# Cosmos Prop 868: Set MinInflation to 0%

## Overview

Proposal 868 aimed to set the minimum inflation rate for the Cosmos Hub to 0%.

Inflation is a subsidy to incentivize Validator Services.

As more ATOM is staked, the inflation rate decreases toward 7%. It's possible that the current inflation lower bound causes Cosmos to overpay for security in the form of Inflationary Supply Overhang // Sell Pressure [1].

The proposal failed, likely because the "Security as a Service" model of Validator Delegation incentivizes businesses to be formed around the cash flow provided by ATOM emissions.

Other reasons likely included the belief that 0% inflation would entrench existing powers, and that a lack of cash flow might endanger leveraged liquid staking positions, which require emissions fees to service loans [2].

## Community Opposition

Main concerns and points of opposition:

1. Validator Economics

Validator services need cash flow. And while inflation ought to be limited, perhaps it ought to be 2-3% min, instead of 0% [3].

Without inflation, coordinated price volatility would likely increase, as well as leveraged liquid staked ATOM, as sales and leverage would be used to cover expenses, rather than sell pressure from emissions.

This could lead to coordinated pump and dumps, or cascading liquidations.

Economic Failures for Validator Services could also lead to slashings, which impact delegations from community members.

People seemed to agree that there would be volatility around the staking ratio, as participants joined or left, depending on incentives. Some thought that this volatility in participation was bad for security, others thought it was economic for the price discovery of the appropriate inflation rate to pay for security.

2. Whale Governance Dominance

If the price of ATOM goes high, due to supply constraints, ATOM Validator Whales might brute force agendas, and it might be difficult to democratize governance access through distributions and lower prices [4].

This is a difficult position to take, because it means that whales dumping their emissions is good for democracy -- which is true, but not if those emissions reduce people's interest in holding the token.

3. More Data!

Govmos explained how the inflation formula works, and that the Cosmos community needs to understand these implications more before making changes [5].

## Stakeholder Impact

1. Validators:

The Fee Rake from Validators pays for their business costs, and their salaries, and for the assets used to build more governance power.

The 48% voting No could have loans to service, which are paid for by emissions, or salaried employees they could no longer maintain. In order for these businesses to continue, they may be dependent on their ATOM emissions.

The 25% voting abstain still benefit from their profit margins, without voting against.

The 25% who voted YES, could simply be operating from a more idealistic or populist position, or could have less overhead.

2. Stakers:

Stakers probably care more about price action than Validators, because they have less capital. Because of this, they may be more interested in cutting inflation, to boost the perception of ATOM as an investable token, which would lead to their profit.

3. Developers:

Developers might be concerned with the long term economic viability of the project, due to their low cost basis entry, and their career orientation, and idealism.

They might also understand the nuances of security decentralization -- such as how many validators would be ideal, or whether or not it is positive that these validators have greater distribution of voting power.

There are also some concerns here about grants, and the agendas of whales. If you are a developer, you likely want grant emissions to your project, and if governance is cornered by larger entities, then they are likely to support their projects and interests, and perhaps not the interests of smaller projects.

4. Community Members and ATOM Holders:

Security is currently subsidized by depreciating the assets of non-stakers. So -- if you hold ATOM, and you don't stake, then, you eat inflation, as well as sell pressure created by that inflation.

These people want ATOM price to go up, and as long as inflation is high, that will be difficult [1].

## Technical Considerations

Potential risks and unintended consequences:

* Price | Supply volatility
* Decreased stability for Validator Set.
* The impact of leveraged liquid staking positions on price action, in the event of cascading liquidations of Validator sets who are levered to pay for operations in the event of a low emissions environment.
* Increased centralization if lower inflation leads to less distributed token ownership over time [2]

Govmos provides a Primer on Inflation Code [5]. If people read the code, then they might understand that the Inflation param was designed to oscillate along with staking ratios, in order to find a fair price for security subsidy.

## Economic and Incentive Analysis

A 0% minimum inflation parameter would be aligned with the long term vision of the Cosmos Community, but it doesn't really matter, because Cosmos currently relies on a set of "Security as Service" businesses, for whom a high minimum inflation parameter equals profit margins.

The proposal and forums also lack information on the balance sheets, expenses, and leveraged positions of the books for these validators.

So, it's difficult to tell where these 5% to 7% in fees are going toward, or to audit to determine if the Hub is overpaying for security.

A 0% Rate would allow the market to discover an efficient lower bound on emissions, but the majority of stakeholders have a vested interest in retaining high inflation at the expense of community members [1].

## Strategic Timing and Presentation

In 2024, we saw pumps to $12, and $14 ATOM, but there was no sustained support at those levels, likely due to sell pressure from emissions.

Any business expenses which are subsidized by those emissions do not necessarily decrease with the market value of ATOM, causing an increase in sell pressure to meet the same operating expenses.

This means that a sustained downward rally, with inability to gain new highs, or retain support at higher levels, is a description of capital extraction via inflationary sales pressure.

If the proposal was released today, along with financial documents from top Validator Services, then there might be enough pressure for those who Abstained to join the YES side, and pass the vote.

## Lessons Learned

I would create economic profiles of the Validators inside of the Keplr Wallet Dashboard.

In situations like with TIA and DYM, there were issues of VCs who had large allocations with low entry positions, who were able to sell emissions on locked tokens.

Concerning ATOM -- it's likely that there has already been a lot of solidifying of holdings, which means that you have more of a calcified ATOM voting power, and probably more capital for hedging to preserve value from markets, or business operations costs, such as well paid employees, or buildings, or servers.

The types of positions that are held, whether or not they are deeply leveraged and susceptible to liquidations, or if they have TradFi Business Loans which must be serviced in order to pay for their business expansions -- these are all important pieces of the puzzle.

#### For Example:

If Cosmostation has 5M in Debt, and an operating budget of 1M a year, and they only earn 500k annually in emissions, then of course they will not vote to allow emissions to be reduced to 0%.

However, this information is not available - so I have no idea what Cosmostation's balance sheets look like -- just that they have 12M ATOM delegated to their validators.

There is not any readily available information on what they do with their earned 5% Fee.

## Proposal Improvement

* Increase transparency | Reports of the financial operations of Validator Services.
* Increase competition amongst Validators to delegate to those who have not just a performance history, but also:
* those who have lower Debt to Income Ratios
* lower company expenses with comparable performance
* alternative sources of income, such as fees from projects.
* Companies who don't have shareholder obligations requiring sales pressure to compensate VC funding.
* Introduce a sequence of Proposals starting with 6% and decrement toward 0%, until the proposals no longer pass.

## References

[1] StakeLab, "[PROPOSAL] Set Min Inflation at 0%", Cosmos Hub Forum.

[2] vixcontango, Comment on "[PROPOSAL] Set Min Inflation at 0%", Cosmos Hub Forum.

[3] Krugg3r, Comment on "[PROPOSAL] Set Min Inflation at 0%", Cosmos Hub Forum.

[4] ThePowerCosmic, Comment on "[PROPOSAL] Set Min Inflation at 0%", Cosmos Hub Forum.

[5] Govmos, "The x/mint module and understanding the inflation rate calculation", Cosmos Hub Forum.

* Link to forum post: https://forum.cosmos.network/t/proposal-set-min-inflation-at-0/12224/4
* Link to proposal: https://www.mintscan.io/cosmos/proposals/868