The Cosmos Hub is a well-known center of cryptocurrency innovation, pioneering many now-widely adopted technologies. Notably, the founders of Cosmos are the inventors of the Proof-of-Stake consensus mechanism, a testament to the ecosystem’s knack for pioneering new technologies. But despite all this technological ingenuity, Cosmos has lost momentum. The market value of the Atom token has declined. Cosmos lags behind rival ecosystems in metrics such as total value locked, active users, and revenue. Confidence in the ecosystem has waned, and Cosmos’ lackluster performance is worrying for a network that has been praised for its innovative spirit.
In this article, we will analyze the factors behind Cosmos’ stagnation. What went wrong? More importantly, what can be done to make Cosmos a leader in the cryptocurrency space again?
Competitive Advantage
Cosmos was founded with the expectation that no single blockchain could solve the "blockchain trinity" problem - the balance between decentralization, security, and scalability. This stems from the inherent trade-offs between these features. For example, increasing transaction throughput typically requires larger block sizes, which leads to centralization because fewer nodes can process and store larger blocks.
Years before the entire crypto industry came to the same conclusion, Cosmos realized that only a multi-chain architecture could overcome these trilemma trade-offs. As a result, they pioneered a vision focused on horizontal scalability, with each app powered by its own decentralized yet seamlessly interoperable blockchain.
In order to realize the vision of a multi-chain structure, Cosmos has developed a groundbreaking inter-blockchain communication (IBC) protocol. IBC enables seamless interoperability between chains, and funds can be transferred between different chains in a few seconds with very little fees. This is far superior to the bridging experience of Ethereum, layer2, and other crypto ecosystems.
Compared to the challenges faced by Ethereum, Cosmos has already established and is ready for seamless interoperability. This is Cosmos' biggest competitive advantage and the best interoperability solution in the industry to date.
IBC Connection Map
Cosmos is facing many problems
Unfortunately, as the founder of this exciting key technology, Cosmos has not achieved the heights that many people imagined. Why is this the case? The reasons that have caused Cosmos to struggle are both internal and external. So let's dig into the various problems that exist in Cosmos and try to come up with possible solutions that may work.
1. The reality that appchains are expensive
As mentioned earlier, Cosmos is designed around the AppChain theory, which envisions each application running on its own sovereign blockchain. Unfortunately, this AppChain theory faces several problems. Building and maintaining an AppChain is very expensive, both in terms of engineering resources and ongoing operational costs. This creates a huge financial burden, especially for early-stage startups.
To address this challenge, most Cosmos chains have turned to inflation as a means of paying validators. While this approach worked well in bull markets, bear markets exposed its shortcomings. As validators continued to sell inflation rewards to maintain operations, this caused token prices to plummet. Even after the recent market recovery, many projects, including well-known projects such as Osmosis, are still down 90% or more.
This makes launching a Lisk a potentially bad business decision for many developers. With the emergence of layer 2 solutions that make Ethereum scalable, and the emergence of various alternative fast layer 1s, launching a Lisk is becoming increasingly unwise for many developers.
Exception: Benefits of Lisk
But there are exceptions. Mature projects with a strong user base and tangible products can benefit from launching their own application chain. These projects can internalize the benefits of MEV (maximum extractable value), achieve higher circulation, and have full control over the blockchain. Once a good user base is established, the product can generate sustainable revenue, and if the benefits of a particular business model outweigh the additional costs, then it makes sense to transition to an application chain.
dYdX is one of the latest projects to embark on this journey. Its success or failure will greatly affect the future of the appchain theory. If dYdX proves that it can create superior products with its appchain that surpass competitors such as Gains Network or GMX, it will be a major boost to the appchain concept. On the other hand, if dYdX does not perform well, it will cast doubt on the legitimacy of Cosmos and similar appchain-centric ecosystems.
Cosmos faces stiff competition
Various solutions have been developed to alleviate the cost pressure faced by appchains. Thanks to solutions such as Eigenlayer, Optimism Superchain, and Polygon 2.0, appchains will be able to launch their own roll-ups or chains on Ethereum, benefiting from a larger community, more liquidity, and lower setup and maintenance costs. In the Cosmos ecosystem, Celestia offers a solution for building tailor-made roll-ups — providing almost the same degree of customization as Cosmos-based appchains.
In addition to cheaper and newer application chain solutions, Cosmos also faces competition from Layer-2 and rapidly updated Layer-1 blockchains. These solutions have fast completion, low transaction fees and good scalability, which makes the advantages of application chains disappear. For many developers, launching on such blockchains is a more cost-effective solution, at least in the early stages, with almost no disadvantages.
This is evident from recent developments. Current trends suggest that the future of blockchain is likely to involve a few strong Layer-1 chains whose Layer-2 networks will host the majority of apps. Therefore, for the Cosmos ecosystem to thrive, there needs to be strong Layer-1 smart contract platforms to launch apps. These platforms should leverage Inter-Blockchain Communication (IBC) to facilitate communication between them and with large apps running on their own blockchains.
There are already multiple efforts underway to connect Cosmos with other ecosystems. For example, Composable is connecting Polkadot and Cosmos via IBC. Landslide is developing an Avalanche subnet with IBC integrated, and TOKI is bringing IBC to Binance Smart Chain. On the surface, these chains should be able to bring a lot of capital and users to the ecosystem. But in reality, this remains to be seen.
Simply establishing a connection is not enough. To truly realize the vision of such chains becoming the leading layer-1 based on Cosmos, these new chains need to actively integrate and cooperate with various Cosmos native projects. Companies like Avalanche and Binance Smart Chain may not have much motivation to do so at the moment.
Therefore, it would be a major step for the entire ecosystem for a Cosmos native layer-1 chain (such as Neutron, Injective, Archway, or Juno) to become a serious competitor with a large number of users and capital. Injective has already done wonders in this regard, and it would be great if it could maintain its rapid growth trajectory for the benefit of the entire ecosystem.
2. The comprehensive service center failed to provide the much-needed value proposition for the Hub
When designing Cosmos, its founders made a deliberate choice: to provide inter-blockchain communication (IBC) as a public product. They decided not to conduct all IBC transactions through the Hub, nor to impose a small tax on IBC transactions, but to stimulate innovation and growth by providing open access to this powerful tool. Cosmos will play the role of a trusted neutral service provider in this ecosystem.
https://informal.systems/blog/building-with-interchain-security
In May 2023, the much-anticipated ICS (Interchain Security) was released to great fanfare. It was designed to eventually provide a revenue model for the Cosmos Hub and make application chains economically viable. However, about five months later, people began to be disappointed. Adoption has been low, with only two ICS chains going live: Neutron and Stride, with Noble in the planning stages. Stride even hinted at the possibility of being acquired by the Cosmos Hub.
This situation highlights a fundamental problem - there are 4 options for launching in the Cosmos ecosystem: your own application chain (the Cosmos Hub earns nothing), on another L1 (the Hub earns nothing), on the ICS chain (the Hub earns a percentage of gas fees), and finally on the Hub itself (the Hub earns 100% of gas fees). Many projects have found that it is more prudent to launch on a layer-1 chain rather than on the ICS chain or on the Hub. If this trend continues, the Cosmos Hub is in danger of becoming a bystander to its own ecosystem. Putting these apps on the Hub through permissioned CosmWASM and letting the Hub earn 100% of transaction fees would be the most beneficial outcome for the Hub.
If running apps on the Cosmos Hub is the best financial outcome for the Cosmos Hub, then running apps on the ICS chain is the second best option, but even then, the Cosmos Hub doesn’t clearly win. The ICS chain actually presents a financial challenge to the Cosmos Hub. Hub validators must validate all transactions, so scalability is limited. Chains like Stride or Noble, while valuable to the ecosystem, don’t generate high-frequency transactions. Low transaction volume means low returns for the Hub. Permissionless first-layer ICS chains like Neutron can bring in significant transaction volume, but they also consume most of the Hub’s bandwidth while only paying the Hub 25% of transaction fees. Therefore, ICS chains, both those with high and low transaction volumes, are not attractive to the Hub, which shows that the business model of the Cosmos Hub itself has not been well thought out.
Essentially, Neutron has the potential to undercut the Hub’s revenue potential. Choosing CosmWASM over the Hub and capturing 100% of the gas revenue may be a wiser choice for the Hub. While the Hub and its ICS model have their advantages, they are not economically satisfactory. In a world where many blockchains are already struggling to be profitable, especially those that promise low transaction fees, further reducing revenue does not seem like a wise decision.
3. Atom token economics is unsustainable
Inflation is not just a small application chain problem in the Cosmos ecosystem, it also affects the Cosmos Hub. The continuous sale of block rewards has put downward pressure on the price of the Atom token. Without a significant source of income, Atom faces the same dilemma as its smaller competitors.
We are working hard to address these token economic challenges. While people expected the new Cosmos Hub token economics to be launched on Cosmoverse this year, this did not happen. However, Blockworks Research’s EffortCapital presentation at Cosmoverse2023 gave us a glimpse into the planned changes.
To strengthen the token economic value of Atom and transform it into a true inter-chain currency, we propose two specific measures:
First: speed up the rate at which inflation falls to reach the final goal of 7% more quickly. To further accelerate this process, Cosmos core contributor ZakiManian proposed the "halving" proposal, which aims to immediately cut the Atom inflation rate in half. This proposal has already passed the governance process, so it should be implemented soon. The governance process is a very tight decision and not without controversy. Most of the large validators who benefit most from high inflation voted against it. On the last day, it looked like the proposal would be defeated by a narrow margin. Thanks to several prominent Cosmos community members (including Osmosis founder Sunny Aggarwal) who purchased a large number of atoms, adding more votes in favor on the last day, the proposal was passed.
Second: introduce a liquidity pledge tax. Once a certain threshold is reached (Blockworks recommends 25% of all circulating Atoms), liquidity pledgers must pay a tax to the Cosmos hub. If the liquidity pledge rate exceeds the specified target rate (Blockworks recommends 33% of all issued Atoms in circulation), the tax rate for liquidity pledgers will increase significantly. The purpose of this approach is to maintain a balance of the ideal liquidity pledge ratio and prevent uncontrollable growth, which is also an issue we have seen recently on Ethereum and has caused heated debate in the ecosystem.
This additional revenue can be used to reduce the inflation of Atoms through the burning mechanism, and can also be used as liquidity for the protocol to stimulate economic activity in the Atom Economic Zone and generate more revenue. This forms a virtuous cycle: increasing revenue, reinvestment stimulates more activity, which in turn generates more revenue.
These recommendations hold promise for building a sustainable token economy for Atom. While details are still developing, and other aspects are being developed by Binary Builders and RMIT’s Blockchain Innovation Hub, initial impressions suggest that Atom is moving in a promising direction to address these challenges.
4. Fragmented liquidity, poor user experience, and low adoption
AppChain infrastructure poses two major challenges: poor user experience and fragmented liquidity.
Compared to more streamlined single-chain blockchains like Solana, performing simple token trades on Cosmos requires additional steps. Users must initiate an IBC transfer to send tokens to the exchange’s chain to trade, and then perform another IBC transfer to return the coins to the app’s chain. While the Cosmos app and wallet provide a user-friendly interface for these transfers, these additional steps can be confusing and hinder new user adoption.
Another significant challenge is liquidity fragmentation. In the Cosmos ecosystem, liquidity is fragmented across different chains, resulting in less liquidity on each chain. As a result, users (especially large traders) experience higher slippage when trading in the Cosmos ecosystem, making it less attractive to this segment of users. This fragmentation also complicates arbitrage activities, which play a vital role in maintaining price stability between different chains.
These challenges are evident in the Cosmos ecosystem’s adoption metrics, with total value locked (TVL) and daily active users remaining significantly lower than comparable ecosystems.
5. Lack of organization, guidance and capital efficiency
One of the major issues facing the Cosmos ecosystem is the lack of a clear, unified vision. In fact, the opposite is true. Core contributors often hold conflicting views, and there is no unified goal that everyone is working towards. Issues such as product-market fit, token economic issues, and a lack of a compelling value proposition have been discussed earlier in this article. Due to its decentralized structure, Cosmos lacks a clear plan or roadmap to address these issues and make the Cosmos Hub and ATOM a more attractive product.
Cosmos is built by many small companies, each developing features that suit their own interests and preferences. There is no higher coordinating organization to prioritize tasks, develop comprehensive plans, and ensure that all work is directed toward a common goal. The lack of a central coordinating body that can take responsibility, find solutions, and steer the ecosystem in the right direction has caused the ecosystem to stagnate.
As a result, the ecosystem’s progress is hampered by disputes between major players and their organizations, each advocating different approaches and solutions. This lack of cohesion paralyzes the ecosystem. In the innovative Web3 space, success often relies on experimentation, hypothesis testing, and agile adaptability, which requires a clear vision and a willingness to change strategy.
Cosmos’ governance process is slow, with influential players following their own interests, in stark contrast to the agile leadership required to succeed in the rapidly evolving Web3 environment. The result is uncoordinated efforts and widespread inaction. In addition, each independent company in the Cosmos ecosystem must manage the overhead associated with legal, accounting, management, and other administrative functions. This creates redundancy and inefficiencies compared to a single organizational entity like Polygon Labs or Solana Labs, which only have to pay for management fees once for their respective ecosystems. To cover these expenses, these companies charge additional fees to the Interchain Foundation and the Community Pool, increasing the overall cost of ecosystem development and maintenance.
Actions to be taken
Cosmos still has significant technological advantages compared to other ecosystems, especially through its unparalleled interoperability solution IBC. However, competitors are not sleeping. Ethereum has long recognized that a multi-chain future is inevitable. Great projects like the actively developed Superchain and Polygon 2.0 that rival IBC or even surpass its capabilities are already in development. While these solutions are still under development, their ecosystems are already far ahead in terms of user adoption and total value locked.
This puts pressure on Cosmos. It may have about a year to launch an application that can successfully attract users and capital to interoperability. If this effort fails and Cosmos lags significantly in adoption when competitors launch interoperability solutions, then Cosmos' prospects may be over.
Therefore, what Cosmos needs most is proactive business development. Instead of focusing on building infrastructure, the ICF should take the initiative to get serious developers to build on Cosmos. Together with the ATOM community pool, the ICF should focus on providing financial incentives for killer applications. The idea is not to cast a wide net and pray for a large number of small projects, but to provide a few large grants to organizations that have not yet participated in the Cosmos ecosystem, but have a history of successful product launches. Our goal is to replicate the success of projects such as Friends.tech within the Cosmos network.
These products should not be launched as independent industrial chains. They need to bring value, users, and transaction volume directly to the Cosmos Hub. Ideally, they can be released directly on the Cosmos Hub through the permissioned CosmWASM. But judging by the direction chosen by the Cosmos Hub, this is likely to fail to reach consensus. Therefore, creating ICS chains or launching them to the Cosmos Hub and aligning them with Layer-1 Neutron is the next best option. Ideally, they will launch without tokens, but instead leverage ATOM. As long as there are one or two killer applications that match the Cosmos Hub, they can drive the development of ATOM.
The Cosmos Hub needs a major redesign on the economic side. We are already working on some promising efforts, especially around the token economics. Support from the wider ecosystem is critical, even if the proposed changes are not perfect and may not be entirely in everyone’s interest. In the current climate, standing still is the worst option, and these efforts are a positive step forward.
The ultimate aspiration should be to make the Cosmos Hub the core of the Cosmos ecosystem, just as Ethereum is the core of its ecosystem - to make the ecosystem work and position Atom as a cross-chain token. This positioning can create excitement and attract the necessary users and capital to transform the ecosystem into a thriving center of Web3 activity.
As the hub strengthens, and successful cross-chain projects like Kujira and Injective gain traction as layer-one blockchains and DeFi hubs, the Cosmos ecosystem will gain more attention from developers looking to launch projects. This will benefit the Atom community as well as layer-one blockchains like Injective and Neutron. The virtuous cycle of adoption driving further adoption can begin, and the vision of interconnected layer-ones via IBC, flagship apps on their own chains, and a vibrant hub with ATOM at its core can become a reality.
To achieve this vision, all participants in the Cosmos ecosystem must collaborate to make the necessary changes and support those who initiate change. While some of the challenges posed by a decentralized structure may remain, the results can be improved. The Cosmos ecosystem is home to outstanding and creative people, and bold decisions that go beyond the status quo are clearly needed. Despite the significant challenges, it would be unwise to underestimate Cosmos, and a brilliant comeback is certainly possible.
