DEVELOPMENT
Let’s cover the topic of the Cosmos ecosystem: what kind of network it is, what development plans for the years ahead.
About Cosmos
What is Cosmos
Cosmos is a platform that offers a decentralized interconnection between blockchains (L1). Often referred to as the “Blockchain Internet,” Cosmos provides many unique features and tools for developing independent blockchains that can serve a variety of uses in the ecosystem.
Cosmos consists of 266 applications and services.
Cosmos’ TVL is equal to approximately $1.1 billion.
By comparison, one Arbitrum has the same TVL.
The total capitalization of the Cosmos ecosystem is about $12 billion.
The main projects in the top 10 by capitalization are Cosmos Hub, Cronos, THORChain, Osmosis, Kava, Fetch.ai, Kadena, Band Protocol.
How much was invested
According to available information, about $17 million was invested in Cosmos.
The details are in the table.
The current capitalization is $3.9 billion.
The current price of ATOM is $13.34. From the highs, the price is down 70%.
What was the initial distribution of ATOM?
The Interchain Foundation* distributed ATOM as follows:
5% of ATOM went to its original investors,
10% went to the Interchain Foundation,
10% went to the company that develops most of the software (Tendermint Inc.),
The remaining 75% will be distributed through private and public fundraisers.
* The Interchain Foundation is a Swiss non-profit organization mandated to research, develop and promote open, decentralized networking technologies such as the Cosmos SDK.
What is ATOM
ATOM is a native Cosmos token that has three main uses:
- Users must pay a transaction fee with ATOM proportional to the computing power required.
- ATOM is also used to participate in the Cosmos management system. The more ATOM you have, the more voting power you have when making decisions.
- the token can be steamed at validators for a fee.
ATOM was distributed through an initial coin offering (ICO), and it has no supply limit, making it an inflationary token. This is because Tendermint rewards ATOM stackers. The inflation rate is adjusted in real time depending on the amount of staking and the number of stakers.
Cosmos development activity
Among the largest ecosystems (Polkadot, Ethereum, Aptos, Chia), Cosmos has been in a solid third place over the past year.
At the same time, the level of development is almost relentlessly growing upwards.
Development activity – shows the project’s development activity over time based on a number of purely development-related “events” in the project’s publicly accessible Github repository. (does not take into account: release comments, forks, stars, etc.).
How Cosmos works
Cosmos architecture
How do you create a decentralized blockchain (L1) network?
One idea is to connect each blockchain in the network to all the others through direct connections. The main problem with this approach is that the number of connections in the network grows quadratically with the number of blockchains. If there are 100 blockchains in the network, and each blockchain has to maintain a connection with all the others, that’s 4,950 connections. That quickly gets out of hand.
To solve this problem, Cosmos offers a modular architecture with two classes of blockchains:
- Zone / Zone.
- Hub
Zones are ordinary blockchains, while hubs are blockchains specifically designed to connect zones to each other.
When a zone creates a connection to a hub, it can automatically access (i.e., send and receive data) from any other zone that is connected to it.
As a result, each zone only needs to establish a limited number of connections to a limited set of hubs. Hubs also prevent double-spending between zones. This means that when a zone receives a token from hubs, it only needs to trust the source zone of that token and the hub.
The first hub launched on the Cosmos Network is the Cosmos Hub.
Cosmos Hub is a public Proof-of-Stake blockchain whose own token is called ATOM. Cosmos Hub acts as a central register for the ecosystem where zones exchange messages.
Let’s imagine that two DApps in two different zones want to communicate with each other. To do this, messages are sent to Cosmos Hub, which records the interaction. Messages are sent through Cosmos Hub, and each zone also records the results of its interaction in its own blockchains. Evidence of the activity of the three separate blockchains emerges. This ability of the blockchains to interact with each other has given Cosmos the nickname “The Internet of Blockchains.”
Any zone or hub need not work with another, but each new zone is linked to Cosmos Hub, the first blockchain running on the Cosmos network, which keeps track of the state of each zone.
Each zone can function autonomously, from authenticating accounts and transactions to creating and distributing new tokens and making changes to the blockchain.
In addition to facilitating interaction between all zones in the network by tracking their states, the Cosmos hub also allows interaction with proof-of-work (PoW) blockchains such as Bitcoin and Ethereum across bridges, even if they are not Cosmos compliant.
Cosmos functionality
Cosmos aims to create a fast, secure, scalable and, most importantly, interoperable “ecosystem,” removing the boundaries between blockchains while maintaining a user-friendly environment for developers and users.
This functionality is achieved through three core features:
- Tendermint
- Cosmos Software Development Kit (SDK)
- Inter-Blockchain Communication (IBC).
In terms of architecture, any blockchain can be divided into three conceptual layers:
- Application: Responsible for updating the state of a given set of transactions, i.e. transaction processing.
- Networking: Responsible for the distribution of consensus transactions and messages.
- Consensus: Allows nodes to agree on the current state of the system.
Let’s take a closer look at some of the most important features of the ecosystem.
What is Tendermint?
Until recently, creating a blockchain required creating all three layers (network, consensus and application) from scratch.
Ethereum has simplified the development of decentralized applications by providing an EVM on which anyone can deploy custom logic in the form of smart contracts. However, it has not simplified the development of the blockchains themselves. Like Bitcoin, Ethereum remains a monolithic technology stack that is difficult to branch out and customize.
Tendermint is a protocol that combines the network and consensus layers of the blockchain into a common engine, allowing developers to focus on application development rather than the complex underlying protocol.
As a result, Tendermint saves hundreds of hours of development time.
Features of Tendermint include high performance, instant finality with thousands of TPS, security, and friendliness to private and public blockchains.
The protocol operates through a PoS control mechanism that supports the integration of the distributed network of computers on which Cosmos runs.
Members of the network can stack ATOM and be rewarded. The top 100 stackers can become validation nodes to manage the blockchain and vote for changes. The higher the amount of ATOM stacking, the higher the validators’ voting power.
Users can also delegate and exchange their tokens to validators. This encourages validators to work honestly. Users can easily switch between validators to which they delegate ATOM, depending on their voting preferences.
Hubs and zones exchange data via the Inter-Blockchain Communication or IBC protocol, which allows them to communicate.
Cosmos SDK
Tendermint reduces blockchain development time from a few years to a few weeks, but building a secure application from scratch remains a challenge. That’s why the Cosmos SDK exists.
The Cosmos SDK is a generalized framework that simplifies the process of building secure blockchain applications on top of Tendermint.
The Cosmos SDK also comes with a set of useful developer tools for creating command line interfaces (CLIs), REST servers, and many other commonly used service libraries.
The Cosmos SDK, like all Cosmos tools, is designed in a modular fashion. Over time, several SDKs built using different architectural models and compatible with several consensus mechanisms are expected – all within the same ecosystem: the Cosmos Network.
It is easily customizable with plug-ins, so users can create new features and functions. With the Cosmos SDK, both Proof of Stake public blockchains and Proof of Authority authorized blockchains can be created.
Ethermint
The modularity of the Cosmos SDK allows developers to port almost any existing blockchain codebase, on top of it.
For example, Ethermint is a project that transfers an Ethereum virtual machine into the SDK module. Ethermint works exactly like Ethereum, but also uses all the properties of Tendermint. All existing Ethereum tools (Truffle, Metamask, etc.) are compatible with Ethermint, and you can migrate your smart contracts without additional work.
Why create a blockchain using the Cosmos SDK when I can just deploy my decentralized application using EVM?
This question is justified given that most decentralized applications today are developed based on EVMs, such as Ethereum.
It should be noted that the reason for this phenomenon is that, until now, blockchains were much harder to develop than smart contracts.
This is no longer the case, thanks to the Cosmos SDK. Developers can easily develop entire blockchains for specific applications, which have several advantages. Among other things, they provide greater flexibility , security, performance and independence .
Connecting Blockchains Together – IBC
Now that developers have a way to quickly create individual blockchains, let’s look at how to link these blockchains together. The connection between the blockchains is achieved using a protocol called the Interblockchain Communication Protocol (IBC). IBC uses Tendermint’s instant consensus finality property to allow heterogeneous blockchains to transfer value (i.e., tokens) or data to one another.
Cosmos’ ATOM 2.0 offering
The Cosmos ecosystem provides application developers with best-in-class tools to run their own blockchains, and it has been instrumental in launching many well-known projects such as Osmosis, Thorchain, the now ill-fated Terra, and many others.
Some of the major frustrations associated with the ATOM token representing Cosmos Hub are the lack of utility and underutilized potential.
Any blockchain launched in the Cosmos ecosystem could do without the ATOM token. This is because the commission logic is inherent in each blockchain (developers choose which tokens pay for gas, how much different types of transactions cost), and each blockchain has its own network of validators.
ATOM currently has a high annual revenue stream (up to 20%) to incentivize and compensate Cosmos Hub validators for their work.
While people tend to ignore inflation in bull markets, it puts additional pressure on the token price during bear markets. This is another reason for ATOM’s disappointing performance.
It puts ATOM steakers in a dilemma. Steak ATOM for the sake of 20% yield or use ATOM in DeFi products in the Cosmos ecosystem (because it is hard to find competitive yield in DeFi).
This conundrum leads to a situation where the use of ATOM in DeFi is low and only becomes practical due to the strong incentives for mining liquidity offered to blockchains in their own tokens (indeed the most generous). The wider use of ATOM as collateral, as well as deeper liquidity, will not only benefit ATOM itself, but also the broader ecosystem.
In this situation, the emergence of the ATOM development proposal: ATOM 2.0 becomes appropriate. Let’s talk about it in more detail.
A technical proposal for ATOM 2.0 was published by the Cosmos team in September 2022 and put out to the community. The details are here.
To address the aforementioned issues, Cosmos developers are introducing four key elements:
- Inter-network security or ICS.
- Liquid Stacking.
- Interchain Scheduler
- Interchain Allocator.
Let’s look at them one by one.
Inter-network security (ICS)
Inter-network security allows other Cosmos blockchains to “rent” validators from Cosmos Hub to better protect their own networks (and also allows Cosmos to directly monetize Cosmos Hub security guarantees).
Currently, any blockchain developer at Cosmos is responsible for running the blockchain from scratch, uploading and maintaining a set of blockchain validators, and taking care of economic security. That’s the whole point of Cosmos: sovereignty.
The idea behind ICS is simple. Instead of struggling with its own validators and economic security, why not let blockchains simply “rent” that security from a much stronger monetary zone, such as the Cosmos Hub (ATOM) itself?
Then developers can focus on building blockchain and still enjoy most of the customizable benefits associated with blockchain (ownership of block space, customization of payment logic, etc.).
Liquid Steaking
Cosmos hopes that liquid steaking products will be adopted by a variety of vendors through a competitive process. There are teams such as Quicksilver, Persistence, Stride, and Lido that will offer liquid-stacking not only for ATOM, but also for other tokens in the Cosmos ecosystem.
From Cosmos’ perspective, the goal is to provide security, so it makes sense for its validators to partner with liquid-stacking providers.
Quicksilver will provide full economic security to Cosmos through ICS, which probably means it will be the preferred liquid-stacking vendor for ATOM.
In the context of using liquid steaking to replace steaking rewards, it should be noted that liquid steaking essentially requires participants to take more risk through DeFi activity. Thus, income for ATOM 2.0 participants will have a different and higher risk profile than conventional steaking.
Interchain Scheduler / Interchain Scheduler
Another feature proposed in the ATOM 2.0 document is the Interchain Scheduler, which facilitates the interchain MEV* market in the Cosmos network.
* MEV is a way for validators to make additional profits by changing the order of transactions before approving a new block on the network. See link for details.
Assuming crosschain activity continues to grow, the opportunities for MEV in the Cosmos ecosystem will be significant. However, the Cosmos development community also recognizes that not all forms of MEVs are created equal, and often MEVs are subject to off-network cartelization, giving an advantage to a small minority of market participants.
While taking advantage of unsuspecting users’ transactions by triggering or creating sandwich attacks may be considered malicious, other forms of MEV, such as price arbitrage between pools, DEX or CEX, can be seen as effective.
Thus, the goal of Interchain Scheduler is to create a rational, transparent market for MEVs.
Interchain Allocator / Interchain Allocator
Unlike other ecosystems like Solana or Ethereum, which either invested directly in ecosystem projects or provided funding for public goods, Cosmos has not played such an active role in investing projects.
Interchain Allocator is changing that. Its role will be to fund new projects online in the Cosmos ecosystem and provide support according to incentives. This is intended to accelerate the speed of new projects in the ecosystem and increase the relevance of the services Cosmos Hub can provide (some of which are ICS and Interchain Scheduler).
These collaborations can come in many different directions, but some of the initial ideas include exchanging tokens, helping with initial liquidity loading, treasury management, participating in each other’s governance processes, under-secured funding, etc.
I wonder how those involved in managing ATOM will orchestrate the successful deployment and management of the ever-growing amount of capital to achieve various goals, what checks and balances will be in place, etc.
Reducing ATOM Inflation
A combination of these initiatives, primarily ICS and liquidity-stacking, will reduce long-term ATOM inflation and replace it with alternative sources of income. Rewards to validators will no longer be issued in ATOM. This is where the intercept between liquid-staking and DeFi becomes important, and the rewards in the form of tokens from blockchains.
ATOM will have inflation for 36 months, likely starting in late 2023.
While the updated issuance schedule eventually narrows to a sustainable annual issuance of less than ~0.1%, the supply corresponds to the issuance of ~88 million ATOM over a three-year period, of which ~55 million ATOM goes to the Cosmos treasury. It is important to note that the bulk of this new issuance (~65%) will occur within the first 9 months.
The idea is to increase inflation in the first few months to help get the Cosmos Treasury up and running so the Interchain Allocator can work.
In fact, this comes at the expense of ATOM holders, because a marked increase in inflation/issue for the benefit of Cosmos Hub, does not result in a proportional increase in the number of tokens for ATOM holders.
For the first 9 months, ATOM inflation will be 3 times higher than usual, but then it will fall quickly due to liquid stacking and inflationary rewards from blockchain.
The ATOM issuance rate after the 36-month window is expected to be just under 1% per year (compared to more than 10% now), which will only go to the Cosmos treasury.
Current ATOM holders are rightly concerned about short-term dilution, and have carefully considered how the Cosmos treasury funds will be used.
Some community members, including co-founder Tendermint, have expressed the view that in order to entrust the treasury with such a significant amount of capital, community coordination tools for the prudent use of that capital must be more clearly defined and thoroughly tested. Without a robust model for coordinating and deploying capital, ATOM holders will be diluted in the short term and will actually bear the bulk of the risk associated with deploying treasury capital at a high rate of return.
DeFi at Cosmos
The collapse of UST has cast a shadow over Cosmos DeFi. UST was accepted not only in the Terra application network, but also in Osmosis, the largest DEX in Cosmos, and elsewhere. DeFi without a stable coin is a futile endeavor.
This situation is now changing for the better: in early 2023, Circle launched its own USDC in one of the Cosmos blockchains secured with ICS, demonstrating the usefulness of the overall security design. In addition, Agoric has created a decentralized IST Stablecoin, which is set to become a multilateral asset like DAI on Ethereum.
Liquid stacking, which is currently being implemented by several providers, essentially unlocks the efficiency of capital and allows it to flow into money markets and DEX. ATOM should be the primary beneficiary, but this also applies to blockchain tokens.
One potential problem could be liquidity fragmentation – for example, there could be many different versions of a stacked ATOM. That said, this problem can be solved by using stable exchange pools or wrapped versions of ATOM with stacking that aggregate all the different stacking derivatives.
Since each application in Cosmos is its own blockchain, there is an aspect of asynchronous execution across DeFi environments. To get around this, Cosmos uses IBC, or blockchain communication protocol, to send messages between blockchains and execute smart contract calls.
IBC is also ideal for oracles on the network. Instead of relying on standalone systems, Osmosis DEX price oracles can be used throughout the space.
The idea behind ATOM 2.0 is to trigger a flywheel effect in which ATOM becomes more desirable and useful in the ecosystem.
It all starts and ends with inter-network security (ICS) – the more it is implemented, the more economically attractive ATOM becomes. Liquidity-stacking helps in this regard, as it tightens monetary policy and reinforces the role of ATOM as desirable collateral.
Interchain Allocator and Interchain Scheduler will not directly add value to ATOM token holders, but they will provide valuable services and funding to the ecosystem, leading to increased demand for ICS. If ICS adoption is insufficient, ATOM inflation will return to compensate validators.
Why the Cosmos ATOM 2.0 proposal was rejected by the community
After weeks of debate and an intense two-week voting period, the Cosmos community decided to reject proposal #82, “ATOM 2.0: A New Vision for Cosmos Hub.”
The proposal failed, even though it had the support of a majority of voters.
Based on a white paper written by Cosmos co-founder Ethan Buchman and eleven others, the proposal was presented as the next step in the evolution of Cosmos Hub.
The proposal, now seen by some in the community as the most controversial in Cosmos history, generated an unusually high turnout of 73.41% of all ATOM tokens, with the vote remaining tight until the very end. In the end, 47.51% of the coins voted yes, 37.39% voted NoWithVeto, 13.27% abstained, and 1.82% simply voted no.
While the majority of tokens did vote “yes,” Cosmos’ governance mechanics ensure that the proposal cannot be accepted if more than 33.4% of voters choose “NoWithVeto,” a system that prevents Cosmos from becoming a victim of 51% attacks. Thus, “NoWithVeto” is a strong signal that community members use to communicate their belief that the proposal is harmful to Cosmos’ interests.
Why the proposal was rejected
ATOM 2.0 was an ambitious and exciting proposal, and that may have been part of its problem.
The 26-page white paper went beyond changing one or two aspects of the ATOM token, as the community originally expected, to fundamentally change the way Cosmos functions by introducing three new core tools in addition to updating the tokenomics.
The Interchain Scheduler, for example, aims to become the MEV marketplace on the network, while the role of the Interchain Allocator will be to provide mutual participation in the various Cosmos blockchains; these are two very different, very complex topics, and ATOM members may have voted against the proposal because of one of the tools, even though they liked the other.
Another glaring problem with the ATOM 2.0 proposal was the updated tokenomics. The white paper argued for a large increase in the issuance of ATOM tokens for a short time to subsidize Cosmos, and then a reduction in inflation over 36 months. Critics argued that the monetary policy change was unwarranted and that there were no details about how Cosmos would use the accumulated ATOM. Others were not convinced that ATOM inflation could be successfully replaced by other sources of income by the time inflation declined.
Conclusion
Cosmos does a great job of developing its ecosystem. It is confidently keeping the level of development at the highest level.
It is clear from their latest offerings that they are looking to add value to the ATOM token. They want to launch massive liquid stacking to improve capital efficiency.
They also plan to invest in new blockchains on Cosmos (the way Ethereum, Solana does).
The overall gist of the ATOM 2.0 proposals is to allow Cosmos to become a security provider, while further aligning incentives between blockchains and ATOM holders.
By doing so, they are trying to increase the likelihood that ATOM will generate additional benefits. At the same time, the community has been cautious about ATOM’s proposed monetary policy changes and whether the benefits of future capital allocation in Cosmos Treasury justify the risks of short-term dilution for token holders.
It is likely that various components of the ATOM 2.0 white paper will eventually be resubmitted to the community for a vote as separate drafts, just as the detailed proposal for Interchain Security – another ambitious initiative to position Cosmos as a central component of the Cosmos ecosystem – passed in March 2022.
