Inflation reduction and the introduction of co-staking

[baby_fisherman]

Inflation reduction and the introduction of co-staking - Text Proposal

Summary

This proposal seeks to get support from the Babylon community regarding adjusting BABY tokenomics, including reducing inflation and introducing BTC-BABY co-staking.

The Context

Babylon is about building native use cases for Bitcoin. It makes Bitcoin productive, trustlessly.

The Babylon Bitcoin staking protocol is the first such use case, allowing native Bitcoin to provide proof-of-stake security to any blockchain and roll-up and earn staking rewards. There is no wrapping or bridging needed.

The recent invention, trustless Bitcoin vaults, is even more significant: It allows native Bitcoin to participate in any smart contract DeFi on any blockchain and roll-up. Again, without any bridging or wrapping.

This “any blockchain and roll-up” property means that Babylon protocols can be (and should be) deployed everywhere. This will optimize Bitcoin holders’ experience, maximize the adoption of Babylon protocols, maximize the value and impact that Babylon protocols could generate for Bitcoin and the crypto economy, and create a Bitcoin-charged crypto economy. And this could increase the utility of the BABY token.

To support this strategic direction, the BABY tokenomics should be upgraded, so that:

1. its inflation is used to incentivize active contributions to the Babylon ecosystem,
2. as the adoption of Babylon protocols increase, the inflation should reduce,
3. as the adoption of Babylon protocols increase, the utility of BABY increases.

The Proposed Upgrade to the Tokenomics

Currently, BABY has an annual inflation of 8%, where 4% is staking rewards for BABY stakers and the remaining 4% is staking rewards for BTC stakers. The purpose is to bootstrap the adoption of Bitcoin staking. This goal has been very successfully achieved, with nearly $7B Bitcoin staked as of writing.

This, together with the invention of the trustless Bitcoin vault protocol, indicates that it is time to prepare the BABY tokenomics for the next chapter again to ensure the protocols’ adoption and viability.

As the first step of this evolution, we propose that inflation be reduced by ~30%, from 8% p.a. to 5.5% p.a., where:

• 1% goes to BTC stakers, and finality providers can charge commission.
• 2% goes to BABY stakers, and CometBFT validators can charge commission.
• 2.35% extra goes to BTC stakers who also stake BABY, serving as the co-staking reward. Every 20,000 BABY staked makes 1 staked BTC eligible for the co-staking reward.
• Due to Cosmos SDK’s limitation, finality providers and CometBFT validators cannot charge commission from the co-staking rewards. To compensate for this limitation:
  • 0.075% goes to active FPs based on their delegation size.
  • 0.075% goes to active CometBFT validators based on their delegation size.

Once the trustless Bitcoin vault protocol becomes ready, the tokenomics should be revisited and adjusted again to bootstrap the adoption of the protocol.

The inflation reduction and the new split in the above proposal are self-explanatory. The only part that needs further specification is the co-staking reward mechanism proposal.

The Co-Staking Reward Mechanism Proposal

The high level idea is to encourage BTC stakers to also stake BABY and actively provide security towards both validation and finality provision. The more BABY they stake, the more co-staking reward they will get for their loyalty towards the network. Recall that each BTC stake is associated with a BABY address to receive the staking rewards. Thus, the BABY address can be used to identify a co-staker.

Let C be the co-staking reward during a unit time (e.g. one Babylon Genesis block). Let B_BABY be the amount of BABY a co-staker stakes. Let B_BTC be the amount of BTC this co-staker stakes to active FP(s). Then the weight of this co-staker is:

w = min(B_BABY / R, B_BTC),

where R = 20,000 is a co-staking factor.

Let the total weight across all co-stakers be W, then each co-staker will get C * (w/ W).

This mechanism effectively means that every 20K BABY a BTC staker stakes will make 1 of its staked BTC eligible for a co-staking reward.

For example, Alice has staked 6 BTC with 3 stakes (1, 2, 3), and has staked 50K BABY. Then the weight of Alice will be min(6, 50K / R) = 2.5.

For another example, Bob has also staked 6 BTC with 3 stakes (1, 2, 3), and has staked 150K BABY. Then the weight of Bob will be min (6, 150K / R) = 6.

If the co-staking reward is 10K BABY and Alice and Bob are the only two eligible co-stakers, then Alice will receive 10K * 2.5 / (2.5 + 6) = 2.94K BABY, and Bob will receive 10K * 6 / (2.5 + 6) = 7.06K BABY.

Timeline

• testnet-ready by late Sep 2025
• mainnet-ready by late Oct 2025.

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Submitted by: Fisher Yu/Babylon Labs]
Date: [2025-09-24]
Contact: [[email protected]]

[Damien_Simply]

I’m all for this proposal in merit to help support and more closely align BTC and BABY Stakers.

My only question (small concern) would be what would be the repercussions for the network if those $7B of staked BTC decide to sell when they see their rewards essentially go down slightly?

[baby_fisherman]

Hi Damien, thanks for replying!

What do you mean by $7B start selling? Do you mean unbond their BTC stakes? Then the BTC stakers who stay staked and also stake some BABY will have a lot higher APR.

[Matigallardo]

@baby_fisherman

1. Reduce Inflation to 5.5%

The current inflation of $BABY creates continuous sell pressure and limits its attractiveness as a strategic asset. Reducing inflation to 5.5% would:

* Improve long-term sustainability of the token

* Increase scarcity perception and strengthen value

* Attract new investors and committed holders

So i am agree

2 more points

2. Strategic Airdrop Distribution After the Co-Staking Launch

Instead of releasing the scheduled 200M tokens on September 30, the distribution should be aligned with the BTC + BABY co-staking program:

* Objective: Minimize sell pressure and encourage holding

* Strategy:

* Link the airdrop with utility in co-staking, incentivizing users to stake their tokens rather than sell them

* Shift the narrative: the airdrop is not just a transfer of value but a mechanism to strengthen liquidity and token utility in DeFi

* Reinforce $BABY as a core asset within Babylon’s infrastructure, not only as a reward token for BTC stakers

3. Burn Unclaimed Airdrop Tokens

All unclaimed airdrop tokens should be permanently burned:

* Removes excess supply, reducing effective inflation

* Creates a deflationary event that supports the token’s value

* Provides clear incentives for users to actively claim and participate

Expected Impact

* Strengthened $BABY narrative as a key DeFi asset, beyond just a reward token

* Reduced circulating supply and lower sell pressure

* Increased market confidence through strategic and sustainable token management

* Greater attractiveness to DeFi users and investors seeking a token with real utility and clear economic policies

[AtlasStaking]

MIntscan shows inflation of 4%, fyi. The Babylon chain according to Mintscan has 19% of floating token supply staked. Prevailing knowledge says networks want at least 51% of outstanding supply to be staked to be secure.

We are a BABY validator and BTC finality provider. We also run validators for Cosmos ecosystem chains Akash, Band, Bitway, Cosmos Hub, Elys, Intento, Kava, Osmosis, Seda, Story, Symphony, and are a governor for Stride. I also am a former CFP and investment manager coming from TradFi with a background in marketing. I only mention all that to give my feedback some cred.

TLDR: tokenomics don’t matter yet. The investing public does not care about tokenomics (yet). Nor do they care about decentralization. Real world mobile dApps that attract users is what’s most important. Sometimes it’s best to attract devs and users via inflation and to wait to fix tokenomics until there are users. Solana has so many devs because their foundation treasury is enormous and they hand out money. Additionally, let’s split this into two proposals.

I have mixed feelings about this proposal in its current form.

My thoughts on co-staking:

I do think the BTC/BABY co-staking is a great idea, but lowering the number of BABY tokens needed to qualify for co-staking will not only potentially increase demand for BABY, but will likely increase the percentage of supply that’s staked and thus chain security.

At current price 20,000 BABY is only $1000 so this minimum required could potentially be adjusted according to price. As price rises, perhaps the minimum required to qualify for co-staking falls. Just a thought. The idea is to include as many people as possible vs co-staking being an exclusive club for those with money.

My thoughts on inflation reduction:

Other chains we support have lowered inflation to improve tokenomics and as of this point, it’s done nothing for token demand and even hurt chain security.

Kava is 0% inflation and only 10% of supply is staked and the token price is at all-time lows.

ATOM inflation got halved last year and there was a mass unbonding (some due to drama). Token price is near all-time lows and has yet to reclaim the 2/3 of supply staked it had before the cut.

Osmosis recently halved inflation and staking rewards have plummeted to under 4%. Token price is at all-time lows and less than 37% of outstanding supply is staked.

Chains must also consider their validators and please don’t call me cartel. That’s ridiculous. BUT, 3.6% OSMO rewards for a $0.14 token isn’t profitable. So “the cartel” gets together and submits proposals to reduce the validator set, which has happened twice. That way there are fewer plates at the table to split the family-style dinner.

I realize they are different investments and different investors, but short-term treasury bills pay over 4%. So why in the world would I buy a token (OSMO) in consistent decline, plus volatility, plus managing private keys to earn less income than t-bills?

That brings me to 20% staking APY for BABY with a $0.05 token, also not profitable. (but we have faith)

Based on what I’ve seen, cutting inflation does not increase demand, it discourages staking and bleeds out validators. This results in smaller validators giving up, consolidation of voting power to the large validators, and a more centralized chain with several large validators who control governance. It’s cutting your nose off to spite your face.

At some point tokenomics will matter, but it just doesn’t seem to yet.

I think it’s really important to separate out the two parts of this proposal. Co-staking being its own proposal and inflation reduction being a separate proposal.

Personally, I’d like to see mass amounts of money handed out to teams with a track record of bringing in users and for joint ventures. IMO that’s what creates demand for the token, and thus price action, and thus more demand for the token. No matter how important you think tokenomics is, it’s just not. Not yet.

Devs, use case, users, devs, use case, users. That’s the flywheel for now. Wait to improve tokenomics and instead provide crazy rich incentives to proven dev teams. If the goal is to attract other networks to pay for Bitcoin security and stakers who want those tokens, pay devs handsomely to make it happen quickly.

[baby_fisherman]

Hi Mati, thanks a lot for advising! The 200M airdrop rule is promised already so I don’t think anyone can change that. But burning the unclaimed airdrop is a good idea. We are also working hard on the new vault protocol, which will generate a lot of utility for $BABY.

[baby_fisherman]

Hi Atlas staking team,

Thanks a lot for your analysis, deep thoughts, and most importantly, faith in Babylon!

4% inflation displayed in Mintscan is misleading because Mintscan only reads the inflation towards BABY stakers, not the other 4% towards BTC stakers.

I agreed that inflation reduction alone is not effective. It reduces sell pressure but does not create demand. Indeed, most of the negative examples you mentioned have a problem that the token has no (or not enough) utility. Thus, inflation reduction should be coupled with increased utility to maximize the result.

Co-staking is an example of $BABY utility, and thus why I coupled it with the inflation reduction. Totally agree that the co-staking ratio should be revisited and adjusted based on price. The ratio is a parameter so it can indeed be adjusted through governance proposals.

As I have mentioned in the post, I strongly believe the trustless Bitcoin vault protocol will capture massive adoption and create a lot of utility for $BABY. To incentivize its adoption, we will need to direct inflation and other incentives towards its devs and users as you suggested. A tightening on the staking side will create the budget and room for the vault protocol.

Thanks again! I believe we are largely aligned!

[Matigallardo]

What I mean is that the 200M should be delivered at the same time that Co-Staking is launched. I think it would be a smart move to avoid such selling pressure.

According to the roadmap, the vaults won’t be completed this year, so low-inflation measures should be implemented as soon as possible.

We understand that bringing in TVL is important, but we must find a balance with the Babylon Native Token.

[Lf8888888]

Hi

I agree with most of what you have said but possibly with some additions

The aim is to incentivize btc staking as well as baby staking. The rewards should only be for btc stakers but those reward require baby to be co-staked. I don’t understand the rationale in giving an apy to stake baby by itself that just creates a yield hunting scenario. If it was up to me I would only give rewards to btc stakers and only if the C amount of baby is co-staked as suggested. The C amount should be inflationary which would force btc stakers to stake more baby over time or forfeit their yield. forfeited yield can either be burnt or go into a Treasury account to incentivize fp’s.

I don’t agree with the comment that deflationary measures are bad. Inflation doesn’t have anything to do with incentivizing fp’s. The fp’s can be incentivized by charging commission. Furthermore instead of burning unclaimed rewards they can be distributed to fp’s.I am 100% in favour of making fp’s very profitable but inflation is not the answer.As mentioned previously the coin supply should be increased based on what the coin supply would be in 10yrs given the current inflation and then have zero inflation as a go forward.

[AtlasStaking]

@Lf8888888

The aim is to incentivize btc staking as well as baby staking. The rewards should only be for btc stakers but those reward require baby to be co-staked. I don’t understand the rationale in giving an apy to stake baby by itself that just creates a yield hunting scenario. If it was up to me I would only give rewards to btc stakers and only if the C amount of baby is co-staked as suggested. The C amount should be inflationary which would force btc stakers to stake more baby over time or forfeit their yield. forfeited yield can either be burnt or go into a Treasury account to incentivize fp’s.

I don’t agree with the comment that deflationary measures are bad. Inflation doesn’t have anything to do with incentivizing fp’s. The fp’s can be incentivized by charging commission. Furthermore instead of burning unclaimed rewards they can be distributed to fp’s.I am 100% in favour of making fp’s very profitable but inflation is not the answer.As mentioned previously the coin supply should be increased based on what the coin supply would be in 10yrs given the current inflation and then have zero inflation as a go forward.

My co-staking feedback was only for co-staking, not solely BABY staking, but BABY staking is necessary to secure the network. You must pay staking rewards to those who only stake BABY without BTC.

Inflation must exists as an incentive until fees generated can replace it.

I never said that deflationary measures were bad. I said the timing is such that the investing public doesn’t care and in my experience only handicaps projects. My point was to say if we’re going to move rewards away from stakers, then shift that money to pay devs instead of burning the tokens.

[Lf8888888]

My understanding is that the whole point of Babylon was to use BTC to secure the network not the native token. In fact as BSNs come on board the rewards aren’t necessarily in Baby. Perhaps I have misunderstood. In either case even if baby is used to secure the network from a pure economics standpoint it makes no sense to reward baby stakers without a btc stake which is why I believe we have a co-staking proposal in the first place. My suggestion takes it to the extreme. You need to stake baby in order to earn a btc yield and you will need to restake a portion of that baby reward to maintain the yield.

This I know to be untrue, case in point BTC tokenomics There needs to be sufficient supply available to incentivize miners/fp"s until fees can replace the mining rewards/ fp incentive (which is why I suggested increasing the supply to mimic inflation over a 10yr period and then cap it). In btc tokenomics rewards reduce over time resulting in more work required to earn the same yield. I have suggested a similar mechanism. You need to stake baby in order to earn a btc yield. The amount of baby you need to stake increases over time to maintain that yield (ie it becomes harder to maintain the yield) This mechanism falls on its face if there are any infinite number of tokens as it now further relies on a burn mechanism to reduce those tokens. Bottom line as with btc miners you need to reinvest in the network to maintain the yield it’s not just “given” to you by minting more coins infinitely. That investment becomes more expensive because the supply is capped, however the price of baby should increase.

I understand that it’s very easy to evaluate any proposal with a view as to how it impacts oneself. If I view my proposal which advocates no baby staking rewards from an FPs perspective it’s a very bad idea for an FP with no btc stake. However, if there was a guarantee that FPs would earn the same or not more would you view my proposal differently. There should be many ways to incentivize fp’s who only stake baby .

• Commission
• Instead of a burn auctioning mechanism send tokens to fp’s
• There will be potentially forfeited yield for those btc stakers who do not increase there baby stakes. Funnel that forfeited yields to fp’s

[baby_fisherman]

Yep. Make sense! Lowering inflation will give the project the room and budget to incentive the vault when it is ready.

[Matigallardo]