ATOM Staking Rewards: On-Chain Analysis for Q2 2023

KEY INSIGHTS & TAKEAWAYS

In the second quarter of 2023, the Cosmos staking encountered challenges due to several factors: the SEC lawsuit, the unprecedently high level of already staked ATOM, and the broader crypto market landscape. Our findings indicate the following:

• The total value of staked ATOM increased by 9.84%, primarily driven by institutional delegations. While June resulted in the lowest stake increase in Q2, it did surpass the figures from February 2023.

• Despite a net outflow in June, Q2 saw a modest rise in the number of delegators, increasing by 3.4% to 829.06k.

• The inflation rate reversed its upward trend because the staked ratio surpassed 66.7% in April. It will continue to decrease unless the staked ratio drops below 66.7%.

• The ATOM price reached its lowest point in Q2, declining by 19.6%. The most significant dip occurred in June, followed by a slight recovery towards the month's end. Notably, the stake continued to rise, suggesting a considerable portion of committed ATOM investors continued to invest.

• The staked ratio reaching 70.2% indicates that Cosmos Hub remains one of the most secure Cosmos-based blockchains. This might lead other projects to launch consumer chains to utilize Cosmos Hub’s security through the Replicated Security model.

• The Staking APR is decreasing due to pressure from the Staked Ratio. However, ATOM delegators have begun earning additional rewards in NTRN, the native token of the first consumer-enabled Replicated Security. Although NTRN rewards are currently minimal, as Replicated Security evolves, ATOM stakers are expected to earn more from the full spectrum of upcoming consumer chains.

You can recreate all charts from this report in Everstake's free Interactive Dashboard. Additionally, you can craft new charts for Cosmos Hub analysis for selected periods and by determined parameters. Whatever you're looking for – generating analytical content or facilitating well-informed decision-making  – Interactive Dashboard is here to help. 

For a more comprehensive understanding, acquaint yourself with the earlier reports:

• ATOM Staking Report: On-chain Data Analysis 2020-2022

• ATOM Staking Report: On-chain Data Analysis Q1 2023

If you are using any of our materials, please leave the reference to Everstake and link to the original report.

Introduction to Cosmos Staking

Cosmos is positioned as the "Internet of Blockchains," a decentralized network of blockchains that interfere with each other. Before diving into the state of Cosmos staking for the second quarter of 2023, let's take a closer look at why Cosmos is worth all the buzz around it. 

What is Cosmos?

Cosmos is a decentralized network comprising independent parallel blockchains with a proof-of-stake consensus mechanism. These blockchains operate via the Tendermint consensus algorithm, known for its Byzantine Fault Tolerance (BFT). Currently, most Cosmos chains are expected to migrate to CometBFT, Tendermint’s successor.

The network's core purpose involves establishing an ecosystem where interconnected blockchains can avoid the restrictions of the traditionally isolated ones. To achieve this, Cosmos facilitates the development of tailored blockchains using the user-friendly Cosmos SDK. This SDK simplifies application-specific blockchains development, providing high security, performance, and adaptability.

A pivotal feature within Cosmos is the Inter-Blockchain Communication (IBC) protocol. This protocol empowers distinct Cosmos blockchains to exchange tokens and data seamlessly.

What is ATOM?

The Cosmos Hub is the first and the primary chain within the Cosmos, having its native token ATOM which serves for staking, liquid staking, governance, and paying transaction fees, thus providing the entire operation of the chain.

What is ATOM staking?

Staking ATOM involves locking up a certain amount of ATOM tokens as collateral to support the security and operations of the Cosmos Hub. This can be accomplished by operating a node or delegating tokens to validators. In return, stakers receive rewards in the form of additional ATOM tokens. 

ATOM staking is a critical mechanism that helps secure the Cosmos network, encourage active participation, and align the interests of token holders with the network's health and growth.

Interactive Analytic Dashboard for Cosmos Staking Analytics

This report will walk you through the historical data and its expert analysis. Alternatively, we’re happy to represent our automated PowerBI report with the On-chain Data Analysis in Cosmos which allows you to monitor the dynamics of the Cosmos staking independently.

Utilize our interactive dashboard to access data that are tailored to your preferences, including:

• Commission rate;

• Validator rank;

• Time (down to the data for today);

• Validators.

Follow this link to access our automated PowerBI report with the On-chain Data Analysis in Cosmos and get instructions on how to use it fully. 

Essential Definitions

Here’s a brief explanation of the basic terminology mentioned in the report:

• Stake (Voting Power) – the number of staked ATOM;

• Validators – node operators in Cosmos Hub producing new blocks and confirming transactions;

• Delegators – ATOM holders who delegated their tokens to validators performing staking to get staking rewards;

• APR – annual percentage revenue provided by the blockchain for staking;

• Inflation – the percentage of ATOM yearly supply.

The Blockchain Landscape in Q2 Affecting ATOM Staking

Monitoring significant events around the Cosmos Hub is crucial for understanding and predicting changes in ATOM staking. So, this section is about big Cosmos-related news during the second quarter of 2023.

Replicated security launch

The Replicated Security model (RS) was successfully implemented on the mainnet in May 2023. This implementation aimed to achieve several purposes, including kickstarting new Cosmos-based blockchains, commonly called consumer chains. Additionally, it aimed to enhance long-term ATOM tokenomics.

To explain the concept, consumer chains gain access to the voting power of Cosmos Hub validators embodied in ATOM delegations made by validators and their delegators. This approach grants consumer chains high security within the Cosmos ecosystem, supported by the substantial staking value of $2.8 billion in ATOM. 

Notably, consumer chains achieve this heightened security without establishing their own set of validators. In return, these consumer chains share a portion of their profits with Cosmos Hub, benefiting delegators and enhancing the appeal of ATOM staking.

Neutron took the lead as the pioneer consumer chain for the RS model. It functions as a DeFi Hub within the Cosmos ecosystem. It is responsible for sharing 25% of its earnings, which come from transaction fees and the anticipated maximum extractable value feature, with ATOM delegators.

Liquid staking evolution

During the second quarter, there was significant progress in the evolution of liquid staking within the Cosmos ecosystem. This progress aimed to enhance the liquidity of staked tokens, initially focusing on ATOM.

This technological advancement enabled ATOM stakers to obtain liquid staked tokens (LST) representing their current stake. These LSTs could be utilized in DeFi, allowing for additional profits and continuous trading. This approach offers more flexibility compared to the traditional staking of ATOM, which mandates a 21-day unstaking period before trading.

Of particular note, Stride, the leading provider of Cosmos LST, gained popularity by forming partnerships with multiple DeFi platforms. Stride also had plans to join the Replicated Security model (RS) and contributed to reshaping the Liquid Staking module in the Cosmos SDK.

Throughout Q2, ATOM's Total Value Locked (TVL) within Stride doubled to reach 2.6 million tokens.

Interchain Foundation’s delegation program completion 

The Interchain Foundation successfully concluded its Delegation program in April. This initiative involved granting 10 million ATOM tokens to 93 validators actively contributing to the Hub.

By June, the number of active staking providers had grown to 180 validators, following an increase of 5 validators. This expansion led to the approval of governance proposal #797, which proposed the validator set size of the Cosmos Hub be increased from 175 to 200.

SEC lawsuit

The notable incident involving the US SEC was an external factor that significantly impacted the Cosmos blockchain in June – the SEC claimed that ATOM, among other tokens, should be classified as a security in their charges against the Binance exchange. 

Despite the apparent lack of solid arguments supporting this declaration, the price of ATOM experienced a temporary dip. In response, the community engaged in discussions regarding the possibility of hiring an attorney to defend ATOM's position.

The Number of Delegators in Staking Cosmos Grew by 3.4% over Q2

Despite the market pressure, amidst a bearish trend, the Cosmos Hub attracted a considerable inflow of new delegators. They were drawn in by the promising prospects of the chain and its notably high APR of around 20%.

During this period, 28,200 unique staking addresses joined the network. Among these, 2,700 addresses were brought about by adding five new validators to the active set in June. This influx of addresses represents a 3.4% growth compared to the first quarter.

The total stake value increased to Q1 by 24.3 million ATOM (9.84%) and reached 246.92M (worth $2.59B as of June 2023) in total.

Staking change by months looks like decreasing cascade. The maximum increase of 14.84M ATOM tokens (61% growth in Q2) was observed in April. This increase was primarily driven by the completion of the Delegation program by the Interchain Foundation and the contributions from All in Bits.

In May, 7.94 million ATOM tokens were added to the network, with the majority originating from retail investors. However, June saw less prolific growth, with only 2.71 million ATOM tokens added. 

This decrease in growth can be attributed to the price drop linked to the SEC case. It's worth noting that the price partially recovered by the end of Q2, which provides a basis for anticipating more positive trends in the future.

The chart below shows the monthly stake increase percentages, indicating their share of the total stake.

Staked Ratio in Cosmos Staking Reward Reversed to the Downtrend Following the Dynamic Inflation Logic

Despite the consistent growth observed since 2021, the APR steadily decreased. This trend aligns with the dynamic inflation model preset in the blockchain, where the inflation rate fluctuates between 7-20%.

Consequently, as long as the Staked Ratio (total stake/supply) remains below 66.7%, inflation continues to rise, influencing the growth of the APR. 

This pattern shifted once the Staked Ratio reached 66.7% on April 4, 2023, accompanied by an APR of 21.72%. From this point, inflation (represented by the yellow line) and APR (represented by the green line) have consistently declined.

At the close of Q2, the APR settled at approximately 9.41%, with inflation at 15.14%. The APR is anticipated to continue to decrease further, with an expected monthly decrease of around 0.5%.

Despite declining staking yields, they remain among the highest in the Cosmos ecosystem and the more expansive blockchain space. 

The development of the ATOM economic zone through Replicated Security has contributed to the network's maturation. This approach enables ATOM to enhance its value by leveraging the profits generated by consumer chains.

While RS is still in its initial stages, upcoming months will witness the integration of more chains, adding value to the Hub and providing extra rewards to ATOM delegators.

In theory, the staked ratio could reverse, declining from the current 70.2% (as of June 30) to a level lower than 66.7%. This could increase inflation and APR. However, such a scenario would not only impact the security (total stake) of the Hub as it did before RS but also affect all consumer chains. This outcome is undesirable and carries the potential for performance risks.

Price and Stake Dependencies in Q2 for ATOM Staking Rewards

ATOM's price peak of Q2 happened in April, reaching $12.69. However, by the end of June, the price had declined to $9.28, marking a decrease of 19.6% over three months. Despite this, the staking amount continued to rise throughout Q2. This trend indicates the community's ongoing and sustained interest in staking activities.

The graph below showcases the price dip that occurred in June, provoked by a questionable SEC lawsuit against Binance. 

Nevertheless, the development of Cosmos Hub is progressing rapidly, largely thanks to the living roadmap facilitated by Informal Systems, a key contributor to the Hub. 

This roadmap mainly focuses on enhancing Interchain Security and aims to create a shared security model for all stakeholders: validators, delegators, the Cosmos Hub, and consumer chains.

Delegators Net Flow in Staking Atom Went Red and Returned to Positive

The initial two months of the period were notably productive for the Hub in terms of new delegators, witnessing an increase of 26,000 new participants. However, June presented an atypical situation with an outflow of delegators. We can attribute this to a substantial price drop of $3 between June 4 and June 10.

While the chart depicts an inflow in mid-June, it's important to note that we can't consider this increase organic. These delegators had already been staking ATOM, but their stake wasn't factored in until the active validator set included five validators responsible for operating their stake. 

By the final week of June, the net flow of delegators returned to positive, coinciding with the price rebounding to $9.3.

Retail ATOM staking dynamics don't correlate with APR

In Q1, stakes made by retail investors correlated with APR growth, while Q2 showed the opposite trend, with retail stakes dynamics remaining positive despite APR's constant falling. 

April stood out as the month with the most significant surge in retail stake, followed by a decline in May and subsequent stabilization in June. This pattern underscores the steadfast commitment of retail delegators to the Cosmos Hub.

Filtering retail delegators, those holding stakes below 100,000,  we better understand the effects originating from entities like IFC (Interchain Foundation) and custody validators. These entities collectively accounted for approximately 146 million as of June 2023. 

Thus, we see that the correlation between the rising total stake and the APR no longer exists.

TOP Validators in Atom Staking Keep Leading

As of June 2023, the 20 biggest staking providers accumulated 10.14 million ATOM, 37% less than in Q1. Despite the slowed growth, validators from the TOP 20 dominate with 60% of the total stake. Notably, this group also holds 50% of all ATOM delegators.

The TOP-20 includes custodial (Coinbase, Kraken, and Binance) and non-custodial (Everstake, Imperator, SG-1, Allnodes) validators.

Just to remind you, custodial validators hold and manage users' staked assets, while non-custodial validators let users control their assets and validator nodes. Custodial options offer convenience, while non-custodial choices prioritize control and decentralization.

This is how shares are distributed among the top 20 best Cosmos staking validators ordered by total stake as of 30 June 2023:

By the end of Q2 2023, the leading 20 validators managed 146.91 million ATOM, involving 410.36K distinct staking addresses – a decrease of -2.8% from Q1. This shift indicates the delegators’ rebalancing between TOP 20 and other active validators, promoting improved decentralization. 

Anyway, the TOP 20 validators maintain their role as the primary contributors of stake within the network.

Compounding Staking Rewards in Atom Staking Attracts 26.7% of Delegators

Replicated Security provides one of the easiest ways to keep your ATOM yield on a decent level by restaking Cosmos staking rewards, thus increasing the stake. 

After experiencing growth in Q1, the restake index has now stabilized. Approximately 27% of delegators opt to restake their rewards for compounding interest over six months. This practice peaked in March 2023 with 0.56 million ATOM, followed by another all-time high (ATH) in April, totaling 0.6 million. 

The proportion of restaked rewards notably rose in Q2, averaging 16%.

As known, Cosmos Hub itself doesn’t provide auto compounding for staking Cosmos rewards, leaving this option for delegators by will. Notably, regular restaking increases staking profit by up to 3% per annum. 

Currently, two public platforms provide automatic restaking: 

• Yieldmos (can be connected via Leap Wallet, Metamask, Keplr, and Ledger)

• REStake (can be connected via Leap Wallet, Cosmostation, Keplr)

There’s also Exodus Wallet, which provides such an opportunity for their users directly in the wallet. 

By activating the restake option, you automate the withdrawal and staking of your rewards on a predetermined schedule, eliminating the need for manual involvement.

Everstake validator provides all three solutions, allowing delegators to compound their rewards effortlessly. The security of these services, provided by the Authz module as a part of Cosmos SDK, has undergone prior verification. 

By enabling auto-compounding grants, delegators (granters) designate a specific address (grantee) solely responsible for two types of transactions: claiming rewards and staking them, with no additional permissions.

This grant can have a specified duration, like one year, and can be revoked anytime without limiting delegators' actions. 

Cosmos Future Prospects

Currently, the community identifies several promising avenues to enhance ATOM and the Cosmos ecosystem’s growth, including:

• Liquid Staking: This is facilitated mainly by Stride at present.

• Advancing Interchain Security: Shifting towards subsequent iterations like Opt-in Security and Mesh Security models, concurrently saturating the ATOM economic zone.

• Strengthening Governance: A more weighted and less centralized consensus can be achieved by encouraging greater delegator participation in voting.

• Reviewing and Potentially Redesigning ATOM Tokenomics: This aims to create a more sustainable and appealing framework for stakeholders, including investors, developers, validators, and delegators.

• Increased Network Contributions and Enhanced Social Engagement: Fostering more active engagement and meaningful contributions to the network.

This is the third report in this series, and Everstake will keep publishing them every quarter. If you have any questions, please contact our BM on Twitter. 

Everstake is a non-custodial staking provider founded in 2018. Customer-driven approach and state-of-art technical expertise allowed us to achieve the leading position among all staking validators, according to Staking Rewards.

Besides providing staking services, Everstake continuously contributes to the PoS domain by developing blockchain products enhancing user experience and filling technical gaps: on-chain explorers, dashboards, software development kits, APIs, RPC tools, and others. 

Addressing Cosmos Hub challenges, recently, we have released a Wallet SDK that allows seamless implementation of ATOM staking to non-custodial cryptocurrency wallets in 1-2 days.      

To simplify the staking process for our delegators, we have developed the Native Staking platform. This platform incorporates all essential functionalities and offers a user-friendly interface for effortless ATOM staking.