On November 26th, the Cosmos Hub Governance passed a proposal to reduce the maximum inflation rate of the ATOM token from around 14% to 10%. This means that the Staking APR (Annual Percentage Rate) on the network will decrease from 19% to 13.4%.
The proposal was approved with a relatively close vote, with 41.1% of the votes in favor compared to 31.9% against. Moreover, this vote witnessed the highest participation rate ever in the Cosmos ecosystem. Initially, many believed the proposal would fail, but a significant number of late votes helped tip the balance in favor.
Zero Knowledge Validator, the entity that supported the proposal the most, explained, “Double-digit inflation is unnecessary for network security, and it also weakens the long-term ATOM price while diminishing the incentive to use ATOM in DeFi and other areas of the Atom Economy Zone.”
Reducing token inflation is expected to alleviate selling pressure on ATOM. However, prior analysis suggested that even a 20% reward and staking yield might not be sufficient for small and medium-sized validators to break even. This discrepancy could lead to larger players accumulating more delegated ATOM, potentially affecting network security.
Nevertheless, the issue of capital adequacy is a significant barrier to the development of the Atom Economic Zone (AEZ). The Interchain Security mechanism, in particular, demands higher technical expertise and fees for maintenance.
In the coming time, there will be two more proposals to further reduce inflation for the governance token ATOM. The 10% inflation figure is calculated based on capital adequacy and the profitability of Validators in the network. Additionally, to offset operational costs, Validators can request higher staking fee discounts from users.
*Cosmos Hub, the central blockchain of the Cosmos network, is an ecosystem of interconnected blockchains. The native token of the Hub is ATOM, used for staking, governance, and transaction fees.
Immediately after the proposal was passed, the price of ATOM showed positive reactions. At the time of writing, ATOM is trading around $9.6, up nearly 10% in the past 24 hours.