$ATOM: Ready for a rebound?

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TLDR;

• $ATOM, the native token of the Cosmos blockchain network, has underperformed against ETH in recent months - currently sitting around yearly lows.

• This is likely due to a number of factors, including its lack of value accrual or catalysts to bring new investors to the token.

• However, there are several upcoming events that could help to reverse this trend and drive new demand for ATOMs.

• These include an update of $ATOM’s tokenomics model, Neutron launching on Binance Launchpool, and dYdX’s V4 launch. 

• Overall, the upcoming catalysts for $ATOM are promising and could lead to significant investment in the token in the coming months.

Introduction

The Cosmos project was founded in 2014 by Jae Kwon and Ethan Buchman. The Cosmos whitepaper was published in 2016, and the Cosmos SDK was released in 2017. The Cosmos Hub launched in 2019, and the first Cosmos-based appchains launched in 2020.

The Cosmos blockchain is a network of interconnected blockchains that enables developers to build custom, secure, scalable, and interoperable blockchain applications quickly.

Cosmos is based on the Tendermint consensus mechanism, which is a delegated proof-of-stake (DPoS) consensus mechanism designed to be fast, secure, and scalable. Cosmos also uses a Tendermint-based blockchain called the Cosmos SDK, which provides developers with a set of tools and libraries for building custom blockchains.

Cosmos has a number of advantages over other blockchain platforms, including:

• Interoperability: Cosmos blockchains are interoperable with each other, meaning that users can easily transfer tokens and data between different Cosmos chains. This is achieved through the Inter-Blockchain Communication (IBC) protocol.

• Scalability: Cosmos blockchains are designed to be scalable, meaning that they can handle a large number of transactions per second. This is achieved through the use of parallel processing and sharding.

• Security: Cosmos blockchains are designed to be secure, using a number of security features, such as Tendermint consensus and IBC security modules.

Overview of the Ecosystem

The Cosmos ecosystem has grown rapidly since its launch. There are now over 100 Cosmos-based blockchains in development or production, and the total value locked (TVL) in Cosmos is over $1.5 billion.

The ecosystem is made up of a number of different components, including:

• Cosmos Hub: The Cosmos Hub is the central hub of the Cosmos network. It is responsible for coordinating communication between different Cosmos chains and providing security for the entire network.

• Cosmos SDK: The Cosmos SDK is a Tendermint-based blockchain that provides developers with a set of tools and libraries for building custom blockchains.

• Inter-Blockchain Communication (IBC) protocol: The IBC protocol is a cross-chain messaging and bridge protocol that allows Cosmos blockchains to communicate with each other and transfer tokens and data.

• Cosmos appchains: Cosmos appchains are custom blockchains that are built using the Cosmos SDK. Appchains can be used for a variety of purposes, such as DeFi, NFTs, and gaming.

Tokenomics

The native token of the Cosmos blockchain is $ATOM. The token is used for staking, governance, and transaction fees. Holders can stake their tokens to secure the Cosmos Hub, earn rewards, and vote on governance proposals to help shape the future of the Cosmos ecosystem.

ATOM has a number of functions, including:

• Securing the Cosmos Hub: $ATOM stakers help to secure the Cosmos Hub network by validating transactions and voting on governance proposals.

• Staking for Annual Percentage Yield (APY): $ATOM stakers are rewarded with new ATOM tokens, which are created through inflation. The current APY for $ATOM staking is around 3.6%.

• Key to On-Chain Governance: $ATOM stakers have the right to vote on proposals and make decisions on the future of the network.

• Stakedrops: New chains building with the Cosmos SDK often incentivize $ATOM holders through stakedrops. This is because $ATOM holders are likely to stake the tokens they receive, which provides instant stability to a new chain.

Inflation and Supply Cap

$ATOM has an inflationary model, with a target inflation rate of 7% and a ceiling of 20%. The inflation rate is adjusted based on the percentage of $ATOM that is staked. When the staked percentage is above 66%, the inflation rate heads down to the floor of 7%. When the staked rate is below 66%, the inflation rate starts heading up towards the ceiling, 20%.

The purpose of inflation is to incentivize staking. Staking helps to secure the Cosmos Hub network by validating transactions and voting on governance proposals. $ATOM stakers are rewarded with new tokens, which are created through inflation.

$ATOM does not have a supply cap. This is because Proof of Stake networks generally do not have a maximum supply, which necessitates inflation eventually going to zero once that supply is reached.

Value Accrual

The ATOM tokenomics are designed to incentivize staking and governance. However, a common criticism from the community is that the tokenomics do not provide enough value accrual to the ATOM token directly.

Cosmos is a framework for building interoperable, customizable blockchains, and it allows developers to create AppChains, which are essentially their own independent blockchains. Whilst novel in the current approach, the architecture has resulted in AppChains avoiding using the $ATOM token for a variety of reasons related to the mechanics and goals of these specific chains. The main reasons why they opt for their own tokens include:

1. Independence and Customization: AppChains are designed to be independent blockchains with their own sets of rules, governance, and tokenomics. Using the $ATOM token would limit their customization and may not align with their specific use cases and requirements.

2. Unique Tokenomics: AppChains can have their own unique tokenomics, which are tailored to their specific needs. These tokenomics might involve features such as inflation, staking rewards, or transaction fees that differ from those of the $ATOM token.

3. Divergent Governance: Governance mechanisms for an AppChain can be distinct from those of the Cosmos Hub, where $ATOM tokens are used for voting. The governance of an AppChain might prioritize different decision-making processes or have different participants.

4. Focus on Specific Use Cases: AppChains are often designed to address specific use cases or industries, and using the $ATOM token might not make sense in those contexts. For instance, an AppChain for supply chain management might introduce a token specifically for tracking goods within its ecosystem.

5. Avoiding Dependency and Competition: Relying on the $ATOM token could introduce a level of dependency on the Cosmos Hub, and it could create competition for the limited resources and attention of $ATOM holders. AppChains might want to avoid these potential conflicts.

6. Economic Model and Incentives: AppChains may have their own economic models and incentive structures that differ from those of ATOM tokens. This can be essential for aligning stakeholders and achieving specific objectives.

7. Token Swap: While AppChains do not use $ATOM tokens, they might provide a way for users to swap their $ATOM tokens for the native token of the AppChain. This can help facilitate the onboarding of existing Cosmos ecosystem participants.

In summary, AppChains built on Cosmos often have unique goals, use cases, and tokenomics that make it more practical for them to have their own native tokens rather than relying on $ATOM. This flexibility allows developers to tailor their networks to specific requirements and ensure that their ecosystems function optimally for their intended purposes. Historically, this has resulted in criticism from investors, and a dislocation in the use of the Cosmos network, and value accrual back to $ATOM token holders.

Upcoming Catalysts

$ATOM, the native token of the Cosmos blockchain network, has underperformed against ETH in recent months and currently sits around yearly lows. We believe this is due to a number of factors, including its lack of value accrual and few catalysts to bring new investors to the token. That said, we believe the emergence of several upcoming events could help to reverse this trend and drive new demand for $ATOM.

These catalysts include:

Updated Tokenomics

At Cosmoverse 2023, held in October, the team unveiled plans to engage in discussions to revaluate ATOM's tokenomics and increase community involvement in the decision-making process. In our opinion, this not only underscores the team’s commitment to decentralization and inclusivity but more importantly offers a route for the $ATOM token to become more closely aligned with ecosystem growth.

A general outline of this process was given, and we’ve highlighted some of the forthcoming tokenomics adjustments:

1. Community Participation: As part of a shift towards greater community involvement, Cosmos is placing considerable importance on soliciting community input throughout the decision-making process concerning $ATOM's tokenomics. In-depth discussions will take place in the coming weeks, preceding the governance proposal voting stage. This strategy empowers stakeholders to wield a direct influence over shaping the Cosmos Hub's future.

2. Incremental Proposals: Rather than presenting a single, comprehensive proposal, the changes to $ATOM's tokenomics will be introduced incrementally, in more manageable segments. This approach fosters focused discussions, constructive feedback, and better alignment with the diverse interests prevalent within the Cosmos ecosystem.

Neutron’s Binance Launchpool

Neuron is a new project building on the Cosmos ecosystem. The project allows developers to easily build cross-chain applications over Inter-Blockchain Communication Protocol (IBC) and provides DeFi dApps with the full economic security of the Cosmos Hub. It is ultimately a decentralized infrastructure project for building and running blockchain-based applications and aims to provide a more scalable, secure, and user-friendly platform than existing blockchain networks.

On October 10th, Binance announced Neutron to be the 38th Launchpool project on it’s platform. When a new project launches on Binance Launchpool, users can stake their supported tokens into pools to farm the new project's tokens. The more tokens users stake, the more rewards they will earn.

Binance Launchpool is a popular platform for both new projects and investors. For new projects, it is a way to raise awareness and funding for their projects. For investors, it is a way to earn rewards from new projects without having to buy the new project's tokens on the open market.

The Neuron Launchpool is a significant event for the Cosmos ecosystem, as it will be the first time that a project launching on Cosmos will be able to leverage the platform. This is expected to bring a lot of attention and investment to the Neuron project, and could also act as a catalyst for $ATOM, the native token of the Cosmos ecosystem.

DYDX V4 Launch

DYdX, one of the most popular and successful DEX’s on the market, is launching as a Cosmos appchain to take advantage of the Cosmos SDK's modularity and scalability. The Cosmos SDK is a framework for building blockchains, and it provides a number of features that are well-suited for decentralized exchanges, such as:

Interoperability: Cosmos chains are interoperable with each other, as well as with Ethereum and other non-Cosmos chains. This means that dYdX users will be able to seamlessly transfer assets between dYdX and other blockchain ecosystems.

Scalability: Cosmos chains are designed to be scalable to millions of users and transactions per second. This is important for dYdX, as it needs to be able to handle a high volume of trading activity. As dYdX founder, Antonio Juliano, says, “L2’s right now can kind of process on the order of 100 transactions per second or so, which is great. That's kind of a 10x improvement over Ethereum itself. But we need more on the order of 1,000-plus transactions per second, just because of the nature of the product that we're building.”

Security: Cosmos chains are secured by a robust consensus mechanism and a number of other security features. This is important for dYdX, as it needs to be able to protect its users' funds.

In addition to these benefits, launching as a Cosmos appchain will also allow dYdX to take advantage of the Cosmos community and ecosystem. The Cosmos community is a large and active community of developers and users who are committed to building a better blockchain ecosystem. The Cosmos ecosystem also includes a number of other projects that are complementary to dYdX, such as decentralized asset bridges and custody solutions.

Overall, launching as a Cosmos appchain is a positive development for dYdX. It will allow dYdX to take advantage of the Cosmos SDK's modularity and scalability, as well as the Cosmos community and ecosystem.

Conclusion

In conclusion, the Cosmos project has evolved significantly since its inception, and it has become a pioneering platform for building interconnected blockchains. These interconnected blockchains, known as AppChains, enable developers to create custom, secure, scalable, and interoperable blockchain applications.

The core features of Cosmos, including the Tendermint consensus mechanism and the Inter-Blockchain Communication (IBC) protocol, offer distinct advantages such as interoperability, scalability, and security. The ecosystem has witnessed remarkable growth, with over 100 Cosmos-based blockchains in development or production, and total value locked growing significantly.

However, the tokenomics of the native $ATOM token has faced criticism due to its limited value accrual. Cosmos is addressing this concern by engaging the community in discussions to reevaluate ATOM's tokenomics incrementally, fostering inclusivity and alignment with the ecosystem's growth. The Neutron project's integration with Binance Launchpool and DYdX's move to the Cosmos appchain framework are anticipated catalysts that could rejuvenate interest in $ATOM and the entire Cosmos ecosystem.

We beleive Cosmos continues to be an exciting and evolving project within the blockchain industry, and with these upcoming catalysts and a commitment to improving tokenomics, the whole ecosystem has several tailwinds to watch in the coming months. We’ll be exploring ways to gain exposure to this growth as an investment theme in some upcoming articles and look forward to sharing our findings.

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