Cosmos Validator Economics—Revenue Streams


Revenue Streams within Cosmos

The Cosmos team has a habit of introducing novel ideas to the blockchain ecosystem, i.e. the hard-spoon and IAVL trees. One such concept is something called “block provisions”.

You’re probably already aware that validators (analogous to mining pools) and delegators (analogous to miners) earn revenue in exchange for staking their tokens. Here’s how. Revenue is earned in three parts:

Part 1: Block provisions (in Atoms)

Block provisions are paid in newly minted ATOMs when new blocks are committed. Provisions exist to make ATOMs a depreciating asset—just like physical machinery—in order to incentivize ATOM holders to stake, thus utilize, their staking equipment. To prevent your ATOMs from deflating in value, you should stake them so that you are supplied with a comparable amount of ATOMs to compensate for the value that would otherwise have been deflated away had you not staked. 

The yearly inflation rate converges around a target of ⅔ bonded stake out of the total supply of ATOMs in circulation. If the total bonded stake is less than ⅔ of the total ATOM supply in circulation, inflation incrementally increases to 20%. If the total bonded stake is more than ⅔ of the ATOM supply in circulation, inflation incrementally decreases to 7%. This means that if the total bonded stake remains below ⅔ of the total Atom supply in circulation for a prolonged period of time, unbonded ATOM holders can expect their ATOM value to deflate by 20% per year.

Part 2: Block rewards (in Photons)

Block rewards work the same as in Bitcoin. Validators are rewarded in Photons when a new block is committed. Unlike the ATOM, Photon value will not be deflated away, as this is the fee token for the Cosmos Hub.

The initial distribution of Photons will be hard-spooned from Ethereum, only if ATOM holders vote to deploy the code to do this. What’s important to note, however, is that irregardless of whether or not ATOM holders pass the hard-spoon code to distribute the initial Photons, Photons will “mined” as block rewards when the Cosmos Hub launches. 

Only bonded ATOM holders will receive newly created Photons as block rewards. Photons will be distributed at a rate of 500 per hour in proportion to each bonded Atom holder’s stake.

The ratio of Photons to Ether, the supply of Photons, when the snapshot of the EVM will occur, etc., will rely on decisions made through governance. The Cosmos team only writes the software to enable its stakeholders to make decisions.

Part 3: Transaction fees (various whitelisted tokens)

Each transfer on the Cosmos Hub is paid with a corresponding transaction fee. Transaction fees can be paid in any currency that is whitelisted by governance through the Cosmos Hub. Fees are distributed to bonded ATOM holders in proportion to their stake. The first whitelisted tokens at launch are ATOMs and Photons.

Commission Fees & Breakdown of Revenue for Validators/Delegators

Each validator’s staking pool receives revenue in proportion to its total stake. However, before this revenue is distributed to delegators inside the staking pool, the validator can apply a commission. In other words, delegators have to pay a commission to their validators on the revenue they earn. 

Take, for instance, a validator whose total stake (i.e. self-bonded stake + delegated stake) is 10% of the total stake of all validators in the network. This validator has 20% self-bonded stake and charges a commission of 10% to its delegators. Now let us consider a block with the following revenue:

  • 990 Atoms in block provisions
  • 10 Photons in block reward
  • 10 Atoms and 90 Photons in transaction fees.

This amounts to a total of 1000 Atoms and 100 Photons to be distributed among all staking pools.

Our validator’s staking pool represents 10% of the total stake, which means the pool obtains 100 Atoms and 10 Photons. Now let’s look at the internal distribution of revenue within the validator’s pool:

  • Commission = 10%*80%*100 Atoms + 10%*80%*10 Photons = 8 Atoms + 0.8 Photons
  • Validator’s revenue = 20%*100 Atoms + 20%*10 Photons + Commission = 28 Atoms + 2.8 Photons
  • Delegators’ total revenue = 80%*100 Atoms + 20%*10 Photons — Commission = 72 Atoms + 7.2 Photons

Then, each delegator in the staking pool can claim its portion of the delegators’ total revenue based on their percentage of stake.