Cosmos Protocol Report 2024

Table of Contents

1. Introduction 2. Use Case 3. Technology 4. Cosmos' 2022 Updated Whitepaper and ATOM 2.0 5. Economics, Governance, Development & Network 7. Team & Early Days 8. Regulation 9. EVOS 10. Conclusion & Investment Table

Preface

This free research is provided by Xellar Capital Research intended for educational purposes and should not be considered financial advice.

Xellar Capital Research is the investment arm of Xellar Technologies, a Web3 technology firm focused on Security, Infrastructure into the web3 space in southeast asia.

Xellar Technologies is the developer of Xellar App and the Xellar Vault, the first non-custodial card types cold wallet in South East Asia. Xellar also develops RPC endpoints and infrastructure which power many Web3 companies and providing low latency connection to the blockchain.

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Introduction

Cosmos is a decentralized network of blockchains that enables interoperability and scalability. It is designed to solve the problem of fragmentation in the blockchain industry, which makes it difficult for different blockchains to communicate and interact with each other. Cosmos also aims to address the scalability limitations of many existing blockchains, which can only handle a limited number of transactions per second.

ATOM is the native token of the Cosmos network. It is used to secure the network, pay for transaction fees, and participate in governance. ATOM holders can also stake their tokens to earn rewards.

Cosmos is a valuable investment opportunity for several reasons.

First, it solves a major problem in the blockchain industry: fragmentation. By enabling interoperability between different blockchains, Cosmos makes it possible for developers to build applications that can interact with multiple blockchains simultaneously. This opens up new possibilities for innovation and collaboration.

Second, Cosmos is highly scalable. It can handle thousands of transactions per second, making it suitable for a wide range of applications. This is particularly important for enterprise applications, which often require high throughput.

Third, Cosmos has a strong team and a growing community. The Cosmos team is led by experienced developers who have a proven track record in the blockchain industry.

The Cosmos community is also large and active, with developers and users from all over the world.

Why is it worth considering?

Cosmos is a unique project with several advantages over other blockchain platforms. Here are just a few of the reasons why Cosmos is worth considering:

Interoperability: Cosmos is the first blockchain platform to enable true interoperability between different blockchains. This means that developers can build applications that can interact with multiple blockchains simultaneously, without having to worry about bridging or conversion.

Scalability: Cosmos is highly scalable, and can handle thousands of transactions per second. This makes it suitable for a wide range of applications, including enterprise applications.

Security: Cosmos is built on a secure and proven foundation, and uses several security measures to protect users and their assets.

Governance: Cosmos has a strong governance system that allows token holders to participate in decision-making. This ensures that the Cosmos network remains decentralized and aligned with the needs of the community.

Token Details

Fundamentals

Basic Information: ATOM, the native token of Cosmos, is identified by the symbol ATOM, with the current price standing at $10.2 as of November 6, 2023.

Use Case: ATOM serves as a governance token, allowing users to participate in decision-making, staking to circulate the token, and fee payments within the ecosystem, providing control over its future developments (L1).

Target Audience: Primarily catering to developers, validators, and DeFi enthusiasts as everything is fully decentralized, the token aims to create a secure and efficient environment for building and using decentralized applications (dApps).

Use Cases: Cosmos can be used to build and use a wide range of dApps, including:

Payment applications: Cosmos can be used to send and receive payments in a fast and secure way.

DeFi applications: Cosmos can be used to build and use DeFi applications, such as decentralized exchanges, lending protocols, and asset management platforms.

Web3 applications: Cosmos can be used to build and use Web3 applications, such as social media platforms, decentralized marketplaces, and gaming applications.

Statistics

Total Value Locked (TVL):	$3.5 billion (as of Nov 6 2023)
Trading Volume:	$500 million per day (as of Nov 6 2023)
Number of Active Users:	$250,000 (as of Nov 6 2023)
Circulating Supply:	203,121,910 ATOM
Non-Circulating Supply:	57,848,702 ATOM
Market Cap:	$2.1 billion (78% of total supply)
Fully Diluted Valuation:	$2.8 billion

Expected Market Cap Reach Next Cycle: $100 billion (50x) if L0 is being appreciated, minimum 10x (on normal bull market conditions)

Technical Insights

Technical Architecture: Cosmos is built on the Tendermint consensus mechanism, which is a Byzantine Fault Tolerance (BFT) consensus mechanism that is designed to be secure and scalable. Cosmos also uses the Cosmos SDK, which is a modular framework that makes it easy for developers to build blockchain applications.

Blockchain Features: Cosmos supports smart contract functionality, which allows developers to build a wide range of dApps, including DeFi applications, Web3 applications, and payment applications. Cosmos also supports interoperability between different blockchains, which means that dApps built on Cosmos can interact with dApps built on other blockchains.

Scalability: Cosmos is a highly scalable blockchain platform. It can handle thousands of transactions per second, making it suitable for a wide range of dApps. This is particularly important for enterprise applications, which often require high throughput.

Security: Cosmos is built on a secure and proven foundation, and uses several security measures to protect users and their assets. These security measures include Tendermint consensus, the Cosmos SDK, and rigorous auditing protocols.

Overall, Cosmos is a well-rounded blockchain platform with a strong technical foundation. It is a valuable investment opportunity for investors who are looking for a blockchain platform that is scalable, secure, and interoperable.

Financial Aspects

Risk and Ownership

While Cosmos implements robust security measures, potential market volatility and regulatory uncertainties pose inherent risks for investors. The cryptocurrency industry is still relatively new and untested, and there is always the risk of new and unforeseen risks emerging.

Ownership Distribution:

ATOM is a decentralized token, meaning that it is not owned by any single entity. The tokenomics of ATOM are as follows:

Totally Supply:	260,906,513 ATOM
Circulation Supply:	203,121,910 ATOM
Market Capitalisation:	$2.1 Billion (As of Nov 6 2023)
Inflation Rate:	7% per year (gradually decreasing)

Distribution: ATOM is distributed to holders in the following ways:

Note: The ownership distribution of ATOM is relatively decentralized and very healthy, with no single entity holding more than 10% of the total supply. The top 100 holders of ATOM control around 30% of the total supply. The remaining 70% of the supply is distributed among a large number of retail investors.

Tokenomics: ATOM has a fixed total supply of 260,906,513 tokens. The inflation rate of ATOM is 7% per year, but will gradually decrease over time.

Community and Ecosystem

Community Growth:

Cosmos has a vibrant and growing community, with over 250,000 active users on social media and Discord. The Cosmos community is highly engaged, with a large number of users participating in discussions and development initiatives.

Developer Ecosystem:

Cosmos has a strong developer ecosystem, with over 2,000 active developers contributing to the protocol. The Cosmos developer ecosystem is supported by several grants and initiatives, such as the Cosmos Hub Community Pool and the Cosmos Grants Program, which help to attract and retain talented developers.

Additional Statistics:

Twitter Followers:	200,000+
Discord Followers	100,000+
Telegram Members:	50,000+
GitHub Stars	30,000+

Investment Strategy

Cosmos is a good investment opportunity for investors who believe in the long-term success of the Cosmos Hub and its ecosystem. Cosmos is a scalable, secure, and interoperable blockchain platform that is well-positioned to benefit from the growth of the decentralized finance (DeFi) industry.

Cosmos is still a relatively new project, but it has gained traction quickly. The Cosmos Hub has over 250 active validators and over 3.5 billion dollars in total value locked (TVL). The Cosmos ecosystem also includes a growing number of dApps, including DeFi applications, Web3 applications, and payment applications.

Potential 10-15x gain to 150B Market Cap in the next cycle with a max holding of 8% of the portfolio.

Cosmos has a market capitalization of $2.1 billion as of November 6, 2023. If Cosmos reaches a market capitalization of $20 billion, this would represent a 10x gain for ATOM investors.

Conclusion

Cosmos is a pioneering blockchain ecosystem that offers a unique approach to interoperability and scalability, positioning itself as a frontrunner in the rapidly evolving world of decentralized finance. With a robust network of interconnected blockchains, a strong community, and a focus on developer-friendly tools, Cosmos is well-equipped to solidify its prominent role in the decentralized finance sector.

Use Case

Cosmos bills itself as a project that solves some of the "toughest problems" facing the blockchain industry. It aims to offer a proof-of-work protocol solution that is notoriously "slow, expensive, scalable and environmentally dangerous", as used by Bitcoin, by offering a connected blockchain ecosystem.

Other objectives of the project include making blockchain technology less complex and difficult for developers thanks to a modular framework that demystifies decentralized applications. Lastly, the Interblockchain Communication (IBC) protocol makes it easy for blockchain networks to communicate with each other - preventing fragmentation in the industry.

The Cosmos ecosystem we see today is distinct from others like Ethereum, BNB Chain, Solana, and Avalanche. These differences boil down to simplicity, flexibility, and features unique to the Cosmos SDK. Cosmos is home to dozens of application-specific and application-agnostic blockchains, such as Cosmos Hub, Osmosis, Axelar, Juno, Evmos, Cronos, Secret Network, Kava, Akash, and Terra 2.0. Each of these blockchains brings unique features like packet routing, LP staking, EVM compatibility with chain-native bridges, Rust smart contracts, and algorithmic stablecoins. The heterogeneity of technical approaches leveraged by projects in the Cosmos ecosystem is what makes it stand out in comparison to other Layer 1 protocols.

In terms of user experience, Cosmos’s primary advantage is that it allows users to onboard from other chains without requiring centralized intermediaries. The plethora of wallets available for users to choose from allows them to take full control of their funds and perform actions like staking right from the wallet interface, reducing front-end risks of interfacing with applications. With the introduction of Interchain Accounts and the upcoming release of Interchain Security, the ecosystem will become significantly more composable and will offer an even more enriched user experience.

The teased revamp of ATOM tokenomics may bring further utility and value accrual to the Cosmos ecosystem, which may incentivize adoption from profit-seeking users.

The origins of Cosmos can be seen in 2014, when Tendermint, a core contributor to the network, was founded. In 2016, the Whitepaper for Cosmos was published - and a token sale was held the following year. ATOM tokens are obtained via a hybrid proof-of-stake algorithm, and they help keep Cosmos Hub, the project's flagship blockchain, safe. This cryptocurrency also has a role in network governance.

Technology

Cosmos, a project often described as “the internet of blockchains,” connects sovereign blockchains via a “hub and zone” model using the Inter-Blockchain Communication (IBC) protocol. A central Cosmos Hub, using Proof-of-Stake (PoS), is the native chain on which the ATOM token lives. Stakers of this primary hub secure the network and route/execute transactions across disparate blockchains. Cosmos is also sometimes called “Blockchain 3.0”; where “blockchain 1.0” would be Bitcoin, before Ethereum and similar smart contract platforms representing “Blockchain 2.0.” The Cosmos Network looks to be a solution to three main issues concerning blockchains:

Scalability - Cosmos adopts a Proof-of-Stake (POS) consensus mechanism through Tendermint's BFT (Byzantine Fault Tolerant) consensus engine.

Usability - Cosmos fixes the steep learning curve for developers creating blockchain applications for the first time through the Cosmos SDK; a modular framework for creating secure blockchain applications on top of Tendermint. For reference, Angular and React are examples of popular frameworks for JavaScript. Currently, the Cosmos SDK uses Go.

Interoperability - Crypto currently has a "competitive island" atmosphere. Every project is fighting for attention with every other project, with the rare partnership. Cosmos enables projects to co-exist and cooperate through the IBC protocol, cross-chain swaps, and other inter-blockchain actions and communication.

Currently, the blockchain space is rather siloed, with projects developing and operating completely independently from each other. The Cosmos Hub aims to serve a beacon-chain-type role that helps coordinate and connect all zones. Today, the Cosmos ecosystem secures and facilitates the transfers of 60+ billion dollars in value across 50+ blockchains. Despite its technological prowess, however, Cosmos does not accrue significant value from the use of its whole ecosystem to its ATOM token, which keeps it truly decentralized, but creates a strain on developer funding.

Image credit: Cosmos website

Cosmos SDK

The Cosmos SDK helps get developers to follow similar rules and thereby lowers the barriers to cooperation and interoperability. The SDK is similar to software that other projects can license for creating their blockchain ecosystems, enabling faster development rather than having to start from scratch. Consider the SDK as a collection of various pre-programmed application functions, such as token staking, community governance, and more. As the network expands and developers continue to create increasingly complicated applications, the database of available modules will expand to enhance the efficiency of network construction and expansion.

dApps don’t directly deploy onto Cosmos as they would on an L1. Instead, they deploy as “app chains” — i.e. application-specific blockchains — or onto blockchains that have been deployed via the Cosmos framework.

Tendermint

The Cosmos network uses Tendermint Core, a language-agnostic consensus algorithm that enables developers to replicate dapps in whatever programming language they wish. Tendermint Core is a Byzantine Fault Tolerant (BFT) consensus mechanism for distributed systems; this means that even if as much as one-third of the machines in the network arbitrarily fail, the network still reliably reaches the same version of events and executes the same state.

Tendermint Core achieves Byzantine Fault Tolerance via validators that stake ATOM and "vote" on blocks of transactions in rounds. Validators confirm transactions and broadcast cryptographic signatures to "vote" on the validity of state changes in the network. Validators cannot sign invalid or duplicate transactions or else they will have their staked ATOM "slashed" (i.e., taken from them).

Tendermint Core assumes a partially synchronous network, where there is an upper bound on the time of messages delivered. It is assumed that non-byzantine nodes have a sufficiently accurate clock, which does not deviate substantially from global time. Despite the slightly variable clocks across validators, however, the network can maintain consensus using the system of rounds and steps and the CommitTime in each committed block. This consensus mechanism is safe up to a threshold of 1/3 of network validators being malicious. If, for example, in the previous round, at least one good validator committed a block, this means that they received at least 2/3 of precommits. If less than 1/3 of validators are malicious, this means that at least 1/3 were good validators that have committed the previous block and locked onto it. These 1/3 of honest validators will be unable to commit any other block in the current or the following rounds because of their lock. Furthermore, if less than 1/3 of validators are malicious, the protocol does not deadlock. Even if two different blocks have been locked onto by honest validators, a proof-of-lock from a validator in the later round will unlock the validators and allow the consensus process to resume. Effectively, if malicious validators have less than 1/3 of voting power, the incentive is to continue performing validation correctly, because otherwise malicious behaviour is identified and the validators are punished through slashing.

Tendermint Core also accounts for validators attempting to game the system and exclude others’ signatures from the previous block when proposing the next one to gain a larger share of protocol fees. If a malicious validator excludes a block signature the whole validator set gains the excluded validator’s rightfully deserved fees, with the malicious validator receiving his proportional share. This, however, will cause the excluded honest node to exclude the malicious validator’s signatures from their subsequent blocks. If this continues and both nodes exclude each other’s signatures, both lose in the long run, effectively dividing a portion of their fees across the rest of the delegator pool. It may make sense for the malicious validator to exclude some signatures from a block that has an outsized block reward linked to it, which may compensate for the loss of the full block reward when the honest validator excludes them from their block. However, even in that case, they will still lose money in the long run as they will be consistently excluded from block rewards by the honest validator.

Source: Kraken

Tendermint BFT has three blockchain layers:

Application layer: Code that creates some type of functionality.

Networking layer: Broadcasts the transactions and consensus-related messages.

Consensus layer: Allows nodes (computers) to agree on the current state of the system.

Proof-of-Stake (with Something at Stake)

Tendermint was the first project to demonstrate a conceptual solution to the nothing-at-stake problem that plagued early PoS blockchains. Essentially, Tendermint’s consensus mechanism involves a security deposit element to the “stake,” which users stand to lose if they behave maliciously or ineffectively. This is in contrast with earlier permutations of PoS systems whereby users just had to have tokens in a wallet to participate in the network’s consensus. In Cosmos, it can be said that validators have “something at stake” instead of “nothing-at-stake,” as malicious activities are punished by having some of their staked ATOM slashed or burned. Before PoS systems that required validators to have capital at risk (in virtue of it being staked), it wasn’t clear how double-spend attacks could be prevented by those with even 1% of the network's tokens (as opposed to 51% of the computational capacity).

Inter-Blockchain Communication (IBC)

In addition to relying on a PoS mechanism that isn’t encumbered by the nothing-at-stake problem, Cosmos aims to become “the internet of blockchains” via its internal Inter-Blockchain Communication (IBC) protocol. IBC allows users to send information between two IBC-connected sovereign chains by running a light client on each chain (see Map of Zones). As a reminder, full nodes download and validate every transaction that has ever occurred on the chain since its genesis. Light nodes (typically) only check block headers. This means light clients are “lightweight” nodes that require fewer computing resources than a full node. This makes them more egalitarian because they are cheaper and typically easier to run, helping to further decentralize the network. Once a zone creates an IBC connection with a Hub, it automatically has access to every other zone that’s connected to it.

Inter-blockchain communication (IBC) is considered more secure than bridges primarily due to its inherent design and structural advantages. Here's why:

Native Integration: IBC is built directly into the architecture of the involved blockchains within the Cosmos ecosystem. This means that the communication protocol is an integral part of the network, allowing for more direct and secure communication between blockchains. On the other hand, bridges often rely on external components or third-party applications, which can introduce potential vulnerabilities and points of failure.

Consensus Mechanism: IBC leverages the consensus mechanisms of the interconnected blockchains, ensuring that any transactions or data transfers between them are validated by their respective networks. This reliance on the existing consensus mechanisms enhances security, as it requires approval from the participating blockchains before any data is transferred. In contrast, bridges may necessitate a separate consensus mechanism, which can introduce additional complexities and potential security risks.

Reduced Centralization: IBC is designed to facilitate decentralized communication between blockchains within the Cosmos network. This decentralized approach ensures that there is no central point of control or authority that can be targeted by potential malicious actors. On the other hand, some bridges may require a centralized entity to oversee the transfer of assets or information between different blockchains, making them more susceptible to attacks or manipulation.

Layered Security Protocols: IBC is equipped with layered security protocols that help protect the integrity of data transfers between blockchains. These security measures often include encryption, validation checks, and other security layers that are built into the protocol itself. In contrast, bridges may need to rely on external security measures, which can be more challenging to implement effectively and comprehensively.

Hubs vs. Zones

The Cosmos Hub is a PoS chain that serves as the primary hub for routing transactions and data between Cosmos blockchains called zones. Hubs are the largest, most liquid zones in the ecosystem. Zones are application-specific chains built using Cosmos SDK. Using the hub and zone model, any zone can send information to a connected hub, and then that hub can send the information to any of the other connected zones. Because hubs act as routers or middlemen between zones, they are also responsible for maintaining the global state (token balances) across all Zones.

Zones plug into hubs, which route and validate the transactions passed between different zones in exchange for fees. They connect to a Hub via a two-way peg, similar to Ethereum and side chains like Polygon. When a valid cross-chain transaction is submitted on the IBC, the token on the original chain is (essentially) frozen/burned while the receiving chain mints the equivalent amount on new tokens.

Image credit: Cosmos blog

For example, if a user wants to transfer 50 ATOM from one chain to another, those 50 ATOM are bonded or locked on the native chain, then proof of the bonding is relayed to the other chain, and the proof is verified against the native chain’s header, and then vouchers for that 50 ATOM are created on the other chain. So, one could say the ATOM on the other chain is not “real,” but they do provide proof the ATOM they represent on the native chain is frozen.

Cosmos' 2022 Updated Whitepaper and ATOM 2.0

In September 2022, The Interchain Foundation released a revised concept for the Cosmos Hub, ATOM token, and the basis for the future roadmap. The biggest changes center around Interchain Security (ICS), new ATOM tokenomics the inclusion of protocol-level liquid staking, and new protocol entities entitled the " Interchain Allocator" and "Interchain Scheduler."

Stepping back just a bit, the Theta upgrade was released in April 2022 and featured Interchain Accounts (ICA). ICAs allow any account on any Cosmos zone to open and control an account on another zone. This removes the previous limitations inherent to the IBC in which only certain transactions that conformed to certain standards could be executed.

Where the IBC on Cosmos enables network participants to easily share tokens between accounts on different chains, the Theta upgrade includes the ability to interact with other accounts (similarly to how Ethereum users interact with smart contracts) in other hubs. Interchain accounts are a key step towards interchain security, in addition to having other major impacts on the Cosmos network. IA enables developers to leverage existing functionality regardless of the hub on which it exists.

Technically speaking, ICAs permit an IBC-connected chain to open ICA channels with new, pre-defined messaging standards. This fact is important because ICA transactions do not adhere to the typical IBC standards. Instead, they are bundled transactions wrapped into an IBC-conforming transaction. The receiving zone gets the IBC wrapper, processes the transactions inside based on the newly established ICA messaging standards, and then updates its state.

The main benefits of Interchain Accounts are a more seamless user experience with less friction for moving between zones and increased composability. With Interchain Accounts enabled, users can yield farm in DeFi, stake in the Cosmos Hub, vote in governance, and participate in DAOs across all connected zones, all from one account on the Cosmos Hub. Current IBC chains will become more composable with one another, enabling a transition from their native, single-chain business model to interchain native business models.

Interchain Security (ICS)

Interchain Scheduler (IS): Currently, Cosmos and the IBC enable frictionless token transfer across its zones, creating enormous cross-chain Maximum Extractable Value (MEV) opportunities. However, most of this MEV is extracted by a select few happening off-chain. The IS brings this activity back on-chain and plans to distribute the rewards across the users and Cosmos zones.

Interchain Allocator (IA): Using a percentage of the money made from the Interchain Scheduler, the Interchain Allocator reinvests the revenue into Cosmos-based projects, serving as a formal long-term incentive program for Cosmos dapps. Specifically, the (IA) consists of two arms: the Covenant and a Rebalancer. The Covenant will create multi-lateral agreements with IBC-enabled zones, while the Rebalancer will automatically manage the portfolios/public liquidity. All of it together will create the new Cosmos stack (image below).

Economics

While the Cosmos protocol can support thousands of separate tokens, Cosmos’ native crypto is ATOM. There are ~261 million ATOM in total, with about 283 million circulating as of Q2 2023. There’s no capped maximum supply of ATOM, as in networks like Bitcoin.

Cosmos ranks comfortably in the top 20 cryptoassets by market cap.

ATOM’s primary functions in the Cosmos ecosystem are:

Staking to secure the network and maintain consensus

Paying transaction fees

Chain governance

ATOM tokens can be staked to participate in the Cosmos PoS consensus mechanism. ATOM holders who stake their ATOM may receive additional ATOM as a reward.

ICO Details

Cosmos’ ICO was conducted over two weeks in 2017, with the fundraiser beginning on April 6, 2017. The chain genesis occurred later that year in Q2 2017.

For exact details, the Cosmos Plan can be referred to, but generally, the token distribution was as follows:

10% of all ATOM allocated to the Interchain Foundation (ICF), a Swiss non-profit with a mandate to research, develop, and promote Cosmos SDK

10% to Tendermint development

5% to initial donors

75% to pre-fundraiser and fundraiser donors

The suggested price per token started at $0.10 with strategic investors getting a discount of 25%, and early birds getting a discount of 15%.

Changes to ATOM and Staking in New Cosmos 2.0 Whitepaper

Liquid Staking allows users to continue transacting with their staked ATOM rather than having it locked up. The Lido team, which implemented ETH's wildly successful and popular Liquid Staking procedures, has suggested a proposal for Cosmos’ future development that builds on the limited V1 functionality of Liquid Staking.

Governance

Complimenting their PoS mechanism is robust on-chain governance that relies on community members to submit proposals for continuous upgrades to the blockchain.

Lunie, a non-custodial staking platform, has an in-depth guide about how the process works, but at a high level:

Users submit a proposal and pay the associated transaction fee (to discourage spam)

A deposit period of two weeks commences, and at least 512 ATOM must be deposited for the proposal to move into voting

Once in the voting stage, only staked tokens are allowed to vote ‘yes,’ ‘no,’ or ‘abstain.’ Note that Cosmos uses a supermajority in their consensus mechanism, so at least two-thirds of the group must vote affirmative for an action to pass

If more than 40% of all staked tokens vote with more than 50% voting ‘yes’ and less than 33.4% voting ‘no,’ then the proposal will be successfully propagated to the network

Development

An important indicator to determine if a project holds promise is developer activity—how fast are they shipping products? Are they on top of vulnerabilities? One of the best ways to determine whether a blockchain has real-world demand is on-chain transactional data.

Vulnerabilities

CosmicValidator published a Medium post about why a 51% attack or a similar attack, such as a two-thirds attack, would be hard to accomplish on the Cosmos Network. Thanks to Tendermint’s BFT algorithm, the Cosmos Network has been able to handle transactions at an increasing rate while maintaining strong security.

While Cosmos Network was one of the earliest protocols to target the middleware and blockchain interoperability niche, the space has become increasingly saturated with serious competition from the likes of Polkadot and Avalanche, which have gained considerable popularity and recognition.

Another reason Cosmos may attract less media attention is due to its technical nature and the learning curve associated with understanding the project. A crypto novice would first need to understand the individual, siloed blockchains, why those blockchains need to be connected, and then finally how Cosmos achieves this. In doing so, Cosmos must introduce complex topics and terminology like hubs and zones, IBC, interoperability, Tendermint Core Byzantine Fault Tolerance, etc.

Bridging Between Hubs

However, while all this is possible, it’s still not as frictionless or trustless as if all components were built on one chain, e.g. Ethereum. One of Ethereum’s current advantages over its competitors is the amount of composability it provides builders in the space. It’s far easier for a new developer to integrate an existing Ethereum DeFi application with their project if they build it on Ethereum rather than Cosmos. Cross-chain transactions in the Cosmos ecosystem must flow through the Cosmos Hub or multiple hubs which is not the case for other single-chain solutions.

Network Effect

Cosmos has shown popularity among developers and announced various partnerships. Reportedly, over 100 projects have been integrated with Cosmos, with some of the most significant including:

Binance Chain

Secret Network

OKChain

Band Protocol

Aragon

While Cosmos has seen impressive user growth, transactions processed alongside commensurate gains in ATOM token price and market capitalization, the blockchain interoperability space may see something of a fundamental challenge from Ethereum’s scaling progress. To the extent that a key portion of the Cosmos value proposition concerns scalability, cheaper and more usable scalable blockchain platforms (as Ethereum is potentially soon to become) make this a competitive niche. Fortunately for Cosmos, the need for interoperability exists notwithstanding scalability considerations.

Team

In late 2020, the Cosmos founding team broke up and created separate teams focused on different aspects of the protocol. However, the project continued despite the disruption among the team.

At the heart of the Cosmos project is the Interchain Foundation, a Swiss non-profit that supports the development of the Cosmos Network.

Interchain’s foundation council consists of:

Jae Kwon, President

Ethan Buchman, Vice President

Pascal Schmid, Council Member

Fernando Pedone, Council Member

Brian Crain, Council Member

Who is Jae Kwon?

Before co-founding Tendermint Inc., a core contributor to the Cosmos Network, Jae Kwon spent many years working on various startups and open-source projects. After graduating from Cornell

University in 2005 with a bachelor’s degree in Computer Science, he started off working for Amazon on their web services team. He worked there for 2 years, developing the Alexa Web Search Platform, a tool to create search engines, and the Alexa Web Thumbnail Service, an API for creating website thumbnails. In 2007, Jae joined Yelp as the lead on their mobile development team and successfully launched what would become one of the most well-known platforms for crowd-sourced reviews about businesses.

After leaving Yelp in April of 2009, Jae “got the startup bug” and spent several years as an entrepreneur, founding different startups and looking for the industry in which he’d want to stay long-term. In 2011, Jae co-founded iDoneThis, a productivity app that tracked daily activities via email. iDoneThis was incubated by AngelPad, a seed-stage accelerator program founded in 2010 by former Google employees.

After iDoneThis, Jae went on to work on several open-source projects, including a CoffeeScript compiler/ interpreter developed in JavaScript, an email service with end-to-end encryption called Scramble.io, and a cryptocurrency exchange. Working on open-source codebases, language compilation, and communication encryption allowed Jae to build up a skill set applicable to the then-nascent cryptocurrency market. Jae’s expertise in JavaScript and npm, the JavaScript package manager which significantly simplifies development, inspired him to build a generalizable framework for blockchain development that was easier for developers to onboard into compared to other projects. This is what motivated him to eventually create Tendermint and the Cosmos SDK.

The Early Days of Cosmos

The concept of a Proof-of-Stake blockchain with a Byzantine Fault-Tolerant consensus dates back to 2014 when Jae Kwon published a paper proposing Tendermint, a blockchain that

achieves consensus without mining. Following the release of the whitepaper, Jae joined forces with Ethan Buchman, whom he met at the Cryptocurrency Research Group and Crypto-economics

Conference, and founded Ignite (formerly known as Tendermint Inc. and All in Bits Inc.), which focused on building tooling for distributed networks. In 2015, All in Bits Inc. implemented the EVM on top of their proposed Tendermint BFT consensus, calling it Ethermint. Following the success of Ethermint, in 2016 Jae Kwon and Ethan Buchman published the whitepaper for Cosmos, A Network of Distributed Ledgers. The team went on to win the Shanghai Blockchain Week “Most Innovative Project”, which attracted a lot of attention to their technology. Subsequently, they formed the Interchain Foundation (ICF) to support the development of Cosmos and its ecosystem. In April 2017, Cosmos conducted an Initial Coin Offering (ICO), during which they sold 67.9% of the initial supply in exchange for $16.8 million in BTC or ETH, raising the full amount within 30 minutes. Strategic and early adopters received 7.1% of the initial supply, seed contributors received 5%, All in Bits Inc. received 10%, and the Interchain Foundation received 10%. At Genesis, 236 million ATOM tokens were allocated to just under one thousand accounts. The Cosmos ICO has been cited as one of the most successful blockchain-based fundraising events in history.

User Experience

Within the Cosmos ecosystem, ATOM is used for governance activities.

Users can also choose to pay transaction fees on the Cosmos network with ATOM, but this is not required as users may also use other tokens to pay the transaction fees.

Users can stake ATOM, which allows users to earn rewards and vote on proposals. Currently, Cosmos lists the typical APY of staked ATOM at 9.7%. New users can begin investigating their staking options on the Cosmos website. Users will need to pick a wallet and validator with which they are comfortable. It is suggested that users delegate to multiple validators with favourable reputations and uptime statistics to hedge their risk. A full list of validators can be found here.

A strong indicator of user presence is hardware wallet support - if there are enough users to warrant the demand for a hardware wallet solution, then there's significant demand for a particular cryptocurrency.

In ATOM's case, Ledger allows users to send or receive ATOM on their wallet, just like any other asset. If you're familiar with Ledger's UI, the process is the same:

Install the app through Ledger Manager.

Use as you would any other Ledger app.

You can even stake ATOM directly through Ledger for an integrated solution.

Beyond hardware wallets, Cosmos boasts 32 wallet choices ranging from IOS to Android to desktop. Just like what you'd expect with any other cryptocurrency with an established ecosystem, there's also:

Block explorers – Bigdipper.live, Atom Scan, and Hubble Figment

Additional full-featured wallets like Cosmostation and Keplr wallet.

Cosmostation is a native desktop wallet but is also cross-platform compatible with both Android and ios.

Keplr

Keplr is a web browser extension and hot wallet similar to MetaMask in Ethereum. It is the most popular wallet in the Cosmos ecosystem and allows users to do far more than just send and receive tokens. A new user can create a new wallet or import an already existing one. Users need to preserve and re-enter the seed phrase when creating a new account to ensure security.

Regulation

Cosmos Network is fortunate to not have received any regulatory scrutiny specifically targeted towards ATOM and thus doesn't have any specific views nor contradictory statements from governing bodies. Many digital assets lack clear utility and thus have no purpose other than for retail investors to speculate on price (i.e. invest). ATOM has an obvious utility case on the platform in the form of staking and paying for transactions. ATOM performs the role of a utility in the form of allocating computational resources on the network.

One potentially problematic feature of ATOM is its POS mechanism which results in validators being rewarded through inflationary measures. While one could argue that ATOM is necessary as a sort of "digital oil" to process transactions on the network (thus not being classified as a security and failing the Howey Test), receiving a dividend, of sorts, walks the line of an investment vehicle.

The SEC has already commented on Ethereum (twice) – in conjunction with Bitcoin – saying that it is not a security. In addition to those preliminary comments, the previous CFTC Chairman publicly stated in October 2019 that ether is viewed as a commodity by the U.S. regulatory body. While there are numerous differences between the Cosmos and Ethereum ecosystems, it is likely that, from a legal standpoint, the projects would be viewed through a similar lens by governing bodies given their structures, goals, and fundraising histories. ATOM will likely still be subject to any blanket regulation imposed on cryptocurrencies.

Cosmos was rated by the Crypto Rating Council (CRC) in October 2019 and currently has a rating of 3.75. The scale runs from 1 to 5, with lower scores being less likely to be similar to a security, and higher scores being more likely to be similar to or considered a security, according to CRC’s framework. As of the time of writing, CRC has rated 28 cryptocurrencies, with XRP having the highest rating at 4.0 and Bitcoin, Dai, Litecoin, Monero, and USD Coin tied for the lowest rating at 1.0.

Evmos

Evmos stands for EVM (Ethereum Virtual Machine) and CosmOS. It’s a scalable, high-throughput PoS (Proof-of-Stake) zone on Cosmos that’s fully compatible and interoperable with Ethereum. It’s built using Cosmos SDK and runs on top of the Tendermint Core consensus engine.

Developing on Evmos enables developers to:

Leverage existing Ethereum infrastructure, tooling, and DAOs while offering low gas fees and fast finality

Interoperability with other IBC chains

Liquidity from EVM-compatible chains like Ethereum, Avalanche, Fantom, Binance, etc. to move into IBC.

ATOM Evmos diagram. Source

The Evmos Hub has been experimenting with an incentivized testnet since 2021 and has a mainnet launch underway as of Q2 2022. Evmos makes it easy for all EVM smart contracts to deploy and communicate within the Cosmos ecosystem. It’ll serve as the Cosmos ecosystem’s connection to Ethereum, Fantom, Avalanche, and Harmony as well as their $130+ billion DeFi TVL.

Conclusion

The technology Cosmos offers to developer teams is unrivalled in the broader cryptocurrency space, which is why the applications built on top usually offer unique features that don’t exist

anywhere else. Despite the tensions among core team members, the project has a very compelling narrative for steady future adoption. Considering the current state of the ecosystem, it’s easy to tell that Cosmos technology is a prime breeding ground for innovation. And it’s impossible not to look at the Cosmos SDK and ecosystem and not admire its truly open-source origins and nature. Most importantly, it isn’t only new projects that build on Cosmos, but old battle-tested projects consciously deciding that Cosmos would be the best platform to build the next iteration of their apps. Looking forward, the implementation of the features outlined in the roadmap into the Cosmos ecosystem and technology stack is very likely to improve both user experience and adoption. At the end of the day, most adoption in a blockchain project happens

when significant monetary incentives are being distributed to both developers and users, so if any of the features implement mechanisms to reward both of these key groups of ecosystem participants, the project could see rapid growth. Considering the success of applications built using the Cosmos SDK and IBC, Cosmos technology can no longer be considered an experiment. There are clear use cases that demonstrate the competitive advantage of Cosmos technology over other blockchain stacks. While we are already seeing developers realizing the technology’s potential, the development of applications and their adoption takes years, so, likely, we won’t see a major shift in user mindshare towards Cosmos before the second half of 2023.

Key Takeaways

IBC is significantly safer than bridges.

By making PoS validator sets of connected chains run light clients that can verify the state of the partner chain, the design of the bridge is perhaps impossible to compromise technologically and extremely expensive to compromise economically (by purchasing sufficient stake to disrupt consensus). Compared to traditional bridges which use external and arbitrarily selected or PoS-selected validator sets, IBC is significantly more secure.

Cosmos technology is exciting but isn’t fully polished yet.

Despite being secure, IBC technology relies on centralized relayers which are not compensated for the work they perform. To implement decentralization in packet relaying and to ensure that relayers are compensated, developers will first need to implement the upgradability of IBC channels. Similarly, with other aspects of the Cosmos SDK, developers are routinely pushing out updates and new modules.

The Cosmos ecosystem is unique and innovative.

The projects built using the Cosmos stack are free to experiment with a lot more features than those built on smart contract-enabled Layer 1s. The flexibility has allowed projects to experiment with altered versions of Proof-of-Stake consensus, different virtual machines built on top of Tendermint Core, and protocol-level customizability of applications.

Experienced application developers are realizing the potential of Cosmos technology.

The decision of dYdX and Injective Protocol to use the Cosmos network signifies that Cosmos may be one of the best solutions for the complete decentralization of throughput-heavy applications like order book exchanges, play-to-earn games, and social networks. To preserve the immutability and independence of these applications, developers would need to keep in mind that the level of decentralization of a system is determined by its least decentralized component.

The ecosystem will only succeed if ATOM’s utility increases.

The technology that powers Cosmos is still undergoing continuous development and iteration. Additionally, there is an almost complete lack of developer and user incentives, which are required for ecosystem expansion. It is likely that without ATOM’s growth that gets redistributed to core developers of the protocol, application developers, and users, Cosmos will remain a project with good technology but little adoption.

Roadmap & Future Plan

2023 Q1

Atomic IBC: Implement atomic composability to Cosmos Hub consumer chains.

2023 Q2

Replicated Security: Implement replicated security for the Cosmos Hub.

2023 Q3

Atom Economic Zone: Develop the Atom Economic Zone concept.

Cross-chain governance: Allow Cosmos Hub validators to vote on proposals from other Cosmos blockchains.

2023 Q4

Interchain state sovereignty: Implement interchain state sovereignty for Cosmos blockchains.

Interchain standards: Develop standards for interoperability and composability between Cosmos blockchains.

2024

Continue development of Cosmos Hub and its features.

Explore new use cases for interoperable and composable blockchains.

Engage with the broader blockchain community to promote interoperable and composable solutions.

Risk, Challenges, & Red Flag

Risk challenges:

1. Complexity: Setting up and deploying a blockchain on the Cosmos network can be complex and require a significant understanding of the underlying technology.

2. Competition: While Cosmos has a strong market presence, it faces competition from other Layer 0 protocols, potentially impacting its growth and adoption rate.

Potential Red Flags:

1. Low Token Utility: If the ATOM token has limited utility within the Cosmos ecosystem, it may hinder its potential for widespread adoption and usage, impacting its long-term value proposition.

2. Limited Adoption: A lack of significant adoption by developers and projects within the Cosmos ecosystem could suggest a potential challenge in establishing a thriving and active network, which may affect the token's growth potential.

3. Market Volatility: High volatility within the cryptocurrency market, including significant fluctuations in the price of ATOM, can pose risks for investors, potentially leading to investment losses and reduced confidence in the token's stability.

4. Regulatory Concerns: Uncertainties and regulatory challenges within the cryptocurrency and blockchain industry may pose risks for the ATOM token, leading to potential legal and compliance issues that could impact its market performance and overall adoption.

5. Competitive Landscape: Intense competition from other Layer 0 protocols and blockchain networks offering similar solutions may pose a challenge for the ATOM token, potentially impacting its market share and relevance within the broader blockchain ecosystem.

Investment Table

Team	70%
Product Market Fit	80%
Token Utility	50%
Community	85%
Growth	85%
Project Conviction	70%

If the Crypto Marketcap 3-5x in the next cycle to $3-5T, ATOM probably can 10-20x to $100-200B Marketcap as it is one of the current top Layer 0 which only has dydx and injective as its current biggest usage

Price Prediction	$100 - $200
Upside based on current price	10x
Max allocation in portfolio	8%

What is Xellar?

Xellar is the next generation non-custodial application, integrated into the DeFi world. Download Xellar on the App Store & Play Store. Integrate with Xellar’s cold wallet technology.