Cosmos was once the king of interoperability thanks to its revolutionary Tendermint consensus mechanism and Inter-Blockchain Communication (IBC) standard. However, several years after its release, the Cosmos ecosystem has grown without needing the ATOM token. Let’s analyze the value proposition of ATOM, its newfound competitor Ethereum, and if the Cosmos ecosystem has a chance of ever taking off.
Cosmos was founded in 2016 by Jae Kwon and Ethan Buchman. They were part of the Tendermint team, which developed a software development kit that provides the core functionality of a blockchain, such as consensus and networking. The Cosmos SDK utilized Tendermint to create a modular framework that allows developers to build their blockchains with custom features and applications without starting from scratch. The SDK’s standardization also enables cross-chain communication through the Inter-Blockchain Communication (IBC) protocol, which allows different blockchains to transfer tokens and data with each other.
Initially, the value proposition for the Cosmos blockchain and its ATOM token was that it would be the hub in a hub-and-spoke blockchain model. Whenever a Cosmos SDK or IBC-enabled chain, called a Zone, transferred tokens to another Zone, they would use Cosmos as the bridge and pay fees in ATOM. At first glance, this proposition made a lot of sense, as it would allow Cosmos to be the secure bridge between the Zones and collect value in that manner.
Unfortunately, as the number of Cosmos SDK-based chains grew, the hype and value of ATOM did not follow. Some prominent projects like Binance Chain, Crypto.com, and the now-infamous Terra were built using Cosmos and Tendermint technology and dwarfed ATOM in market capitalization. Binance did not even bother integrating with the IBC and instead used Tendermint solely as the consensus mechanism. The growth of these chains had little-to-no effect on Cosmos. Yet other Zones, including Kava, Band Protocol, Evmos, and Injective, joined the ecosystem, and there was still hope for Cosmos to succeed.
When the Osmosis Zone was released in 2021, it was initially meant to be the decentralized exchange of the IBC. Naturally, this brought a lot of liquidity and volume to the chain, quickly becoming the de facto hub of activity in the Cosmos ecosystem. Since there was no strict requirement for bridging using Cosmos, Osmosis promptly became the hub of the ecosystem and inspired the idea of Zones simply bridging to other Zones instead of going through a hub. This realization created the staus quo we see today, where Cosmos, the project that made the majority of the technology, does not receive any benefits from the plethora of chains using it.
In an attempt to regain a value proposition in its ecosystem, ATOM 2.0 was announced in late 2022. The main feature of these new tokenomics is the creation of InterChain Security, meaning that new projects can “rent” security from ATOM by paying in the chain’s native token. This allows new projects not to worry about building a decentralized network, as they can rely on the time-tested network of ATOM validators while still having the sovereignty of their own chain.
Though this idea is exciting and novel, it has a massive new competitor: Ethereum. Indeed, the once-monolithic smart contract protocol has increasingly become more of a data availability layer than a compute engine, as Layer 2s execute computations off-chain and store the associated data on Ethereum. Even Solana, a competitor to Ethereum, announced plans to use it as their data availability layer to improve interoperability between the two chains and take advantage of the Ethereum network and security effects. This trend and the ability to easily create Layer 3s using Optimism and Arbitrum’s tooling directly challenge Cosmos’ ICS plans.
The future of Cosmos has never looked more uncertain. Even though Tendermind and IBC are revolutionary technologies that are the backbone of billions of dollars in blockchain value, Cosmos’ initial tokenomics failed to capitalize on its creation. The proliferation of ICS could bring more value back to Cosmos, yet many app-chains will likely choose Ethereum due to its significantly larger user base and liquidity potential. Though this is not financial advice and is merely for education, it makes much more sense to hold Cosmos than to buy it. On the other hand, for those who believe in the potential of ICS and the value of IBC, this could be a great buying opportunity for ATOM and other Cosmos ecosystem chains.
By Lincoln Murr