Inflation change to off-set the on-chain Terra fund tax

With the plan to create an on-chain Terra fund by instituting a 6% tax for 12 months posted on the forums recently (link: A 12-month on-chain fund for Terra projects), this seems like a good opportunity to zoom into one briefly mentioned aspect of that proposal, namely a potential inflation change. It was suggested by several community members that we adjust the maximum inflation to keep the same effective apr that we currently enjoy (~7.4%). I think this is an important enough discussion to warrant it’s own thread and discussion.

Calculation

Inflation / (total staked SCRT / total SCRT) * (1 - fees) - inflation = effective apr

If we would like to keep the current ‘effective apr’ and create the on-chain Terra fund:
X / (137/218) * 0.88 - X = 7.4
Solving for X leads to an inflation of 18.5% to keep the same effective apr with the Terra fund.

Previous ‘effective’ APRs on Secret Network

January 1st 2022: ~11%
Last month (SF tax at 10%): ~6%
Current: 7.4%
If on-chain Terra fund gets approved: 6%
If on-chain Terra fund gets approved and maximum inflation is raised to 20%: 8%

Current inflation on other Cosmos chains

ATOM: 11% (Maximum inflation is 20%)
OSMO: 80% (Reduced by 1/3 per year)
JUNO: 40% (Halved yearly until 10%, then reduced by 1% per year)
Sentinel: 37% (Reduced by 6% every 6 months until 13%)

Goals of this thread

  • Estimate support for temporarily increasing inflation to 18.5% or 20% to offset the on-chain Terra fund and start community discussions before an on-chain proposal
  • Kick-start long-term inflation discussions (40% of validators that participated in the 2022-Q2 Validator Survey would like to see the inflation percentages, and inflation change rate being discussed)

Notes

  • Increasing inflation would also increase the amount of SCRT received by SF, the community pool, and the prospective Terra fund. At 20% inflation, they would each receive 33% more SCRT than now.
  • Increasing inflation may lead to more SCRT being sold. It could also attract more stakers due to a more attractive apr.
3 Likes

Being a team building on secret that depends on staking rewards, I support a temporary increase to 18.5% for the duration of the new tax in efforts to offset its negative impact. I also think new users are paying a lot of attention to apr on new chains they are researching, so helps keep secret compelling to new stakers.

2 Likes

18.5% or 20% both seem fine to me, I’ll support both.
A higher inflation attracts more stakers from the cosmos ecosystem though, which we count on most atm?
Price per SCRT isn’t that good right now so the theoretically higher selling pressure won’t help us in the bear market, but if that’s the price to pay to attract more stakers from the cosmos ecosystem then I’m fine with it.

1 Like

If we increase the money supply faster than the real output growth of the network, we will cause inflation, negating any calculated effective APR increase.

So, the question becomes whether the Terra proposal would generate enough increase in real output growth to offset the increase in money supply.

To me, this is unlikely since the only way to avoid the inflation would be through staking with a 21 day unbonding period (and therefore not consuming the Terra dapp services).

More importantly, I actually think the contractionary monetary policy enforced by the Terra proposal will be a positive factor, given the already high levels of inflation that we’re seeing on $SCRT.

Reducing the money supply via this additional tax should help curb excess spending on line items not currently contributing to real output growth (e.g., the various marketing / support committees).

1 Like