Original Title: "State of Cosmos Hub Q3 2023"

Original Author: Red Sheehan, Messari

Translated by: Deep Tide TechFlow

Key Insights

Neutron and Stride have become the first batch of blockchains protected by the replication security mechanism of Cosmos Hub, sharing their validator set. This marks the beginning of the Atom economy zone.

IBC transfers in and out decreased by 27.3% and 22.0%, respectively. The role of Cosmos Hub is transitioning from an interoperability hub to a security provider.

Despite the decline in ATOM price and Cosmos Hub activity, its revenue increased by 2.4% month-on-month.

The daily active addresses and daily trading volume both decreased by 19.8% and 6.3% respectively compared to the previous period.

Atom Accelerator DAO has selected Blockworks Research, Binary Builders, and RMIT University to propose a comprehensive overhaul of the ATOM token economy - Tokenomics RFP. These teams have submitted five forum posts detailing their proposals.

Cosmos Hub Overview

Cosmos Hub is an independent application chain focused on interoperability and security. It is a sovereign blockchain that uses a proof-of-stake (PoS) mechanism and an account-based accounting model, without built-in smart contract functionality. ATOM is the native token of Cosmos Hub. Cosmos Hub leads the development of technologies such as Cosmos SDK, CometBFT (Tendermint), ABCI, and IBC, which have been adopted by many interchain networks. Interchain networks consist of sovereign networks connected by the interoperability protocol IBC, also known as the Cosmos ecosystem.

Atom Economic Zone (AEZ) is a collection of ecosystems aligned with the ATOM token, including networks that have various associations and integrations with the ATOM token. The network that rents Cosmos Hub validator security services, namely the consumer chain, is part of AEZ. Due to the lack of programmability, Cosmos Hub security cannot be shared as freely as EigenLayer's re-staking model, but it can be individually enabled through governance. Replicated security (formerly known as inter-chain security) refers to sharing the complete set of Cosmos Hub validators with another chain through governance voting authorization.

Cosmos Hub was launched in 2019 and utilizes technology developed by the Interchain Foundation and Ignite (also known as Tendermint). Multiple teams, including the Interchain Foundation, Binary Builders, Atom Accelerator DAO, Informal Systems, and Strangelove, continue to support the development of Cosmos Hub and the Cosmos technology stack. The Interchain network has over 100 independent networks, each with its unique supporting entity.

Key Indicators

Financial Analysis

ATOM prices have fallen for the second consecutive quarter, with a 21.0% decrease to $7.11 compared to the previous quarter. This lags behind the overall cryptocurrency market, which fell 9.2% during the same period. The total market value of ATOM dropped from 23rd to 24th place. As of the end of the third quarter, ATOM ranked 10th in terms of market value among network tokens.

ATOM is the native token of Cosmos Hub, compatible with the ICS-20 standard, allowing users to transfer ATOM across chains through the IBC protocol. The total supply of ATOM is approximately 356 million, with a circulating supply of approximately 293 million. This asset has the following functions:

Transactions on Cosmos require payment of transaction fees in ATOM.

Holders can pledge ATOM to operate validators, protect the network, and receive rewards.

Holders can delegate ATOM to existing validators to help secure the network and earn a portion of the validator's rewards.

All pledged and delegated ATOM can be used to participate in the network's governance process.

Revenue is measured by total transaction fees. The revenue of Cosmos Hub increased by 2.4% month-on-month. On July 31st, revenue soared, with the average daily transaction fee rising to $0.22, far higher than the quarterly average of $0.04.

ATOM Token Economy

In the third quarter, the actual yield of Cosmos Hub averaged about 4.5%, and at the end of the quarter it was 4.65%. The high inflation rate of ATOM is about 14%, which almost offsets the reward rate of about 19% given to validators and delegators. The circulating supply is mainly affected by the staking rewards of validators and delegators. Due to the high reward and inflation rates, this imposes a heavy burden on ATOM holders who do not participate in staking.

As a practitioner in the encryption industry, I can translate Chinese into English without considering the context or industry-specific terms and phrases. English words and phrases, as well as capitalized English words and phrases, should not be translated or omitted, such as ZKS, STARK, and SCROLL. If there are English characters in the hyperlink, they should be returned directly without translation, and the hyperlink should not be missed. When there are only punctuation marks in the content, the punctuation marks should be returned as they are. HTML tags in the content, such as

, , , and

, should not be translated. If there are English characters in the HTML tags, they should be omitted and returned directly. The content in the hyperlink should be preserved and not translated. All Chinese characters should be translated. The content to be translated is: "As of the third quarter, there are two deflationary pressures on the ATOM token."

The governance and destruction of Cosmos Hub have on-chain governance mechanisms, and ATOM token holders can vote and propose changes such as altering 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 repeatedly signed or the validator is offline for a long time, the ATOM reward of the validator node may be reduced. The reduced reward is then destroyed.

The rejected ATOM 2.0 proposal has reimagined the token economy of ATOM. The goal of this proposal is to significantly reduce the issuance of ATOM over the next few years and then completely eliminate inflation. 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 the ATOM token.

Although the initial proposal was rejected due to its broad scope and rapid introduction, each component is still being explored as a separate proposal. It is worth noting that two proposals, increasing the size of the treasury and improving the liquidity staking function of ATOM, were introduced for the first time in ATOM 2.0 and were subsequently approved in later proposals. 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 interchain technologies such as IBC and CosmWasm.

Subsequently, the community failed to pass additional proposals related to the token economy, such as the destruction of ATOM based on transaction fees or incentives for holders to stake their tokens. Developers are still discussing ways to improve the fee mechanism of the Cosmos Hub to reduce spam transactions. One proposal is to use a model similar to EIP-1559, where a portion of the fees paid to validators is 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. These five proposal teams explored governance, liquidity staking, treasury, public funds, relationships within the Atom economic zone, and the issuance of ATOM.

Blockworks Research has proposed a fiscal policy change. The proposal aims to transition from the current static 10% community pool tax to a more diversified tax structure. This new approach includes several components:

IBC

Atom Economic Zone

Neutron

Stride

Proposal 817 seeks approval from the Cosmos Hub community to select a 5-person advisory committee for governance, 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 pool on Osmosis is the ATOM/OSMO pool. Approximately 75% of Osmosis TVL comes from the ATOM pool (primarily ATOM/OSMO and ATOM/stATOM).

Osmosis' "ATOM Alignment" and role in AEZ far surpasses that of liquidity. ATOM is another fuel token on DEX. Although ATOM is used as fuel in some cases, due to the activity pattern, many cases are suspected to be generated by robots.

Proposal 810 on the Cosmos Hub will determine the use of Osmosis DEX for flexible gas fee payments. This proposal will allow transaction fees on the Cosmos Hub to be paid with any token, using Osmosis to swap the tokens for ATOM.

Other Networks

More chains may soon join AEZ with different capabilities. Composable Finance has submitted a proposal to join AEZ and replicate security from the Cosmos Hub, just like Stride and Neutron. Neutron serves as programmability and DeFi center, while Stride serves as a liquidity collateral solution. Composable proposes to become a rollup settlement center as it connects to other multi-chain ecosystems.

Although the definition of secure replication is easy to define, "ATOM alignment" is more subjective. Some community members believe that, because their ecosystem is intertwined with ATOM, networks such as Agoric and Kujira are already part of AEZ. In other words, ATOM tokens can provide a lot of liquidity for the Cosmos Hub and promote a lot of cross-chain activity.

Summary

Since its inception, the role of Cosmos Hub has been the center of interoperability and the broader Cosmos ecosystem. In the third quarter, Cosmos Hub took an important step towards becoming a provider of security. By replicating security, Neutron and Stride became the first chains protected by Cosmos Hub. The new positioning of Cosmos Hub as a modular security provider adds to its role as a cultural center of the wider Cosmos ecosystem, as more chains join the Atom economy.

The Cosmos community has submitted proposals, including more chains such as Composable Finance. In addition, other interchain networks are exploring other forms of "ATOM alignment", such as using ATOM to pay fees and become part of the Atom economy zone.

After the rejected ATOM 2.0 proposal, the proposal reimagined the ATOM token economy in various ways, with most concepts continuing to be explored as separate small proposals. Governance, decentralization, liquidity collateral, financial management, and token economics were the themes explored in the third quarter. AADAO has been providing grants to teams to address these issues, including the Tokenomics RFP.

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