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Cosmos (ATOM) Network – Deep Dive
Welcome to the second article of Layer 1 blockchain research series. In this piece, we talk about the Internet Blockchain, Cosmos!
Market Cap: $2,537,936,995
Fully Diluted: Non-detected
Volume (24h): $207,127,706
Circulating Supply: 286,370,297 ATOM
Total Supply: No limit
What is Cosmos (ATOM)?
The primary purpose of Cosmos is to provide realistic solutions to the weaknesses presented by typical Proof-of-Work (PoW) consensus mechanisms, such as slow speeds, high transaction fees, negative environmental impact, and limited scalability.
Back in 2014, Ethan Buchman and Jae Kwon built Cosmos, a blockchain network that operates with a proprietary Tendermint Byzantine Fault Tolerant (BFT) consensus algorithm, an SDK, and an Inter-Blockchain Communication protocol (IBC) that connects “Hub and Zone” blockchains in the Cosmos network. The IBC protocol plays a central role in the Cosmos network, allowing any blockchain (Zones) to communicate with one another via a greater, connective blockchain (Hub).
At the time of writing, ATOM, the native token of Cosmos, is worth approximately $15, with a total market cap of about $4.3B, ranking in at the #29th largest crypto on Coinmarketcap. In March of this year, the total value locked (TVL) of the Cosmos ecosystem was about $30.25B, putting Cosmos in the top ten blockchains ranked by TVL. Often compared to Polkadot for its similar functionality and focus on interoperability, Cosmos already has more Dapps in its ecosystem but maintains half the valuation of its counterpart. This is a strong signal for the potential of Cosmos to expand widely in the near future.
What Problems does Cosmos solve?
Cosmos is a Layer-1 blockchain, designed to solve three main problems present in most blockchain networks today:
Scalability: Ethereum faces transaction times that are too slow for certain real-life situations where time-to-finality is essential. This happens because its validator population is always occupied with validation activity required by the Dapps built on its Virtual Machine. Cosmos has figured out an efficient way to solve this issue through Zones (the blockchains on Cosmos), which are based on the Cosmos SDK.
Interoperability and the binding capability: Most blockchains typically cannot interact directly with each other; they actually require a special structure called a “bridge” to connect a blockchain to another. IBC was built to connect all blockchains in an easy way with low fees.
Usability and Sovereignty: With Cosmos SDK, the Cosmos network offers a developer-friendly environment for its ecosystem, which ultimately reduces the time duration and financial costs of continuous blockchain development.
Cosmos is able to address the aforementioned issues of other blockchains due, in part, to its Proof-of-Stake (PoS) consensus mechanism, known as Tendermint, which operates the blockchain through two main conduits: Validators and Delegators. In the initial phase of consensus, these operators are required to lock up a certain amount of ATOM in order to establish a node. The more tokens are locked up, the greater chance that an operator’s node will be chosen as the proposer of the subsequent block of transaction data – thus allowing the operator to harvest ATOM rewards. On the other hand, if misbehaviors by nodes are discovered, those node operators will lose their locked-up token stake. This “slashing” penalty functions in part to maintain security against malicious actors, otherwise known as a Sybil Resistance mechanism.
Cosmos Network has three main layers, each serving a unique function for the operation of the blockchain. At the top, we have the Application Layer, which sits above the Consensus Layer and the Networking Layer. This blockchain structure allows developers to build on the application level with a variety of commonly used programming languages like Java, C++, Python, etc. The support for these coding languages is coupled with the Cosmos SDK, which provides the framework for creating blockchains in the Cosmos network. Together, the versatile coding environment and standardized developer tools provide significant flexibility and convenience for builders, which will lend Cosmos to attracting more blockchain Dapps to build on its network in the near future.
In the construction of each layer, Cosmos uses three distinct technologies designed to optimize for scalability, security, and developer-friendliness.
Tendermint Core, developed by Jae Kwon, is the PoS consensus mechanism that is language agnostic and fast with regard to time to finality. It is Byzantine fault-tolerant (BFT) to up to ⅓ of malicious actors, so it provides secure consensus for a variety of applications in a scalable and expeditious manner. (Scalability)
Cosmos SDK is the blockchain framework that serves as both a library of modular blockchain application SDK’s for building Dapps and a communication tool that securely interacts with blockchain applications, allowing for quick and thorough application deployment. On the Tendermint website, now known as Ignite, the SDK has elicited a collection of blockchains that together manage $6B in assets across public blockchains. (Usability and Sovereignty)
The Inter-Blockchain Communication protocol (IBC) is an open-source interoperability protocol that allows for the relay of messages between independent, distributed ledgers. This means that many blockchain networks can utilize this solution for cross-chain communication without the use of bridges, which vary in terms of security. As of November 2021, IBC is utilized by 22 different networks, comprising a total of 1.5M transactions per month. (Interoperability solution)
By providing more powerful tools for developers, Cosmos may receive a new influx of apps and money into its ecosystem as developers continue to drive more value with Tendermint, Cosmos SDK, and IBC as their vehicles. Coupled with low transaction fees (~$0.0x) and high transactions per second (~1400 TPS) – notably greater than the 1000 TPS of Polkadot, these Cosmos modules provide a launchpad for future innovation across multiple blockchain networks.
One of Cosmos’ chief value propositions is seamless communication and data transfer among blockchains in the Hub, the central blockchain connecting various other blockchains, known as Zones. Cosmos is certainly fulfilling this vision, being home today to more than 265 apps and services and integrating a number of independent, well-known blockchains like Terra, Binance Smart Chain, and Crypto.com (Cronos). In addition, Cosmos supports 35 different wallets (Web wallets and mobile wallets) in their ecosystem that allows users to easily approach its applications. In total, Cosmos secures around $93.43B in digital assets, which certainly goes to show the development its witnessed thus far.
Achievements of Cosmos Network in 2021
Juno Network, a smart contract based on the Cosmos SDK and Tendermint protocol, deployed successfully on the mainnet
Kava Network, a Layer-1 co-chain comprised of Cosmos and Ethereum, developed rapidly after launching its Kavaswap, Ethereum Bridge, and Kava ecosystem fund.
Secret Network, a blockchain-focused entirely on customizable privacy, showed strong growth with the release of its improved Supernova, an upgrade to the mainnet.
IBC was released in April 2021, enabling the interoperability between internal blockchains for which Cosmos is so well-known. Currently, IBC-enabled blockchains see a trading volume of around $135M per day, with more than 100,000 IBC daily transfers.
In addition to the increased transaction volume, IBC's unique number of users also increased significantly month by month. The majority of these users are found utilizing decentralized exchanges (DEX), such as Osmosis, Sifchain, GravityDEX, etc.
Octopus Network, an IBC compatible bridge that connects NEAR Protocol to Cosmos, launched this year.
Cosmos collaborated with Celo to create a bridge, sharing value, users, and resources across both ecosystems, eliciting greater synergistic development between the two.
The Puzzle Pieces of Cosmos
According to big ventures’ data in 2021, Throughout 2021, many reputable VCs have demonstrated prolonged interest and focus on the development of prominent projects. They are as follows:
Multicoin: THORchain, Kadena
Paradigm: Cosmos, Osmosis
Hashed: Terra, Cosmos, Vega, Injective, Secret Network
Delphi: Terra, THORchain
Coinbase: Terra, Vega, Umee
Spartan: Secret, Band, Persistence, PStake
Binance Lab: Celer, Terra, Kava
Alameda Research: Sifchain, Umee, Persistence, PStake
Upon the release of IBC, Cosmos Hub quickly developed two noteworthy projects to promote the development of the ecosystem: Osmosis and Emeris.
Core Team, Investors & Partners
A core team of Cosmos (Source: https://gfsblockchain.com/he-sinh-thai-cosmos-atom.html)
The development of Cosmos was led by the co-founders of Tendermint Jae Kwon, Zarko Milosevic, and Ethan Buchman. Up to now, Peng Zhong is appointed to operate Cosmos and replace Jae Kwon.
Jae Kwon is the CEO and founder of Tendermint, who is a co-founder of “I done this” - a collaboration tool for teams and personal users. Furthermore, he also has more contributions to Scramble.io, Flywheel Network, and Yelp. In 2020, Kwon announced that he retired but was still a part of Terra.
Ethan Buchman is the CTO and co-founder of Terra
Zarko Milosevic is the CTO at Informal Systems (the core team developer of Cosmos)
Token Allocation & Vesting Schedule
The allocation is heavily skewed toward public investors (67.9%), which partly reflects the intention of the Cosmos project to put its community first. Currently, validators have locked around 183M/ 297M (62%) circulating supply of ATOM, approximately $3.8B. This amount of token staked is relatively high compared to the 57% stake of a similar project, Polkadot.
Roadmap and Updates
Cosmos’ roadmap for 2022 can be summarized around two distinct major infrastructural updates.
Interchain Security (Shared Security): One factor that affects the development of any ecosystem is its attack-resistance mechanism to ward off hackers. In Proof-of-Work mechanisms (PoW), blockchains are protected by miners who consume energy to run powerful hardware that can compute and create new blocks. In this consensus model, the increasing difficulty of eliciting these blocks’ hash rates is what provides security against hackers. With Proof-of-Stake, validators are a crucial part of network protection, but smaller projects may struggle to acquire a robust set of validators. Interchain Security is a solution from Cosmos to deal with this issue. It allows bigger projects to share their validation nodes with the smaller ones in the network. In practice, validators from one chain (the security provider) can conduct validation on another (the security consumer). Any misbehavior evident on the security consumer’s chain will result in slashing penalties against the malicious validators of the security provider’s chain. In this way, huge projects on the Cosmos Hub will be able to share their security with smaller chains in their nascent stages.
Interchain Security is currently being developed by the Interchain Foundation and Informal Systems. Along with improving the security of new projects, Interchain Security also offers more benefits for validators and delegators to earn rewards on multiple chains in the form of multiple native tokens just by staking ATOM on the Hub. Moving forward, the more chains that are compatible with IBC, the more chances validators and delegators will have to receive the native tokens of early-stage projects, thus increasing the utility of their ATOM.
Liquid Staking: Liquid staking is essentially the tokenization of staking assets, which can be traded, lent, and borrowed to help users optimize their profits without selling their assets. For example, a user can deposit ETH for Lido, and the user will receive stETH and a block reward. After that, stETH can be used for trading, lending, or as a collateral asset for borrowing.
V1 of Liquid Staking will allow ATOM holders to convert their bonded ATOM into transferable assets that can be used in liquidity pools or as collateral assets in lending and borrowing activities, and more. This, in turn, will promote a greater influx of capital into DeFi projects in the ecosystem as well as allow ATOM holders to maximize their ATOM while still earning staking rewards from delegation and validation.
Is ATOM a Good Investment?
Cosmos is a creative project that could change the vision of blockchains in the future. Specifically, Cosmos truly brings the value of interoperability to the forefront of the conversation, creating an interest among users, projects, and investors to leverage the resources and communication that interoperable networks provide.
Furthermore, Cosmos is used by many prominent blockchains such as Binance Chain, Terra, Crypto.com, and Thorchain, so its adoption is certainly rapid
Market Cap (May 2022): $3,921,833,893
Current Supply: 297,670,000
Max Supply: No fixed total supply
Inflation/Year (2022): 11.52% (minimum 7% and maximum 20%)
Vesting Period: Completed
Staking Yield: ~15%
The staking yield is currently approximately 15% according to AtomScan. While this is an attractive yield, this statistic is also indicative of the inflation rate of ATOM in circulation. With a high staking yield, ATOM may experience greater selling pressure down the road.
To have a deeper insight into staking yield and the effective profit of any ATOM investment, the calculations below demonstrate happened with ATOM during the first half of 2022.
To calculate the effective reward rate of ATOM:
Effective Reward Rate = ((100% - Commission Rate%) * Yield Rate) - Inflation
With a validator that charges a 10% commission rate, the effective reward rate for a delegator would be ((1-0.1) * 15) - 11.52 = 1.98% a year in ATOMs
This calculation demonstrates that users only actually receive a yield of around 1.98%, which is significantly lower than the 15% yield advertised for the project. Its yield is relatively higher than AVAX with a -17.3% due to its high 25.95% inflation rate. In this sense, ATOM demonstrates a greater ability to control inflation at an acceptable level.
To calculate effective profit in FIAT (USD)
The price of ATOM in early 2022 was $28 and is currently $9.50, which is a 66% decrease. The yearly reward yield is 15% so in profit terms 15 - 66 = - 51%
The profit in USD = a loss of 51% in USD
To calculate effective profit in BTC
The early 2022 price of ATOM is 0.00072 BTC, as of the time of this writing they are now 0.0003 BTC, which is a decrease of 58.33%.
The profit in BTC = Reward Rate + Change in Price per ATOM in BTC over a year
The profit in BTC = 15 - 58.33 = a loss of 43.33% in BTC
As is evident, ATOM’s price has dropped to ⅕ of its ATH at $45. However, as mentioned above, ATOM still provides an actualized yield of almost 2%, along with a lot of upside potential in the long term.
External ATOM Ecosystem
Regarding other aspects of Cosmos, ATOM demonstrates healthy performance for investors.
According to Coinmarketcap, the market cap of ATOM is relatively lower, only ⅓ of both AVAX and Polkadot. However, the values Cosmos provides for users are no less than two competitors, so there is greater potential for upside.
Total Value Locked (TVL)
According to Defillama, the TVL of ATOM is only slightly lower than the TVL of AVAX and significantly higher than that of Polkadot.
Dapp Ecosystem Size
C98 Analysis disclosed that the number of apps built on ATOM and AVAX increased sharply at the end of 2021 and early 2022. AVAX and ATOM both demonstrate a developer-friendly environment where applications can be developed conveniently and create more value for users.
After comparing these three heterogenous blockchain projects, it is evident that ATOM has more opportunity to increase in price than others at its current market price. (Not financial advice)
However, there are some disadvantages that this project maintains that could minimize the upside of its token value. These include the required lock duration for staking ATOM, which is a minimum of 3 weeks, and authorized staking leads to ATOM, which may be wrong while validators perform their duties. Furthermore, there is too much competition from tens of thousands of other cryptocurrencies.
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