When Moon/Cosmos?

Cosmos’ ATOM tokens just opened for trading on Coinbase Pro, which means they’ll likely soon be available (and stakeable) on Coinbase.

Should we expect similar staking dynamics to what we saw with Tezos when it became available to stake on Coinbase, Binance, and Kraken?

First, a quick recap on XTZ’s delegated staking model.

In the Tezos staking design “bakers" act as protocol validators by locking security deposits on the network and maintaining the required validation hardware. Bakers earn direct fees from their work, and XTZ holders can delegate their stakes to third-party bakers who will stake and bake (!!!) on the users' behalf — usually for a commission similar to that of a mining pool.

Bakers have what’s called a "staking capacity,” which is currently 8x their security deposits. If their staking balance (the baker’s funds + all delegated funds they manage) exceeds the security deposit by more than 8x, the baker is considered “over-delegated.” That means the participants in that baking scheme will receive less than their expected pro rata funds unless the baker increases their staking capacity (adds to their security deposit). (More on the math here.)

The dynamic is designed to do two things:

1) in theory, incentivize decentralization because it encourages delegators to find bakers with available staking capacity,

2) in practice, ensures bakers increase their staking capacity and principal holdings in lockstep with user deposits.

The Tezos design assumes users will be proactive and bakers reactive, rather than the other way around. In reality, many customers simply rushed to stake through Coinbase as soon as the company's new (stupid simple) staking service was released. As the company’s baker quickly hit its staking capacity and became over-delegated, Coinbase purchased additional XTZ to top up its security deposits.

The company said it would not (perhaps could not, given regulatory restrictions) use customer funds for security deposits, which are subject to some illiquidity, slashing penalties, and protocol risk; and because there are no lockup periods for delegated XTZ, Coinbase upped its balance sheet Tezos position, and may have caused other exchanges to quickly follow suit.

Though it’s unclear how much each exchange purchased, the Tezos price jumped ~70% in the six weeks following the Coinbase, Binance, and Kraken announcements (it's still up 20% from the initial Coinbase announcement). The rush to source liquidity by the major staking services was likely a major catalyst for the Tezos pump, given the fact that more than 75% of XTZ is currently staked.

So the million dollar question is: will we witness a similar trend for ATOMs?

Cosmos staking

Like Tezos, Cosmos leverages a delegated staking model to secure its network. However, validators in the Cosmos universe push some risk to their customers (delegators). A misbehaving validator could lose its staked funds and those of its delegators, creating a higher diligence standard for those looking to delegate stake. And the validators must post a minimum level of "bonded delegation," which includes delegated ATOMs that cannot be un-bonded for a minimum of 21 days.

Despite the risks, since there are only 125 active validators at any time who can receive inflation rewards, there are incentives for small stakeholders to delegate with third parties or build their own infrastructure. The active validators are determined by "staking weight”, the total of self-delegated and user-delegated ATOMs. But there is no equivalent "staking capacity” metric to Tezos, because there is no restriction on the minimal amount a validator must self-delegate while piling up delegated ATOMs.

That reduces the possibility of an artificial supply shortage, as custodial exchanges like Coinbase, Binance, and Kraken won’t need to ramp up ATOMs purchases to satisfy customer staking demands.

PS - h/t to our analyst Wilson for the assist on this research. Worth a follow on twitter.

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