Editor's Note: This article comes fromEditor's Note: This article comes fromCosmos interconnected chainmedium, by Felix Lutsch, Brian Crain, Meher Ro, and Chjango Unchained; reprinted with permission from Odaily.

1. Cosmos economic system design

Cosmos is an upcoming blockchain network that is revolutionizing the blockchain space by providing scalability and interoperability. The Cosmos network will be co-secured by holders of Atoms (Cosmos’ stake-backed token) and validators, who will run validator nodes to verify transactions and maintain the consensus of the network.

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Cosmos Hub

We then defined the key parts of the Cosmos system, because even those who know Cosmos very well may not be aware of the latest plans. First, we explain the key components of economic design.

Atom

Atoms are the native token of the Cosmos Hub. The core utility of Atom is to serve as an equity mortgage mechanism to ensure that the Hub plays a deposit role in the equity proof process. Borrowing the proof-of-work mining analogy, you can think of Atom as a virtualized ASIC. The Atoms staked by each validator will determine how often it is selected as a block producer and its weight when submitting block votes. The specific information is explained in detail in this blog. In order to motivate everyone to stake their Atoms, each validator can get corresponding block rewards, stake profits, and whitelist handling fees (see below for details).

SF

SF

Validators secure the Cosmos Hub by validating and relaying transactions, proposing, verifying, and confirming blocks. Validators can stake their own Atoms or accept delegation from other Atom holders. The number of verifiers is capped, initially 100, and each will be required to be able to run on a highly reliable infrastructure that supports automatic signatures. When validators connect to the P2P network to sign blocks, they must ensure that their private keys are kept safe. Validators can ask delegators for a certain percentage of commission as their fee for maintaining network security.

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Delegators of the Cosmos Hub are Atom holders. They secure the Cosmos network by delegating Atoms. There is no minimum amount required to stake Atoms. The specific way is that they choose to delegate to one or more validators, and the validators will get the voting weight of the delegators. If the verifier misbehaves (for example, signing two different blocks at the same block height), then part of the staked tokens pledged by the verifier and the delegator will be fined. In return, delegators receive a certain percentage of transaction fees and block rewards.

The mortgaged Atoms will inflate more Atoms, which will be distributed as part of the block rewards to validators and delegators participating in the consensus. This also incentivizes Atom holders not to passively store their Atoms in wallets, but to stake them to keep the network secure. The number of new atoms that are inflated each block depends on the amount staked and the percentage of the supply of atoms in the network. Atoms are used as collateral to secure the network. Atom's target mortgage ratio is 2/3. If fewer Atoms are mortgaged, the number of Atoms issued through inflation will increase. The annual inflation rate is capped at 20%. If more than 2/3 of the Atoms are mortgaged, the Atoms produced by inflation will gradually decrease, and the lower limit of the annual inflation rate is 7%.

Transaction Fees

Transactions on the Cosmos network will be charged transaction fees similar to other existing blockchains. Unlike existing blockchains, the Cosmos network plans to accept multiple tokens for transaction fees (see Whitelisted tokens for more information). The tax-related part of the generated transaction fees enters the Reserve Pool, and then is distributed to validators and delegators according to the mortgage ratio. Funds in the Reserve Pool are planned to increase the security and value of the Cosmos network, and may also be allocated based on decisions made by the governance system.

On-chain governance

The Cosmos network adopts the method of allowing Atom holders to vote on proposals for on-chain management. Proposals can adjust system parameters, implement upgrades or change the governance constitution that manages the Cosmos Hub. (Currently the governance constitution for the Cosmos Hub has not yet been implemented.) Each partition in the network can have its own regulations and governance mechanisms. Delegators participate in the voting process by inheriting the votes of the validators they delegate to. Delegators have the option to change the votes they originally delegated to Atom validators if there are certain circumstances.

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PhotonThe Cosmos network currently plans to introducesecond token

Atoms inflated in this way are distributed to validators and delegators who stake Atoms. This process will dilute the value of Atoms that are not staked. Effectively reducing the value of Atoms that are not staked in the process. Photon, as the second type of token, is designed to have high liquidity, and has the characteristics that the inflation rate will gradually reach 0. Newly generated Photons will be distributed to validators and delegators as rewards for their contributions. Validators will take a commission out of these rewards. So far, whether to activate Photon in the initial stage of the Cosmos network has not been determined, and it needs to be determined by voting on the Cosmos Hub.

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Hard Spoon

Photon is likely to be allocated to Atom holders, and can also be distributed to all ETH holders in a similar airdrop manner, based on a state snapshot at a certain block height of Ethereum. So, we need to create a dedicated partitioned blockchain in the Cosmos network to get Photon. The user's account in this blockchain is consistent with Ethereum, and then Photon can be transferred to other blockchains to pay fees. The value of Photon tokens has been clearly stated in previous blogs. It is hoped that in such a way, Ethereum users are encouraged to migrate to the Cosmos network to enjoy better blockchain services. The relevant parameters of Hard Spoon are planned to be determined by a management vote. In this vote, the form of Hard Spoon will be determined, such as how photons are distributed among Ether holders and Atom holders and its inflation rate. The core issues about how Hard Spoon will be implemented and what kind of economic parameters of Photon will be determined after the mainnet is launched.

commission rate

The commission rate charged by validators for Atoms, Photons, and fees can be variable. So far, the default model is to adopt a single commission rate for Atom and Photon block rewards and transaction fees. However, if the community chooses to change this setting to a different commission per fee token at a later date, the community can accomplish this through on-chain governance.

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In addition to the two native Cosmos tokens, Atom and Photon, once other tokens become available on the Cosmos Hub, it is planned to whitelist other tokens (such as Bitcoin and Ethereum) to pay transaction fees on the network. Which tokens will be accepted will be determined by an on-chain governance vote. These future possibilities are detailed in the token model paper. Whether whitelisted tokens can be accepted as payment for fees is determined by how much each token is valued by the validators themselves.

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2. The pros and cons of Atom holders

Atom and Photon are two different elements of economic value. The economic value of witness nodes in the system depends on the prices of these two tokens, but they can also be decoupled. But the next article will introduce the impact of economic benefits on Atom holders (whether as validators or delegators).

Cosmos Network Balancing Mechanism

The goal of the Cosmos network is to form an interconnected network of blockchains by de-pivoting blockchains. No single member can control it or initiate censorship. This needs to form a balance, so that enough validators can benefit from security witnesses, and at the same time, these nodes cannot accumulate too much wealth and power (determined by the number of Atoms held) in the process of providing services. An idealized system would give nodes sufficient authority to work properly but at the same time would not affect normal operation due to security issues in the network caused by excessive decentralization.

Cosmos uses a Byzantine fault-tolerant mechanism based on Proof of Stake (PoS), which can ensure the efficient operation of the system while ensuring the realization of decentralization. The reason is that Atom holders can elect validators who can represent themselves and the interests of the entire network . The system also designs a punishment mechanism for those verifiers who behave appropriately.

The strange law that the poor get poorer and the rich get richer

When using Proof of Stake (PoS) to secure information in a decentralized system, it is often controversial because a common problem is that certain validators can quickly accumulate wealth (collateral tokens of PoS) and control the entire network of control.

• The following example will adopt a realistic assumption, let us see that in the Cosmos network, it will take a long time to accumulate a large amount of Atoms through commissions, so as to prevent the concentration of nodes holding Atoms from being too high.

• 230 million Atoms in total

• Average annual inflation (growth): 10%

• Average commission rate: 10%

• Total annual commission generation: 2.3 million Atoms

• Margin: 50%

The total annual node income is 1.15 million Atoms (0.5% of the total supply)

Let me assume that after 10 years, nodes in the blockchain can accumulate wealth with a 50% marginal profit and a 10% commission rate. At the same time, in 10 years, the wealth obtained by nodes is represented by Atom. During this period, they do not need to pay dividends, do not return cash to investors, do not need to exchange Atoms for common currency to hedge their balance sheets, do not use Atoms for reinvestment or sell Atoms across chains. After calculation in this way, the tokens that these nodes can obtain only account for 5% of the overall token supply. It is impossible for any validator to claim that they can quickly accumulate Atoms in a short period of time.

• Let's imagine a scenario where there is an account holding a large number of Atoms in Cosmos

• Average annual inflation (growth): 10%

• Atom holdings of large investors: 1,000,000

Validator cost: $300,000 per year

Assume that validators receive an average commission cost of 20%. If a large user chooses a validator as its representative and is willing to pay a service cost of 1,000,000 Atom*10%(inflation)*20%(commission) = 20,000 Atom per year. And the big player wants the price of Atom to exceed $15, so it is more rational for this big player to become a validator instead of letting others be their representatives.

As the law of "the rich get richer" is broken, we can focus more on the formulation of blockchain security mechanisms and how to use economic benefits to motivate decentralized validators in the network to ensure the formation of a decentralized Network Systems.

Blockchain Security

The security of a blockchain network is directly related to its attack cost. At the same time, the cost of attack is directly proportional to the investment in the construction of basic security facilities in the network.

Let's take Bitcoin as an example. Currently, Bitcoin's market capitalization is around $150 billion. The current block reward is roughly equal to an inflation rate of 6%, that is to say, miners can earn about $9 billion in block rewards a year in addition to handling fees. Miners' income will increase as the value of the network increases. The increase in the value of the token means that the mining income will also increase, so more funds will be invested in mining equipment. This improves network security, but competition also reduces revenue.

This is a positive incentive mechanism, because as long as the price of Bitcoin is higher, the security of the network will be higher. That is to say, the higher the value of the system, the higher the profit of attacking the system. Therefore, only by increasing the spending incentives for mining can the cost of network attacks be increased. This is also the reason for Bitcoin's economic incentive design.

So what about a proof-of-stake based network? An attacker can purchase a large amount of staked tokens and then submit different blocks at the same height, causing the blockchain to fork. Fortunately, the cost of such an attack is enormous. If the attacker wants to buy tokens in large quantities in the market, this will inevitably push up the price of the tokens. If you want to buy 2/3 of the total amount of tokens, this behavior may push up the price of tokens ten times. This also means that the cost of the attack will be high. In addition, if this attack is executed, a hard fork will occur. The fork will confiscate the tokens of the evildoers, and eventually all funds will be wasted. This mechanism is very strong, which means that such an attack cannot occur. In the Cosmos network, the probability of such an event will be smaller, because most of the Atoms will be used as collateral, so the Atoms circulating in the market may not be enough to form an attack.

However, this does not mean that there is no danger of attack! Validators in the Cosmos network must continue to participate in the consensus through signatures, which means that their private keys will always exist on the server. Private keys cannot be isolated from the outside world. If a hacker breaks into a validator's server, they can take control of the entire network. In this case, slashing of staked tokens is still possible, but the losses are at the expense of the attacked validators and delegators.

Therefore, we believe that the attack on the Cosmos network is more likely to be achieved through a security attack on the server of the validator node. Therefore, the security of the Cosmos network is closely related to the firmness of the network foundation of the verifier node. Infrastructure includes the use of HSM, data centers, sentinel node architecture, hiring security experts, ensuring relevant key files, conducting relevant security audits, installing attack detection systems on nodes, and so on. According to the Validator Working Group's incident experience, the cost of building such a secure system ranges from $10,000 to $2,000,000.

As a network, we hope that validators can invest more funds in the upgrade and maintenance of network security as the value of the network continues to increase. For example, when the network is first launched, there may be several key persons in property management in each validator operation company. As the amount of Atoms controlled by the verifier increases, such as greater than $100,000,000, this risk is intolerable. Exchanges like Xapo, Coinbase or others build a sophisticated system to defend against internal and external attacks. As validators grow in influence, it also needs to build such a system. As the influence of the network increases, the difficulty and cost of running a validator node will continue to increase. This also increases the cost of the attack, which has a positive impact on network security.

• What would change if validators charged commissions? Let's assume a validator VCorp:

• Number of Atoms staked: 5,000,000

• Commission rate: 15%

• Atom Inflation Ratio: 10%

Atom price: US$5

VCorp's asset price is US$25,000,000, and its income is expected to be 5,000,000*10%*15% = 75,000 Atom, worth US$375,000. If the price of Atom rises to $50, then VCorp's total assets will reach US$250,000,000. The responsibility of protecting so many assets is great, but at the same time the income will be very high US$3,750,000. Companies can use the revenue to upgrade security systems.

Therefore, we think that as Atoms appreciate, competitive validators will invest a lot of their income in daily security maintenance.

If the cost of maintaining the security of a validator node does not increase linearly with the market capitalization of the network, then we will see the commission rate gradually decrease among validators in order to compete.

Incentives for validators in the Cosmos network

Now we discuss in detail the economic incentives of validators in the Cosmos network. When the Cosmos network is launched, we design that there will be a maximum of 100 validators in the network. Over the next ten years, the number of validators will increase to 300. The economic mechanism should be set up so that 100 validators can profit from operating a node. In other words, compared to simply entrusting Atom to a validator, operating a validator node will be more profitable after deducting the operation and maintenance costs. If this balance cannot be obtained, it will inevitably lead to the centralization of the verifier's rights. For example, only the best/most popular validators can profit from participating in consensus; validators may deploy sub-optimal security facilities for profit. In the discussion that follows, we consider the cost of operating a validator safely as the cost of running a validator. This cost will also be positively related to the amount of validator assets.

The assumption of this balanced design is that the ideal validators are highly specialized. Just having a lot of Atoms is not enough to qualify as a validator. The Cosmos network will have an important impact on the ecology of future cryptocurrencies. Therefore, the Cosmos protocol will have the most stringent requirements for security, especially Cosmos will be the first public chain project to run Proof-of-Stake on a large scale.

In the current setting, in a balanced state, a validator V with poor ability can set the commission ratio CRv and the ratio SDv of the entrustment it receives, and the same ratio can be used for block reward Photon (PP) and mortgage Benefit from Atom (AP) income. This way you get:

Transaction Fees

Transaction Fees

Only after the transaction fee is paid, the transaction submitted by the user will be packaged in the block. Because the Tendermint consensus engine can support a large throughput, and the time interval between block generation is also very short, the Cosmos Hub will have a large transaction processing capacity. We estimate that for a long time, there will not be too many transactions on the Cosmos blockchain, so users do not need to increase transaction fees to ensure that transactions are executed. Therefore, for block producers, the marginal cost of adding a transaction is almost zero.

As we have observed from other blockchain projects, fee income only becomes important when the network becomes very saturated. This also has a bad effect on usability. Therefore, according to the above analysis, we can think that when the network is not very saturated, the commission received through the handling fee can be ignored.

The disadvantage of viewing Photon as a fee token is that since other partitions will be connected to the Cosmos Hub in the future, more tokens will enter the fee whitelist, so the value of Photon as a fee token will be diluted. If you want to transfer ETH from a partition of the Ethereum mainnet to a decentralized exchange, you will prefer to use ETH to pay the transaction fee rather than exchange it for another token.