The ATOM 2.0 white paper is about to be released. Will the value capture capability of Cosmos improve?

Author: Biscuit, Chain Catcher

On September 26, Tendermint, the developer of Cosmos, released the white paper for the ATOM 2.0 version at the Cosmoverse conference and discussed the Atom 2.0 topics and its impact on Cosmos and interchain. This is undoubtedly an important step forward for the Cosmos ecosystem.

According to the official roadmap, in the upcoming Q4 2022 and Q1 2023, Cosmos will launch Interchain Accounts and Interchain Security, respectively. These functional modules will elevate the Cosmos network to new heights. This series of actions indicates that Cosmos is not willing to back down in the fierce competition among public chains.

After years of development, many excellent public chains have chosen Cosmos SDK as their underlying technology, including BNB Chain, Thorchain, Oasis, Okchain, Terra, Osmosis, Cronos, etc., with 49 blockchains already connected to the IBC ecosystem.

At the same time, recognition from the outside world fully proves this point. Delphi Labs will continue to build around Cosmos, and the V4 version of dydx will run on Cosmos.

So, why has ATOM not been as popular as ETH over the years? Will its value capture ability improve after ATOM 2.0? This article will introduce the reasons for the ATOM 2.0 upgrade and discuss the differences between the Cosmos and Ethereum ecosystems.

Where is the value of ATOM?

The internet serves as a bridge, allowing previously isolated computers to connect and communicate. Now, each public chain operates like a standalone computer, and Cosmos believes that their IBC protocol may become the TCP/IP protocol of the blockchain world in the future. The architecture of the Cosmos ecosystem is based on Hub and Zone.

Hub and Zone in Cosmos

To this end, Cosmos has built the Cosmos SDK, a modular framework that allows developers to easily build application-specific blockchains. Important foundational modules include:

• IBC (Inter Blockchain Communication): Standardizes cross-chain information, responsible for reliable transmission, authentication, and data ordering.
• ICA (Interchain Account): Cross-chain accounts can control on-chain accounts' behavior on another chain, allowing assets to move through cross-chain accounts without users needing to operate across multiple product interfaces.
• ICS (Interchain Security): Cross-chain security is similar to Polkadot's shared security model, allowing validators on one blockchain to produce blocks and maintain the security of another chain.

As the native token of the first Hub in the Cosmos ecosystem, ATOM's value capture ability has been heavily criticized. Value capture ability represents the benefits that token holders receive from the overall value growth of the ecosystem, and this standard is not limited to evaluating public chains, exchanges, application protocols, etc. For example, tokens like BNB and SNX have very strong value capture abilities, where holders not only benefit from price increases but also receive additional benefits as the ecosystem develops. ATOM has two main drawbacks in this regard due to its original architecture and token economics.

First, the Cosmos SDK is an open-source technology, and most Hubs and Zones built on this technology do not require ATOM. The Cosmos Hub itself does not have many applications; only transactions and staking on the Cosmos Hub require the use of ATOM tokens.

Second, ATOM 1.0 has a high inflation rate, with a lower limit of 7% and an upper limit of 20%. If the staking rate falls below 66%, inflation will start to approach 20%. Conversely, if the staking rate is significantly above 66%, inflation will drop to 7%.

Therefore, ATOM holders can only earn rewards in the Cosmos ecosystem by staking in the network, but the token's value stagnates due to the high inflation rate. Additionally, new public chains in the ecosystem may airdrop to ATOM stakers, but for holders, this also falls under unpredictable investment strategies.

High inflation can be beneficial in the early stages of network development, incentivizing more users to stake to maintain network operation. However, as the multi-chain ecosystem has begun to take shape, blockchain networks require more than just stability and the ability to facilitate token exchanges. The advancement of ATOM 2.0 is precisely aimed at addressing this value capture pain point.

Solutions of ATOM 2.0

Ethan Buchman, co-founder of Tendermint and Cosmos, revealed during an AMA that ATOM 2.0 will allow Cosmos Hub to play a role in cross-chain interactions, making cross-chain access easier and enabling large-scale applications. The new white paper includes economic models, extensive research in the DeFi space over the past few years, and aspects related to Protocol Controlled Value (PCV).

Specifically, Cosmos is expected to adjust the inflation rate of the token, such as setting an upper limit on inflation through built-in controllers or changing it to a fixed inflation rate that will not be adjusted based on user staking amounts.

In terms of token incentives, Cosmos will utilize the Protocol Controlled Value (PCV) mechanism to incentivize other cross-chain activities. The targets for incentive adjustments will also include the community, which may receive one-time grants or establish developer funding streams. The new version of the token model aims to better serve and advise other aspects of the ecosystem.

Regarding the fee mechanism, a burning function similar to Ethereum's EIP1559 may be introduced into ATOM. Additionally, various fee tokens may be adopted to facilitate direct airdrops on the Hub.

Regardless of the specific content of the ATOM 2.0 white paper, its reform direction is very correct, and ATOM 2.0 will provide new momentum for the entire Cosmos network.

Ethereum & Cosmos: Different Paths to the Same Destination

Although there are data discrepancies between Cosmos and Ethereum, in terms of usability, Cosmos is the second-largest ecosystem after Ethereum. Both are building blockchain networks capable of accommodating the next billion users.

Daily active addresses and transaction data of public chains in the Ethereum and Cosmos ecosystems, source: Artemis.xyz

In terms of daily active addresses and transactions, BSC, built on the Cosmos SDK, surpasses Ethereum. Of course, the number of bots on the BSC network is also much higher than that on Ethereum, leading to some inflated data.

Osmosis is slightly behind Arbitrum and Optimism, likely due to the significantly higher activity on Ethereum L2 compared to Osmosis. These data are sufficient to prove the usability of the Cosmos ecosystem.

Multi-chain Architecture

Dragonfly partner Haseeb Qureshi once proposed a brilliant viewpoint that "every public chain is like a city," which helps us better understand the multi-chain ecosystem. Ethereum is like the expensive New York City, building skyscrapers (L2) to accommodate more people. In contrast, Cosmos is a vast highway system connecting public chains that resemble small towns.

The multi-chain architecture of Ethereum is easy to understand as it transitions from 2D to 3D, always having the Ethereum main chain as a connection point. Meanwhile, Cosmos has been known for its abstraction since its inception, with its multi-chain existence being 3D. Before the launch of IBC, public chains built on the Cosmos SDK had little interaction with each other. Imagine the various public chains in the Cosmos ecosystem as different themed amusement parks, some in the air, some underground, or categorized into entertainment, sports, learning… Since the construction of the IBC highway, users from these parks have been able to access other themed parks.

Cross-chain security primarily serves the developers of these amusement parks, who no longer need to spend heavily on hiring security or setting up safety facilities. Instead, they can apply to Cosmos Hub and pay/stake ATOM to have their public chain's security managed. This greatly assists aspiring Web3 builders and makes the Cosmos ecosystem more open and fair.

Cross-chain accounts cater to all users in the Cosmos ecosystem, allowing them to perform complex cross-chain operations without cumbersome cross-chain processes. It's like visiting a zoo but suddenly wanting to try a dish from a food court; cross-chain accounts will let you enjoy distant delicacies without leaving your spot. This feels like a teleportation feature, an unimaginable cross-chain experience—Amazing!

DeFi Competition

Benefiting from a large number of developer communities, Ethereum is the center of blockchain innovation. Throughout its journey, whether it was ICOs, DeFi Summer, NFTs, or future concepts like SBT and L3, Ethereum has led the direction of blockchain development. In the past year, Cosmos has quickly and efficiently built its DeFi ecosystem by adopting a "take the essence, discard the dross" strategy.

According to data from the map of zones, there are currently 49 public chains in Cosmos, with approximately $10 million being transferred daily through IBC, which are important DeFi infrastructures in the Cosmos ecosystem.

• Osmosis: A network supporting developers to create cross-chain AMMs, and also the largest DEX in the Cosmos ecosystem.
• Axelar: Connects all blockchain networks, assets, and programs within the ecosystem through a universal protocol and API, aiming to support developers in building multi-chain dApps.
• Juno: An open-access smart contract deployment platform where developers can easily build any functional smart contract applications and communicate with other IBC-integrated public chains in the ecosystem.
• Kujira: A center for high-quality projects in the Cosmos ecosystem, allowing applications to be deployed only after successful governance votes. Additionally, this network has developed an on-chain order book exchange, a liquidation collateral market, and an over-collateralized stablecoin USK.
• Celestia: A project focused on building modular blockchain networks, significantly improving scalability by separating the consensus layer, execution layer, and data availability layer of blockchains.
• Sei Network: A blockchain built using Cosmos SDK specifically for DeFi. The project's goal is to make Sei the best environment for DeFi applications. Its unique features include front-running protection and a built-in order matching engine.
• Crescent (formerly Gravity DEX): A multi-chain asset liquidity incentive market with capital efficiency.
• Evmos: Interoperable with Ethereum mainnet, EVM-compatible environments, and other BFT chains through IBC, serving as an EVM Hub for any other EVM Cosmos chains. Evmos aims to become the EVM hub of Cosmos, facilitating the easy deployment and communication of EVM smart contracts within the Cosmos ecosystem.
• Agoric: An application chain utilizing JavaScript, dedicated to bringing 12 million JavaScript developers into the crypto space.
• Sommelier: A co-processor for DeFi traders and liquidity providers, dynamically optimizing investment strategies on-chain.

Challenges and Bottlenecks

Compared to Ethereum's DeFi ecosystem, Cosmos still faces several developmental bottlenecks, which are challenges that the Cosmos ecosystem must currently confront.

First, due to the unique structure of blockchains, Cosmos struggles to interact with blockchains outside its ecosystem, currently relying on a few protocols like Evmos and Axelar. This may be the main reason why stablecoins in the Cosmos ecosystem are at a disadvantage. Centralized stablecoin issuers like Tether and Circle have not issued native stablecoins on the Cosmos network. The Cosmos ecosystem validator node Swiss Staking previously stated on its social platform that Circle would issue a native USDC on Osmosis, but Circle has not responded officially.

Currently, the solution involves USDT/USDC/DAI stablecoins entering the Cosmos ecosystem through five different cross-chain bridges, resulting in 15 different formats of mapped tokens, causing extremely fragmented liquidity for stablecoins. Meanwhile, the UST from the Terra ecosystem has failed to sustain the stablecoin utility in the Cosmos ecosystem. New-generation stablecoin protocols like IST, NOTE, and USDX still need time to be tested.

Crypto wallets are also the first infrastructure for users to enter the blockchain ecosystem, and their importance is self-evident. Ethereum's most popular Metamask wallet, due to its first-mover advantage and the network effect of EVM, is the preferred wallet for most crypto users, with active users reaching 30 million in March this year. Meanwhile, the mainstream wallet in Cosmos, Keplr, has just reached the milestone of 500,000 users.

Data from the Chrome extension download page

Finally, the Cosmos community is often perceived as a "bulk" multi-chain community. The open-source, decentralized inter-chain architecture, multi-entity participation in management, and infighting among co-founders have led to various public chains in the Cosmos ecosystem establishing their own territories, often resulting in factional conflicts. A well-known incident among crypto users is when Cosmos founder Jae Kwon opposed Proposal 69 in a hostile manner. IBC can connect blockchains, but it cannot connect hearts.

Excessive decentralization may be a prelude to chaos. Due to the lack of a soul figure like Vitalik, Cosmos appears more fragmented under significant decisions. This may also give rise to extreme fanatics like Do Kwon, who used a 20% APR to entice neutral users' support, ultimately leading to the evaporation of $60 billion in wealth and causing irreparable damage to the ecosystem.

In Conclusion

At the recently concluded Wanxiang Blockchain conference, Wanxiang Chairman Xiao Feng stated that the application layer protocols of blockchain will experience a major explosion. Cosmos, focusing on application chains, is positioned to thrive in this crucial multi-chain era. The release of the ATOM 2.0 white paper by Cosmos Hub indicates that ATOM will provide new momentum for this established public chain.

However, like most public chains, Cosmos has a history of delays in technical implementation. The previous IBC module was repeatedly postponed due to resource mismatches. So, what is the specific progress of the highly anticipated interchain security and interchain accounts?

The competition among public chains has undergone a dramatic transformation, with high-performance parallel public chains like Aptos and Sui potentially becoming strong challengers to Cosmos. In this new competitive cycle, Cosmos will need more cutting-edge narratives and solid ecological progress to maintain its leading position.

References:

1. The Path of the Metaverse: "Latest Focus Points of the Cosmos Ecosystem: Interchain Security (ICS), Atom 2.0, and Nomic"

2. SevenUp DAO: "Opportunities in the Cosmos Ecosystem and the Outlook for Inter-chain in the New Industry Narrative"

3. Atomic Aggregation: "Interchain Security in the Cosmos Ecosystem (ATOM 2.0)"