ATOM 2.0

October 2022

On September 26, the co-founders and core contributors of the Cosmos ecosystem released an updated whitepaper. This paper outlines a fresh vision for where Cosmos is headed and a new economic model for the ATOM token, which is at the heart of the ecosystem. The paper specifies novel value accrual mechanisms for ATOM and introduces an innovative governance framework and vocabulary for talking about DAOs. This month we will dive into what this new vision is and review the key points laid out in the whitepaper.

The updated whitepaper starts with the bold statement that “The vision of the Cosmos Network has been realized”. This is true, the original whitepaper details the creation of a hub and spoke model of many blockchains communicating over IBC (Inter-Blockchain Communication). This model exists and Cosmos today has a vibrant set of sovereign blockchains that interact with each other, transferring tokens seamlessly through IBC.

With v1 of Cosmos complete, the Cosmos Hub needs a new role, and this role is “to grow a resilient interchain economy”. To unpack this statement, it helps to contrast Cosmos with Ethereum. If you listen to Ethereum core developers speak, they focus entirely on Ethereum as a base layer chain and focus on the security of the chain. This is Ethereum’s USP; it is a highly secure base chain and the idea is that value will accrue to this base layer. This is also known as the “fat protocol thesis”, with Ethereum as the “world computer” that is the ultimate settlement layer and single source of truth. It is telling that all the core engineers of Ethereum are fully focused on the protocol and are not themselves building applications.

Conversely, when you listen to Cosmos developers speak, they focus on the idea of application specific blockchains. Indeed, many of the core Cosmos engineers are themselves building applications using the Cosmos SDK. Every blockchain in Cosmos is its own settlement layer with value accruing to the applications. As an analogy, in the Web2 world, we have seen value accrue at the application layer to companies like Google and Amazon, and less so on the protocol layer to things like TCP/IP, HTTPS or to Internet Service Providers like AOL or CompuServe. The Cosmos model advocates not for a “world computer”, but for “community computers” that communicate with each other and are each their own applications and settlement layer.

The “interchain economy” refers to the constellation of app specific blockchains that exist in Cosmos. The role of the Cosmos Hub is to support these chains and provide infrastructure services. In Cosmos, chains can use the Cosmos SDK without touching The Hub. As a result, the Hub is forced to provide additional value to be relevant. The proposal in the updated whitepaper is that the Hub will have a layered architecture with 5 core areas of focus:

  1. Social Coordination Technology: the Cosmos Hub is the default home and coordination layer for the Cosmos SDK, Tendermint and IBC DAOs.
  2. Interchain Security: today every chain in Cosmos is required to assemble its own validator set to secure itself. Going forward, the Cosmos Hub will offer its security and validator set to new consumer chains, making it easier to launch chains on Cosmos. The ATOM token will secure many chains bringing further value to the token, as stakers will receive fees from every chain that is secured.
  3. Liquid Staking: going forward, secure infrastructure will enable staked assets to be represented by liquid tokens and used in DeFi.
  4. Interchain Scheduler: the Cosmos Hub will create a market for block space. This will provide opportunities for maximal extractable value (MEV), whereby groups take advantage of being able to pay fees to be sure to gain space in certain blocks. This will become a revenue source for the Cosmos Hub, something the Hub has previously never had.
  5. Interchain Allocator: with revenue received from the Interchain Scheduler, the Cosmos Hub will be able to allocate funds to new projects that will grow the ecosystem. The idea here is to create a flywheel effect with the Hub generating revenue and using these funds to bring more activity to the Hub to generate yet more revenue. As the whitepaper states: "The positive feedback loop between the Scheduler benefiting from increased interchain liquidity and the Allocator deploying capital to increase interchain liquidity gives the Hub asymmetric advantages relative to other liquidity providers."

To pay for these new initiatives and kick-start the new Cosmos vision, the Hub needs funding. There is around USD10m of ATOM in the community pool available to the Hub today. The updated whitepaper proposes a new monetary policy that will provide funding to the Hub. The ATOM inflation rate will increase significantly in the start-up phase, reducing gradually over 36 months to then hit a stead state of inflation at about 1% which is lower than the rate today.

So far, this radical change of inflation is a point of contention within the Cosmos community. Some ATOM holders feel that the high inflation rate to kick start the new vision is excessive and unwarranted. Others agree that it is needed and that the longer-term lower inflation rate counteracts the short-term high rate of inflation. What is true is that many layer 1 protocols have significant treasuries that vastly outweigh the treasury of the Cosmos Hub. Re-capitalising the Hub will address this and give the Hub the finances to carry out its plan.

The final portion of the whitepaper focuses on decentralized governance. Societies have spent centuries refining governance structures for companies. Blockchains have only been around for about a decade and the use of decentralized autonomous organisations (DAOs) is only just underway. The updated whitepaper offers a governance stack and structure for how multiple DAOs could be deployed on the Cosmos Hub to coordinate funding allocations. This focus on organizational governance is something that Ethan Buchman, the co-founder of Cosmos, is passionate about. He has written about it at length and his company, Informal Systems, has open-sourced their own language for managing workflows. With the end of the whitepaper focusing on decentralized governance, it feels as though Ethan and the team are once again peering into a future of their own design.

With the release of this updated whitepaper, Cosmos is moving in a new direction. For several years, critics have argued that ATOM was not designed to accrue value and that the value of the Cosmos SDK and technology stack were not being captured by ATOM holders. The new vision for Cosmos puts ATOM value accrual at the front and center, with the Cosmos Hub as a revenue generating blockchain at the heart of the ecosystem.

At CMCC Global, we are close with many of the Cosmos core engineers. We remain impressed by the original ideas, technical implementation, and overall dedication of the leaders in the Cosmos ecosystem. Cosmos is forging its own innovative way forward and is not looking at other projects for guidance. It is pushing the boundaries from a technical and economic design perspective. We have strong conviction that there is a bright future ahead for the ecosystem and see this new vision as a positive step towards that future.

The full whitepaper can be read here and Ethan Buchman has written a great blog on the Phases of Cosmos, that can be read here.

Charlie also spent time dissecting the whitepaper and posted his views on Twitter here.

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