*Note: a SWOT analysis is an evaluation of the fundamental, operational, technical, social, economic, and even to some degree administrative elements of a project. This is not a model to be used for trading purposes. (NFA, DYOR)
Composed of four elements, Strengths, Weaknesses, Opportunities, and Threats, a SWOT analysis framework provides excellent insight for establishing a high-level understanding of the state of a project’s well-being through the lens of a birds-eye view.
It can help formulate decisions around which areas require more attention, set performance goals, and organize a foundational understanding of where a project is headed.
Rarely (if ever) used in crypto, it is time to apply this timeless method of evaluation to the digital asset space.
💪 Strengths (Internal) (Helpful)
The Atomic Economic Zone is at the heart of Cosmos’s upcoming techno-economic overhaul. The purpose of the Economic Zone is to tighten the alignment of the ecosystem with the ATOM token. A multitude of networks, including Kujira, Agoric, Osmosis, Stride, Neutron, et al., have already integrated and pledged their diligence. At its most basic, the AEZ’s main focus is to have ATOM play a foundational role in the inter-chain activities and unifiy chains with universally applicable governance frameworks.
2. World Class Governance Community
Either legendary community-building skills, deviously clever teams, or a combination of both, Cosmos has achieved incredible levels of engagement both through its social and governance platforms. The core community is always active and involved in the proceedings, helping steer the project and uphold its interesting commitment to decentralization.
3. Adoption by Chains
Comos has seen an influx of projects into its ecosystem. Hosting over 46 networks so far, of which many are considered to be noteworthy (Osmosis, KUJI, Cronos, ThorChain, Injective, Secret, KAVA, Akash, etc.) and a pipeline of new leading projects, namely Celestia and dYdX, the positioning of Cosmos within the context of the greater industry could be tipping into the “Too-Big-Too-Fail” territory.
4. Contribution to Web3 Technology
From its consensus mechanism (CometBFT) to the inter-chain communications protocol (IBC) to its appchain thesis and beyond, so many solutions have tapped into the tech pioneered by Cosmos and made available through their SDK. Value in the form of new technological primitives can be found laden throughout their excellent documentation. If a project could truly be valued on its merits, Cosmos would dwarf 99% of other base layers.
5. Shift of Security Model
Cosmos has been undergoing tectonic transformations in its architecture. Previously acting as a relay point, the Cosmos Hub will now act as a point of unified security provision. Effectively, the shift signifies an emphasis on shared security (whereby multiple different networks leverage the same validator set). While there has been some valid rebuttal against using economic primitives (price) for security due to the implied relationship between price and security, the conversation has primarily been based in theory and cannot be proven until something happens. The new model just might be enough to help Cosmos stand out from the increasing pool of infrastructure providers in Web3.
6. Stake Rate over 67%
Stake rate is a direct expression of an ecosystem’s community’s willingness to support a project. With over 2/3’s of all ATOM staked, Cosmos happens to have one of the highest rates among other networks of the same caliber. Taking into consideration that ATOM was among the worst performers (purely from a price perspective) this last year, the fact that long-term stakeholders did not abandon their positions (in fact, actually grew them from 62% same time last year) shows deep commitment. The higher the stake rate, the more constrained the circulating supply and the sharper the reflexivity between demand and price. If this trend continues, it would be unlikely that ATOM does not reflect it.
😞 Weaknesses (Internal) (Harmful)
1. Economic Underperformance
While a SWOT analysis does not usually account for price action, it is impossible to ignore the fact that ATOM is one of the worst performers among tier-1 crypto projects. Regardless of the parabolic growth taking place across independent Cosmos chains and the market at large, it seems that market participants are simply not interested in ATOM. The expression of interest is similar to liquidity, a self-feeding mechanism where interest begets more interest.
A contentious point that has long been discussed around Cosmos is the design of its core system; while the technology has been amazing and certainly seen adoption, the ATOM token’s economics have been lackluster in their ability to capture value. With its relatively high double-digit perpetual inflation, absence as a requirement for Cosmos chain’s fees, and inability to address these issues earlier, has resulted in a prolonged period of sub-optimal performance attributable to the inefficient initial implementation forces the project to ensure invisible costs in the form of early community members. The problem can be (and is currently being) fixed but it does not guarantee that the new model will not be flawed in its own right.
3. IBC’s Lack of Asset Interoperability
A lesser talked about nuance with the technical design of the Inter-blockchain-Communication protocol is the accounting system that takes place under the hood during the movement of assets between chains. Every transfer instantiates its own trail. ETH on Osmis is (osm)ETH) moving it from Osmosis to Kujira turns it into (osm-kuji)ETH). If moved to Cronos, the asset becomes (osm-kuji-cro)ETH). Therefore, it loses its composability because other ETH will have different trails depending on how it has been transferred. Imagine party A has 10 ETH in a liquidity pool on KAVA, and party B wants to provide liquidity in that same pool. Moving their 10 (osm-kuji-cro)ETH) to KAVA, party B’s asset becomes (osm-kuji-cro-kava)ETH) which is different than Party A’s (kava)ETH) in the pool; therefore, party B is unable to join the KAVA liquidity pools; unless there have been sophisticated customizations built in to accommodate that or they retrace their ETH’s footprint.
4. IBC’s Performance Waning
The Interblockchain Communications Protocol was once heralded as one of the industry’s most promising innovations in the interoperability space and contributed to the blossoming of Cosmos’s hosting of over >45 independent chains. However, it seems that over the last year demands for IBC have been dwindling. Total transfers are down over -38%, Unique senders are down -48%, and Unique Receivers down -48%. If this trend continues, it could be a matter of time before we see the once-glorified technology disappear into an oblivion of obsolescence.
🧐 Opportunities (External) (Helpful)
1. ATOM 2.0
Initiatives have been put forth by the Foundation to transform ATOM tokenomics. A multitude of parameter adjustments to address centralization concerns, value accrual, and inflation. Already slowly being rolled out through governance proposal 848, the staking rate has been cut from ~14% to 10%, lowering the real yield from 19.3% to 13.4%. With lower inflation, there is a higher proclivity from users to hold on to their assets and find DEFI applications for it. Value accrual will be imposed through the alignment of independent environments with the use of ATOM tokens to facilitate cross-chain settlements. As it pertains to centralization, Cosmos currently scores 8 on the Nakamoto coefficient, meaning that it only takes 8 of the 177 validators to subvert the network. Under the new regime, there will be disincentives put in place for delegators that over-concentrate their allocation; a tax that increases alongside validator balances and, in turn, economically incentivizes end users to increase their delegations to smaller validators.
2. Widespread adoption of IBC
This one is a bit of a wildcard, shot-in-the-dark, roll-of-the-dice potentiality, but one with gargantuan positive implications. In the event that the new ATOM token model delivers on its promise to adequately capture the value, and IBC delivers on its promise to provide seamless interoperability functionality, there is a good chance that Cosmos becomes further engrained into the industry through an acceleration of adoption.
3. Fork Proposal
Jae Kwon, founder of Tendermint and co-creator of Cosmos, is known for his activism and radical attitude. He has recently come out and said that given the circumstance of Cosmos currently suffering from inadequate governance, it would be best to fork the network. By and large, forks a notoriously malicious event that can negatively impact the integrity of the original chain and result in communities being split. However, this appears to have an inverse potential for Cosmos as it would put an end to the continual disputes within the network and enrich the holders with new tokens. Be it purely speculative airdrop hunting or some genius economic resolution, talk of a possible fork has actually been accepted relatively well by the crypto markets. This can have very strong short-to-medium-term impacts on price as people try to front-run each other and qualify for the hard fork.
😳 Threats (External) (Harmful)
1. Terra Luna Debacle
Built with the Cosmos SDK, Terra was an IBC-compatible network that handled tens of Billions of dollars in UST transactions. After a spectacular blowout that literally wiped hundreds of billions from the Crypto market’s capitalization within days, the crippling whiplash crept across the entire industry, with Cosmos suffering a loss of over -75% 2 months post-mortem. Frankly, no direct value correlation between Cosmos and Terra Luna existed; however, based on the fact that their SDK was used, the image of Comsos has been tainted by possibly the most notable failures of any crypto protocol.
2. Declining Activity and Revenue
In spite of an extremely positive market sentiment, Cosmos has seen declines across the board in terms of its utilization. The amount of daily active addresses has shrunk from >17,000 to ~16,000, the amount of daily transactions fell by nearly 33% from ~63,000 to ~40,000, and average revenue fell by nearly 50%, from a laughable $4,000 to an even more laughable $2,000. Luckily, the project does not seem to rely on the revenue it generates to sustain itself, otherwise it might have already been dead.
3. Rise of Advanced Alternative Competition
Scalability and interoperability have been, are, and likely will continue to be the most aggressively researched sectors of the Web3 economy. With each new generation of blockchain-based technology, new superior solutions come to market with the capacity to outperform and displace predecessors. Rollups, Subnets, Parachains, Payment Channels, Nested side-chains; the growing amount of similar tech that enables similar capabilities currently available will likely continue to dominate mindshare and further squeeze OG’s like Comsos out of public consciousness.
Jokingly referred to as the “Dogecoin for Intellectuals”, Cosmos is floating on the fringes between techno-economic paradise and irrelevance.
The architectural pivot towards becoming providers of a validator set for other networks is not something entirely new; other projects, such as Eigen Layer, are ahead in this regard. However, if Cosmos’s approach finds better market adoption, it holds a lot of promise for the ATOM token.
There remains an elephant in the room; valid rebuttals about a logical gap in Cosmos’s economic modeling. If the security provision by validators is based on their stake, then the security itself hinges upon speculative elements; if price goes down, then so does security.
It seems that in spite of the internal techno-political headwinds, Cosmos continues to be a domineering force on the layer 0/1 scene.
Outside of what was mentioned earlier, is the fact that Cosmos has the support and material endorsement from many of the industry's Giga-brains (such as Chris Burniske from Placeholder Ventures) that make the case as to why Cosmos is a better option than its two leading competitors Polkadot and Avalanche.
Cosmos is living proof that even with an incredibly talented team, good intentions, innovative technology, and a flourishing community, nothing is ever guaranteed in crypto.
A cool piece of information about Cosmos that is hardly ever mentioned is the brilliance in the intentions behind the Cosmos Hub’s design. The Hub itself is just an account-based model based on an environment that does not support smart contracts. This minimalism is distinctly reminiscent of Bitcoin, where the product is hyper-focused and purpose-built to mitigate the attack vector surface area and prevent fees from running out of control.
Thank you so much for reading,
I hope this serves you well on your journey.
Live long and prosper 🥂
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