ATOM 2.0: Will it Make Cosmos a Crypto Powerhouse?

Cosmos has been a top cryptocurrency for a while, and its inter blockchain communication standard has been adopted by several chains as one of the main standards for interoperability. However, the ATOM token has been unable to capture a lot of the value it has created. ATOM 2.0 hopes to change this by introducing new and exciting features that make ATOM relevant again.

Cosmos was released in 2019 by Tendermint, a software company now known as Ignite. Before the release of Cosmos, Tendermint also released the Tendermint consensus mechanism which drastically simplified the blockchain creation process. It allowed developers to use a pre-made consensus mechanism and network structure to create their own blockchain and allowed developers to devote their time to building out their network’s application and features. Along with being easy to implement, Tendermint is also scalable and can handle hundreds of transactions per second while also offering instant finality on transactions, meaning that there is no need to wait for block confirmations like there is on Ethereum or Bitcoin.

Tendermint and Cosmos’ tooling have been utilized by many top blockchains, including BSC, Crypto.com, Osmosis, and the now-infamous Terra. 

One of the main benefits of Tendermint and the Cosmos Software Development Kit, or Cosmos SDK, is their ease of implementing the inter blockchain communication, or IBC, standard. The IBC uses a hub-and-spoke model where one blockchain acts as the intermediary between other chains, and then assets can be transferred from one chain to the other. In theory, Cosmos was supposed to be this intermediary chain, and ATOM holders would benefit from the constant bridging that would be taking place between the Cosmos chain and other IBC-enabled chains.

Even though this vision was grand and exciting, the reality turned out much different. Since the main monetization strategy for Cosmos was through it being the hub for the IBC, they did not profit from other blockchains using their free tooling to create their own chains, and these other changes took advantage. For example, BSC has yet to integrate with the IBC but has built one of a top 3 blockchain by market capitalization on the back of the Tendermint team’s work. Since each chain built on Tendermint did not have to use the ATOM token to pay fees, there was no way for ATOM to gain any sort of value from chains built using their SDK. Additionally, other hubs have become more prominent, such as Osmosis, the DeFi hub of the IBC. Since Osmosis already has a lot of volume due to its hosting of a decentralized exchange and future plans to host a lending market, it only made sense that it became the de facto hub of activity in the IBC. 

To counter these challenges and give ATOM a value accrual method, the Cosmos team has released a whitepaper for ATOM 2.0. There are a few main features that are bringing more excitement to the project and will hopefully lead to ATOM living up to its title as the “Internet of Blockchains.”

One of the main features of ATOM 2.0 is the possibility for interchain security, or ICS. Currently, any blockchain that utilizes Tendermint or the Cosmos SDK is required to start up its own security, which means finding validators to stake the native tokens and secure the network. This is an incredibly difficult process, and there are lots of opportunities for malicious actors to get control of the network or take advantage of issues while it is in an infant state. To solve this, ATOM 2.0 proposes a method for new chains to rent security from Cosmos and ATOM, which already has a strong set of decentralized validators. ATOM stakers would be responsible for block production and security for the new chain, and the new chain would provide token rewards to ATOM stakers as compensation. This would bring a lot more value to ATOM, as it would be used to provide security on several different chains, and staking ATOM would bring with it the possibility to passively accrue new and exciting tokens. ATOM stakers would only have to own one coin but would be able to acquire ownership over several different projects in the IBC, and essentially bet on the IBC itself’s success.

The second big change to Cosmos is the introduction of the Interchain Scheduler. Since all of the chains on IBC are entirely sovereign and separate from one another, there are constant arbitrage and value extraction opportunities between chains. The Interchain Scheduler would give blockchains the opportunity to sell some of their block space to it, and in exchange, the scheduler will guarantee (in theory) the execution of an arbitrage trade across chains. This arbitrage would typically be taken advantage of by a trader or someone who has no incentive to use the chain, but it is now going to be directed to the chain and the Cosmos ecosystem. This value-capture mechanism significantly increases the efficiency and treasury of the IBC.

Instead of the Interchain Scheduler giving the value it accrues back to ATOM stakers, it uses it to fund another part of the ATOM 2.0 vision: the Interchain Allocator. The allocator will be responsible for funding new projects building in Cosmos through grants and other rewards. This sustainable growth of the ecosystem using MEV that would otherwise be taken by traders and bots is an incredibly interesting idea and will help to catalyze the growth of the Cosmos ecosystem.

Much like Ethereum 2.0, ATOM 2.0 is a complicated and multi-faceted upgrade that could take years to fully release. In the meantime, the excitement for what’s to come in the Cosmos ecosystem will help to keep it relevant, and more and more chains may choose to build there to reap the future rewards of the allocator and scheduler. ATOM 2.0 represents a massive shift in the tokenomics of Cosmos, and one that bodes well for the so-called Internet of Blockchains.

By Lincoln Murr

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