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Design Doc 12: UMEE Inflation v2

Changelog

  • August, 2023: Initial Design (Ming Duan, @robert-zaremba)

Status

Accepted

Abstract

Umee v2 Inflation model introduces market cap for the UMEE supply and inflation cycles when the inflation is updated.

Context

Today, the token issuance follows standard Cosmos SDK mechanism. We want to progressively limit the issuance in an algorithmic way. The UMEE tokenomics needs to be optimized with the following considerations:

  • The current network parameters - min inflation 7% max inflation 14% - results in high spending on chain security.
  • The adoption of liquid staking will drive more staking with a lower staking yield required.
  • Interchain security and chain based revenue streams can become additional source of income for stakers.
  • Set the hard cap to influence more the market expectations of the Umee supply.

Specification

We set the max inflation to 21 billion UMEE (the supply today is around 12.2 billions):

  • Block rewards are always adjusted (zeroed or reduced if necessary) so total supply never exceeds 21 billion UMEE.
    • Supply is measured based on bank/QueryTotalSupply.
  • Minting resumes if supply drops below 21B (and stops again once 21B is reached).
  • Burn events will reduce the UMEE supply, enabling more staking rewards, according to the inflation rules. Burning events were included in the whitepaper, but the exact specification will be the subject of another design document.

The $UMEE v2 Inflation follows a similar Cosmos dynamic inflation mechanism based on the bonding rate in the x/staking module, to allow the Umee chain to naturally adjust inflation rate to drive staking activities to reach the target bonding rate.

On top of that we introduce inflation cycle, which is initially set to 2 years and controlled by the UMEE governance. In each inflation cycle, the yearly total amount of newly emitted tokens is a variable as per the x/staking Cosmos SDK module. At the end of each inflation cycle, the x/mint module inflation_min and inflation_max parameters are automatically decreased by the infaltion_reduction_rate parameter, which is initially set to 25%.

Finally, we accelerate the x/mint inflation rate change speed from 1 year to 6 months.

Umee governance at any time can vote and modify the inflation schedule if the external environment changes materially and requires a different plan.

Technical Implementation

The new inflation mechanism is build on top of the existing x/mint module by providing InflationCalculationFn to the x/mint module constructor. That function will use Umee x/ugov module which will control and store the following parameters:

message InflationParams {
  // max_supply is the maximum supply. Inflation will not increase the UMEE supply above this value.
  cosmos.base.v1beta1.Coin max_supply = 1;

  // inflation_cycle duration after which inflation rates are changed.
  google.protobuf.Duration inflation_cycle = 2;

  // inflation_reduction_rate for every inflation cycle in basis points.
  uint32 inflation_reduction_rate = 3;
}

The Umee x/ugov will be extended by the following Msg Server Message:

message MsgGovUpdateInflationParams {
  option (cosmos.msg.v1.signer) = "authority";

  // authority must be the address of the governance account.
  string          authority = 1 [(cosmos_proto.scalar) = "cosmos.AddressString"];
  InflationParams params    = 2;
}

The inflation cycle change is handled by the InflationCalculationFn function, implemented by the inflation.Calculator object (in the app/inflation package). The Calculator will handle the x/ugov module dependency.

Alternative Approaches

We were discussing more advanced mechanism, which would define the staking rewards per user based on his usage of the x/leverage and x/metoken modules (notably amount of supplying assets).

Another possible modification is to set a constant inflation rate during each Inflation Cycle. It would make the calculation simpler, and make the yearly new supply more predictable. However, it will remove the dynamic nature of the traditional x/staking which adapts the block rewards based on the UMEE staking target.

Test Case

  • Unit tests to verify the Inflation Cycle changes.
  • Unit tests to verify the inflation change speed.
  • Integration test to verify the x/staking and x/ugov integration.

Consequences

  • Umee supply is predictable.
  • Umee sell pressure is reduced.
  • Umee inflation is more dynamic.

Backwards Compatibility

  • The solution is backwards compatible with the existing Cosmos SDK stack. We don't need to fork any Cosmos SDK module implementation, nor overwrite it.
  • The implementation adds new method to the UMEE x/ugov module and new parameter set, which is additive.

Further Discussions

We are exploring the burn mechanisms and ways how to better react on the market conditions.

References