Recently in Cosmoverse, an event that happened in Medellin, the whitepaper for ATOM 2.0 was presented. A new token economics was introduced alongside new features, thereby creating the wireframe of how the future of Cosmos can look with ATOM 2.0, and its implications for the future of this ecosystem.
This piece aims to simplify that whitepaper, and dive into how this set of upgrades aims to strengthen Cosmos’ position as the Internet of Blockchains, and what the future might look like.
But first, let’s dive really quickly into the history of Cosmos and how ATOM 2.0 came about.
Quick note: This section below is a quick dive, not a technical one, so if you want to learn everything you need to know about Cosmos before this new whitepaper, you can head over here to read more about it.
The birth of connectivity: Exploration
In 2016, Cosmos Network was envisioned to become the Internet of Blockchains using secure software stacks, to build and connect application-specific blockchains. Many blockchains back then were simply siloed, thus causing fragmented communities and liquidity.
In the following years, Cosmos has since had a leap of development to support its initial vision, with various open-source tech stacks that are now fundamental to how Cosmos operates — Mainly Tendermint, Cosmos SDK, IBC — and used by a thriving community of sovereign individual communities and blockchains that are used for various app-specific functions.
However, despite Cosmos’ technological advancement and thriving community, this has not really reflected in its valuation when compared to other blockchains that are similar in nature, and the Hub had almost little to no direct value accrual when their tech stack was being used.
This phase can be considered as the exploration phase of Cosmos or known as Initiation as referenced by Ethan’s article, where different tribes of builders were experimenting with this new novel tech stack and pushing the boundaries of what can be — from integrating EVM with the IBC layer to making DeFi fully interconnected — with Cosmos.
As of now, there are 49 zones (or sovereign blockchains) connected with IBC, with a combined monthly transaction volume of 1B and it is expected that about 200 zones will be connected via IBC by the end of 2022.
Setting the table for Expansion
With the introduction of the new Cosmos whitepaper, the Hub aims to expand the reach of its vision and be the center (… or the Hub) for stewarding Interchain coordination, while remaining economically sustainable and secure, through its layered architecture.
Building upon the OG tech stack of Cosmos (Tendermint, IBC & Cosmos SDK), the new upgrades that are upcoming will be (1) Interchain Security, (2) Liquid Staking, (3) Interchain Scheduler, and (4) Interchain Allocator.
1: Securing Cosmos with Interchain Security & Liquid Staking
Interchain Security and Liquid Staking both aims to create a secure base layer for newer projects to build upon and expand on Cosmos’ vision while allowing the Hub to be secure while scaling in tandem with its economy.
Liquid Staking solves the dilemma of having to think about either staking ATOM to secure the Hub while getting rewards or making their ATOM liquid to capture opportunities and make their ATOM capital efficient.
Currently, 66% of ATOM is bonded or staked (as of writing), and with Liquid Staking in mind — especially with app-specific blockchains such as Stride and Quicksilver close to launching — we will most likely see an increase in this staking ratio.
What this also means is that there will be lesser ATOM inflation as the staked % increases (If the staked % was smaller, the Hub would have needed to accelerate issuance to make subsidizing Cosmos’ security attractive, as compared to deploying this ATOM elsewhere).
Interchain Security allows the Hub to secure consumer chains and delegate some of the core functionalities of the Hub to these consumer chains.
This abstracts away one of the hardest parts of building a chain as it gives consumer chains a faster, easier and cheaper path to market while remaining secure, as compared to needing to scramble and find their own validator sets to secure their chains starting from scratch.
Consumers chains will be launching in early 2023, and the chains that are confirmed to be coming (as of writing) and secured by Interchain Security include:
- Stride and Quicksilver — Liquid Staking for the Interchain
- Simply Staking — Governance-driven on-chain ETFs
- Fair Block — Risk Mitigation MEV
- Neutron — Permisionless Smart Contract platform for the Interchain, with the first set of contracts to cover Liquid Staking.
- Circle — Native USDC on-chain in Cosmos
Personally, I believe that more use-cases and more chains will come as Interchain Security expands itself and becomes more robust, leading up to very interesting use-cases after Interchain Security v3, such as “mesh-security” as described by Sunny in his speech during Cosmoverse.
For the full breakdown of Mesh Security, this tweet thread by Emperor Osmo gives a very good detailing of Sunny’s speech.
Mesh Security — apart from just allowing validators to secure their own chains — allows subsets of validators to secure other chains. When propagated, this will then create a mesh-like network of security, similar to the diagram above, except that when it goes live, it will be a mesh of 100s of sovereign chains, each securing their own chains and getting secured by subsets of validators from other sovereign chains.
This mesh-like network is akin to the North Atlantic Treaty Organization (NATO), where a network of sovereign nation-states provides security to each other, and all with their own set of governance and rules.
In the end, the goal of Interchain Security is to avoid centralization and to seek consensus among the Interchain. This quote from David Clark, who is an internet pioneer, brings it home.
“We reject kings, presidents, and voting. We believe in rough consensus and running code.”
2: Scaling the Economy with Interchain Scheduler and Allocator
However, focusing on security alone won’t cut it.
The economic engine of Cosmos cannot expand at a rate equivalent to the growth of its security if there are no economic engines that can support this expansion. This would render Liquid Staking and Interchain Security useless as it would be akin to renting a full security team for a trip to the minimart that is only 25 meters away.
This is where the Interchain Scheduler and Interhchain Allocator that is defined in the whitepaper comes into play: To drive the growth of Cosmos.
The Interchain Scheduler is a marketplace for tokenized cross-chain blockspace. This marketplace, or scheduler, will be available for Interchain Security consumers of the Hub first, as they are looking for secure initial deployment. The end intention of this is to expand so that the Scheduler can become the primary venue for future interchain block space.
But what is blockspace, and how does it fit into the whole picture?
In a typical PoS setting, you have your users (who send transactions), the mempool (which is the staging area for transactions), your validators, and block producers (in Cosmos these two are used interchangeably).
Blockspace is a commodity because it has a time-value to it due to the fact that the sizes of blocks are capped and there is a limited number of transactions that can go through at a given time.
Say your transaction to swap a particular asset remains unconfirmed for a period of time, and you’ll get front run by arbitrage bots. Have a multi-transaction fail in the middle of executing… and well, you now have a failed arbitrage opportunity that you can only hope will not be taken up by another user or bot.
Because of this reason, there is an off-chain market for blockspace that exists, known as the MEV market which is possible through something called the MEV relay networks. This allows for the submission of private transactions, and enables more expressive and efficient execution of user intent with protective capabilities such as front-running protection, multi-transaction bundling, failed transaction prevention, and transaction sequence priority.
However, this particular market is prime for monopolization as the assurances of the MEV relay network are only as strong as the number of validators running this modified software, and the functionality of this network rests on the trusted relationships between validators, MEV relays, and the builders. Furthermore, the fees generated by the MEV markets are only shared by validators and clients directing the order flow, which keeps the protocols and token holders out of the value equation.
This is where the Interchain Scheduler comes into play.
The Interchain Scheduler will be bringing this MEV market on-chain, only possible through the latest ABCI++ upgrade.
The Scheduler system works with consumer chains that have enabled the module by allowing these chains to provide a portion of their blockspace via a cross-chain contract, after which, the scheduler will issue non-fungible token reservations to represent future block regions on the chains.
These token reservations are then periodically auctioned in batches, or optionally traded on the secondary market. And after the block is executed successfully, the proceeds from the auction will be sent back to the partner chain.
Thus, apart from offering trust-minimization in offering guarantees for future block regions, by bringing this market on-chain, the Scheduler also allows for the internal regulation of the blockspace markets by the chains themselves and provides a transparent and fair system to include the protocols and token holders in the value equation in this MEV market.
The Interchain Allocator aims to provide new Cosmos projects with a more efficient path toward user acquisition, liquidity, and ecosystem alignment by introducing two tools: Covenant and Rebalancer.
Covenant: The covenant allows chains and IBC-enabled entities to establish multilateral agreements, with the main goal to streamline Interchain coordination with as little as a single action by the parties involved.
Rebalancer: The rebalancer allows the execution of third-party capital allocation strategies for liquid assets. It takes into account the (1) current portfolio, (2) target portfolio, and (3) exchange policy.
3: A stronger ATOM for the Interchain reserve currency
With that, a new set of economics for ATOM tokens will come into play to support the ecosystem's growth. In the past iteration of ATOM tokenomics, the monetary policy of ATOMs was mainly used to subsidize security at an expense of lower liquidity (ie. If the staking ratio fell below a certain percentage, issuance will increase staking rewards)
However, with the introduction of increased security through liquid staking and Interchain Security, alongside its economic engine, the ATOMs now will be used to support the growth of the Interchain.
But first, where will the fees from these new modules flow to?
Fees from Interchain Security will go towards the distribution modules, and in the future, apart from just receiving ATOMs, you can also expect to receive tokens from consumer chains as well.
Fees from, the Allocator and Scheduler, however, will be going directly to the treasury to fund future public goods and the growth of the Interchain.
Updated Issuance Model
The issuance for ATOM will also be updated to support its new role, with issuance being high for the first 9 months to fund the Treasury, after which, this will be reduced significantly.
This new issuance model will reduce the growth of ATOM supply as well in the long term, and brings inflation to a low.
The new model will be managed in 2 phases, a transition phase that lasts for 36 months, and a steady state which lasts indefinitely after the transition phase. During these stages, a few things will happen:
- After the 36th month, the security subsidy will cease, and newly issued ATOMs will fund the treasury instead.
- The staking rewards will get replaced by the revenue from Interchain Security and ventures from the Treasury.
- In the case that the staking rate falls below the desired number, this new monetary policy will pause and the old monetary policy will resume and increase incrementally, up until the staking rate exceeds.
4: Moving forward as a united front
With that, comes the part that brings everything together. A shared organizational language and policies to streamline processes.
Why is this a focal point?
Well, for one, the development of Cosmos and its networks up until today has been developed through multiple groups and parties committed to the vision of Cosmos. However, that also means that cooperation and communication between parties are limited to a certain extent.
In the case of parties trying to work towards a certain goal; multiple proposals have to be passed down to multiple groups, with no one group in charge of anything. And with scale, this can get messy, real quick.
Just like how IBC creates hubs that connects to different zones to communicate with one another — which allows for scalability and brings down the level of trust required — we must do the same if we were to compete in the big leagues.
Cosmos Governance Stack
The first step towards this would be for the Hub to furnish a generalized system for any Hub-aligned DAO to use and deploy, and the Governance Stack will do exactly that.
It will allow DAOs to self-specify their structure and relationships with one another while offering transparency into their CAPEX and OPEX. Below is an example of how three entities can make use of this Governance Stack.
The creation of this Governance Stack is also isn’t very far off the timeline, due to the fact that most of these modules are available today such as Groups, Authz and Interchain Accounts. The only problem is that these modules are not packaged together, or rarely seen as an integrated system to create organizational structures on-chain.
With the Governance Stack, this means that there will be a lot of new DAOs coming up to represent their presence from various ecosystems, each with their own set of thoughts and ideas.
However, to access the resources of the Hub, these entities will need to participate in a common system for planning and coordination, and the system must be flexible while remaining accountable to the Hub and the greater Interchain with checks and balances.
This is where the Assembly comes in, to represent the strategic interests of the Cosmos Hub community. Alongside a set of domain-specific Councils, the Cosmos Hub Assembly forms a governance supply chain that enables a variety of entities to work together within a common framework.
The Cosmos Assembly will be compromised of delegates from the respective councils, and they are responsible for setting priorities, budgeting process, and drafting the proposal to be proposed optimistically that will be subjected to ATOM holder veto.
This system allows existing informal and off-chain workflows to be more explicit, accountable, and open to wider participation.
Critiques and Conclusion (CC)
And that wraps up the whitepaper: for the Hub to seek the expansion of the vision of the Hub. While most of the content has been positively accepted by the ATOM community, some questions still remain and are waiting to be answered in the coming weeks.
In this forum post, most of the arguments against the WP have been based on the new issuance numbers and its connection to the Treasury, as it shifts the future risk of the Hub to the holders of ATOM.
In that regard, my critiques against the Whitepaper are as follows:
- There is currently no way to visualize how the expected returns of the Treasury will outsize or match up to the security subsidies, and hence in that regard, it is hard to accept these issuance numbers in a short-term timeframe.
- In my opinion, the DAOs and councils should be a priority before any changes to the issuance and funding of the Treasury. In the case of changes, it should be introduced at a smaller scale instead and track performance metrics before allocating more funds towards the Treasury.
- DAOs and councils will have to have multiple vetting processes from the community, so as to make sure that the funds and power will not be exploited for greed.
Let me know what your thoughts are on this Whitepaper in the comments section, and I’ll see you guys in the next article!