Reconstructing the ATOM: What’s Next for the Cosmos Hub?
Despite Cosmos’ tech stack being the bedrock for some of crypto’s most innovative and popular blockchains, the Cosmos Hub and its token, ATOM, have not been as integral to the ecosystem as originally planned. However, thanks to ongoing and upcoming alterations in the chains architecture that should add utility to the ATOM, that should soon change.
When originally architected, the Cosmos Hub was intended to be the apex of the Cosmos ecosystem, facilitating the transfer of arbitrary data and consensus info and allowing liquidity to flow seamlessly throughout the entire Inter-Blockchain Communication (IBC) sphere. But in the midst of multiple networks quickly maturing and attracting both users and capital, Cosmos Hub has not fulfilled or met its original purpose.
Additionally, the Hub’s native token, ATOM, has been criticized for both its lack of utility and its failure to capture much of the value generated in the burgeoning ecosystem.
Recent and upcoming upgrades, including interchain staking, IBC-routing, seamless access to IBC chains, and liquidity farming incentives should radically increase the Hub’s significance, driving greater adoption of the ATOM.
Branches of the Cosmos
Since launching in 2019, Cosmos’s proof of stake consensus algorithm, Tendermint Core, and its software developer kit, Cosmos SDK, have been utilized by a swath of developers to build and deploy new blockchain networks. 21 Cosmos-built chains are already interoperable, including the interchain decentralized exchange network Thorchain, the stable coin network Terra, the lending platform Kava, the privacy-focused smart contract platform Secret Network, and the oracle chain Band, and more networks are constantly being added.
Historically, Cosmos chains, which are more often than not application-specific and therefore commonly known as “app chains” have operated independently of the Cosmos Hub, the foundational chain that was developed by the same team behind Tendermint and SDK. But thanks to InterBlockchain Communication (IBC) going live in February of 2021, the networks that have enabled IBC can trade data and tokens, meaning information and liquidity is no longer siloed on single chains but can now flow within the ecosystem. IBC represented the first step towards an interoperable, robust, and flexible Cosmos ecosystem – the next step in that process entails boosting the Hub.
The original vision for Cosmos and Cosmos Hub entailed one network composed of many different app chains; at the center of these chains would be various Hubs, which would reduce friction and offer efficient interoperability between chains. Again, IBC was the first step towards making the Cosmos-powered chains interoperable. Proposal #56, which was overwhelmingly passed in September, is the next step in that original vision. Once implemented, it will make the Hub the apex router for all networks within the ecosystem, generating value for both app chains and ATOM stakeholders. The proposal, which is slated for a December implementation in the Vega Upgrade, reasserts the centrality of ATOM and enhances its utility to the protocol. while also creating more seamless connections and growth for the entire ecosystem.
Chains Planning to Implement IBC
Cosmos Hub, Secret Network, IRISnet, Akash, Crypto.com, Persistence, Regen Network, Sentinel, Osmosis, Starname, SifChain, Terra, Band
Switcheo, HBTC, Thorchain, Althea, Microtick, LikeCoin, Kava, Cyper, E-money, Commercio, Fetch.ai, et al.
The total market cap of all chains built with Cosmos SDK summed together is roughly $178bn, making the aggregated ecosystem worth more than any smart contract platform other than Ethereum. As showcased in the data below not even $50 billion of the overall $178bn Cosmos ecosystem has integrated with IBC. Among those that have integrated with the IBC, ATOM’s share has declined while Terra and Secret Network have witnessed rapid adoption.
What Cosmos Proposal #56 Accomplishes
The Hub will offer Interchain Routing as a service. While IBC has been successful, new chains face issues. Namely, they must maintain counterparty archival nodes and relayers for every network they want to be interoperable with. Instead of having every chain build infrastructure, Proposal #56 would make Cosmos Hub the routing engine for IBC networks by offering Interchain Routing, whereby “multi-hop packet routing [of] ISC20 transfers” would be supported by the Hub.
It generates value for $ATOM stakers. Proposal #56 adds a fee that will indirectly be routed to $ATOM stakers. While the fee will initially be set to zero (to encourage adoption), a later governance proposal is expected to set a positive fee amount, incentivizing stakers by routing protocol revenue to them.
It gives other chains alternatives. Chains are still free to create their own chain-to-chain bridges, but the launch of the Hub gives developers and users more optionality, generating a positive feedback loop whereby liquidity, utility, and information are more easily ported and thus shared with counterparty chains.
Into the Cosmos
Unlike Ethereum, which takes a one chain (e.g. one set of protocol parameters) fits all approach to building applications, Cosmos utilizes a hub and spoke model whereby various “zones” (app chains) are connected via the Hub and communicate via IBC.
Cosmos chains are built with SDK, which gives developers a flexible framework to quickly build new app-specific networks. Unlike Ethereum, in which all applications are restricted to rules set on one chain (and therefore dependent on said chain for security), Cosmos’s approach allows for the quick development and deployment of robust and independent chains that have their own security and validator set. In essence, SDK enables devs to pick which Cosmos building blocks to include, making development fast, robust, and more convenient than building within a chain’s existing parameters.
Notably, Cosmos’s growth is not restricted to networks built with SDK. Like other networks, including Ethereum and Bitcoin, app chains can be connected via bridges and peg-ins (however, it is important to note that connecting to chains built outside the SDK-Tendermint framework is inherently more complex). Moreover, Cosmos developers, thanks to the spoke and hub topology of the ecosystem, can program applications in any language (including Solidity) and still connect with the IBC network. An Ethereum bridge (Gravity Bridge) is expected to go live late in 2021, enabling tokens to be sent back and forth between Ethereum and Cosmos, and support for other heterogeneous chains, like Polkadot and Celo, is in the works. Additionally, the ecosystem itself has an SDK-built platform called Ethermint that’s capable of running EVM dapps.
Put simply, this means the chain’s parameters are both inherently flexible and robust. Building an interoperable app chain with one specific purpose is optimally convenient and secure, while chains can still maintain their independence from the Hub’s and other app chains’ validation processes, meaning a failure in one zone or of a hub itself will not affect the other networks connected to it. This stands in stark contrast to networks like Ethereum or Solana in which decentralized applications are entirely reliant on base-layer security and consensus.
At the center of this flexibility and robustness is the Hub. While developers can build chain-to-chain bridges, building a bridge between every app chain is a process that grows quadratically, meaning it takes far more effort to build network-to-network bridges than simply having a few communication hubs. Additionally, instead of separate chains needing to maintain archival nodes and relayers to validate counterparty chains, chains can instead utilize the existing infrastructure of the Cosmos Hub. In a method analogous to a lighthouse guiding ships, the Hub can provide the interoperability, security, and information the various chains need, allowing any IBC-compatible network to be quickly built and quickly interoperable with a growing set of already app chains.
Enter the ATOM
While the implementation of Proposal #56 in the aforementioned Vega upgrade is certainly exciting for the Hub and ATOM, it’s not the only utility the token currently has today or, more importantly, will get in the future. The token is already the base for gas fees, payments, and swaps on the Hub and it is the base asset for the cross-chain Gravity decentralized exchange (DEX) which went live in July’s Delta upgrade. While the Gravity DEX is facing some in-house competition for the ecosystem’s dedicated DEX chain Osmosis and is still in Beta, the DEX looks poised to hold its own and offer Cosmos users greater optionality. Moreover, thanks to another recently passed upgrade, Proposal #58, the Hub should soon launch ATOM-based farming incentives for the Gravity DEX, putting it on an even playing field with Osmosis.
Since the launch of the COMP token on Ethereum and the subsequent mania, last year now known as “DeFi Summer,” liquidity incentives like farming have been instrumental for DeFi applications in accelerating adoption and bootstrapping a user base. While farming is limited in that protocols are ultimately renting “mercenary capital” that can quickly migrate to other protocols or platforms, at least a chunk of users tend to stick around for longer periods of time, showing that farming incentives can be effective at establishing a core base of users. Like the revenue generated from Proposal #56, these incentives are nascent to the Hub. With an already live DEX seeing flows, these additional incentives should make ATOM more productive and increase adoption.
Most importantly for the Hub, and what some are calling its wild card against potential IBC routing competitors, however, is the launching of the long-awaited Interchain Staking service. Interchain Staking will let new app chains stake ATOM (and utilize other parts of the Cosmos tech stack) and thereby rely on the Cosmos Hub base layer for validation, consensus, and security if they choose. In turn, this service, which will give developers and users even more engineering and operational runway, will increase the ATOM token’s utility. Notably, both the Gravity DEX and Gravity bridge, once Interchain Staking is live, might migrate from the Hub main chain and begin their own development cycles.
In addition to advancing the ATOM’s utility, Cosmos devs are pursuing their stated goal of interoperability and connectedness with the Emeris, a cross-chain and non-custodial interface that makes swapping between chains quickly and easily. Emeris is still in Beta, but it already supports the Gravity DEX and several app chains including Osmosis. Going forward, a simple but key catalyst for the Hub’s and the ecosystem’s success will be convenience – users and hence capital often follow the path of the least resistance. Emeris, by substantially lowering the hurdles of operating in an ecosystem made up of multiple chains, should help leapfrog Cosmos adoption once it is fully live.
The impending upgrades, while representing major improvements in the Hub’s and the ATOM’s utility, are just the first on the horizon. Cosmos’s already successful developer team is building for an interchain, interoperable future. Additional upgrades should come to fruition sometime in 2022 that should add to this vision in coming about. These include meta-transactions (separate accounts sign transactions), interchain accounts (access all of Cosmos through one account hosted on the Hub), and staking derivatives (staked ATOM can be made liquid via derivatives). To read the full list of proposed upgrades see the Cosmos Hub Roadmap 2.0.
While the sovereignty and composability of app chains are beneficial, running applications on siloed networks and connecting them through a Hub does have consequences. Namely, chains must compose their own validation networks, which is more difficult than simply building a dapp on Ethereum or Solana and running ETH or SOL validators to handle security and consensus. However, the launch of Interchain Staking on the Hub should make crafting app chains much easier, granting more composability than building within base layer parameters. In combination with the Vega Upgrade, which should implement Proposal #56’s fee capture, and the eventual implementation of Proposal #58’s farming incentives, the Cosmos Hub looks poised for another bang.
While competition from other IBC hubs is inevitable (and in fact arguably here with the ultra-composable Osmosis DEX), the Cosmos Hub’s offering of Interchain Staking gives it a unique moat to ward off would-be competitors. Moreover, this competition, while possibly drawing users and capital away from the Hub, also makes the Cosmos ecosystem more robust, meaning the whole system should only expand, which could still indirectly lead to more adoption of the Hub.
In summary, several upcoming catalysts for the Cosmos Hub and its ecosystem will enhance ATOM’s utility to the protocol:
Revenue generated from offering IBC routing as a service.
Interchain Staking app chains to launch and host apps without the hurdle of crafting their own validator set.
ATOM farming incentives on the Gravity DEX incentivizing adoption.
Non-custodial interfaces like Emeris and interchain accounts will make the Hub and therefore its token, the base for transacting across Cosmos’s network of networks
As the number and popularity of blockchain networks continue to expand, a likely outcome is one world network composed of multiple interoperable chains. As an easy-to-use, secure, composable, and popular tech stack, Cosmos SDK, IBC, and Tendermint have a solid chance of becoming the standard for interoperability. And as the primary router for an increasing number of chains utilizing IBC, the Cosmos Hub and its token look poised, for the first time ever, to be a major catalyst of that growth.