Introduction

Some 500 million years ago, the Cambrian Explosion created the foundations for life as we know it. Today, Cosmos has taken inspiration from the ‘Biological Big Bang’ to create a network that sustains an ecosystem of blockchains.

Tracing back to the genesis of Cosmos in 2014, the network was co-founded by computer scientists Jae Kwon and Ethan Buchman. With their combined forces, Buchman envisioned Cosmos as “not a single thing or single network. It’s a philosophy of blockchain design that has materialized in major advances, including some of the most useful software artifacts available today to blockchain developers.”

With that kind of drive, it’s no surprise that the Cosmos ecosystem has grown to $50 billion dollars (at the time of writing) since the mainnet went live on 13 March 2019, making it the largest ecosystem after Ethereum. As one of the key Cosmos players, the BNB chain (formerly known as the Binance Smart Chain) represents approximately 75% of the total market capitalization.

Since our last report in February 2021, ‘Cosmos Stargate Review & Deep-Dive’, there have been a lot of changes in the ecosystem worth talking about. If you’re new to Cosmos or fancy a recap, this article will launch through the basics, including the utility and revenue of the ecosystem’s native token (ATOM), before lifting-off into some exciting areas to watch.

Let’s get strapped in.

The Cosmos ‘Control Panel’ – where it all happens

It’s understandable to think that Cosmos is as confusing as a plane’s cockpit. In reality, once you understand that a plane’s movement is primarily controlled by the ailerons, elevator and rudder (the three axis of rotation) everything else starts to fall into place. In a similar vein, once you wrap your head around the three main components of Cosmos – the Hub, Network Architecture and Internet of Blockchains – the seemingly complex ecosystem starts to make a lot more sense.

1. The Hub

Cosmos Hub — https://members.delphidigital.io/reports/the-cosmos-ecosystem-has-arrived

The Cosmos Hub was the first blockchain to be launched on the Cosmos network and it acts as an intermediary between all the independent blockchains (termed zones or App-Chains) created within the Cosmos ecosystem. As pictured above, it lies at the center of the ecosystem and is secured by validators staking ATOM.

Providing security to the zones is one of the primary capabilities of the Hub (e.g. validating the chain’s transactions), however, it is not mandatory for the zones to implement this set-up. Instead, the zones have the choice to retain their sovereignty, which includes authenticating accounts and transactions, creating and distributing new tokens and executing fundamental blockchain updates.

As a bit of a teaser, there are plans in the pipeline for the Hub that we will elaborate on later in the article, such as shared staking.

When looking at the roadmap, this includes essential interchain services like automated market makers, bridges to Bitcoin, Ethereum, and the wider digital economy. Together, this infrastructure will offer:

new functionality for ATOMs
an improved experience for blockchain users
simpler means to deploy high-security blockchains, and
countless services for the thriving ecosystem of sovereign, interoperable blockchains beyond the Cosmos Hub

2. The Network Architecture

Cosmos SDK — https://members.delphidigital.io/reports/the-cosmos-ecosystem-has-arrived

Let’s quickly recap some blockchain 101 to help us understand Cosmos’ architecture.

Fundamentally, each blockchain can be divided into three conceptual layers:

Application: Responsible for updating the current state (condition) of the blockchain given a set of transactions, i.e. processing transactions.
Networking: Responsible for the propagation of transactions and consensus-related messages, i.e. communication of transactional data between nodes.
Consensus: Enables nodes to agree on the current state of the system, i.e. a system of voting on the current state.

These layers serve as the foundations for the three pivotal components of Cosmos:

Tendermint Byzantine Fault Tolerance (BFT) — this is the key software that serves as a blockchain engine enabling developers to bypass the time-consuming and technical cryptography required to set up a blockchain. Tendermint comprises two out of the three layers mentioned above: networking and consensus. Thus, it enables developers to focus on the application layer.

As an aside, it’s worth mentioning that the Tendermint design has become seminal literature with regard to Proof of Stake (PoS ) blockchains. For example, the design of Ethereum 2, Solana’s VFD Consensus and Polkadot’s GRANDPA, to some extent, derive from Tendermint.

Inter-blockchain communication (IBC) — this is the communications protocol that allows you to move data and assets from one blockchain to another within the Cosmos ecosystem.
Cosmos SDK (software developer kit) — this is the open-source tool kit that allows developers to build app-chains.

How do these three pillars tie together?

To use a very simple analogy, Tendermint is like a pizza base: it forms the foundation that allows developers to start building blockchains. Using the already established base, you can add a variety of different toppings (the applications) using the various Cosmos SDK plug-ins. The different blockchains (zones) in the ecosystem are able to communicate using the IBC protocol. Delicious stuff.

3. The Internet of Blockchains (“the interchain”)

Sometimes referred to as the interchain, the Cosmos network is composed of a thriving number of App-Chains (49 at the time of writing). Using the above interactive ‘Map of Zones‘ interface, you can visualize the network, learn which chains are currently IBC-enabled, and how much value is being transferred throughout the network.

It’s worth noting that the zones built using the Cosmos SDK have a choice in opting to be part of the IBC-enabled network. For example, Chad Baraford, the technical lead at THORChain (built using the Cosmos SDK), recently stated that THORChain will not enable IBC for the foreseeable future. He briefly explained why:

The first point is about security – currently the only way an individual can swap $RUNE to another asset is either on THORChain or on a centralized exchange such as Binance. Connecting to IBC would mean theoretical THORChain hackers would have more exit points (i.e. the ability to swap to another asset), due to IBC providing connections to many different chains. Thus, it would make THORChain’s more vulnerable to attack.

Additionally, the second point touched on design ethos. The IBC relayer is a point of centralisation and has broken down in the past. From day one, THORChain has been a vehement advocate for decentralization and believes this design is incompatible with what THORChain is looking for.

Chad was clear that his views were not disparaging towards IBC. On the contrary, he said IBC has a great use case and that when he builds his own project in the future, he will most likely interface with IBC.

On the flip side, Osmosis, an IBC-enabled App-Chain offering an AMM service, was recording the highest amount of activity in both volume and dollar terms at the time of writing. As the first IBC-native DEX to go live, Osmosis processed $300 million dollars in the last 30 days which consists of 1.3 million IBC transfers – the highest of any IBC-chain. With such high traffic, it’s possible that Osmosis could be considered a ‘hub’ in its own right further down the road, alongside the Cosmos Hub. This is due to its significant connections to other zones and processing huge amounts of dollars.

Over time, we expect the proliferation of App-Chains to increase, particularly as new modules are added to the SDK, while existing ones are improved. For example, dYdX is the most recent high-profile chain to announce their entrance to Cosmos. According to Defi Llama, dYdX is the largest decentralized derivatives trading platform with over $550M in Total Value Locked (TVL). Their decision to migrate from Ethereum’s Starkware-based Layer 2 solution to Cosmos was driven by the superior scalability and decentralization offered by Cosmos.

Now that we have an overview of the three main components of Cosmos, let’s take a closer look at the ATOM token.

ATOM Token Utility

As the primary token of the Cosmos Hub, ATOM also provides valuable security for the entire interchain. In this section, we’ve listed out the token’s current four main use cases that you need to be aware of.

1. Staking

ATOM stakers earn a return from two primary sources:

New ATOM issuance, i.e. block rewards – right now, ATOM’s annualized staking APR is ~19%.
Transaction fees from IBC transfers through the Cosmos Hub – currently, the Hub supports IBC but will soon feature ‘Shared Security’ which stakers stand to earn fees from.

The Cosmos Hub implements delegated proof of stake (DPoS) meaning that passive ATOM holders can delegate their staked tokens to active validators in return for a portion of the yield. The exact amount of validator revenue that is shared varies depending on the commission charged – you can monitor it here.

At the time of writing, the ratio of bonded ATOMs to total ATOMs was circa 63.1% (190M/301M tokens). While this is below the Hub’s target of 66%, this will mean a higher staking APR rate which is currently at 19.01%. In theory, this should incentivize individuals to restake their ATOMs to participate in the higher yield bringing the ratio back to the desired threshold.

Cosmos ATOM — https://www.mintscan.io/cosmos

A rough calculation to prove the staking APR of 19.01% is to divide the inflation rate by the bonded ATOM rate, i.e. 12.22%/63.1% which equals 19.36%. Note, that there is a delta of 35 basis points, however, this is due to the actual block speed being slower than what it is meant to be – circa 6 to 7 seconds. Put simply, block rewards are issued per block, so if the block speed is slower than actual, fewer rewards are issued.

Furthermore, it’s worth noting that there is no ATOM supply limit. This is because newly minted ATOMs are used to reward stakers as part of the consensus mechanism. As such the staking APR adjusts depending on the ratio of staked tokens. This is termed ‘dynamic inflation’ – i.e the amount of ATOM staked determines the rewards rate. The staking ratio is volatile and individuals can unstake their ATOMs at any moment subject to the 3-week unbonding period.

Let’s shift our focus and evaluate the current state of the Cosmos Hub’s validator set. The concentration of ownership is a fairly common phenomena in both crypto and tradfi alike. As seen in the image below, it’s unsurprising that the top 10 validators account for 44.7% of all the ATOMs staked. For context, the total number of active validators stands at 175 (the current maximum cap set by governance).

https://www.mintscan.io/cosmos/validators

2. Airdrops

As you’re probably aware, a cryptocurrency airdrop is a marketing stunt that involves sending free coins or tokens to wallet addresses to promote awareness of a new currency.

In the Cosmos ecosystem, airdrops are typically sent to addresses that own a certain number of ATOMs and other established projects such as Osmosis and Juno tokens.

Here’s a big lesson that many learnt the hard way: when Osmosis was airdropped, if you held your ATOM tokens on Binance then you would have been ineligible for the airdrop. As a fixed rule, to be eligible for future airdrops you will need to custody your own ATOM. To do this is quite simple using a non custodial-wallet – if you don’t already have one set up, check out the notes below for a quick explainer.

With future airdrops in mind, as a Juno staker, I recently claimed the below WYND airdrop. The deadline to claim is 31 August 2022, so why not get in there!

You can monitor for future airdrops here.

A quick note on wallets

In order to stake, claim airdrops and interact with the Cosmos ecosystem you will need a non-custodial wallet.

The Keplr wallet browser extension is widely accepted as the best wallet for interacting with the Cosmos ecosystem. The user interface is clearly presented and the application is easy to navigate.

It’s always recommended best practice to use a hardware wallet, such as Ledger, when using the Keplr wallet (or any other online wallet for that matter).

3. Governance

The Cosmos Hub, similar to other Cosmos-based blockchains, allows users to vote on upgrades to the network using the Hub’s native ATOM token.

The Hub is considered one of the most active governance systems in crypto.

4. LP Rewards: THORChain x Cosmos Integration

Recently we published an article titled ‘Hammering home the investment case for THORChain’ which looked at some of the supply and demand factors that will likely contribute to the overall success of the chain. We are excited about THORChain’s future and are pleased to report that native ATOM has arrived.

For the uninitiated, THORChain provides cross-chain liquidity infrastructure that allows for multiple layer-1 token exchanges across siloed blockchains such as Bitcoin, Ethereum and BNB.

Let’s delve into some of the benefits of the ATOM liquidity pool on THORChain, particularly if you’re an existing for ATOM holders:

You can swap directly to native Bitcoin using THORChain’s swapping function – the reverse swap is also possible. In addition to this, you will be able to swap to other tokens such as ETH and BNB.

You can provide liquidity and earn rewards based on the swap volume. On THORChain, this works by providing 50% RUNE and 50% of the non-RUNE asset, in this case, ATOM. In return for providing pool liquidity, you earn a percentage of the swap fees when users transact.

It’s worth mentioning that THORChain is working on network enhancements to allow single sided exposure, which means that, in the future, you will be able to provide liquidity without being exposed to RUNE. Therefore, you will not take on RUNE price risk nor be subject to impermanent loss risk as your exposure will be restricted to a single token.

It’s clear that ATOM has a well-thought-out utility proposition, but how does this fit into the wider picture of the ecosystem’s business case?

Cosmos Revenue

Cosmos Revenue — https://tokenterminal.com/terminal/projects/cosmos

Macro factors have led to liquidity being sucked out of the crypto space indiscriminately, resulting in downward pressure on prices and consequently, a reduction in interest in the markets.

Over the past 180 days, Cosmos activity has significantly reduced as measured by revenue (transaction fees paid by users); however, from the above image we can observe that the daily revenue of circa $1k is largely in line with that of Polkadot’s ecosystem. We use Polkadot as a comparison due to the ecosystems being somewhat similar in terms of consensus and network architecture.

At the time of writing, the annualized revenue for Cosmos was $360k, according to Token Terminal. This low level of revenue is to be expected given how relatively new IBC is as a technology. On the bright side, the revenue generation has been consistent and there are a number of upcoming catalysts primed to lead to further future growth.

With that in mind, let’s consider the key developments to keep an eye on in addition to the Cosmos Hub Roadmap 2.0.

Last But Not Least: What to Watch

1. Shared Security (a.k.a Shared Staking)

Historically, we’ve seen App-Chains bootstrap their validator sets on their own from scratch. However, this isnt always an easy route. For any new chain starting out, a low token price and initial lack of public trust makes it difficult to attract new validators. Compounded by a bear market, this creates clear security challenges for new chains.

But what if new chains were able to offload this resource-intensive process to an external party, which would free up their time to focus on building the core product?

Enter shared security.

Put simply, this is the mechanism whereby existing Cosmos Hub validators provide security services to other chains within the ecosystem. Based on recent announcements, we expect this to commence in Q3 2022.

What’s in it for ATOM validators? The potential to earn more ATOM tokens and/or tokens from other chains – thus, bolstering APY. From a consumer chain perspective, they can benefit from an established validator set with a significant bonded value which is a proxy for security.

As shared security becomes more established, we would likely see a faster time to market for new chains and a richer IBC-enabled ecosystem.

2. Interchain Accounts

You can think of interchain accounts as a one-stop-shop solution that allows users to transact on any IBC-enabled chain all from the Cosmos Hub. Instead of a user having to navigate multiple blockchain interfaces, they will use a single interface but have the ability to interact with dozens of IBC-enabled zones.

This will make the Cosmos ecosystem more user friendly, which should drive further engagement. For more information, you can read the FAQs here.

3. Liquid Staking

This new mechanism allows users to tokenize their staking position, providing them with additional liquid assets that can then be utilized across other DeFi products and applications.

Through liquid staking, stakers can now pursue other avenues to earn additional yield while maintaining core positions of their staked assets. As an entirely new asset class, liquid staking vastly broadens the usability of Cosmos, accruing immense value to participants.

4. Gravity Bridge

This is a Cosmos <> Ethereum bridge that runs on The Cosmos Hub. It could eventually play a key role, tapping into all of the TVL on Ethereum.

Looking at the image below taken from Map of Zones, you can learn that the bridge already has 86 channels open and has processed over $1m of volume in the past 30 days.

https://mapofzones.com/

To provide some context, Zones open communication channels between one another to facilitate IBC transactions. The more channels that are open, the more transactions that can occur. There can be multiple channels open between two zones, which enables the flow of different assets.

Ethereum is the most established ecosystem and this bridge should enable Cosmos to capitalize on Ethereum’s significant user base and transaction volume.

5. Political Infighting

There has been internal restructuring happening behind the scenes. Tendermint, the original name of the company behind Cosmos, was recently split into 2 new entities: Ignite and NewTendermint.

Zaki Manian, Tendermint’s number 2 under Jae Kwon, recently resigned from the company. According to Coindesk, he wrote a (now-deleted) Twitter thread stating that “Jae has subjected every internal communication channel to religious discrimination, loyalty tests and abusive rants.”

Further, it is alleged that Kwon’s relationship with Buchman and much of Tendermint’s early team soured around 2020.

Just like with the early days of Ethereum, the battle of ideas amongst different individuals is brewing. After all, we are humans and when there are multiple visionaries and personalities in a “single room” this can give rise to disagreements. As the saying goes, too many cooks can spoil the broth, so restructuring seems like a natural and healthy course.

Conclusion

We’ve taken a small glimpse through the telescope at what the future of Cosmos could look like. Whether that’s a thriving shared staking offering that will differentiate the ecosystem from rivals in the cryptosphere, or creating the perfect conditions for ATOMs value to soar – Cosmos is definitely one to watch.

Granted, there are some teething issues, such as the political infighting, however, when creating something that has the potential to grow into a core piece of crypto-wide infrastructure, it was never going to be smooth sailing.

My bet is that the Cosmonauts are going to reach galactic heights.

Cosmos Through The Telescope