Cosmos ($ATOM) recently released a new whitepaper that provides a renewed roadmap for the “Internet of Blockchains.” The whitepaper, aka ATOM 2.0, goes through several key changes to the Cosmos Hub and details how they will impact the broader Cosmos ecosystem and $ATOM.
Cosmos’ vision from the very beginning was to build a constellation of Layer 1 chains that interact with one another: communicating, trading, and sharing features. These are often referred to as “appchains” since they’re Layer 1 blockchains custom-built for specific uses (e.g. DeFi, trading, privacy, etc).
This ‘hub and spoke’ model allows Cosmos applications to launch on their own unique chain and decreases costs while increasing throughput, thus optimizing UX. These appchains are connected to each via IBC, a generalized messaging protocol, while the Gravity bridge helps facilitate assets swaps cross-chain alongside IBC.
Cosmos’ new whitepaper builds on its already impressive tech by rolling out key changes to its security model and tokenomics. Perhaps most relevant to retail investors are the significant changes centered around $ATOM staking, which directly influences the ecosystem’s security.
Cosmos employs a shared security architecture called Interchain Security, which enables the reuse of the same validator set and staked collateral to secure additional state machines. New projects can develop as independent applications within the Cosmos Hub’s security boundary, while the Hub minimizes its security surface.
One of the big new features of ATOM 2.0 is liquid staking. Going forward, liquid staking providers will be the first users of Interchain Security, enabling ATOM holders to earn staking rewards while also using their ATOM to pursue other yield-bearing opportunities. Together, Interchain Security and Liquid Staking combine to create a more robust, secure base layer for projects in the Cosmos universe.
Another intriguing change in the whitepaper is ATOM’s new issuance schedule.
The new issuance proposal will drastically reduce issuance for staking, thus having liquid staking widely adopted is a critical first step to ensuring enough ATOM is staked and bonded.
The proposal aims to front-load funding a treasury comprised of ATOM. Issuance will start at 10M (~$130M at today’s prices) ATOM for the first month with 2/3 going to the treasury and 1/3 to security, with staking starting at roughly the same APR as it is today (19%). Monthly issuance will decline by 12%/month, settling at a perpetual rate of 300k ATOM/month (<1% inflation) after 36 months. The whitepaper set this at 300k/month going to the treasury, but pushback from the community appears to have shifted this issuance to stakers instead. At the end of 36 months (using the current proposal), ATOM supply will look as follows, with 85% in the hands of holders and 15% in the treasury.
You might be wondering: why would Cosmos want to create a giant treasury slush fund? Well, enter the Interchain Allocator, another key aspect of the ATOM 2.0 vision. The idea behind the Interchain Allocator is to turn the Hub into a decentralized VC fund of sorts and the ATOM token, by extension, into an IBC index play, offering ATOM investors exposure to the growth of the entire Cosmos ecosystem vs the indirect relationship they had pre-ATOM 2.0.
The Interchain Allocator aims to bootstrap liquidity across the Cosmos ecosystem by creating agreements between the Hub Treasury and protocols via covenants, thereby directly aligning new protocols’ success with that of the Hub. For example, this may take the form of token swaps, with an associated multi-year lock-up, where the Hub swaps its ATOM tokens with a new project for a portion of its initial supply.
This gives new projects ATOM in their treasuries (which should be less volatile than their native token) and also guarantees a portion of their tokens are long-term aligned (thanks to the multi-year token lock-up). At first glance, this last point may seem banal but it’s actually quite noteworthy.
One issue with Cosmos’ current ecosystem is the way in which projects attract users. Currently, the most popular user acquisition tool is for new projects to airdrop tokens to ATOM stakers. They do this to effectively buy goodwill within the ATOM community and simply write off the airdrops as a marketing expense. However, the downside is this strategy is the tokens are often dumped and the long-term incentives of the protocol and airdrop recipients are not aligned. The Interchain Allocator’s multi-year lockups essentially swap ATOM stakers (short-term, mercenary holders) for the Hub (long-term, incentive-aligned holders).
By helping Cosmos projects bootstrap treasury liquidity, the Interchain Allocator should bring the added benefits of: increasing the velocity of new Cosmos projects, accelerating projects’ growth trajectories, improving incentive alignment, and positioning ATOM as the undeniable reserve asset in the Cosmos ecosystem. New crypto projects often struggle to align the proper stakeholders early on in their lifecycle and the new Interchain Allocator architecture helps ensure Cosmos appchains have the most important parties by their side – the ATOM Hub itself.
The final big change ATOM 2.0 introduces is the Interchain Scheduler. The Scheduler monetizes IBC economic activity via a cross-chain blockspace market to make MEV more efficient and secure.
The Scheduler will tokenize future blockspace and enable an auction where users can bid on this space, which is tokenized in the form of an NFT. Cosmos app-chains may opt to enable the Scheduler module in their zone, forcing MEV Searchers to compete at auction for the value they extract. Revenue from the auction is split between the Cosmos Hub and the partner chain itself. The block space auction has the effect of redistributing MEV extracted through cross-chain arbitrage democratically amongst the Cosmos Hub, the partner chain, and users themselves. We recommend checking out the excellent Delphi Digital ATOM 2.0 research report for a more in-depth analysis of the specifics of the Interchain Scheduler.
There’s no doubt ATOM 2.0 represents a substantial overhaul to ATOM. Previously, the ATOM token was valued as a purely monetary asset, with no obvious ties to the rest of the ecosystem. Cynics may even argue ATOM’s price was driven entirely by speculation. However, ATOM 2.0 changes this. There are now three distinct pillars to ATOM’s value: money (reserve asset of the Cosmos ecosystem due to protocols holding ATOM in their treasuries), backing (quantifiable value behind ATOM due to Interchain token swaps, making ATOM a ‘decentralized VC’), and finally productivity (cash flows from Interchain Security, the Interchain Scheduler and Allocator profits). Combined, these pillars dramatically improve ATOM’s fundamentals.