Cosmos inflation & staking rewards:
How are they related?
It’s important to understand that Cosmos’ inflation is different than its rewards rate.
Think of Cosmos’ newly-minted ATOMs as a pie: inflation is the size of that pie. Staking is your right to claim a slice of the pie. We pool and split the rewards with everyone else staking, so the more that others stake, the smaller the slice of pie you get. The bigger the pie, the bigger the slice for everyone staking.
Cosmos Stats from Sep 25, 2019
Inflation = 7.50%
Rewards rate = ~10.61% (based on a rough calculation)
Inflation Rate Changes Slowly
Cosmos’ inflation rate changes very slowly, based on a targeted staking participation rate of 67%. That means that when 67% of all ATOMs are staked, the inflation rate will stop changing.
Inflation decreases if over 67% of ATOMs are staked, and very gradually, bottoming out at 7%. Right now, 70.69% of ATOMs are staked and inflation is 7.50%. In a week from now, for example, we can expect that inflation will be 7.48% if over 67% of ATOMs are still staked. Let me know if you want to see the math for this.
Inflation increases if under 67% of ATOMs are staked, maxing out at 20%.
The pool of Cosmos rewards is a pie that we share
Think of Cosmos’ newly-minted ATOMs as a pie: inflation is the size of that pie. Think of staking as your right to claim a slice of the pie. We pool and split the rewards with everyone else staking, so the more that others stake, the smaller the slice of the pie is that you get. The bigger the pie, the more rewards everyone staking gets.
The rewards rate
A quick way to do calculate the rewards rate is with this equation:
inflation_rate / staking_ratio
Right now the inflation rate is 7.50%, so:
inflation_rate = 0.075
173.10M ATOMs are currently staked out of the entire 244.86M ATOM supply, so:
staking_ratio = 173.10M / 244.86M = 0.7069
Final, rough calculation for staking rewards:
0.075 / 0.7069 = 0.10609
Therefore stakers are currently earning approximately 10.61% rewards for staking on Cosmos. And that could change much quicker than inflation can.
The rewards rate changes faster
The reason that rewards rate can change quicker than the inflation rate is because it’s a factor of how many ATOMs are currently staked. Right now, 70.69% of ATOMs are staked, but let’s take a look at two scenarios.
Scenario 1: stake 49M new ATOMs
If I suddenly staked 49M ATOMs, 90.69% of ATOMs would be staked. How would that impact on inflation? It would have no impact. But it would dramatically change the rewards rate:
0.075 / 0.9069 = 0.08270
As soon as I staked 49M ATOMs, stakers would go from earning ~10.61% to earning ~8.27%. This is very unlikely to happen, but it’s an extreme example to show that the rewards rate is more volatile than the inflation rate is. Let’s do the same for unstaking 49M ATOMs.
Scenario 2: unstake 49M ATOMs
If I suddenly unstaked 49M ATOMs, 50.69% of ATOMs would be staked. How would that impact on inflation? It would very little impact, taking over 12 weeks to increase from 7.50% to 7.75%. But it would dramatically change the rewards rate:
0.075 / 0.5069 = 0.14796
As soon as I unstaked 49M ATOMs, stakers would go from earning ~10.61% to earning ~14.80%. This is also very unlikely to happen.
Now you know
And now that you know the relationship between Cosmos’ staking rewards and inflation, be sure to check out my monthly network analysis articles, particularly the ‘Key Metrics’ part. September is due very soon, and I will try to keep these links updated:
Hopefully you found this useful. Feedback is always welcome! I’m on Twitter.