 vision?

We need a large treasury to bootstrap the [Interchain Allocator](#What-is-the-Interchain-Allocator).

One of the objectives behind ATOM 2.0 is the need to create incentive alignment between the Hub and the rest of the IBC economy. This means getting ATOM in the hands of as many promising projects as possible. It's not possible to do this without a large treasury.

While it's very hard to pin a down the specific number needed, the idea here is ensure the Hub has a treasury worthy of its mission, in other words, that of a top 10 DAO. Much of this funding will continue to be owned by ATOM holders as protocol-owned liquidity. Some will be used to invest in promising projects, generating a return. A small portion will be used for continued development and operational costs.

At current prices 40M ATOM is approximately $600M USD. To put this in context Gitcoin has a $100M treasury while Uniswap's treasury is $3.0B in size.

## Why can't the Community Pool be used instead of creating a Treasury? Is the Treasury centralized?

If you look at past community spend proposals, costs have not been managed effectively. Though the Community Pool is a critical resource, it is not structured to efficiently manage a large amount of capital.

In order to address this concern, the Treasury system was devised to put *additional* constraints on capital allocation. Instead of anyone being able to request funds, as in the case of the Community Pool, only Councils elected by ATOM on-chain governance with a specific mandate can spend funds by first agreeing with each other that such spending is required.

ATOM holders will nominate a Community Council that will oversee spending and help negotiate costs. Morover, ATOM holders always retain the right to stop a spending proposal at any time through a governance vote.

## Who will manage the Treasury?

Councils are teams or sub-DAOs with a specific mission, voted in by tokenholders.

All the councils taken together make up the Assembly and the Assembly is charged with making Treasury proposals (in the form of a yearly budget).

Notably, since stakers have veto-power over Assembly proposals, there's a sense in which validators/delegators are also a part of the Assembly.

At a high-level:
- Anyone can form a council
- A council is a specific type of DAO
- A council is a DAO that is a part of the Assembly
- Not all DAOs on the Hub need to be a part of the Assembly

It is critical that the Treasury is *not* managed only by core teams, but a diversity of members from the Cosmos community. The intention is for the [Cosmos Hub Charter](https://forum.cosmos.network/t/discussion-working-draft-of-cosmos-hub-charter/7803) to put additional constraints on how the Council and Assembly system. Particularly that the number of Councils someone can participate in should be limited, conflict of interests should be disclosed, and that Council membership should be significantly diversified.

Another important part of this piece are the Allocator DAOs, which will be tasked with investing on behalf of the [Allocator](#What-is-the-Interchain-Allocator). These Allocator DAOs will be represented on a Council to ensure they are held accountable to both tokenholders and the wider Assembly.

## How do Treasury tranches ensure accountability?

The Treasury won't all be minted at once. The paper opens up the possibility of minting up to 10 tranches of 4 million ATOMs each, though not every tranche has to be minted.

Notably, it is up to ATOM stakers to authorise the minting of tranches. **If core teams fail to deliver, the next tranche won't be minted. It's as simple as that.**

## What happens if a tranche doesn't pass a governance vote?

The tokens are never minted. They can be minted later if the community decides they are necessary.

Viewed from this lens, 40M is an upper limit for the Treasury, not its actual size.

None of the minted tokens will be used to vote on governance proposals, so approving one mint does not change voting power.

## Why aren't the tranches denominated in USD?

One of the objectives of ATOM 2.0 is to equip the Hub with a top 10 treasury. Since crypto prices are still very much correlated, denominating this in ATOM makes more sense.

Another reason is to provide holders and potential investors with a more predictable issuance schedule.

## What happens if the bonding ratio falls below 2/3?

As a safety measure, if the staking rate ever falls below 2/3, the new monetary policy will pause and the original monetary policy will resume.

Issuance will then incrementally increase up to a maximum percentage of supply until the staking ratio exceeds 2/3 again, at which point issuance will return to the steady state.

## Do treasury ATOMs count toward the 2/3 bonded ratio?

Not yet. But this can be addressed via a governance vote.

## Is the Treasury a substitute for the Community Pool?

No. The Community Pool will continue to exist and function exactly like today.

## Will ATOM 2.0 dilute existing stakeholders?

Firstly, the purchasing power of the ATOM token is not necessarily directly affected by **any** minting event of ATOM.

ATOM issued to the Treasury are like shares which have been authorized but issued [[1]](https://uncommoncore.co/a-new-mental-model-for-defi-treasuries/). They won't enter the supply and have an impact on the value of ATOM until they are released by the protocol.

Once these minted ATOM enter the supply, the dilution of existing stakeholders only occurs if the newly spent ATOMs from the Treasury do not outperform when denominated in ATOM.

To illustrate, if the Hub prints 4 ATOM to the Treasury, and invests it and turns it into 3, then that is an objectively bad trade for ATOM holders. They are now taking on extra execution risk with underperformance of the Treasury in the bear case.

For the optimistic take, the Treasury is looking for VC-style returns. The Treasury's unwritten mission is to 100x itself, something it does by funding the Scheduler-Allocator flywheel.

## Why do we need to enable liquid staking?


The end-goal is a vibrant economic zone of Consumer Chains all secured by the Hub. The components in the paper are to realize this vision.

So why the push towards liquid staking? Quite simply, to reduce the opportunity cost and hurdle rate for ATOM. With no liquid staking tokens, all ATOM in Cosmos DeFi (i.e. on other chains) is unstaked. This directly impacts the Hub’s security, as fewer tokens are staked/bonded on the Hub.

Not only that, but incentivizing staking over DeFi puts a drag on the growth of the broader ecosystem, because for people to use ATOM in DeFi they need to beat the staking hurdle rate. It ends up causing an awkward competition between Cosmos chains and the Hub with everyone overpaying in the end.

Liquid staking is a solution to this conundrum. One that the market seems to have embraced.

Another angle here is that more than 50% of the current demand for ICS comes from liquid staking. Since the apps that have expressed interest in using ICS are closely connected to liquid staking, If you ban liquid staking, ICS product market fit declines.

## Does limiting liquid staking run the risk of handing more power to large exchanges?

A world in which exchanges – who already have ecosystem power – have private control over chain security, is one we should be trying to avoid at all costs.

The question we need to ask ourselves is whether limiting in-protocol liquid staking will lead to a larger share being captured by exchanges as opposed to other more decentralised solutions.

Earlier this year, Coinbase [announced](https://twitter.com/Blockworks_/status/1526652645594865664) that it is entering the liquid staking game, through its support for an institutional liquid staking protocol built by Alluvial.

If we were to normalise placing limits on relatively more decentralised and transparent protocols, at the very least we would probably need an equally credible commitment from the likes of Alluvial and Coinbase.

In particular it might make more sense to think about placing limits at the derivative level rather than at the staking pool level.

## Are the risks around in-protocol LS pools greater than the centralization risk from exchanges?

It’s hard to say. The risks are different, and it’s really hard to compare them to each other. One key difference regarding exchanges though, is that the risks aren’t hypothetical. The susceptibility of these entities to government pressure has already been [demonstrated](https://twitter.com/bantg/status/1493938075734618116).

Our take is that liquid staking will happen irrespective of ATOM 2.0. This is why Binance and Coinbase are massive holders. They are effectively offering liquid staking solutions to retail.

More broadly, if a KYC standard were to dominate the staking derivative market – and become a key DeFi building block – this could become a gatekeeper problem that ends up killing the permissionless soul of Cosmos.

## How can we reduce the risks associated with liquid staking?

ATOM 2.0 aims to bring a risk-fraught *but inevitable* liquid staking industry into the center of Cosmos economic and operational security, where everyone thinks all day about how to make protocols as robust as humanly possible.

The intersection of ATOM 2.0 and liquid staking zones aims to achieve transparency around underlying liquid stake assets, realism about their existence, and practicality around defense and utility.

We are operating under the assumption that the most effective defence is to support on-chain liquid staking products that have greater legibility and auditability, and can therefore be regulated by market-based, crypto-native solutions.

## What is the Interchain Scheduler?

A unique property in Cosmos, especially with consumer chains, is that validators will have insight into multiple chains at the same time.

This is very different from trying to do cross-chain MEV in systems with completely different validator sets.

The natural tendency here is for an off-chain MEV market to develop for crosschain execution guarantees, a highly centralizing model which directs MEV profits away from token holders and protocols and directly to validators and searchers. The Interchain Scheduler allows protocols to front-run this by selling MEV in advance and capturing a portion of this revenue for themselves/their token holders.

Under the Scheduler, rights to future blockspace become part of the consensus protocol, which allows the rules around these rights to be enforced by the protocol iself. This is in stark contrast to third party solutions like Skip or Flashbots, where these rights rely on a trust relationship between validators and out-of-protocol actors.

## What is the Interchain Allocator?

The Interchain Allocator is an idea that revolves around turning the Hub into a decentralized fund and ATOM into an IBC index play (in other words, directly tying ATOM to the growth of the Cosmos ecosystem).

The Allocator can be used for things like token swaps, bootstrapping new projects by providing ATOM for the ATOM side of a liquidity pool, lending capital with loan agreements, or providing liquidity for a CDP stablecoin backed by ATOM.

In sum, it is the engine that seeks to create an incentive alignment between ATOM and the future growth of the IBC ecosystem.

Notably, the Allocator will not be a single entity, but a group of sub-DAOs working autonomously towards independent objectives and strategies. Each of these DAOs will be voted in by ATOM stakers, and kept accountable by the Assembly.

## Are the Scheduler/Allocator in conflict with the Hub minimalism?

This depends on your conception of Hub minimalism. We are operating under the philosophy that as much functionality as possible should be pushed to consumer chains.

Within this philosophy, the logic of the Hub itself will always remain as minimal as possible. As such, both the Scheduler and Allocator will themselves be consumer chains.

## Where do the Scheduler/Allocator revenues flow to?


If you’re an Interchain Security consumer chain there is an expectation that fees are being used to pay for security, therefore these fees are automatically sent to the distribution module, becoming staking rewards.

The Scheduler and Allocator will themselves be consumer chains, so a portion of their revenues will also be sent to the distribution module automatically.

However, the idea is that the remaining funds will go to the Treasury first. The Assembly (including the Community Council) will then allocate this capital so as to improve the long-term welfare of the Cosmos Hub and ATOM. This includes the possibility of sending Treasury funds back to the distribution module (and therefore stakers) if deemed the best use of capital.

## What is the Scheduler/Allocator flywheel?

S/A flywheel:

1. Scheduler monetizes IBC economic activity
2. Revenue goes to Allocator
3. Allocator invests in new cosmos chains
4. Market for Scheduler expands (more participants join the network)
5. Scheduler monetizes more IBC economic activity (rinse and repeat)
...


Consequences:

- ATOM becomes preferred collateral in ecosystem
- Hub becomes long term holder in ecosystem assets
- IBC ecosystem incentive aligned from an ATOM pov