The Cosmos Hub voted on and approved a proposal on Nov. 26 that will reduce the maximum inflation rate of its native cryptocurrency, ATOM. The proposal seeks to decrease the maximum inflation parameter from 20% to 10%, resulting in a tangible impact on ATOM’s current inflation rate, which is around 14%. This adjustment will also affect the Annual Percentage Rate (APR) for staking, reducing it from approximately 19% to around 13.4%.

The proposal saw a tight vote, securing 41.1% in favor and facing 38.5% opposition. While the proposal seemed poised for failure just before the deadline, a last-minute surge in votes, coupled with some validators reversing their stance, narrowly tipped the outcome in favor of the proposal.

The rationale behind the proposal is rooted in the desire to fine-tune the inflation schedule for ATOM, a topic that has been under community discussion for several years. Currently, ATOM employs a dynamic inflation model that fluctuates between a floor of 7% and a ceiling of 20%. The rate is intricately tied to the bonded or staked ratio of ATOMs. If less than two-thirds of all ATOMs are staked, the inflation rate increases, incentivizing staking to secure the network.

As of now, the bonded ratio for ATOM stands at 65.7%, slightly below the two-thirds threshold, resulting in a gradual increase in the inflation rate. This adjustment, based on a dynamic formula, is set to continue unless more ATOMs are staked. The proposal aims to address concerns related to the sustainability and predictability of ATOM’s future supply.

One notable aspect of the adjustment is its potential impact on the Atom Economic Zone (AEZ) and the emerging decentralized finance (DeFi) ecosystem on the Cosmos network. By reducing ATOM’s inflation rate, the proposal aims to enhance the value proposition of ATOM as a security provider for consumer chains within the Cosmos Hub. This move is particularly crucial as the AEZ expands, with projects like Neutron and Stride gaining momentum.

Furthermore, the proposal highlights the importance of ensuring network security. By historically maintaining a higher inflation rate compared to its peers, ATOM has faced challenges in establishing a robust monetary premium. Data by Blockworks Research suggests that the Cosmos Hub might be overpaying for security, and the proposal addresses concerns about the constant sell pressure affecting ATOM’s price performance.

Validator costs are also a significant consideration in this proposal, with detailed analysis provided for different validator scenarios. The reduced inflation rate is expected to impact the profitability of validators, especially those running multiple consumer chains. The proposal outlines the potential financial implications for validators based on various factors, including commission rates and the number of active consumer chains.

It’s important to note that this is the first of three proposed adjustments. The subsequent proposals are expected to focus on reducing the minimum inflation parameter and increasing the inflation change parameter. The inflation change parameter impacts the speed at which inflation varies on a block-by-block basis.

These proposals collectively aim to fine-tune the inflation dynamics of ATOM and foster a more sustainable and secure Cosmos network.