This week, we explore Cosmos on-chain staking and validator data. Last week we looked at Solana’s on-chain data, check it out.
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Leveraging our Staking Rewards API data, we look closely at Cosmos staking and validator activity. Staking and validator activity help assess investor belief in Cosmos beyond more surface level metrics like price movement. In addition, exploring the Cosmos validator set helps us ensure there are no structural red flags ahead while providing insights into the validator business.
Staking Activity
Cosmos Staked Tokens balance has increased from 184M to 204M over the past year, growing 10.6% year-over-year, averaging 427.6k tokens per week. ATOM price averaged $14.64 in the same period, leading to staking inflows averaging $6M per week over the year.
Most inflows for the year came in after the year’s weekly average low of $6.33 on June 12th. Only six weeks since then have there been negative outflows.
The most significant outflows happened around the year’s price highs between February 20th and March 27th. Both weeks with significant outflows were countered in the following week by inflows ~80% of the size of the outflows.
The most meaningful outflow in 2022 happened during the week of October 16th, when 7.9M tokens were unstaked. Before the outflow, Staked Tokens balance was at an all-time high of 209M tokens. Despite late year outflows, most of the following weeks had positive inflows into early 2023 – in line with a continued price increase.
Investor Confidence in Staking
Cosmos’ Staking Market Cap growth rate has outperformed Cosmos Market Cap growth rate consistently since October 25th, 2022. Cosmos investors are gaining confidence and locking in their position in Cosmos at a faster rate than the ATOM price is increasing. The trend has continued into the beginning of the year. When Staking Market Cap, which is staked value in USD, is growing faster as a percentage relative to the overall Market Cap, it implies investors are staking and locking in positions more as token prices increase.
Comparing Staking Market Cap vs. Market Cap across all PoS assets shows the opposite result to Cosmos. Global Staking Market Cap is decreasing in value faster than the Market Cap of PoS protocols, meaning investors are unstaking tokens and have lost confidence in locking positions. The trend began in early November during the FTX collapse and continued through the end of the year. The trend came close to reversing in late January 2023. In January the Global Staking Market Cap growth began to outpace but not outgrow grow the Global Market Cap of PoS protocols relative to October 25, 2022.
Validator Distribution
Validators are vital to sustainable L1s. Operating validators highlight a sustainability baseline required for network security and decentralization. We looked at overall validator growth and distribution for Cosmos from August 28, 2020, to January 24, 2023 to better gauge decentralization.
A few things stand out. The top ranked validator at any point in time maintains a consistent percentage of network balance between 5.5% to 7.5%. The top 2-10 validators also maintain a relatively similar balance over the years since August, 2020. Cosmos is dominated by large validators despite many smaller ones entering. Over time Cosmos has grown from 128 to 482 validators. However, not all are still active. Currently, Cosmos has 170 active validators.
To further probe the question of decentralization on Cosmos, we compare Staked Tokens balance vs. Average Validator Balance vs. the Number of Validators. In an ideal scenario, Average Validator Balance should continuously decline as more validators join and the number of tokens staked increases.
Cosmos shows the validator count growing and the average validator balance shrinking in tandem with the growth of tokens staked starting in Q3 2021. This suggests new validators were entering the space. However not all new validators necessarily remained active or gained significant balance as highlighted by steady averages when breaking out Average Validator Balance by validator Balance Rank.
Top Validators
It’s essential to track the top validators in Cosmos since it leads us to the Staking Providers behind them. Beyond centralization concerns by stake, we want to ensure the validator Providers are running sustainable businesses and won’t negatively affect network security. One of the biggest challenges for validators is competition amongst themselves, which currently threatens the overall PoS ecosystem, not just Cosmos. We cover validator competition in-depth in our State of Staking 2022 Ecosystem Report.
To conduct the Cosmos validator analysis, we ranked validators by Stake Balance and identified the top 10 from August 28, 2020, to January 24, 2023. A total of 18 addresses have been in the top 10. We used our Staking Rewards API data to identify the validator wallets.
Eight of the top 10 Staking Providers active on Cosmos in 2023 have never left the top 10 for more than two quarters in a row since 2020. The eight include Coinbase Custody, stake.fish, DokiaCapital, Paradigm, SG-1, GAME, Zero Knowledge Validator (ZKV), and Polychain. Currently, stake.fish is the number one validator on Cosmos by balance. Binance Staking maintained the number-one position for the longest duration from 2020 Q4 to 2022 Q3. In 2022 Q4, Binance Staking fell to sixth place. Several of the top validators on Cosmos are also a part of our Verified Provider Program. Our program assesses validators in-depth to help users make faster and smarter staking decisions. If you’re looking to stake with a trusted and verified Staking Providers look for ones with a check mark on stakingrewards.com.
One factor to keep an eye on in Cosmos is the Balance Distribution of staked ATOM amongst the top 10 validators. Over time, distribution of staked tokens number to improve for a truly decentralized and secure network. The Staked Tokens balance delegated to the top 10 validators is currently at 43%.
Reward Rates vs. Inflation
The Cosmos approach to rewards and inflation aims to maintain a 67% staking ratio. Cosmos relies on its staking ratio to determine the inflation rate, which also affects reward rates. At a 67% staking ratio, inflation on Cosmos stops changing. Inflation decreases gradually to 7% if 67% of ATOM is staked, and vice versa. Learn more about the Cosmos rewards system and calculate staking scenarios with the Cosmos staking calculator.
Currently, running your own Cosmos validator yields 23.5% APR whereas delegating yields 22%. However, considering inflation, and a current average of 7% commission fee on rewards, the real yield is more around 5.4%. Real yields are higher than usual on Cosmos since early 2021. The high yield aims to incentivize ATOM stakers, so the staking ratio increases from 63% to 67%. Once the staking ratio increases back to 67%, rates will trend back down.
Conclusions
Staking and validator activity shows Cosmos is gradually bouncing back in terms of Staking Market Cap after hitting a low staking ratio of 58.8% at the end of 2021. Currently, a staking ratio below 67% make Cosmos a relatively attractive staking option as real reward rates continue to reach year highs. The market seems to think so as well. Cosmos Staking Market Cap growth is outpacing its Market Cap growth rate, while the Global PoS equivalent metrics are doing the reverse. On a cautionary note, it’s noteworthy that Cosmos has 43% of its current Staked Tokens delegated to the top 10 validators. Ideally, the share of Staked Tokens in the top 10 validators reduces over time. Check out our piece on the Cosmos roadmap or our Cosmos asset page to better understand Cosmos.