Cosmos is a layer 0 blockchain focused on interoperability. Cosmos allows several monolithic blockchains built on Cosmos SDK to communicate in a trust-minimized manner and takes a differentiated approach to scalability.

Cosmos’ first whitepaper, released in 2016 by Jae Kwon and Ethan Buchman, defines the Cosmos ecosystem as a world of connected app-specific blockchains (app-chains). as the Cosmos ecosystem. The community believes this vision has been realized and is focused on the next phase for Cosmos. A new whitepaper presenting a new era for the Cosmos ecosystem powering the Cosmos Hub was released at the Cosmosverse Conference in Colombia. It outlines a three-year plan to expand the Cosmos ecosystem, improve ATOM tokenomics, reduce ATOM issuance over time, and position the Cosmos Hub as the economic hub of app-chains.

The Cosmos Vision

Cosmos envisions a future with multiple Cosmos app-chains, with the option to have their data availability, consensus, settlement, and execution functionality. Cosmos chains also share functionality with other app-chains on Cosmos through the Inter-Blockchain Communication (IBC) protocol. App-chains require trusting one another’s security since tokens are fungible when transferring between interchains.

Cosmos proposed a system with two types of blockchains, Hubs, and Zones, to address the interoperability issues in the existing blockchain ecosystem. A Hub is a blockchain connected with other hubs, and each Hub can have several zones, representing application-specific sovereign chains (app chains) that inherit its hub’s connections. These zones are connected to the Hub by the IBC protocol (Inter-Blockchain Communication), almost like a network of independent servers. IBC is a general communication standard that uses cryptographic proofs to prove that a message was sent from a zone to another to enable interoperability between interchains. A Zone only needs to establish an IBC connection with a Hub to exchange data and assets with other Zones linked to that Hub. This means that instead of connecting with every Zone, Zones only need to establish a limited number of connections with a limited set of Hubs.

App-chains provide significant customisation benefits to founders and developers while leveraging IBC for secure cross-chain communication. However, if each zone had to build all the networking and consensus mechanisms from scratch, it would be impossible for the ecosystem to grow at an exciting rate. As a result, Cosmos offers the Cosmos SDK, a collection of customisable modules that act as a template for creating new blockchains, which makes launching a Zone as simple as deploying a smart contract. Each Zone must determine the level of security required for its goal and incentivise validators to provide it.

If Ethereum is considered the world computer, then Cosmos can be described as the internet of community blockchains. To learn more about the Cosmos vision, read our previous article here.

Cosmos Hub

Cosmos currently has 51 different zones (app-chains) which purposefully do not share security because of the Cosmos layer 0 design.

In 2019, Cosmos Hub was the first app chain (zone) deployed on the Cosmos network. It is an intermediary between all the independent app-chains created within the Cosmos ecosystem. Cosmos Hub uses the Tendermint consensus algorithm (Proof of Stake). Cosmos validators stake the native token ATOM to secure the network. Validators are rewarded in newly minted Atoms for their contributions to network security. It is deemed the safest zone in the Cosmos ecosystem due to its high staked value and broad validator set, composed of 175 active validators and 457 total validators at the time of writing. It accounts for around 40 percent of the total validators in the Cosmos ecosystem and the most significant economic value in bonded tokens. ATOM can be bonded, which means it can be locked for a period of time to acquire voting power that can be delegated or not to validators who maintain the Cosmos Hub. Bonded tokens confer the right to rewards but are vulnerable to slashing.

A Hub maintains information on the network state and the total number of tokens of each Zone connected to it.

The New Whitepaper

One major challenge Cosmos currently faces is accumulating value to ATOM, critical for economically secure blockchains. Cosmovers has published a new whitepaper that defines new utility for ATOM and proposes four new features for the Cosmos ecosystem:

Interchain Security
Native Liquid Staking
Interchain Scheduler
Interchain Allocator

The Cosmos Hub will play a new role in developing a resilient interchain economy. It will secure critical app-chains in the ecosystem and serve as an entry point and communication hub for app-chains.

Interchain Security

The number and diversity of validator nodes in distributed systems significantly affect network security.

Typically, Cosmos’ zones fail to attract validators to their sovereign chain, resulting in network centralization and lack of security. Interchain Security puts Cosmos Hub in the center of the Cosmos ecosystem security model by enabling chains to rent Cosmos Hub validators for app-chain network security at a pre-defined price.

App-chains will pay for this security in ATOM and/or in their native tokens if whitelisted. Interchain Security rent price will be defined in ATOM, and an oracle will convert prices accordingly. A fee is charged and will be sent to ATOM stakers.

Creating a secure validator network is difficult. Interchain Security makes it easier and provides high security from the start. Interchain Security is helpful for smaller app-chains lacking validators and for those wanting to join the Cosmos ecosystem quickly. Interchain Security is a promising solution to an existing criticism of Cosmos security. Successful execution of Interchain Security is likely to speed up Cosmos ecosystem growth.

It is anticipated that Interchain Security will be made available in January 2023. Five app-chains have already expressed an interest in taking advantage of Cosmos’s new security approach.

In early 2023, Circle intends to introduce its native USD coin (USDC) stablecoin on Cosmos and three other ecosystems, mentioning its interest in using Interchain Security and sharing part of the transaction fees, in USDC, with Cosmos’ Hub stakers.

Native Liquid Staking

Liquid staking is the process of wrapping staked tokens to use them as collateral and improve capital efficiency.

Like Ethereum, liquid staking on Cosmos allows ATOM holders to stake ATOM tokens and use the same tokens to transact throughout the Cosmos ecosystem. This allows ATOM stakers to explore additional reward opportunities across Cosmos app-chains. This is necessary to increase the utility of ATOM across different chains, decrease fragmented liquidity, and provide stakeholders with better UX and capital efficiency. Liquid staking incentivises ATOM staking and, therefore, Cosmos’ security.

Interchain Scheduler

IBC, Interchain accounts, and Interchain Security (coming soon) functionality are examples of interconnected app-chain transacting activity. For example, IBC powers asynchronous markets between different app-chains. These transactions inherently introduce MEV opportunities. MEV stands for Maximal Extractable Value and refers to maximum possible profits to be made by optimally ordering or excluding transactions within a block which is being produced.

Due to a low fees and a first-come, first-serve market, speed and spam have become the dominant MEV search strategies. Because of this market structure, MEV accrues primarily to searchers and hardware providers who rely on low-latency infrastructure. MEV isn’t extracted by stakers, validators, and users who generate the opportunities. For example, Osmosis alone has leaked more than $6.7 million in value to arbitrage bots since June 2021. (Source)

The Interchain Scheduler is a marketplace for future cross-chain blockspace and an on-chain MEV relay service for negotiations with validators. A consumer chain of Interchain Security can sell its blockspace in this new marketplace, and anyone can bid to acquire that blockspace.

Cross-chain blockspaces will be represented as NFTs and can be traded in secondary marketplaces. Users can use future blockspace to lock in arbitrage opportunities or schedule cross-chain transactions with strong execution guarantees.

The revenue from the marketplace will be split between the consumer chain, the chain selling the blockspace, and Interchain Scheduler. Revenue is not split amongst stakers directly. Instead, revenue goes to the Interchain Allocator to support new Cosmos chains and grow the Cosmos ecosystem.

According to the new whitepaper, the Interchain Scheduler on-chain MEV relay service would complement, rather than replace, off-chain MEV relay services, promoting competition and decentralization for MEV opportunities.

Interchain Allocator

Cosmos Hub Treasury funds support interchain projects and the Cosmos ecosystem. This capital allocation incentivizes chains to use the Hub for security. This is intended to increase the number of new projects in the ecosystem and the relevance of services provided by the Cosmos Hub.

DAOs chosen through governance voting will decide capital allocations on behalf of the Cosmos Hub.

As more chains rent Interchain Security, more revenue is generated for stakers and MEV grows, resulting in more revenue for the Treasury, as shown in the diagram below.

Some of the ideas being discussed in the community for funds allocation are token swaps, bootstrapping liquidity, treasury management, under-collateralized financing, etc.

Tokenomics

The ATOM native token ICO was launched in 2017, and the network was ready to use in 2019. Currently, the primary function of ATOM is to provide security for the Cosmos Hub via a staking mechanism. However, since other hubs and zones can have their native tokens, and their validator set, the ATOM token did not accrue any value. As a result, Cosmos protocol revenue is negligible. At the time of writing, Cosmos estimated total annualised revenue is currently around $15.14K, a decimal point to Ethereum’s revenue of $673.6M.

Total Amount and Initial Distribution

In 2017, the Interchain Foundation had several private sales, followed by a public sale in April for roughly $17.6M.

The initial token distribution was the following:

5% – Interchain Foundation’s initial donors
10% – Interchain Foundation
10% – All in Bits, Inc. (AIB), the corporation behind Tendermint.
75% has been distributed according to the results of the private (68%) and public fundraisers (7%).

ATOM 2.0

One of the most severe flaws in existing tokenomics was the inflationary issuance of ATOM, which resulted in little value accrual to the token. Because the ATOM token has no utility, one of the primary reasons for the current ATOM monetary policy is to subsidize Cosmos Hub validators who provide security services.

The new whitepaper proposes significant changes to ATOM issuance in order to reduce dilution and provide additional value to stakers. The current approach to the issuance rate is widely criticized for causing excessive inflation. Currently, ATOM issuance adjusts based on the proportion of ATOM staked. It ranges between 20% to 7% at best.

These issuance updates will be divided into two phases over 36 months. The goal is to reduce issuance to a consistent monthly amount of ATOM. The first phase, the Transition Phase, lasts 36 months and is intended to be a transition period, giving projects time to implement Interchain Security while avoiding surprises in ATOM staking rate. Over the first nine months, ATOM will suffer hyper-inflation since more ATOM tokens will be distributed to help fund the Cosmos Hub treasury so that the Interchain Allocator works.

Issuance will begin at 10 million tokens per month and gradually decrease to 300,000 monthly once the protocol reaches its final phase, bringing the inflation rate down to around 0.1 percent. The long-term goal is to make ATOM issuance linear rather than exponential. Validators would not rely on inflationary rewards to provide security. Instead, Validators are compensated with revenue generated by Interchain Security fees, which are expected to compensate for lower inflation at that time. If this scenario does not play out as planned, a safety mechanism will allow the original ATOM issuance model to be gradually reinstated.

Two-thirds of the newly minted ATOM tokens will go to the Cosmos Hub Treasury to support initiatives that increase interchain adoption, growth, and capitalization. A portion of the transaction fees will also go to the Cosmos Hub Treasury. This creates a virtuous cycle l of treasury growth and token value growth.

Final Thoughts

The primary intention behind the publication of this brand-new whitepaper was to encourage conversations regarding the trajectory of the Cosmos ecosystem within the community. The ATOM token currently has minimal value, and the community agrees that something must be done. There will be many discussions, details refined, and decisions made in the community before things are set.

There is currently a proposal for a vote on the Cosmos Forum requesting that the team separate the proposed infrastructure upgrades and inflation change into three proposals while demonstrating why some of the changes proposed in the new whitepaper may fail or be detrimental to the Cosmos community. This proposal also suggests examining alternative funding mechanisms for consumer chains and The Treasury, arguing that the community pool should be responsible for periodically issuing a budget to The Treasury, thereby holding it accountable to delegators and validators. One of the reasons for separating the changes into multiple proposals is to test the Interchain Allocator before changing the inflation, given that the design decisions will only be visible after the infrastructure is deployed, and it is difficult to predict if stakers will be compensated in a way that makes a reduction in inflation worthwhile. You can read more about the open letter here.

The implementation of ATOM 2.0 will take several years and involves a significant degree of complexity. The first step in this process will be the launch of Interchain Security in January 2023. There is yet to be a set date for the beginning of the Transition Phase.

Cosmos 2.0: A Multi-App-Chain Future with Shared Security