Cosmos ATOM 2.0 White Paper: The All-New Road Map Explained

The recent Cosmosverse event announced a highly anticipated Cosmos Hub white paper. Known as ATOM 2.0, the new road map goes through several key details on changes to the Cosmos Hub and how this would impact the Cosmos network and ATOM.

This overall vision is known as the 'Internet of blockchains' and is coming to fruition with the implementation of this road map. Today, multiple sovereign blockchains are able to communicate with each other and improve the interoperability of the Cosmos ecosystem.

Osmosis is one prime example of a blockchain that has a decentralized exchange (DEX) that allows you to swap various Cosmos assets that were sent in from other Cosmos chains and can eventually be integrated with other protocols. Another example would be Mars Protocol, a lending platform for the entire Cosmos ecosystem that leverages the interoperability and composability provided by Cosmos.

Now that you have some context, let's compare the difference between ATOM 1.0 and ATOM 2.0, and take a look at the future of Cosmos.

Building The Foundation Of Cosmos Hub — ATOM 1.0

The Cosmos Hub's initial role was to create the technologies and frameworks needed to kickstart the internet of blockchains, and thus it created the Cosmos SDK, IBC, Tendermint, various interchain modules, etc, which are core open-source primitives for the blockchains that are now part of the Cosmos ecosystem.

Note: ‘Cosmos Hub’ refers to the Layer 1 blockchain in the ‘Cosmos’ ecosystem, with ATOM as its governance token. 'Cosmos' refers to the ecosystem of various app chains with their own governance token.

Cosmos is also known as a Layer 0 blockchain that allowed other blockchains to be built on it. These blockchains are Cosmos chains and are built with the Cosmos SDK, which is a toolkit that helps developers make it easier to create customized Proof-of-Stake (PoS) blockchains tailored to their needs without reinventing everything from scratch.

The Cosmos SDK caught on and many developers went to build on it to create their own customized blockchain. For example, there are chains that are tailored for DeFi and trading such as Carbon and Osmosis, or other chains that focus on specific features such as Stargaze for NFTs.

These are also known as app chains which as similar to relay chains on Polkadot. What makes them interesting is that because they are their own modular chain, activities that happen on each chain won't congest other chains unlike in Ethereum, which is a monolithic chain. This means if a hyped NFT mint is happening on Stargaze, users can still do other transactions such as trading and yield farming on another chain such as Carbon, without having to pay insane gas fees like on Ethereum.

Growing The Cosmos Ecosystem — ATOM 2.0

Now that the foundations of the internet of blockchains have been built with multiple blockchains live for quite some time and working together, and billions of capital locked across multiple chains, the Cosmos Hub is now moving on to a new role - helping a growing ecosystem of interoperable blockchains to flourish while maintaining relevance.

This will be done using four new technology called Interchain Security (ICS), Liquid Staking, Interchain Scheduler, and Interchain Allocator that sits on top of the Cosmos Stack. Let's go through all of them.

Interchain Security — Securing the Cosmos

Interchain Security will transform the Cosmos Hub into a secure platform for others to build the next generation of interchain-native infrastructure and decentralized applications (dapps), paving the way for new cross-chain opportunities and innovation.

The Specifics of Interchain Security

To explain what ICS is, we first need to briefly understand how blockchain security for Cosmos chains works.

Cosmos blockchains are PoS blockchains, and thus their security is determined by the economic value of the staked assets from the chain validators. Basically, the higher the market cap of the token, the more validators there are, and the harder it is to attack the chain. An attacker would require more capital to take over or attack the network.

However, the issue is that maintaining a high market cap to prevent an attack is not easy for all blockchains, especially newer blockchains. When a new chain is created, it may still be finding its product-market fit and may also struggle to get validators as they may not see value in the chain and would not invest their capital to buy the chain's PoS asset and stake it to secure it.

To counteract this, many new Cosmos chains initially offer high inflationary rewards to incentivize validators to buy and stake. But this creates high selling pressure on the token price over time, and it may repel investors from buying the token knowing that there is a lot of dumping pressure. And over time, if the token market cap drops too much from dumping, it again faces an increased risk of attack, and the blockchain is back to round one again.

The Specifics of Interchain Security

This is where Interchain Security comes in. Interchain Security allows the validator set of a bigger chain, known as a provider chain, to provide security to the smaller chain, known as a consumer chain, in exchange, the provider chain receives some of the gas fees and staking rewards from the consumer chain.

For example, an established chain such as the Cosmos Hub can secure a newer chain like Quicksilver with the interchain security mechanism. This would allow the validator set on Cosmos to produce blocks on the Quicksilver chain. It also uses ATOM as a staked asset, so if a user misbehaves on the Quicksilver chain, their ATOM would automatically be slashed on the Hub.

The provider chain may also have its core functionality to be built on a consumer chain and receive financing for its infrastructure build-out, allowing it to cut down on its own development cost and time.

Therefore, Quicksilver would be able to import the entire economic security of the Cosmos Hub, currently secured by billions worth of staked ATOM and one of the most secure validator sets in the Cosmos ecosystem, in exchange for transaction fees and staking rewards. These rewards would then be given to ATOM stakers, increasing the value accrual for ATOM as well as allowing the Cosmos Hub to use and integrate with Quicksilver's liquid staking functionality.

Additionally, ICS is purely optional and can be opted out of even after using it. This mechanism can be used for the early stages of a protocol to provide stakeholders with maximum security.

Benefits Of Interchain Security

Just like how there are thousands of apps that people all over the world are using right now, in the future, if there are thousands of app chains that appear that are being secured by the Cosmos Hub validator set, it could generate a lot of value back to the ATOM token.

Interchain Security also reduces the barriers and costs of entry for consumer chains and enables a number of potential applications, including: 

• Rollup Settlement — A rollup settlement system and scaling solution that enables external data availability providers, i.e. Celestia, to publish fraud proofs and resolve fork disputes

• IBC Routing — A market for IBC relay contracts and multi-hop connections, aggregating various relay providers for cost-effective and reliable communication and transfers across IBC

• Multiverse — A way for projects to permissionlessly launch consumer chains in Cosmos Hub's secured sandboxed environment as easily as deploying a smart contract to allow for faster development

• Chain Name Service (CNS) — A secure identification and authentication service for IBC-connected blockchains that enables permissionless management of information within the Cosmos chains

In summary, Interchain Security gives smaller chains a faster, easier, and cheaper path to market, helping to foster innovation and allowing more integrations and collaborative opportunities with other chains in Cosmos.

Liquid Staking — Unlock Capital Efficiency

The other technology layer is called Liquid Staking which will also help to provide secure economic scaling.

In PoS blockchains like Cosmos Hub, its staked assets are not able to be used, which affects cross-chain composability. Liquid staking would allow users to use their staked collateral, such as staked ATOM, as a liquid token that can be traded with and sent across other Cosmos chains.

This increases the user's capital efficiency by unlocking additional capital, while still securing the network as their ATOM remains staked. The concept is similar to liquid staked ETH from Lido (stETH), which was hugely popular and successful and was accepted as collateral by multiple DeFi dapps such as AAVE.

It would be easy to imagine a liquid staked ATOM achieving a similar level of success in the cosmos ecosystem as well, allowing users to earn ATOM staking rewards while interacting with other DeFi protocols. Liquid staking would extend not only to ATOM but other PoS cosmos assets as well.

While Interchain Security enables the reuse of the same validator set and staked collateral to secure additional state machines. Liquid Staking would enable the reuse of the same staked collateral for other purposes.

Together, Interchain Security and Liquid Staking create a secure base layer for projects to build on, furthering the growth of Cosmos app chains and activities.

Interchain Scheduler — Price Efficiency Across Cosmos

The Cosmos ecosystem is made up of various blockchains that list the same assets. ATOM can be on multiple chains, and as they trade in the market, their prices can vary from one chain to another, similar to how ATOM's price varies slightly across different exchanges. This introduces a lot of arbitrage opportunities, where arbitrageurs will find DEXs offering the same token but at different prices, and will arbitrage the token prices so that they average out and earn a profit in exchange. This is a type of maximal extractable value (MEV) opportunity.

There are two other common forms of MEV apart from arbitrage:

1. Liquidations - MEV bot searchers will compete to be the first to submit a liquidation transaction to earn liquidation fees in protocols that have liquidations such as derivative protocols and money market protocols
2. Sandwiching/Frontrunning - This is a bad and unwanted type of MEV where a searcher bot would watch the mempool for large trades transactions and sandwiches the transaction, effectively buying the asset at a lower price before the original buyer buys it, and then immediately selling it back to the buyer at a higher price

Benefits Of Interchain Scheduler

This MEV market can be made more efficient, more secure, and more lucrative for Cosmos chains and their users. The interchain needs a secure block space market to avoid off-chain cartelization and more options for chains seeking to optimize the use of block space.

Existing MEV solutions on Ethereum like Flashbots’ are off-chain markets, however, it lacks on-chain transparency. Interchain Scheduler brings MEV markets on-chain, facilitating a fairer and more transparent system.

A Scheduler flow would look like this:

1. Consumer chains with the Scheduler module enabled can put a portion of their block space for sale (e.g. one block per minute). 
2. The Scheduler then issues NFTs to reserve and represent each future block region on the consumer chain. NFTs from all participating chains are periodically auctioned in batches.
3. These tokenized reservation NFTs can also be traded on secondary markets until the reservation is redeemed to the validator on the partner chain.
4. Once a block execution is successful, a split of the proceeds from the Scheduler auction are sent back to the partner chain, effectively profiting from selling block space.

Interchain Allocator — Funding and Growing New Chains

The Cosmos Hub used ATOM to fund the development of Cosmos' core components to reach the success that it has today. Funding is key during the initial phases of any ecosystem. Thus, when the next bull market begins, the Cosmos ecosystem may have many new chains appearing. In order to sustain and see the full impacts of the rapid growth, the current approach to on-chain monetary coordination may not be efficient enough to facilitate the needs of these new chains.

Benefits Of Interchain Allocator

Hence the Interchain Allocator was created. It is a platform for allocating capital to delegated parties to incentivize long-term alignment by bootstrapping users and liquidity for new chains. Essentially it attempts to create more 'symbiosis' where the more 'Coin A' that Cosmos Hub holds in its treasury, and the more ATOM that 'Chain A' holds in its treasury, the more aligned they are in incentives and goals.

The Allocator provides two tools that enable incentive-aligned communities to develop strategies for economic coordination on behalf of the Cosmos Hub:

1. Covenant: a system for establishing agreements with multiple parties across designated chains and IBC-enabled entities, essentially allowing DAOs to enter into on-chain agreements with other chains
2. Rebalancer: a system for automatically managing and rebalancing asset portfolios with public liquidity, allowing easier execution of portfolio strategies by streamlining the buying or selling of assets on a periodic basis

ATOM stakeholders could form DAOs and use the Interchain Allocator to achieve its goals, which include: 

1. Increasing velocity of new Cosmos projects
2. Accelerating project growth and sustainability
3. Expanding economy for cross-chain block space
4. Aligning incentives between new projects and Cosmos Hub

Tokenomics Revamp

Token Issuance

The ATOM token does not have a maximum supply and issues inflationary token rewards to incentivize a target supply of the amount of ATOM staked.

For example, when many ATOMs are being staked and the ratio is above two-thirds of its total supply, it will reduce the inflation to a minimum of 7%, and if lesser ATOMs are being staked and the staking ratio is below two-thirds of the total supply, it will increase inflation as high as 20%. As of the time of writing, ATOM inflation rate is around 18% and a circulating supply of 311.8 million tokens with a market cap of $3.6 billion.

The upcoming liquid staking feature will increase the capital efficiency of staked ATOM by allowing it to be utilized while still being staked. Thus, the current monetary policy is being modified as users do not have to choose between staking their ATOM or using it in other DeFi protocols.

As such, a new monetary policy is proposed which involves a transitory and steady phase. 

Transitory Phase For ATOM 2.0

The transitory phase begins with a significant increase in issuance that lasts for 36 months (3 years) before reaching a steady issuance rate that lasts indefinitely. The issuance rate starts at 10 million ATOM per month before declining until an issuance rate of 300,000 ATOM per month. You can view the new Atom issuance model on a chart here.

The goal is to gradually remove security subsidies, starting from the current rate and decreasing by 10% every month for 36 months. By the end of this period, it is hoped that revenue from Interchain Security will meet or exceed the original subsidy and that the small inflation of 300,000 ATOM per month is negligible. 

This initial heightened issuance is meant to bootstrap the new Cosmos Hub Treasury that will be used to support and expand the network for the next few years. 

However there are arguments that this new issuance will be detrimental to ATOM stakers as 2/3 of the inflation will go towards the treasury and only 1/3 of it will go to stakers, and during the steady phase, all of the issuances will go to the treasury and none to stakers. Not to mention, the existing treasury has at least $60 million according to their public wallets, and issuing 10 million ATOM at the current price is over $100 million in market cap which could cause investors to worry about dilution even though the bulk of it goes into the treasury and are not circulating.

This has stirred up some debates which will hopefully be addressed down the line before the proposal gets implemented.

Currently, Cosmos Hub’s transaction fees are sent to the distribution module and divided between the Community Pool, delegators, and validators. The implementation of Interchain Security will add another stream of revenue from each consumer chain to the distribution module, which will replace the current security subsidy. 

The Bottom Line

The Cosmos ecosystem has grown a lot and has come a long way from the initial phases of pre-IBC and individual chains unable to communicate with each other. There is now a vibrant ecosystem of cross-chain transactions and interoperability, and this composability will only increase as more cross-chain dapps are created.

With the addition of interchain security, liquid staking, interchain scheduler, and allocator, there will be more value accrual towards ATOM stakers, although it would be difficult to predict how much value these features could generate and if it is enough to offset the inflation of ATOM.

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