Cosmos is a system that connects blockchains and enables exchanging native cryptocurrencies from one blockchain to another. This article explores the history of Cosmos, its technology, and the ATOM token.
Cosmos belongs to the interoperability category
Let’s start by placing Cosmos into the correct cryptocurrency subcategory. We divide cryptocurrencies into three different categories: currencies, platforms, and tokens.
Currencies have no other significant purpose than transferring and storing value. Bitcoin is the most famous project in this category. Other well-known currencies are Litecoin and Monero.
Platforms serve as operating systems for smart contracts and decentralized applications (Dapps). The most famous platform is Ethereum, but it has recently got an increasing number of rivals, such as Cardano, Avalanche, and Solana. Platforms can be thought to be a bit like iOS or Android operating systems.
Tokens are issued on platforms and do not have their own blockchain. Tokens are often either governance tokens or utility tokens. Some of the best-known tokens are Uniswap and Aave.
Cosmos belongs to the platform category, although it does not directly compete with Ethereum and its rivals. Cosmos should be placed into a subcategory called. Cosmos is a protocol that other blockchains can attach to. Polkadot and Polygon are a bit similar projects.
ATOM is the native token that is used for staking and paying for transaction fees.
History of Cosmos
Cosmos project was founded as early as 2014 when Jae Kwon and Ethan Buchman developed Tendermint. This is a consensus algorithm that became the core of Cosmos later on. The whitepaper of Cosmos was released in 2016.
In 2017, Kwon and Buchman founded the Interchain Foundation, which raised USD 17 million in an ICO. This is when the ATOM token was created as well. In 2019, the project raised $9 million through a Series A funding round.
At the beginning of 2020, Cosmos suffered internal disagreements. As a result, Jae Kwon left the project. The development continued regardless with a new occupation.
One important milestone was reached in spring 2021 with the release of the Inter-Blockchain Communication (IBC) protocol after developing it for five years.
IBC’s development continued in 2021 and led to the launch of Gravity DEX. This protocol allows you to exchange cryptocurrencies from different blockchains without centralized intermediaries, combining the AMM model and order book model. The first application using the protocol, Emeris, was released in August 2021. To use Emeris, you must install the Keplr browser wallet.
Cosmos aims to create an “internet of blockchains”. This is a network of different blockchains that can communicate with each other in a decentralized manner. Cosmos-related blockchains can retain their sovereignty, and the network enables different use cases for different blockchains.
While exploring the Cosmos technology, you will come across a few concepts: Tendermint BFT, Cosmos SDK, and Inter-Blockchain Communication (IBC). These open-source tools are an important part of Cosmos’ technology, so it’s worth checking them out one by one.
Tendermint BFT is a consensus algorithm used to secure the network by the Cosmos network nodes. The algorithm also validates transactions in the blockchain and issues new blocks. At the heart of Tendermint BFT is Tendermint Core. It is a Proof-of-Stake mechanism where ATOM tokens are staked.
Tendermint BFT can process up to 10,000 transactions per second. High TPS is due to the instant finality of Cosmos’ consensus algorithm.
Tendermint BFT only needs 2/3 of consensus to issue blocks. This means that 1/3 of the nodes could be offline, and the Tendermint Consensus would still be able to operate. Compared to Bitcoin and Ethereum, which use the Proof-of-Work consensus algorithm, the difference is significant.
Cosmos SDK is software that allows developers to create public Proof-of-Stake blockchains and private blockchains on top of Tendermint BFT.
Cosmos SDK (software development kit) communicates with Tendermint’s Application Blockchain Interface (ABCI).
ABCI supports a variety of programming languages, so developers are free to decide which language they want to use to create their blockchain. You can think of ABCI as a kind of translator app.
Tendermint saves plenty of time for software developers as it is not necessary to build blockchains from the scratch. For example, the well-known blockchain Binance Chain is built using Cosmos SDK. THORchain also uses the Tendermint consensus algorithm.
Inter-Blockchain Communication (IBC) protocol
The Inter-Blockchain Communication (IBC) protocol allows cryptocurrencies from different blockchains to be swapped without centralized exchanges and intermediaries. IBC takes advantage of the instant finality of the aforementioned Tendermint Consensus.
Blockchains that use IBC must have this same feature. Proof-of-Work cryptocurrencies (such as Bitcoin and Ethereum) are therefore not directly compatible with IBC, but it is also possible to integrate these into the ecosystem through special arrangements (more on this a little later).
In the Cosmos ecosystem, each blockchain performs runs each other’s light clients. This is slightly similar to the structure of THORChain.
When an IBC transfer takes place between blockchains A and B, Cosmos ATOM tokens are locked in chain A. Let’s say in this case 10 pcs.
After this, proof that a certain amount of ATOM tokens are locked is carried to chain B.
Next, this proof is verified in chain B against the header. If it is true, 10 ATOM tokens are issued in chain B.
However, these ATOM tokens are not real native ATOM tokens which are located only in chain A. These are only representations of the ATOM token and proof that the ATOM tokens are locked in chain A.
All blockchains in the Cosmos ecosystem can be connected by such IBC connections. The only problem is that the number of connections is rapidly increasing to a very high level.
To solve this problem, Cosmos has created a so-called hub and zones model. Hubs and zones are two different categories of blockchains in this model. Cosmos Hub is a Proof-of-Stake blockchain used by the Tendermint consensus algorithm described above, developed to connect zone blockchains to each other.
When a zone creates an IBC connection with the hub, it can automatically change value with all other zones that are connected to the hub.
Zones are able to operate independently. They are completely free to secure transactions in their blockchain, create tokens and make changes to their own blockchain. The zone model resembles Polkadot’s relay chain and parachain model.
Proof-of-Work blockchains that do not naturally have an instant finality feature can be connected to the Cosmos ecosystem with the so-called Peg Zone proxy chain.
Peg Zone is a blockchain that tracks the state of another blockchain. Peg Zone blockchain itself has an instant finality so it is compatible with IBC.
Cosmos ATOM token
The Proof-of-Stake blockchain of Cosmos operates using ATOM tokens. The token also holds the entire hub and zones structure together. Validators stake ATOM tokens and receive transaction fees as staking rewards.
Validators also participate in Cosmos governance, where voting rights are given based on the number of staked tokens. Only the 100 biggest stakers can operate as validators, so Cosmos is significantly less decentralized than Ethereum, as an example.
Staking of the ATOM tokens can be delegated to validators, enabling anyone to earn staking rewards. Validators have an incentive to act according to protocol guidelines, as delegates can easily transfer their staking input from one validator to another.
ATOM tokens do not have a maximum quantity. Cosmos adjusts the number of new ATOM tokens issued into circulation according to the number of staked ATOM tokens. The more staked tokens there are, the higher the inflation rate of the ATOM token is.
This motivates token holders to stake, as those who do not stake suffer through inflation. The inflation of the ATOM token is between 7% and 20% and the number of staked tokens is up to almost 70%.
The Coin Bureau video below gives a good introduction to the Cosmos project and ATOM token.
ATOM’s price has stagnated behind many other layer-1 blockchains. This may be due to the fact that ATOM tokens do not have a clear value-return mechanism. ATOM increases its value based on the more blockchains use its hub. On the other hand, ATOM tokens are not needed to create blockchains inside the Cosmos ecosystem.
In theory, there is nothing to prevent for example Binance from setting up its own hub and attracting Tendermint blockchains to it. Blockchains also do not have to use ATOM tokens to pay transaction fees.
Conflicts in the developer team in recent history also cast some dark clouds over the project. The purpose of the ATOM token is strongly based on its governance, and this value is difficult to measure.
Compared to closest competitor Polkadot, Cosmos has a finished product already and several blockchains using it. Besides the aforementioned Binance Smart Chain and THORChain, these projects include stablecoin protocol Terra and the decentralized cloud service Akash.
At the time of writing this article, Polkadot is approximately 5 times bigger than Cosmos in market cap. What comes to the tokens of the Cosmos team and developers, it is unlikely that there will be bigger sales, as all tokens were unlocked already in March 2021.
The Cosmos roadmap
Perhaps the most anticipated update of Cosmos is Gravity Bridge, which is a bridge between Ethereum and Cosmos Hub. Gravity Bridge enables the transfer of cryptocurrencies in the Cosmos ecosystem to ERC-20 tokens in the Ethereum ecosystem and vice versa. This means that ERC-20 tokens can be taken into evolving DeFi sector of Cosmos.
This technology would therefore enable to deposit cryptos in the Aave protocol, and to take out a stablecoin loan against a similar application on Solana, for example.
Another innovation in Cosmos roadmap is Interchain Accounts. With IBC technology, these enable you to manage crypto assets from all blockchains in Cosmos hub through a single Cosmos Hub account.
The plans also include shared security, meaning that the staked ATOM tokens could also be used to secure blockchains apart from Cosmos hubs. This would allow stakers to have higher staking rewards.
Cosmos also plans derivatives for staked ATOM tokens. Staking derivatives gain staking rewards with the difference that they can also be traded on the market.
ATOM price and how to buy ATOM
The ATOM token is listed on all the major cryptocurrency exchanges. The best liquidity can be found on Binance.
By staking ATOM tokens, you can get a 5-10% annual return on your tokens. You can do staking in Binance and Coinbase, for example. If storing ATOM tokens in your own crypto wallet is a better option for you, then you can also stake and store them from well-known wallets like a TrustWallet or Ledger cold wallet.