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Cosmos Hardfork: Founder Proposes Split After Losing ATOM Inflation Vote

Last Updated November 27, 2023 1:55 PM
James Morales
Last Updated November 27, 2023 1:55 PM

Key Takeaways

  • Cosmos founder Jae Kwon has proposed forking Cosmos’ Gaia hub to form a new network called AtomOne.
  • Kwon voted against a proposal designed to reduce ATOM’s inflation by reducing staking yields.
  • However, the community at large voted in favor of the proposal, setting the stage for a potential schism.

The Cosmos community has voted in support of a proposal to limit ATOM inflation to 10%, reducing annualized staking rewards from ~19% to ~13.4%. While the proposal  (#848) failed to get the majority support needed to pass, it highlighted a schism among ATOM holders, with  41.1% voting for and 31.9% voting against the plan.

After voting closed on Saturday, Cosmos co-founder Jae Kwon expressed his disappointment in the outcome. Referencing a “great cultural chasm” that has divided the community, Kwon has proposed AtomOne as a fork of the primary Cosmos Hub, Gaia.

ATOM Inflation Divides Cosmos Community

Explaining the rationale behind AtomOne, Kwon said there is enough disagreement among community members to warrant an alternative fork running alongside the original. 

The proposal to reduce staking rewards emerged  out of a belief that Cosmos Hub’s current tokenomics overpays validators for their work securing the network.

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To ensure ATOM’s staking yields remain attractive compared to lending the token out via Decentralized Finance (DeFi) protocols, Cosmos Hub enacts a dynamic inflation model whereby staking rewards are determined by the ATOM bond ratio, i.e. the percentage of the total ATOM supply staked at any one time. 

Targeting a bond ratio of 2 thirds, when less than 66% of the ATOM supply is staked, inflation decreases with each block to a minimum of 7%. If the bond ratio rises above 66%, inflation increases to a maximum of 20%.

In theory, the dynamic inflation model should create a competitive equilibrium between staking and DeFi rates, with ATOM holders naturally channeling their funds to the most profitable option. However, proponents of lowering the ATOM reward rate argue that liquid staking means people no longer have to choose between the two.

While some Cosmos community members argue that the capping rewards is the best response to liquid staking, Kwon’s vision for AtomOne proposes an alternative solution.

Cosmos Founder Objects To Liquid Staking 

According to the AtomOne constitution , liquid staking “usurps the point of bonded staking.” The document depicts liquid staking as a threat to Cosmos’ democracy due to the way it lends voting power to pool operators.

To limit the practice, Kwon has proposed measures to incorporate into AtomOne. He argued that the new platform shouldn’t support native liquid staking but should instead introduce a new type of voteless staking token to mitigate deprecation for ATOM1 holders. 

Other ideas include subjecting interchain accounts to a 5% tax on rewards and limiting the amount of tokens they can stake to 20% of the total.

Although Kwon’s plan for AtomOne could bring about a major schism in the Cosmos community, he insisted that the plan isn’t to abandon the original Gaia hub.

“This doesn’t mean we will leave the hub to fail,” he noted , adding: “The best case scenario is that we also influence the hub toward safety and clarify its new role.” 

Although Kwon’s motive for launching AtomOne is nominally about taking power back from increasingly influential liquid staking pool operators, critics have pointed out that it essentially rejects a democratic outcome.

By forking from Gaia, AtomOne would build a new community in which Kwon’s supporters hold a supermajority. For someone who claims to support decentralized governance, several observers have questioned the Cosmos founder’s decision to break away from the main hub the moment things don’t go his way.

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