This analysis is for informational purposes only, and should not be used for investment decisions.
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The Internet of Blockchains
Jae and Ethan co-founded Cosmos in 2014, the whitepaper was released the same year, but it was only until 2019 that a first piece of software was released. And it was until 2020 that significant apps used the SDK to spin up their own chains.
Cosmos wants to become the internet of blockchains; where different apps have their own blockspace, but connect with others using the IBC (Inter Blockchain Communication protocol) to facilitate messaging and bridging.
So far, great projects like BNB chain, or recently the DyDx chain have been created sharing the Cosmos SDK.
We will dive into the Cosmos.
Early Days
Jae and Ethan are the founders of Cosmos, and the founding members of the Interchain Foundation. Jae invented the Tendermint consensus protocol, which was the first of it's kind proof-of-stake protocol, after meeting Ethan at a cryptographic conference, Ethan adopted Tendermint as the project for his master thesis.
They decided to write the joint whitepaper, which was used to raise seed funding and then set up the Interchain foundation. It was until 2018 that Zaki joined the team to lead the testnet development, which launched on 2018.
In 2017, the project raised a 17M ICO at $0.1 per token, and then in 2019 raised 9M through a token sale to Paradigm at ~$0.5-1.0. Cosmos was ready to go big.
Appchain Thesis
Cosmos main thesis is the Appchain thesis, which states that most crypto-apps will be financially motivated to migrate to their own app-chain, which will allow them to scale efficiently, have control over their blockspace, and not loose money on expensive L1 gas fees.
Why should a casual game pay the gas fees for blockspace as a large-ticket DeFi platform?
This thesis has played out perfectly. The greatest example is the derivatives trading platform DyDx - with 7M daily transactions, a 400M token market cap, ~100M usd in annualized revennue, and 300B+ of annualized volume - the platform decided to migrate all their infrastructure to Cosmos, essentially spinning up their own chain through using the SDK.
Another use case is BNB chain, which has leveraged the Binance brand, and the Cosmos SDK to spin up a modified version of a Cosmos chain.
So far, spinning up these appchains does not drive value back to the Cosmos token, as the SDK was thought as a 'public good', but since 2022, Cosmos has been working on redesigning the value capture mechanism of the $ATOM token for Cosmos.
$ATOM Tokenomics
The economics of Cosmos' $ATOM are controversial for having a hard time capturing value, and the high inflation rates. The Cosmos ecosystem players are aware of this gap, and are addressing it with the so call $ATOM 2.0 redesign. It's main components are:
Liquid Staking of the $ATOM token to increase and unlock liquidity: Staking rates are at 18%, while inflation is at 14%, yielding a net ~4% APY.
Interchain Scheduler and Security: The new architecture will help drive value to $ATOM by creating a blockspace marketplace with shared security, where new appchains can 'borrow' the security of the main Cosmos Hub chain, for a cost, or rent blockspace on other chains, for a cost and a rake that goes to the Cosmos Hub community treasury.
Increasing the $ATOM community treasury pool by charging higher tax-rates on the Cosmos Hub main chain: The staking rewards tax that go the community treasury has increased from 2% to 10%. Projecting ~400-500M in revenue for 2024, where 90% goes to stakers, and 10% to the community treasury.
The inflation rates are planned to decrease to the low single digits, and be capped at max. 10%, with a decreasing schedule until it stops by 2030.
These are all proposals up for discussion, but the outlook for the $ATOM token are positive.
Traction
Usage
The Cosmos Hub is up to around 1.6M daily transactions, similar to Ethereum's. If you include the main Cosmos chains like DyDx, or BNB, txs are up to tens of millions, and growing.
Revenue
We consider revenue as the staking fees paid by transactors (gas fees), which are accrued 90% to stakers, and 10% to the community treasury. This is ~500M for the NTM.
Another source of untapped revenue comes from the interchain scheduler and security layers, which new appchains will leverage and pay fees to use.
Valuation
Using Blockwork's projections for 2024, NTM revenue is ~500M, where 90% goes to stakers, and 10% to the community treasury. Using the current 2.3B valuation, the rev/mcap comp is 4.7x, compared to Ethereum's 98x rev(fees)/mcap.
One thing is certain, if Cosmos achieves it's plan, the valuation would be competitive to those as bluest of chips chains like Ethereum.
Headwinds and Tailwinds
The main tailwinds for Cosmos are:
New Tokenomics being discussed as you read this
Appchain thesis evolves over time
Interchain Security and Scheduled become good revenue streams
Cosmos is the third most active ecosystem in terms of active devs, with ~460, shy from Ethereum's 1.8k, and Polkadot's ~620.
Circle has announced the native issuance of a Cosmos USDC through Noble, which will help bring local liquidity to the ecosystem, and be used easily between the different chains.
On the headwinds:
$ATOM has always had a hard time capturing value, and it's uncertain if they will be able to execute a better value capture plan
Other ecosystems may become hosts for appchains to evolve, a big example is Ethereum's L2 (OP stack), Polkadot's Parachains, or Solana's forks, like MakerDAO's appchain.
It's still uncertain that Cosmos will become the internet of blockchains, but, they've been growing in terms of ecosystem apps, developers, and improving their token design.
Is $ATOM a better buy right now than in the past 2 years due to the new token design? Yes
Does $ATOM have a clear value capture? Not yet
We'll let you do the thinking.
Sources
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