Fortifying Cronos POS network security: A proposal to increase target bonded ratio and optimize CRO incentives
A non-technical explanation of the latest governance discussion
Introduction
As we observe new developments on the Cronos POS chain (previously named Crypto.org), its token economics should also continually adapt and evolve. A recent governance discussion on GitHub advocates for a strategic parameter adjustment aiming at bolstering the chain’s target staking ratio - a key barometer of network robustness for Cronos POS.
This initiative seeks to strengthen CRO incentives for delegators and validators through higher Annual Percentage Rate (APR) , thereby encouraging a more substantial commitment to the network's economic security. But how does the mechanism work, and what implications might it have in relation to the previously passed Community Burn proposal? Let’s unpack them in this article.
Background
In 2023, we've seen a clear rise in CRO staking participation on the Cronos POS Chain. The total amount staked has increased more than 70% from around 5 billion at the beginning of 2023 to 8.5+ billion at the time of writing. This rise in staking has led to a decrease of the staking APR, falling from nearly 12% to 6.5% today.
The Cronos POS Chain operates on the Cosmos SDK, adhering to an inflation schedule governed by the "mint" module. This critical module is responsible for determining the quantity of new CRO tokens distributed to validators per block.
The staking APR is influenced by two primary factors. The first is the rate of new CRO token creation as stipulated by the Mint Module. The second is the staking (bonding) ratio —the higher the number of staked CRO tokens, the more recipients there are for the rewards, which in turn dilutes the APR for each participant.
Why would we need higher staking APR?
To maintain a competitive and fair incentive for staking delegation, thereby enhancing the network's security, the staking APR is crucial for a chain like Cronos POS. It serves as a key motivator for users to engage with the network, enhancing its stability.
A high total staking amount relative to the total CRO supply signifies a substantial commitment from CRO holders to the security and governance of the blockchain. Generally, the higher this percentage, the more robust and healthy the ecosystem is perceived to be.
For perspective, examining other Layer 1 blockchains reveals that their staking ratios typically exceed 50%. For instance, Solana boasts a bonding ratio of 68%, while Polkadot has 58%. Looking closer to home within the Cosmos ecosystem, the Cosmos Hub stands at a 63% staking ratio, and Osmosis at 53%.
As we move forward, a continued increase in staking participation is anticipated, especially with the growing popularity of liquid staking. Take, for example, Veno Finance, a leading liquid staking protocol on Cronos. In just one year since its launch, it has drawn over 110 million CRO into staking, signaling a consistent upward trajectory in staking activities.
This rising staking ratio necessitates a recalibration of the emission parameters to ensure that stakers receive adequate incentives. Such incentives are critical for maintaining the economic security of the network, which is the cornerstone of a functional POS chain.
So how does the new mechanism actually work?
To grasp how the proposed changes will impact the Cronos POS chain, it's essential to understand three key parameters:
Inflation_max: This parameter sets the upper limit of the inflation rate. Currently, it is set at 0.025 (2.5%). It determines the highest possible annual increase in the total CRO supply.
Inflation_rate_change: This parameter dictates the maximum annual change in the inflation rate. It's influenced by how the current bonding ratio compares to the 'goal_bonded'. Right now this is at 0.006 (0.6%).
Goal_bonded: This parameter indicates the desired staking ratio for the Cronos POS chain, which is currently set at 0.3 (30%). The network's inflation rate adjusts in response to this target: if the actual staking ratio is below the goal, the inflation rate will increase up to 'Inflation_max'. Conversely, if the staking ratio exceeds the goal, the inflation rate will decrease.
The proposed adjustments:
Update inflation_max: Raising the cap from 0.025 to 0.037.
Update inflation_rate_change: Increasing from 0.006 to 0.1.
Update goal_bonded: Increasing the target from 30% to 60%.
Currently, the bonding ratio has exceeded the critical 30% threshold, leading to a decrease in the inflation rate as per the 'goal_bonded' mechanism. This causes a downward effect on the staking APR. The proposed changes aim to recalibrate the dynamics to ensure a fair and sustainable incentive system for all network participants.
These adjustments introduce a more responsive inflation rate that can swiftly adapt to fluctuations in the network's staking ratio. Ultimately, these modifications are intended to increase CRO emissions for validators by stabilizing the staking APR.
How does it work in conjunction with Community Burn?
Regarding the Community Burn, it is important to recognize that its impact on the declining staking APR has been minimal so far. The decrease in APR can be largely attributed to an increased bonding ratio from a surge in network staking participation.
In the context of the Cronos POS chain's token economics, envision a water faucet where the flow represents the CRO tokens being emitted. The faucet's flow is set at a certain rate by the “mint” module, and the Community Burn mechanism determines the allocation of this flow. Specifically, it channels 15% of the CRO emissions into a community reserve, with the remaining 85% going to validators.
The new proposal doesn't alter the existing Community Burn mechanism. Instead, it's like adjusting the faucet to increase the water flow. This change doesn't impact how the water is divided but rather increases the total amount available. It regulates the emission rate, effectively determining how much and how quickly tokens are introduced into the system.
Therefore, these mechanisms operate in tandem but affect different aspects of the tokenomics: one controls the overall emission rate, while the other manages redistribution. Together, they maintain a balanced ecosystem within the Cronos POS chain, benefiting users, delegated stakers, and validators alike.
What you can do
We encourage the community to engage with the future of the Cronos POS chain by discussing the proposal with your validators and participating in community channels like Discord and GitHub.
Validators should consider the diverse perspectives of their delegators before voting. Delegators, if you find disagreement with your validators, exercise your right to vote independently or switch to validators aligning with your vision. Refer to the provided guides for detailed voting instructions (here and here). Your active participation is crucial in forging a robust and sustainable economy for all.