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🤔 What is Cosmos ?

Most of the blockchains like Etherium, Solana, Avalanche etc have been built in isolation. They are not interoperable. Users cannot move assets from one chain to other.

Cosmos blockchain plans to connect all the blockchains, just like stars and galaxies are bound together by the force of gravity. The project aims to create internet of blockchains where all the blockchains communicate with each other.

💡 What role does ATOM token play ?

ATOM is the native cryptocurrency of Cosmos. It plays following role:

  • Staking: Users can delegate their tokens to validators in return for a portion of block rewards.
  • Transaction fees: Users pay transactions fee in ATOM tokens for moving their crypto assets from one blockchain to another using Cosmos hub.
  • Governance: Token holders propose and vote on updates to Cosmos project.

📝 Origin of Cosmos

  • 2014: Developers Jae Kwon and Ethan Buchman co-founded the Cosmos network, creating Tendermint, the consensus algorithm that would go on to power Cosmos.
  • 2017:
    • Jae Kwon and Ethan Buchman founded interchain foundation, a Swiss nonprofit that held atom ICO raising 17 million dollars in the first 29 minutes of the initial Cosmos token sale.
  • 2018:  Game of Stakes is launched, which widely tested the Cosmos network for the first time.
  • 2019:
    • Project raised $9 million through Series A funding round.
    • Cosmos official mainnet was launched.
    • Kava labs becomes one of the first projects built using the Cosmos SDK to launch its mainnet.
    • Kwon and Buchman authored the Cosmos white paper.
  • 2020: Cosmos team splits: founder Jae Kwon steps down as CEO.
  • 2021: Cosmos launches Stargate, which includes the first public release of the Inter-Blockchain Communication (IBC) protocol.

👴🏻 Founders

Jay Kwon

  • Education:
    • 2001-2005: Studied Computer Science at Cornell University.
  • Experience:
    • 2005 – 2007: Worked as software engineer at Alexa Internet, where he:
      • Developed and maintained Alexa Web Search Platform, a platform for creating search engines.
      • Created Alexa Web Thumbnail Service, an API for generating thumbnail images of websites.
    • 2007 – 2009: Worked as lead mobile developer at Yelp, where he:
      • Lead the development of the Yelp iPhone app.
      • Did backend development for messages, search, & iPhone API.
    • 2009 – 2010: Worked as developer at Flywheel networks, where he managed a national Google AdWords campaign of hundreds of thousands of keywords. 
    • 2014: Founded Tendermint.
    • 2017: Founded Interchain Foundation, a non-profit based in Switzerland. Its purpose is to oversee the development of Cosmos project.

Ethan Buchman

  • Education:
    • 2010-2013: Completed Bachelor of Science from University of Guelph.
  • Experience:
    • 2014-2016: Worked as core developer at Eris Industries, a smart contract application platform.
    • 2016-2019: CTO at Tendermint.
    • 2017-2020: Vice president at Interchain Foundation.
    • 2020: CEO at Informal Systems, organization contributing to develop Cosmos project.

😌 What problems does it solve ?

  • Blockchains will benefit from trading with each other, just as countries and traders benefit from trade:
    • Availability of a greater variety of goods.
    • Efficiency and specialization.
    • Efficient allocation of resources
    • Innovation
    • Competitiveness etc.
  • Other blockchains like Etherium needs to accommodate all use cases. Hence it optimizes for the average use case. This results in developers having to make compromises on the design and efficiency of their application (for example, requiring use of the account model in a payments platform where a UTXO model may be preferred).
  • There are two groups of developers in other blockchains:
    • That work on the base layer and
    • Those who develop Dapps on the base layer

If there is a bug in the application, its developers cannot do much about it without the approval of the governance of the base layer. If the application requires a new feature in the base layer, it has to rely on the governance of the base layer to accept the updates.

  • Developers can use tools provided by Cosmos like Cosmos SDK, Agoric Swingset and CosmWasm to develop their custom blockchain in just a few steps.
  • Blockchains like Etherium, Solana, Avalanche etc are independently smart but collectively dumb. They cannot share data with each other. The projects and tokens built on a blockchain cannot be used on any other blockchains. This results in the value being fragmented in different silos that do not talk to each other.

As per Metcalfe’s law: The value of a network increases in proportion to square of the number of connected users.

The total value created by all the blockchains after getting interconnected will be manifold greater than the sum of individual values of each blockchains.

  • Users have to transfer their cryptocurrencies to a central exchange, sell their holdings to buy a cryptocurrency built on a different blockchain. Cosmos will allow developers to build decentralized exchanges where users will be able to directly exchange cryptocurrency from one blockchain with another cryptocurrency on a different blockchain.
  • Blockchain developers do not have to build bridges to every other blockchain to make their Blockchains interoperable with others. Developers can focus their time and energy in improving their blockchains, while Cosmos takes care of interoperability with all the other blockchains.
  • No trusted third party: Users are in control of their funds. The transfer of assets from one blockchain to other does not involve any middleman.

🤖 How does it work ?

Architecture

Cosmos architecture consists of 3 layers:

  • Networking layer: Makes sure that each node receives transactions.
  • Consensus layer: Makes sure that each node agrees on the same transactions to modify their local state.
  • Application layer: Processes transactions.

Interblockchain communication protocol(IBC)

IBC protocol enables separate blockchains to transfer tokens to one another. It works as follows:

  • Bonding: When the IBC transfer is initiated, the tokens are locked up on chain A. 

  • Proof relay: A proof that tokens have been bonded on chain A is passed to chain B.

  • Validation: The proof is verified on chain B, if it is valid, then corresponding tokens are created on chain B.

Note that the tokens that have been created on chain B are not real, as real tokens only exist on chain A. The tokens created on chain B are just the representation of tokens, along with a proof that these tokens have been frozen on chain A.

Hubs  and zones

IBC protocol allows two heterogeneous blockchains to transfer tokens to each other. From there, how do we create a network of blockchains?

One idea is to connect each blockchain in the network with every other via direct IBC connections. The main problem with this approach is that the number of connections in the network grows quadratically with the number of blockchains. If there are 100 blockchains in the network and each needs to maintain an IBC connection with every other, that is 4950 connections. This quickly gets out of hand.

To solve this, Cosmos proposes a modular architecture with two classes of blockchain:

  • Zones: Blockchains that support IBC protocol.
  • Hubs: Blockchains specifically designed to connect Zones together.

When a Zone creates an IBC connection with a Hub, it can automatically access (i.e. send to and receive from) every other Zone that is connected to it. As a result, each Zone only needs to establish a limited number of connections with a restricted set of Hubs.

 Hubs also prevent double-spending among Zones. This means that when a Zone receives a token from a Hub, it only needs to trust the origin Zone of this token and the Hub.

The first Hub launched in the Cosmos Network is the Cosmos Hub. The Cosmos Hub is a public delegated proof-of-stake blockchain whose native staking token is ATOM. The launch of the Hub also marks the launch of the Cosmos network.

Delegated proof of stake

Cosmos hub blockchain uses delegated proof-of-stake consensus mechanism. Cosmos blockchain can support a maximum of 125 validators. Top 125 validators, with maximum stake, are chosen to validate blocks. In return, they receive block rewards and transaction fees.

ATOM token holders can delegate their tokens to validators, to receive part of block rewards.

However, staking ATOM is not risk-free. If a validator has downtime or underperforms, a percentage of ATOM delegated to them may be forfeited. Hence, token holders have to deliberately choose validator to delegate their tokens based on:

  • Track record
  • Security setup
  • Self-bond
  • Commission, etc.

Peg zones

For blockchains that do not have fast-finality, like proof-of-work chains(for example Bitcoin), things get a bit trickier. For these chains, Cosmos uses a special kind of proxy chain called a peg-zone.

A peg-zone is a blockchain that tracks the state of another blockchain. The peg-zone itself has fast-finality and is therefore compatible with IBC. Its role is to establish finality for the blockchain it bridges.

Peg-Zone blockchain is customized for the particular chain they bridge. Building an Ethereum Peg-Zone is relatively simple because Ethereum is account-based and has smart contracts. However, building a Bitcoin Peg-Zone is a bit more challenging.

Cosmos SDK

Cosmos SDK is a generalized framework that simplifies the process of building secure blockchain applications on top of Tendermint BFT. It is based on two major principles:

  • Modularity: The goal of Cosmos SDK is to create an ecosystem that allows developers to easily spin up blockchains without having to code each bit of functionality from scratch. Additionally, developers can create new modules to customize their applications. As the Cosmos network develops, the ecosystem of SDK modules will expand, making it increasingly easier to develop complex blockchains.
  • Capabilities-based security: Capabilities constrain the security boundaries between modules, enabling developers to better reason about the composability of modules and limit the scope of malicious or unexpected interactions.

Cosmos SDK also comes with a set of useful developer tools for building like command-line interfaces (CLI), REST servers and a variety of other commonly used utility libraries.

Binance smart chain, Terra and crypto.com blockchains have been built using Cosmos SDK.

⚙️ Demo

  • Binance smart chain was built using Cosmos SDK.
  • Akash blockchain(peer-to-peer supercloud for serverless computing that provides developers with an open, secure, permissionless marketplace for unused compute cycles) was built using Cosmos SDK.
  • Kava is working with the Cosmos network to provide wallets, exchanges and blockchains with the liquidity and interoperability of Interledger technology.
  • Cosmos provides tools for developers to build blockchain quickly.
  • Cosmos allows blockchains to exchange tokens with other blockchains.

🏛️ Governance model

Cosmos project is governed by ATOM token holders. New proposals go through four different phases before either being accepted and executed or rejected:

  • Phase 1 – The Deposit Period:
    • Anyone can submit a text proposal to the system, but the proposal needs to be backed with a minimum deposit of 64 ATOMs within two weeks after the submission date to proceed into the voting phase.
    • This requirement is a protective measure against proposal spamming.
    •  The party submitting the proposal does not necessarily need to provide the deposit themselves, or in other words, any ATOM holder can contribute to this deposit to support the proposal. Contributors can reclaim their tokens once the proposal gets accepted or if it fails to reach the minimum threshold after two weeks.
  • Phase 2 – The Voting Period:
    • The deposit period ends once the proposal reaches the minimum deposit amount and a two-week-long voting period begins.
    •  There are four voting options (“Yes”, “No”, “No with Veto”, “Abstain”). During the voting process:
      • Only staked (bonded) tokens can participate in governance.
      • Voting power is measured in terms of stake. The amount of ATOMs staked determines the direct influence of the user on the decision-making process (coin voting).
      • Delegators inherit the vote of the validators they are delegated to unless they individually cast their vote, which will overwrite validator decisions.
  • Phase 3 – Tallying Results:
    • Following requirements need to be satisfied for a proposal to get a passing vote:
      • Quorum: More than 40% of the total staked tokens need to have participated in the vote.
      • Threshold: More than 50% of the tokens that participated in the vote (after excluding “Abstain” votes) need to have voted in favor of the proposal (“Yes”).
      • Veto: The number of votes cast for “No with Veto” shouldn’t be greater than 33.4% of the tokens that participated (after excluding “Abstain” votes).
    • The proposal gets rejected if one of these requirements is not met at the end of the voting period. And if a proposal fails to pass the vote for any reason, the deposited tokens associated with the submission are not refunded and instead transferred to the community pool.
  • Phase 4 – Implementing the Proposal:
    • Accepted proposals regarding protocol upgrades and network parameter modifications are integrated with a new version of Cosmos. Proposals regarding fund allocation, marketing activities, or any other decision that needs to be executed off-chain require additional operational management from the community.

Cosmos obliges each validator to vote on every proposal. Those who do not vote, get penalized by the protocol and their validator status gets deactivated for a predetermined period of time.

🤑 How much money does the project have for future development ?

  • The project raised $26 million in 3 funding rounds in 2017.
  • All in Bits Inc (Tendermint Inc.) received 10% of the initial supply equivalent to 23,619,895.81 ATOMs for developing the open-source IP that is used in Cosmos Network.
  • ICF received 10% of the initial supply equivalent to 23,619,895.81 to pursue their R&D activities for Web 3.0.

👍 Tailwinds

  • Strong ecosystem:
    • Large number of blockchain are being built using Cosmos SDK.
    • Many apps are being built using Cosmos hub.
  • Fulfills market demand: There is an unsatisfied market demand for exchanging crypto assets among different blockchains.
  • No competition: There are no major projects that are trying to connect all the blockchains.
  • Network effects: More blockchains would want to connect to Cosmos hub as the number of already connected blockchains increases. This positive feedback loop will cause exponential growth in a short period of time.

😨 Risks and challenges

  • Founding Team Broke Up: 10 engineers and researchers including Tendermint director Zaki Manian and company’s Director of Product, Jack Zampolin parted ways with the team in 2021.
  • Only 125 validators: The consensus mechanism used by Cosmos can only support 125 validators. This is quite limited and makes it vulnerable to centralization.
  • Cosmos and projects built using it are a direct threat to the current banking, government and legal system. Governments will resist and fight the change.

💰 Tokenomics

ATOM token had initial supply of 236,198,958.12 tokens which were distributed as follows:

  • Strategic and early adopters: 7.1%
  • Seed contributors: 5%
  • Public contributors: 67.9%
  • All in Bits Inc (Tendermint Inc.): 10%
  • ICF: 10%

The tokens will be released as follows:

Token Inflation

The annual inflation is capped between 7% and 20%. If more than 2/3 of the Atoms are being staked, atom block rewards decrease gradually down to a floor of 7% annualized inflation. If less than 1/3 of the Atoms are being staked, atom block rewards increase gradually up to a ceiling of 20% annualized inflation.

Demand pressure

Token’s price increases due to demand pressure.

Demand pressure on ATOM token will come from:

  • Staking: Users will acquire ATOM tokens to delegate/ become validators.
  • Transaction fees: Users will acquire ATOM tokens to pay transaction fees to execute their transactions.
  • Speculators: They will buy ATOM tokens for future price appreciation.

Supply pressure

Supply pressure on a token decreases its price.

Supply pressure on ATOM will come from:

  • Block reward: New ATOM tokens are minted and distributed as block rewards to validators for validating blocks.
  • Early investors: They have made a large profit on their initial investment. Some of them will sell their holding to realize gains.

Market opportunity

Interconnecting blockchains will unlock tremendous value in the crypto ecosystem. It will be interesting to see how much the value is accrued by the token used to govern such a project.

🧐 Indicators to watch out for

  • Number of inter blockchain transfers are growing:
  • Twitter account is growing:
  • YouTube channel is growing:

👋Final remarks

Cosmos aims to solve two of the major concerns limiting the growth of crypto industry:

  • Interconnecting blockchains
  • Making it easy for developers to build blockchains.

Investors planning to invest in ATOM token should keep following points in mind:

  • The token does not have a fixed max supply.
  • Inflation rate will fluctuate between 7 to 20%

Hence, investors must also delegate their tokens to avoid getting diluted.

😊 Do further research

You can continue your research by using following resources:

Further reading