Original author: Red Sheehan,Messari
Original compilation: Deep Chao TechFlow
key insights
Neutron and Stride become the first blockchains to be protected by Cosmos Hub’s replication security mechanism, sharing their set of validators. This marks the beginning of the Atom Economic Zone.
IBC transfers in and out dropped by 27.3% and 22.0% respectively. The role of the Cosmos Hub is changing from an interoperability hub to a security provider.
Its revenue increased 2.4% sequentially despite declines in ATOM prices and Cosmos Hub activity.
Daily active addresses and daily transaction volume decreased by 19.8% and 6.3% month-on-month respectively.
The Atom Accelerator DAO has selected Blockworks Research, Binary Builders and RMIT University to propose an overhaul of the ATOM token economy - the Tokenomics RFP. The teams submitted five forum posts detailing the proposals.
Cosmos Hub Overview
Cosmos Hub is an independent application chain focused on interoperability and security. It is a sovereign blockchain with a proof-of-stake (PoS) mechanism, uses an account-based accounting model, and has no built-in smart contract functionality. ATOM is the native token of Cosmos Hub. Cosmos Hub led the development of technologies such as Cosmos SDK, CometBFT (Tendermint), ABCI and IBC, which were later adopted by many inter-chain networks. The inter-chain network consists of sovereign networks connected by the interoperability protocol IBC, also known as the Cosmos ecosystem.
The Atom Economic Zone (AEZ) is a collection of ecosystems aligned with the ATOM token, including networks with various associations and integrations with the ATOM token. The network that rents the Cosmos Hub validator security service, the consumer chain, is part of the AEZ. Due to the lack of programmability, Cosmos Hub’s security cannot be shared at will like EigenLayer’s restaking model, but can be enabled individually through governance. Replication security (formerly inter-chain security) refers to sharing the full set of Cosmos Hub validators with another chain through governance voting authorization.
Launched in 2019, Cosmos Hub leverages technology developed by the Interchain Foundation and Ignite (also known as Tendermint). Multiple teams including Interchain Foundation, Binary Builders, Atom Accelerator DAO, Informal Systems, Strangelove, etc. continue to support the development of Cosmos Hub and Cosmos technology stack. The interchain network has more than 100 independent networks, each with its own unique supporting entities.
Key indicators
financial analysis
ATOM price fell for the second consecutive quarter, falling 21.0% quarter-on-quarter to $7.11. This lagged the overall cryptocurrency market, which fell 9.2% during the same period. ATOMs total market capitalization ranking dropped from 23rd to 24th. As of the end of the third quarter, ATOM ranked 10th in market capitalization among network tokens.
ATOM is the native token of Cosmos Hub and is compatible with the ICS-20 standard, allowing users to transfer ATOM between chains through the IBC protocol. The total supply of ATOM is approximately 356 million, and the circulating supply is approximately 293 million. This asset has the following capabilities:
Transactions on Cosmos require ATOM to pay transaction fees.
Holders can stake ATOM to run validators, secure the network and receive rewards.
Holders can delegate ATOM to existing validators to help secure the network and earn a portion of validator rewards.
All staked and delegated ATOMs can be used to participate in the networks governance process.
Revenue is measured as total transaction fees. Cosmos Hub revenue increased 2.4% sequentially. Revenue spiked on July 31, with average daily transaction fees rising to $0.22 that day, well above the quarterly average of $0.04.
ATOM Token Economy
In the third quarter, Cosmos Hubs actual yield averaged approximately 4.5% and ended the quarter at 4.65%. ATOM’s high inflation rate of approximately 14% almost offsets the approximately 19% reward rate given to validators and delegators. The circulating supply is primarily affected by the staking rewards of validators and delegators. Since both the reward rate and the inflation rate are high, this places a heavy burden on ATOM holders who do not participate in staking.
As of Q3, there are two deflationary pressures on the ATOM token:
Governance Burn - Cosmos Hub has an on-chain governance mechanism where ATOM token holders can vote and propose proposals such as changes to consensus parameters and community pool fund allocation. Submitting a proposal requires a minimum deposit of 250 ATOM from any token holder. If the proposal is rejected, the deposited ATOM will be destroyed.
Reduction - If a transaction is signed twice or the validator is offline for a long time, the ATOM reward of the validator node may be reduced. The reduced rewards are subsequently destroyed.
The rejected ATOM 2.0 proposal reimagined ATOM’s token economics. The goal of the proposal is to significantly reduce the issuance of ATOM within a few years and then eliminate inflation entirely. Additionally, it aims to improve capital efficiency through liquidity staking and position ATOM as an inter-chain reserve asset. Ultimately, these actions will drive the value accumulation of ATOM tokens.
Although the initial proposal was rejected due to its broad scope and rapid introduction, the individual components are still being explored as separate proposals. It is worth noting that two proposals (liquidity staking function to increase the size of the treasury and improve ATOM capital efficiency) were adopted in subsequent proposals after they were first introduced in ATOM 2.0. The community is still discussing other ATOM 2.0 features, including a permissionless shared security model and a social coordination (i.e. governance) center for inter-chain technologies (such as IBC, CosmWasm, etc.).
Since then, the community has failed to pass additional proposals related to token economics, such as burning ATOM based on the amount of transaction fees or incentivizing holders to stake their tokens. Developers are also discussing ways to improve Cosmos Hub’s fee mechanism to reduce spam transactions. One option is to use a model similar to EIP-1559, where part of the fees paid to validators are burned.
In the third quarter, Atom Accelerator DAO (AADAO) selected Blockworks Research, Binary Builders and RMIT University to propose a new ATOM token economic reform - Tokenomics RFP. The five proposal teams explored governance, liquidity staking, treasury, public funds, relationships within the Atom economic zone, and the issuance of ATOM.
Blockworks Research proposes a fiscal policy change. The proposal aims to transition from the current static 10% community pool tax to a more diverse approach to taxation. This new approach includes the following components:
Voting Power Tax: Introduce a tax to prevent delegation to validators with higher voting power to address concentration of power issues.
Dynamic community pool tax: It is proposed to change the community pool tax from a fixed percentage of inflation to a schedule that decreases over time until a base rate of 5% is reached.
network analysis
Daily active addresses and daily transaction volume decreased by 19.8% and 6.3% month-on-month respectively. Cosmos Hub continues its transformation into the center of a new type of multi-chain ecosystem, where Cosmos Hub serves as a security provider rather than just an interoperability hub. As the transition progresses, activity on the Cosmos Hub mainnet is likely to decrease as usage shifts to its child chains. This is further explored in the Atom Economic Zone Analysis section.
Historically, active addresses and transaction volume have been closely correlated, and this continued to be the case in the third quarter. The continued coupling suggests that the surge in trading activity in August was due to new users coming online and interacting with the network, rather than just existing users trading more frequently.
Staking and Decentralization
Cosmos Hub’s 67.6% pledge rate, although down 3.6% month-on-month, is still one of the higher pledge rates among other L1 networks. Stakeholders include validators and delegators. Users who meet the system requirements can run validators by staking ATOM to protect the network and receive rewards. Token holders can delegate at least one ATOM to an existing validator to receive a portion of the relevant validator’s rewards. Delegators are rewarded based on the number of tokens staked, although they are required to pay commissions set by individual validators. In Q3, governance proposal 826 set the minimum commission for validators at 5%.
Only the top 180 validators (ranked based on the total amount of self-staking and delegated ATOM tokens) can receive rewards. Of these validators, the top eight control 33% of the total pledged volume, giving Cosmos Hub a Satoshi Coefficient of 8.
Governance and Grants
Cosmos Hub uses a combination of offline and online governance processes. Network improvement proposals and parameter changes are designed and discussed offline, typically in the Cosmos Governance Forum. Anyone can submit a network or fiscal management proposal and participate in discussions about whether to pursue it. Users can also submit any network change request as an official proposal to Cosmos Hub’s online governance system. Once in the online governance system, ATOM holders vote on whether to approve (and ultimately implement) proposed changes.
There were 24 governance proposals in the third quarter, 10 of which were passed. Notable proposals passed include V1 1, V1 2 and V1 3 software upgrades, as well as expanded AADAO management of ATOM protocol owned liquidity (POL). The AADAO Transparency Report 4 details the finances and grants distributed by the DAO. During the third quarter, AADAOs tranches 4 and 5 grants totaling $1.097 million were distributed to award recipients. Projects funded by these grants include sponsorship of Cosmoverse, DoraHacks’ hackathons, and more. Later, tranche 6 was announced and the grants were distributed in October. These rounds bring the total number of grants awarded by AADAO to 27, with a total value of $2.5 million.
Binary Builders’ “ATOM Aligned Vault” aims to increase the decentralization of Cosmos Hub governance and voting. With validator operating costs increasing and concerns about network decentralization, Binary Builders proposes to allocate more shares to validators based on their voting power. The proposal aims to support low-end validators and further decentralize the network. It also explores how voting rights can be enforced using ATOM on other AEZ networks (more details in the Atom Economic Zone Analysis section).
Blockworks Research’s proposals have governance implications, in addition to fiscal policy changes, which are also outlined in the financial analysis of the ATOM Token Economics section.
The voting rights tax aims to solve the problem of ownership concentration by delegating validators with high voting rights.
As the demand for liquid mortgages grows, a dynamic liquidity mortgage tax will be levied on liquid mortgagers. The aim is to find a natural balance for liquid staking market penetration while generating tax revenue for the Cosmos Hub.
Removing the 25% liquidity staking cap will allow more participants to benefit from liquidity staking. Cosmos Hub itself does not support liquidity staking, but it is available through the Stride network in AEZ. This is further explored in the Atom Economic Zone Analysis.
Cubic Delegation has the potential to solve centralization issues surrounding online governance while ensuring quorum is still met.
IBC
Cosmos Hub has 56 IBC peers and 269 IBC channels. Peers refer to different counterparties that have established IBC connections with Cosmos Hub; channels refer to the total number of routes that can be used to connect peers. Activity among unique senders, unique recipients, and total transfers (including inbound and outbound) all saw declines. Inbound unique recipients fell 40.6% month-on-month, the largest change. All these IBC indicators reached yearly lows.
In most cases, inbound and outbound transfers are closely related. There are some exceptions, such as the massive pit stop peak in May 2023. During the third quarter, there were several peaks where daily outbound transfers exceeded inbound transfers by 2-3x.
Atom Economic Zone
The Atom Economic Zone (AEZ) is a collection of ecosystems aligned with the ATOM token, including networks with various associations and integrations with the ATOM token. Multiple networks exist in an AEZ with different capabilities. Stride and Neutron gain replication security, and Osmosis allows paying with ATOM. Other networks such as Kujira or Agoric rely on ATOM to provide most of their liquidity.
Replication security (formerly known as inter-chain security), a form of shared security, is the AEZ strategy of greatest concern to the Cosmos Hub community and other inter-chain networks. Shared security refers to allowing validators of one network to participate in the consensus of another network using their stake on that chain. This setup would allow smaller-capitalization networks to rent security from larger-capitalization networks. As of Q3, Neutron and Stride are the only chains using replication safety.
Binary Builders’ “ATOM Aligned Treasury” (AAT) aims to make ATOM the default currency within AEZ and align staking and governance between the Cosmos Hub and consumer chains. The team intends to use AAT funds for development work and to provide liquidity within the AEZ.
Neutron
The passage of Prop 792 makes Neutron the first chain to leverage the Cosmos Hub validator set and security through replication security. As a CosmWasm extension of Cosmos Hub, Neutron effectively becomes the DeFi hub of Cosmos Hub.
Neutron is still a relatively new network, having only launched this year. Proposition 72 allocated Cosmos Hub funds for the development of Neutron, and Proposition 819 reallocated these funds directly to the Neutron Foundation.
Stride
Stride implemented replication safety shortly after Neutron. This network provides liquidity collateral for various inter-chain networks and assets. Since ATOM is a core part of Strides activities, it became an obvious choice for early adoption of Cosmos Hub security. Liquidity staking is a large market with narratives in various other ecosystems. By replicating security, Cosmos Hub has a liquidity staking solution in the AEZ because its utility is aligned through governance.
Other networks in AEZ also value ATOM mortgaged through Stride, namely stATOM. Cosmos Hub Proposal 805 (amendment to Prop 800 - Liquidity as a Service) will have AADAO deploy 450,000 ATOM on Astroport Neutron into an ATOM/stATOM constant product pool. On Osmosis, ATOM/stATOM’s TVL exceeds $20 million.
Governance Proposal 817 seeks Cosmos Hub community approval to select a 5-person advisory committee responsible for evaluating and selecting host chain validators through the Stride delegation process.
Osmosis
Osmosis AMM DEX has been deeply integrated with Cosmos Hub and ATOM since its inception. As of Q3 2023, the first and largest TVL pool on Osmosis is the ATOM/OSMO pool. Approximately 75% of Osmosis TVL comes from the ATOM pool (mainly ATOM/OSMO and ATOM/stATOM).
Osmosis ATOM alignment and role in AEZ goes far beyond the liquidity pair. ATOM is another fuel token on DEX. While ATOMs are used for fuel in some cases, many are suspected to be caused by robots due to active patterns.
Proposal 810 on the Cosmos Hub will identify the Osmosis DEX for flexible gas fee payments. The proposal would allow transaction fees on the Cosmos Hub to be paid in any token, leveraging Osmosis to exchange alternative tokens for ATOM.
Other networks
More chains may join AEZ soon with different capabilities. Composable Finance submitted a proposal to join the AEZ and obtain replication security from the Cosmos Hub, just like Stride and Neutron. Neutron as a programmability and DeFi hub, Stride as a liquidity staking solution, and Composable proposes to be a rollup settlement hub as it connects to other multi-chain ecosystems.
While the definition of copy-safe is easy to define, ATOM alignment is more subjective. Some community members believe that networks such as Agoric and Kujira are already part of the AEZ due to their ecosystem being intertwined with ATOM. In other words, ATOM tokens can provide a large amount of liquidity to the Cosmos Hub and facilitate a large number of inter-chain activities.
Summarize
Since its inception, the Cosmos Hubs role has been as an interoperability center and focal point for the broader Cosmos ecosystem. In Q3, Cosmos Hub took a major step toward becoming a security provider. With replication security, Neutron and Stride become the first chains to be protected by the Cosmos Hub. The Cosmos Hub’s new positioning as a modular security provider increases its role as the cultural center of the broader Cosmos ecosystem, as the chain joins the Atom Economic Zone.
The Cosmos community has submitted proposals to include more chains such as Composable Finance. In addition, other inter-chain networks are exploring other forms of “ATOM alignment,” such as using ATOM to pay fees and becoming part of the Atom Economic Zone.
Following the rejected ATOM 2.0 proposal, which reimagined the ATOM token economy in various ways, most concepts continue to be explored as separate small proposals. Governance, decentralization, liquidity staking, fiscal management and token economics are topics explored in Q3. AADAO has been providing grants to teams to address these topics, including the Tokenomics RFP.
