Bart test - 23 March 2022
The Cosmos ecosystem
The crypto markets are gearing up and there has been a lot of attention on newer Layer 1 (L1) networks. In the past, we have covered Polkadot, NEAR, and Terra. Today, we shed light on another L1 blockchain called Cosmos. We think this project has the potential to grow significantly. This post will bring you up to speed on what Cosmos is and highlight some of its key characteristics.
First, we need to recap on what Layer 1s actually are. In essence, the term is used to describe the underlying main blockchain network and architecture. In common practice L1s is a term used for smart contract blockchain platforms on which developers can build and deploy codes that power decentralized applications.
The most well known and biggest Layer 1 on the market is Ethereum. ETH has a market capitalization of $560 bln and according to State of the dApps the network hosts over 3,700 dApps. Today, there are around 90k active users who made over 600,000 transactions in the past 24 hours. This number fluctuates a lot depending on market sentiment and conditions. The problem with Ethereum is the scalability and the fee. Its design can not handle this amount of transactions and often the network is clogged, which in return causes the transaction fees to be very high. Often users have to pay over $100 for simple transactions.
Those problems caused L1s to surge in both price and usage in the past year. Alternative chains became very popular as transactions which are less than a dollar. Those chains also offer the same opportunities as on Ethereum. The focus of the L1s is to offer better scalability.
One of those L1s is Cosmos and the team has come up with a very clever way to tackle the scalability issue. The developers of Cosmos developed the tech so other developers can easily build their own blockchain and customize it to their needs. The tech consists of two main components: Tendermint and the Cosmos SDK. Tendermint is the foundation and is a very secure and reliable Delegated Proof-of-Stake consensus algorithm. Cosmos SDK offers modules and precreated options to include in the blockchain architecture, so developers can fully customize their blockchain.
Over the past years a lot of tokens have been built with the Cosmos SDK. You can find a full list here. Currently 29 projects have been built using the Cosmos SDK and have a collective market cap of $175bln. It shows the power and popularity of the developer stack.
One of the options Tendermint-built blockchains can enable is known as the Inter-Blockchain Communication protocol (IBC). This allows the blockchains to communicate with each other and it is also where the true power of Cosmos lies. Interoperability has been a much discussed topic over the past year. Even though blockchain networks have surged in power and popularity, it is still not really possible to easily connect with one another. You have to use a bridge in order to transfer over digital assets from network to network. This is obsolete with IBC that makes all digital assets compatible on IBC-enabled blockchains.
Interoperability facilitates cross-chain asset transfers and economic activity. With IBC users and developers on one chain can easily access digital assets and blockchain protocols on other chains. This is essentially what Cosmos proposes. It is an extremely important feature, especially because Cosmos also supports the option to have private blockchains. This is something enterprises value highly as they want to have their transactions and activity private, but also want to make use of the different protocols that are publicly available.
Right now, there are a bunch of blockchains live in the Cosmos ecosystem. You can find them in the image below and monitor the dashboard for yourself on Map of Zones. Besides these projects there are teams working on applications and blockchain projects that have yet to go live. We expect a lot of growth in the Cosmos ecosystem over the coming years as it has great tech and high customizability, which is great for both developers and companies.
Improving tokenomics of ATOM
Currently, there is little utility to the ATOM token. This is the native token of Cosmos and is mainly used on the Cosmos Hub, the Cosmos blockchain, to pay for transactions and as collateral to secure the network. Even though the Cosmos network has expanded enormously, the ATOM token did not profit too much from it. However, there are some improvements coming for the token that could lift it in value and utility.
The first thing is interchain security or shared staking. Right now new blockchains have to set up their own validator set in order to properly run their chain. For starting and young projects this can be quite a hassle and very costly. With interchain security those newer projects can ‘lend’ the validator set from the Cosmos Hub and secure their network with the same security layer. This would lead to more transactions processed by ATOM validators, thus more staking rewards.
Scalability is a major problem on Ethereum, which is a major reason why we are currently seeing such a surge of adoption in other ecosystems. One of those L1 platforms is Cosmos that has been in development since 2016. Over the years the Cosmos team built great tech in the form of Tendermint and the Cosmos SDK. The tools are fully open source and allow developers to customize a blockchain to their needs and preferences.
Over the past two years a lot of blockchains went live on Cosmos, most notably Terra that we have covered in a previous blog post. We expect the Cosmos network to grow a lot in both additional networks as projects built on these networks. More activity inherently due to IBC means more value captured by the ATOM token. There are also talks about bringing more utility to the token in the form of interchain security which is a very cool feature and useful for young projects.
The Inter-Blockchain Communication protocol is a real game changer for the crypto industry. Right now, it is very costly to move assets across chains, but with IBC this becomes very easy and cheap.
These things make Cosmos attractive for builders, companies, and users. We think that the underlying token, ATOM, has a lot of growth potential. As the ecosystem grows in projects and activity, more value is captured by the token. Even with a market capitalization of $10 bln this token can still grow significantly over the coming years.