Translated by LC
- On Sep 26, 2022, Cosmos dropped a 27-page whitepaper titled “The Cosmos Hub.”
- Backed by interoperability, the Cosmos ecosystem achieved rapid expansion, however, the current mechanism does not drive value to ATOM.
- ATOM 2.0 proposes Interchain Security and Liquid Staking in a bid to boost token utility and introduces revamped tokenomics aimed at lowering the inflation rate (1% annually).
- The Cosmos Hub aims to make ATOM the reserve currency of the Cosmos ecosystem via the Interchain Scheduler and the Interchain Allocator.
On Sep 26, 2022, Cosmos dropped a 27-page whitepaper titled “The Cosmos Hub” at the Cosmoverse conference in Medellin, Columbia. The whitepaper spells out key changes to ATOM, the Cosmos Hub’s native token, and the introduction of three major features to better secure the Cosmos Hub ecosystem.
New Tokenomics Aimed Toward Accruing Value to ATOM
Criticisms Over the Current Atom Tokenomics
1) Cosmos’ Ecosystem Expansion ≠ ATOM Value
Until now, the growth of the Cosmos ecosystem and ATOM’s value did not seem to correlate as almost every transaction within the Cosmos ecosystem occurs in app chains, of which transaction fees are paid with the projects’ native tokens.
Polkadot requires to bond DOT for parachains to connect. On the other hand, the Cosmos SDK is open-source and designed to make it easy for any developers to build PoS chains without staking ATOM, meaning that the expansion of the Cosmos ecosystem does not necessarily drive the demand for ATOM.
The Cosmos community has also long been criticizing the tokenomics’ inability to accrue value to ATOM and has been discussing measures to revamp the protocol since 2020.
2) Excessive Inflation for Validator Reward
ATOM’s main purpose is to provide security for the Cosmos Hub through a staking mechanism. Cosmos issues ATOM tokens to incentivize validators, and ATOM inflation can rise to 20%, depending on the staking ratio.
The inflation rate is currently at 12.81%, extremely high compared to other mainnets. If the ATOM supply is high when the percentage of the total ATOM supply being staked is low, the supply will eventually outweigh the demand, which may negatively affect the price.
ATOM 2.0 Unveils Key Solutions to Strengthen the ATOM Chain
The revamp proposes a new monetary policy for ATOM, introducing greater token utility and a 3-year transition period for reducing ATOM issuance to accrue more value to ATOM.
1) ATOM Token Utility Expansion: Interchain Security + Liquid Staking
ATOM 2.0 proposes positioning Cosmos Hub as the center of the ecosystem through interchain security and liquid staking, whose joint purpose is to grow a more secure interchain to allow Cosmos chains to leverage shared security and introduce mechanics to accrue value to ATOM.
Interchain Security is a mechanism allowing new chains to essentially rent security from the Cosmos Hub, meaning they can use ATOM validators to secure their projects. In exchange, ATOM validators will earn those respective chain’s native token. The Interchain Security will also create various opportunities for integration and collaboration with the Cosmos Hub community and other Cosmos chains.
Moreover, the Cosmos Hub will start onboarding leveraged liquid staking (e.g., exchange ATOM for stATOM) via Stride, Quicksilver, and Supernova, which are Cosmos-based liquid staking protocols, to improve revenue capture of ATOM. Liquid staking will open new opportunities for ATOM holders, allowing them to earn staking rewards while using their ATOM in other DeFi protocols.
2) New ATOM Tokenomics: Bringing ATOM’s Inflation Rate Down to 1% At Best
The aforementioned liquid staking will steadily reduce ATOM emissions. The current monetary policy necessitates high inflation to incentivize validators, however, this model has faced criticisms since it does not drive any value to ATOM in the long run. If validators can secure liquidity leveraging liquid staking (by minting stATOM), staking participation will increase even with relatively low compensation.
In a bid to reduce excessive inflation while leveraging liquid staking, the whitepaper proposes a new ATOM tokenomics, in two phases. The new monetary policy will see two phases over the next 36 months. In the beginning, i) 10M ATOM would be issued per month for nine months to bootstrap the Cosmos Hub treasury, and ii) issuance would gradually reduce to 300,000 tokens per month, ultimately reducing the annual inflation rate to about 1%.
Three New Features of Cosmos Hub
The whitepaper proposed the introduction of three major features to Cosmos Hub: Interchain Scheduler, Interchain Allocator, and Governance Stack.
1) Interchain Scheduler
The Interchain Scheduler would function as an MEV market solution to collect revenue by reordering transactions within a block while it is being produced. The sold block space would be issued as NFTs representing block space “reservations.” These tokens would be auctioned off periodically and possibly even traded on secondary markets. The original blockchain would then receive a portion of the proceeds.
What allows Cosmos to have a competitive advantage over other blockchains is that it is a vast network of interconnected blockchains, allowing users to purchase synchronous regions of block space on different chains. By doing so, users can lock in arbitrage opportunities or schedule cross-chain settlement transactions. In other words, the more app chains using Cosmos SDK increase and the more interactions between app chains occur, the more revenue will be collected by leveraging the Interchain Scheduler.
<Source: Cosmos Hub Whitepaper>
The Interchain Scheduler will be first released to those chains using the Cosmos Hub’s Interchain Security before expanding the service to other chains. The revenue created via the Interchain Scheduler will be directed to the Cosmos Hub’s Treasury and used to support the Interchain Allocator and enable interchain activities.
2) Interchain Allocator
Revenues collected by the Cosmos Hub via the Interchain Scheduler are directed to the Treasury, and the Interchain Allocator coordinates the revenue. Though not specified in the Cosmos Hub whitepaper, the Treasury is expected to carry out the following roles.
1. Have the Cosmos Hub Treasury hold ATOM tokens as well as other protocol tokens (e.g., X Chain Treasury to hold ATOM and vice versa)
2. Leverage the Cosmos Hub Treasury to provide liquidity to stATOM AMM
3. Use the tokens held by the Allocator DAO to participate in other chain’s governance
The goal of the Interchain Allocator would be to streamline economic coordination across the Cosmos Hub and Cosmos ecosystem. The broader Cosmos ecosystem will add value to ATOM, enabling it to become the Cosmos ecosystem’s reserve currency.
<Source: Cosmos Hub Whitepaper>
3) Governance Stack
Finally, the whitepaper advocated for creating a governance structure called the Governance Stack, which would entail the creation of a Cosmos Hub Assembly that would work together with Cosmos Councils. The Assembly would be composed of representatives of these Councils, within which a variety of entities will work together to build a yearly roadmap on behalf of the Cosmos community’s strategic interests.
Upgrades Aim to Make ATOM the Reserve Currency of the Cosmos Ecosystem
The Cosmos Hub bills itself as the Internet of Blockchains that focuses on building an ecosystem composed of interoperable blockchains. The Cosmos ecosystem has seen rapid growth with inter-blockchains on the rise. Cosmos has attracted many blockchain projects seeking to build their own chains. In June 2022, dYdX, an orderbook DEX project based on Ethereum Layer 2, announced that it would launch its own chain called the “dYdX Chain” as it moves its blockchains to Cosmos. Com2uS, a South Korean mobile and online game development/publishing company, as also announced the launch of its new chain, XPLA mainnet. Leveraging IBC, Cosmos has the potential to become a highly interoperable app chain as there have been continued development efforts to upgrade interchain security aimed at strengthening interoperability.
ATOM 2.0’s newly refined vision has significant importance in that the Cosmos ecosystem’s growth will accrue substantial value to its native token, ATOM. The broader Cosmos ecosystem will drive the success of Cosmos chains and ultimately lead to the success of IBC economy, enabling ATOM to become the Cosmos ecosystem’s reserve currency.
Other Related Research Articles