Cosmos – architecture for an interconnected blockchain ecosystem
Cosmos (ATOM) is a decentralized network of independent blockchains. that appears to be on a growth trajectory in 2022. Learn the factors driving this growth, and why Cosmos is described by some analysts as “the most used non-speculative DeFi protocol” and the best “de-facto cross-chain bet…”
Cosmos (ATOM) is a decentralized network of parallel, independent blockchains, each powered by a Proof-of-Stake Byzantine fault-tolerant consensus model (like Tendermint) designed by Cosmos. It is an ecosystem of blockchains with features that allow them to scale and interoperably communicate with each other.
The native token of the Cosmos ecosystem, ATOM, is up ~343% in the last year. At the start of 2021 each ATOM cost ~US$5.81. At the time it was the 27th largest asset in crypto with a market capitalization of US$1.2 billion. Currently, each ATOM is priced at ~US$38.52. ATOM is now the 17th largest asset in crypto with a market cap of ~US$11.0 billion.
This growth is impressive, but even so, it appears to be somewhat stunted given the reach and appeal of the Cosmos blockchain ecosystem. Cosmos-cap.com displays the independent blockchains and applications that make up Cosmos. There are large independent projects on this list including Binance Chain, Terra, Crypto.com, and Thorchain. The total market for projects built on Cosmos is US$162 billion, dwarfing the value of the native Cosmos projects.
However, the total number of projects and applications attached to Cosmos, at 262, is impressive. Many of the projects built on top of Cosmos are more popular than Cosmos itself, or its native ATOM token. A major factor for why this has occurred is confusion as to how ATOM connects to Cosmos and how Cosmos connects to these popular projects.
“Not sure why people are not talking about Cosmos,” tweeted Qiao Wang, a contributor to AllianceDAO and former trader at Tower Research. Wang calls Cosmos “the most used non-speculative DeFi protocol there is” and the best “de-facto cross-chain bet.”
Source: Google Trends
Data from Google Trends shows that in 2021 there was a sharp uptick in interest for the search term ‘Cosmos crypto’ indicating that the project has shifted into a position of greater public relevance in the last year. The term is particularly popular in the European region and in Belgium, Switzerland, and Ireland.
Source: Santiment
The social popularity of Cosmos appears to jump when development activity for Cosmos increases. This suggests there may be coordinated campaigns to boost the visibility of ATOM before major development updates.
Cosmos’s most notable use case is its Application-Specific Blockchain (‘App-chain’) framework. Projects like Terra, the 9th largest digital asset project by market cap, have been built on top of Cosmos as App-chains and use the built-for-purpose use case-specific solutions Cosmos offers.
Initially, the App chains built on top of Cosmos were separate and ran independently, however, with the launch of Inter-Blockchain-Communication (‘IBC’) in 2021, this changed. IBC enabled the independent blockchains on Cosmos to connect, transact and exchange tokens and other data fluidly for the first time and this has led to the ecosystem growing in scale and utility.
App-chains on Cosmos use the Cosmos Software Developer Kit (SDK) as a resource. The Cosmos SDK can be understood as software that crypto startups can license for building their own blockchain ecosystems. It allows teams to significantly speed up development times and focus on economics and products, while the blockchain architecture is outsourced. App chains can also access consensus/transaction confirmation models like Tendermint.
With the Tendermint consensus, a validator called a proposer submits a block of transactions. Other validators in the network vote in two rounds on whether they accept or reject the proposed block. If a block is rejected, a new proposer is selected and the process starts again. If accepted, the block is signed and added to the chain.
Transaction fees from the block are collected and then distributed as staking rewards to validators and delegators. The original proposer gets an additional reward for his service. Fees, validators and delegators are all separate for each Tendermint chain and they don’t connect back to the Cosmos hub or involve ATOM.
Add-ons to the Cosmos SDK and Tendermint include Ethermint, a project that took the Ethereum codebase, removed the Proof of Work mechanism, and added the Ethereum Virtual Machine on top of Tendermint. This allowed projects like the Binance Smart Chain to build on top of Cosmos, and build faster, more user-friendly versions of Ethereum applications. This immediately attracted existing Ethereum users.
Cosmos SDK and Tendermint allow for fast and cheap transactions but sacrifice decentralization.
Source: Cosmos
How Cosmos SDK-based blockchains compare to other blockchain architectures. Source: Twitter user @rareliquid
Cosmos offers some of the fastest, cheapest transactions across the platform blockchain space. Combined with its strong suite of development tools it is not surprising that mega crypto projects like Terra, the Binance Smart Chain, and Thorchain have chosen to build with Cosmos.
How ATOM and the Cosmos hub fit into this picture
At the center of the Cosmos ecosystem is the Cosmos Hub. This is an app-chain built for facilitating the connectivity between other app-chains within Cosmos. The Cosmos Hub is secured using the ATOM token. Presently interconnectivity is driven through the use of IBC and transfers between various Cosmos App-chains.
In the near future, however, there will be new value drivers for the Cosmos hub and ATOM. A blog from September 2021 outlines the launch of Interchain chain security and shared staking on Cosmos. To date, Cosmos app-chains like Terra and BSC have had to build their own node networks and establish their own consensus security without support. For new projects, this can be risky because initially token prices and market cap are low so they may be exposed to easy to execute attacks by malicious actors.
If new app chains, however, could lease security from a central repository at a fraction of the cost of building their own node networks then more projects could build on Cosmos. They can focus on building a core product and lease security. Interchain security will share the security of the Cosmos hub and ATOM staking with new Cosmos app chains launched.
ATOM validators from the Cosmos Hub will be able to secure networks for a fee. This is attractive for ATOM validators because they earn fees through providing security for more chains. For new projects launching on ATOM, Interchain security will mean it is easier to bootstrap robust security and new chains can get their tokens and projects in front of the Cosmos audience easily.
Brave New Coin spoke with Charly Fei, the Inter-Blockchain Communication Lead at the Interchain Foundation, the Swiss non-profit that funds, stewards, and advances the Cosmos Ecosystem. Here Fei explains the importance of Interchain security standards:
“This design allows for faster and more diverse ideation and development to take place, while Interchain Standards like Interchain Security, Interchain Staking, and other standards in the IBC protocol will maintain consistency and interoperability across a diverse ecosystem. It is this difference in design and ideology that has led to an explosion of Cosmos-based blockchains with such a rich set of features and stakeholders,” said Fei.
The first version of interchain security is expected to launch in Q2 2022
Cosmos is unique to other platform blockchains in that there is no immediate security for apps and tokens launching. A project launching on Ethereum has the risk of a double-spend attack mitigated because of the large node network and the power attached to the network.
Interchain Security will enable smaller projects with less capital available to launch on the ecosystem. This is likely to significantly expand the scope of the project.
Source: Cosmosscan.net
Currently, there appears to be an even and well-distributed quorum of validators on the Cosmos hub. There are a number of notable crypto staking projects securing the project including Binance Staking, Dokla Capital, Coinbase Custody, and Paradigm.
The top 10 stakers make up ~45% of all the ATOM staked. Stakers are also in charge of the governance of the Cosmos protocols. More ATOM staked means a greater degree of voting power.
Source: Cosmosscan.net
The voter turnout rates appear to be quite low with less than 60% of the staked ATOM turning up to participate in recent votes. The most popular of these recent proposals was one for the activation of the Vega software upgrade.
The Vega upgrade included various versioning updates to ensure the security of the core components that the Cosmos Hub relies on, like Cosmos SDK, Tendermint Core, and IBC. The upgrade had efficiency updates to improve consensus, transaction fee and vote delegation activity.
The total amount bonded to the Cosmos hub is 169,699,861.3059 ATOM which is currently equal to ~US$6,470,655,711.
ATOM holders can either choose to run their own validator nodes or assign their stake to a validator which will earn rewards on their behalf. This means that anyone who holds ATOM can choose to delegate some of their tokens to one or more validators, who process transactions and run the network.
Stakingrewards.com lists Cosmos as the 8th largest blockchain in the proof-of-stake ecosystem by the number of assets staked. There are currently 2622 stakers on the Cosmos hub staking ATOM, there was a sharp jump in the stakers on January 18th.
Source: Stakingrewards.com
62.13% of the ATOM circulating supply is currently participating in staking. This number is just below Cosmos’s targeted 66% participation rate. This means that 37.87% of the ATOM circulating is potentially held by speculators and may be sold quickly if market conditions allow. Staking locks assets to the network for a longer timeframe.
Stakingrewards.com assesses that the complexity of delegating ATOM holdings to an existing validator is ‘easy’. It assesses that the complexity of running an ATOM validator node requires a ‘professional’ level of skill. It notes that the risk of delegating is ‘moderate’ and states that running your own validator node is ‘risky.’
The annual return for ATOM delegators is an impressive 13.17%, however, after inflation, this return drops to 4.23%. The minimum period for locking up tokens after the delegation is 21 days. Validators charge delegators an 8.6% commission rate for their services.
Staking rewards estimates that if ATOM holders delegated US$1000 worth of ATOM, in a month they would earn $10.82 (0.28726 ATOM), and in a year they would earn $131.69 (3.49502 ATOM).
For ATOM holders running their own nodes, returns rise up to 14.41%. After inflation, however, this number drops to 5.47%. Like delegating, the lock-up period for validator nodes is 21 days.
Interblockchain Communication: The killer application for the Cosmos hub and ATOM
One of the biggest factors in Ethereum’s success over the last four years is its composability and the ability for the various Dapps to freely share information and liquidity amongst each other. Following the launch of IBC in February 2021, Cosmos app-chains could follow a similar trajectory and freely connect the way Ethereum applications like Curve and Convex do.
Fei explained the importance of IBC to the core of Cosmos:
“The importance of this interchain future was a prescient and integral part of the original Cosmos whitepaper in 2016 and continues to be a core part of the Cosmos thesis. Cosmos offers a different vision for an interchain future: one built around interoperability as a first principle. Cosmos believes that giving sovereign chains a shared communication standard is a natural step in the evolution of protocol design.”
So far not every major Cosmos app-chain has implemented IBC and many appear to be taking a wait and see approach, letting others test the technology.
Source: Mapofzones.com
Mapofzones.com
When an app-chain implements IBC it becomes a zone. This zone can then connect with other IBC enabled app-chain zones within the Cosmos ecosystem and then exchange data and assets. Cosmos implements a hub-and-spoke model to simplify these interactions where some IBC enable will open channels with multiple apps within the IBC zones net. Spokes can connect to these hub applications to simplify and mitigate their own risks.
The growth of IBC. Source: Map of Zones
An example of one such hub is Osmosis. It is the first IBC native DEX built on Cosmos and enables the transfer of Cosmos ecosystem tokens. For blockchains like Bitcoin and Ethereum that are not Cosmos native, tools like the Gravity Bridge, which allows the movement of assets between Ethereum to Cosmos, will expand the scope of Cosmos’s interoperability.
A blog post by Cosmos explains. “So, in parallel with more chains enabling IBC, the ATOM community plans on creating a slew of value-add services that create powerful incentives for sovereign chains to connect to the Cosmos Hub and transfer assets to it — thus driving value for the ATOM token.”
Many app-chains are already connecting to Cosmos-hub to enable transfers across the IBC web. It is already the second most popular IBC transfer hub according to mapofzone.com
An exchange similar to Osmosis is being built to connect directly to the Cosmos hub. Transfers on Gravity Dex will be confirmed by validators and will be a direct source of revenue that will grow the value of the ATOM token. Osmosis is its own app chain with its own validators and its own token, Osmo.
Presently there are two key drivers of value for ATOM holders. One is transaction fees generated through IBC transactions and the other is inflation rewards earned through ATOM new token issuance. The inflation rate of ATOM is around ~7.5% but this amount changes based on the staking ratio. Inflation decreases if over 67% of ATOMs are staked, and very gradually, bottoming out at 7%. Presently, with staking at ~62%, the inflation rate is high. This inflation rate all goes to stakers.
ATOM stakers now earn rewards through inflation and IBC transfers. Soon there will be Interchain security and shared staking rewards and Gravity DEX transfers. It has taken some time but the ATOM token holding is now benefitting more directly from the growth of the Cosmos ecosystem.
Fei gave BNC some insights into the future of Cosmos interoperability beyond IBC. Interchain accounts will allow Cosmos app chains to interface the UI/UX of other chains in the ecosystem and offer users best-in-class app experiences. Interchain accounts are expected to launch in Q1 2022.
“Interchain Accounts will enable all the best bits of composable application and system design critical to the explosive growth in DeFi natively across the interchain. What this means is that instead of transferring an asset across to another chain, and then requiring a user to accordingly also move to that chain’s ecosystem/UI/UX, one chain will be able to transfer an asset onto another chain, and then directly through Interchain Account transactions ie: invest the asset into another chain’s liquidity pool, stake into another protocol, or any other transaction would be part of the product model — all without exposing the end-user to the background noise,” said Fei.
Conclusion
ATOM, the native token of the Cosmos ecosystem has been overshadowed by other major token projects like Binance Smart Chain, Terra, and Crypto.com that have chosen to build on top of Cosmos. These projects have accumulated large market caps and TVLs while ATOM and the Cosmos hub have existed with limited utility.
The ability to allow projects to run autonomously without needing to connect back to the Cosmos hub has helped make Cosmos a popular solution for blockchain builders but it has not created much value for the ATOM token.
This changed drastically in 2021, following the launch of IBC in 2021. The Cosmos hub could now act as a facilitator of transactions between blockchains built on Cosmos. ATOM holders had a new source of revenue through IBC transactions. Buying into ATOM was no longer just a proxy bet on the Cosmos ecosystem.
Interoperability will be the key to the growth in value of the ATOM token. Many features are set to arrive in 2022 that will increase the connectivity of app-chains and much of this will be driven by the Cosmos hub and the ATOM token. 2022 releases like Interchain accounts and Interchain security are exciting for ATOM holders because of the new utility they will create for the token through Interchain operability across Cosmos.
“The Hub’s true value proposition will lie in essential interchain services like routing, chain name services, interchain security, custody provision, and facilities for capital formation,” says Fei. “With the growth of the IBC ecosystem, we’ve already seen the correlating growing demand for interchain services which will service usability, discoverability, and accessibility to the interchain ecosystem. The Cosmos Hub will play a leading role in the expanding universe of blockchains in need of Interchain Services, and ATOM offers a stake in this flourishing economy and the talents of the community invested in the Hub’s success.”
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