At the end of September last year, at the Cosmoverse conference, Cosmos released an exciting 2.0 white paper, planning to change the plight of low utilization of the Cosmos Hub network and ATOM tokens.
In the more than half a year since then, Cosmos has announced some progress around the above issues, such as Cosmos Hub upgrading the original Interchain Security to "Replication Security" and passing the Liquidity Staking Module (LSM) proposal, but it seems that none of them has caused much market discussion.
With the recent launch of the Neutron mainnet of the Cosmos ecosystem, Neutron used the upgraded security mechanism "Replication Security" for the first time and announced that it would airdrop to Cosmos Hub stakers. Discussions about Cosmos, ATOM value capture and its ecology have gradually heated up.
In fact, since 2023, the Cosmos ecosystem has performed well overall. First, the daily transaction volume of the ecological public chain Canto once surpassed Solana, which made Cosmos get off to a good start. Later, the liquidity pledge agreement Stride, Layer1 public chain Injective and Kujira TVL continued to rise, ranging from 2-6 times compared with January, among which Stride and Injective tokens also rose almost 10 times. In April this year, according to token terminal data monitoring, the number of active developers on Cosmos SDK once exceeded Ethereum, and it is currently slightly lower than Ethereum and ranks second.
Many users have also shown high expectations for the implementation of many plans of Cosmos in the second half of the year. There are many voices in the market saying that "Cosmos Summer is coming" and "The flywheel effect is turning." Among them, José Maria Macedo, partner of Delphi Ventures, recently listed representative events that promoted the Cosmos ecosystem to express his optimism about Cosmos, such as the launch of dYdX v4, the launch of two permissionless chains, Neutron and Sei, and Metamask support.
This article analyzes the important progress after the release of Cosmos 2.0 white paper, as well as the dynamics and hot ecological projects of Cosmos in the second half of the year.
1. The consumption chain is launched, firing the first shot of ATOM 2.0 economic zone
Neutron, which was launched on the mainnet on May 10, is a CosmWasm (Cosmos Virtual Machine) platform that combines Cosmos SDK and IBC. As the first "Replication Security" consumer chain using Cosmos, it fired the first shot in the ATOM 2.0 economic zone.
To understand this logic, we need to start with the long-standing predicament of Cosmos and Cosmos 2.0. For a long time, Cosmos has been ridiculed as a beggars' chain, and the prosperity of its ecosystem has no direct relationship with its token ATOM. Polkadot, which is known as the "cross-chain duo" with Cosmos, has a market value twice that of Cosmos despite its weak ecological performance.
The reason for this situation is the low utilization rate of Cosmos' CosmosHub network and the ATOM tokens staked on it.
Cosmos is a blockchain network composed of multiple "blockchains". Unlike single blockchains such as Ethereum, there are countless blockchains optimized for specific applications. These blockchains can quickly build their own chains through the Cosmos consensus mechanism Tendermin and the open source modular development tool Cosmos SDK, and achieve interoperability between multiple chains through the inter-chain communication standard IBC protocol.
However, in terms of communication, after hundreds or thousands of regional chains are formed, directly connecting each regional chain to each other will not only take up a lot of resources, but also be inefficient. Therefore, Cosmos uses the hub chain Hub to open channels between chains. CosmosHub is the first and currently the most important hub chain. ATOM is the native token on the CosmosHub network.
However, although these application chains are based on Cosmos Hub communication, they can have their own independent validator network and do not have to use the Cosmos Hub network validation set, so they do not need ATOM as a payment token. As a result, Cosmos' ATOM has almost no practicality and its price has not risen.
In addition, ATOM 1.0 is highly inflationary, with a lower limit of 7% and an upper limit of 20%. ATOM holders who want to gain benefits in the Cosmos ecosystem can only do so by staking on the network, but the value of the token is diluted by the high inflation rate.
To solve the above problems, Cosmos 2.0 first improves the practicality and value capture of ATOM through interchain security ICS (Interchain Security).
As mentioned earlier, the low adoption rate of ATOM is due to the fact that many chains on Cosmos cannot use the verification network of CosmosHub. So, wouldn’t it be possible to solve this problem by leasing the verification network of larger chains such as Cosmos Hub (ATOM) (called provider chains) to smaller chains (called consumer chains) such as Neutron to share security?
Therefore, on March 15, Cosmos launched the “Replication Security” feature, allowing other chains in the Cosmos ecosystem to abandon their own validators and switch to the validator set of the Cosmos Hub, thereby having the complete security of the Cosmos Hub.
As the first Cosmos ecological chain to use "Replication Security", Neutron has become the most secure CosmWasm platform in Cosmos by using the security of the Hub. The Cosmos Hub will gain benefits from Neutron: 25% of transaction fees, 25% of MEV revenue, 7% of NTRN supply as initial distribution, and more importantly, strengthen ATOM's position as a cross-chain reserve currency.
The Cosmos Hub mentioned in an official Twitter post how Neutron will help strengthen ATOM’s position as the Interchain reserve currency.
On the one hand, it is to improve the application of ATOM in the NeutronDeFi ecosystem. Applications built on Neutron will enable ATOM to use native and liquid collateralized ATOM to provide liquidity, borrow, exercise governance rights, divest bonds, etc. to drive demand for ATOM and reduce the circulating supply by enabling Cosmos to earn rewards by locking their tokens in DeFi protocols. At present, nearly 10 projects such as Astroport have announced cooperation with Neutron. On the other hand, Neutron provides services for large treasuries and can help Cosmos Hub to increase the use cases and liquidity of ATOM in conjunction with other chains, protocols and treasuries.
After Neutron fired the first shot in the ATOM 2.0 economic zone as a consumer chain, multiple consumer chains such as the decentralized exchange Duality, the liquidity pledge agreement Stride, the on-chain ETF SimplyStaking, and the local asset issuance platform Noble in the Cosmos ecosystem may be launched one after another, consolidating ATOM's value capture capabilities and its status as a cross-chain reserve currency.
II. Cosmos’ noteworthy driving events in the second half of the year
In addition to the vitality brought to Cosmos by multiple consumer chains, there are several other developments worth paying attention to in Cosmos in the second half of this year.
1. The entry of native stablecoin USDC boosts liquidity
The demand for stablecoins within the Cosmos ecosystem was previously heavily dependent on the algorithmic stablecoin UST on the Terra chain. Therefore, after the collapse of UST in May last year, the Cosmos ecosystem suffered a significant blow. Since then, Cosmos' native stablecoin has also been vacant, and its internal stablecoins are all mapped tokens from other networks through cross-chain bridges, such as USDC through Axelar cross-chain, USDT and USDC through Nomad bridge cross-chain, etc. This kind of stablecoin mapped through cross-chain has dispersed liquidity due to the inconsistent mapping format, and will also increase the asset risk of users due to the security of the cross-chain bridge.
Therefore, Cosmos has an almost rigid demand for native stablecoins. In March this year, Noble, the Cosmos ecosystem native asset issuance platform, officially announced its cooperation with Circle to bring native USDC to Cosmos. Noble said that this integration will generate hundreds of millions of dollars of liquidity in Cosmos in the coming months.
Regarding the release time of Cosmos native USDC on Noble. In early May, Noble co-founder Jelena revealed in a YouTube video interview that it is expected to be officially released at the end of May or June. In addition, Jelena boldly predicted that ATOM will have a chance to reach a price of 20-30 U by the end of 2023.
2. Liquidity Staking Module (LSM) promotes the prosperity of Cosmos DeFi
Liquidity staking, like the cross-chain security mentioned above, is one of the core strategies of Cosmos 2.0 to solve the value capture of Cosmos Hub and ATOM.
Cosmos has always had a pain point, that is, the utilization rate of ATOM in DeFi is very low. The core reason is that ATOM has a high staking rate (about 20%), and stakers tend to choose staking incentives with certain returns rather than earning returns by providing liquidity. In addition to ATOM, many tokens in the Cosmos ecosystem, such as OSMO and JUNO, also face similar problems, which has greatly restricted the liquidity and use of Cosmos assets, and has lagged far behind Ethereum.
In early May, the Cosmos Hub has passed a new proposal on liquidity staking to address the above issues. The proposal will replace the existing Cosmos Hub staking, allocation, and slashing modules with LSM. ATOM holders are no longer subject to the previous 21-day lock-up period, but will be able to liquidate their ATOMs, enjoy staking benefits on the one hand, and use ATOMs for other use cases on the other.
But it is worth noting that Cosmos' launch of liquidity staking will also increase the leverage risk of user assets. In order to mitigate the risk of liquidity staking, Cosmos' LSM introduces governance control parameters, which can set the initial upper limit of the total amount of ATOM that can be staked to 25% of all staked ATOMs, and can be changed through governance. At the same time, as an additional security feature, validators who want to obtain delegation from liquid staking providers will need to bond a certain amount of ATOM themselves.
At present, the three major liquidity staking protocols in the Cosmos ecosystem, Stride, pSTAKE, and Quicksilver, have staked ATOMs worth $26.35 million, $4.57 million, and $1.67 million, respectively. ATOMs staked through liquidity only account for 1.3% of the total ATOM staked. On Ethereum, Lido alone accounts for 30% of the total ETH staked, so there is still a lot of room for growth in ATOM liquidity staked.
3. Top-tier applications enter the market, injecting new traffic into Cosmos
According to the encrypted data platform RootData, there are currently nearly 20 projects that are about to launch the mainnet on Cosmos. Among them, the actions of leading projects such as dYdX to enter Cosmos have attracted much attention.
In June last year, dYdX announced plans to move to the Cosmos ecosystem, develop a custom application chain based on the Cosmos SDK, and implement the migration in the upcoming dYdX V4 version. As a leading decentralized exchange with a daily trading volume of over $3 billion, there is no doubt that its migration will bring a large number of new users and liquidity to Cosmos.
As for the progress of the migration, dYdX announced in a blog in March this year that it would start the launch of a private testnet on March 28, with the goal of launching a fully public testnet by the end of July and the mainnet in September, officially transitioning from Ethereum to Cosmos.
Some top wallet applications will also support Cosmos. Since Cosmos users need to use wallets specific to the Cosmos ecosystem, some Cosmos contributors are developing a feature called Metamask snaps to allow users to sign Cosmos transactions using their Metamask wallets, lowering the threshold for new Cosmos users.
In addition, the largest hardware wallet Ledger recently announced the expansion of its integration with Cosmos. The new compatibility will allow Ledger Live to allow users to send, receive and stake Cosmos' native ATOM tokens and three other Cosmos-based projects, Onomy, Quicksilver and Persistence, and plans to add more than 20 new Cosmos projects by the end of this year.
3. Hot projects in the Cosmos ecosystem
Since the beginning of this year, Layer1 projects such as Canto, Injective and Kujira in the Cosmos ecosystem and the liquidity staking protocol Stride have seen a good increase in both TVL and token prices.
In addition, the financing of Cosmos ecological projects has also performed well. According to incomplete statistics, nearly 10 projects in the Cosmos ecosystem have received financing so far in 2023, among which Layer1's Sei Network and Berachain have received tens of millions of dollars in large financing.
This year, the most discussed projects in the Cosmos ecosystem are mainly concentrated in the fields of Layer1, LSD, modular blockchain, privacy, etc., especially the frequent emergence of star projects and large-scale financing in the Layer1 field.
Layer1
Corner
Canto is an EVM-compatible Layer1 public chain built on Cosmos SDK, and is an EVM-compatible network designed specifically for DeFi. In addition, compared with other emerging EVM chains, Canto pursues a high degree of decentralization, has no investors, does not set up foundations, relies more on the community, and provides free public infrastructure (FPI) and contract revenue distribution (CSR) for developers.
According to DefiLlama data, Canto's TVL is currently $85 million. In January of this year, Canto's TVL once rose to $125 million. The 24-hour transaction volume on the Canto chain once surpassed Solana to become the fourth largest Layer 1 in terms of transaction volume, and the token price also soared by nearly 50%.
Injective
Injective is an interoperable L1 blockchain optimized for DeFi. The main feature of Injective is that it uniquely provides plug-and-play financial infrastructure, such as high-performance on-chain decentralized exchange infrastructure, decentralized bridges, oracles, and a composable smart contract layer with CosmWasm.
In January this year, Injective announced the establishment of a $150 million ecological fund to promote ecological development. According to the encrypted data platform RootData, there are currently 20 projects in the Injective ecosystem, including Astroport, Celer Network, and Helix. In April, Injective announced a partnership with Tencent Cloud to support developers on Injective.
Six Networks
Sei Network is also a DeFi-specific Layer1 on Cosmos with a built-in Central Limit Order Book (CLOB) module. Decentralized applications built on Sei can be built on top of CLOB, while other Cosmos-based blockchains can leverage Sei’s CLOB as a shared liquidity hub and create markets for any asset.
Recently, the Airdrop button appeared on the official website of the Sei Foundation, which seems to indicate that the details of the airdrop will be announced soon. When the white paper was released at the end of October last year, the airdrop was already announced, indicating that 1% of the total supply of SEI would be used to reward testnet participants. In February this year, Jayendra Jog, co-founder of Sei Labs, also said that it is expected to launch the Sei Network mainnet and conduct airdrops in the next few months.
Sei has been active in the first half of this year. In addition to the progress of the test network, the Sei Foundation was established. In April, Sei Network and its ecological fund received financing of US$30 million and US$50 million respectively. The scale of Sei ecological funds has exceeded US$120 million, and there are more than 120 ecological cooperation projects, focusing on decentralized exchanges, infrastructure, wallets and cross-chain bridges.
Berachain
Berachain is also an EVM-compatible Layer 1 blockchain built on Cosmos SDK and protected by the Proof of Liquidity consensus mechanism. The Berachain token economy first introduced the Bera network with a three-token system, which has the network gas token BERA, the ecological algorithm stablecoin HONEY, and the non-transferable Bera governance token BGT.
Berachain co-founder Smokey the Bera wrote in an article about the opportunity to found Berachain that the characteristics of Berachain are to systematically establish liquidity/incentive protocols and validator participation chain infrastructure, redefine the cost of bribery, and solve the problem of pledge concentration.
It is worth mentioning that Berachain completed a $42 million Series A financing in April, with a valuation of $420 million. Polychain and OKX Ventures both participated in the investment. Berachain said it will also launch a public testnet in the near future.
In it
Kujira was once a subsidiary product of Terra. After Terra's death spiral, it migrated to Cosmos to build its own sovereign blockchain, and quickly created the on-chain order book DEXFIN, the clearing market ORCA, the staking and earning application BLUE, and launched the stablecoin USK.
Kujira's TVL has more than tripled from $3.5 million at the beginning of the year to over $11 million. Its ecosystem currently has six partner projects.
Babylon
Babylon is also a Layer 1 that is committed to using the security of Bitcoin PoW to enhance the security of other PoS blockchains. Babylon works by acting as an intermediary between chains that require additional security and Bitcoin, obtaining Block headers from chains that use its services, and writing these Block headers to the Bitcoin blockchain.
Babylon's team consists of consensus protocol researchers from Stanford Tse Lab and experienced Layer 1 blockchain developers from around the world.
In March of this year, Babylon launched a testnet and will launch a second testnet this summer before launching the mainnet at the end of the year.
LSD
Stride
Stride is a multi-chain liquidity pledge protocol for the Cosmos ecosystem and is currently the largest liquidity pledge protocol for the Cosmos ecosystem. Stride already supports liquidity pledge for ATOM, OSMO, JUNO, STARS, EVMOS, LUNA, and INJ in the Cosmos ecosystem, and plans to support all Cosmos ecosystems that are compatible with IBCv3.
The current StrideTVL has reached $34.68 million, mainly $26.35 million of ATOM.
Modular blockchain
Celestia
Celestia is the first modular blockchain. It is a modular data availability layer built on the Cosmos SDK. It only verifies data availability and transaction ordering, allowing anyone to quickly deploy a decentralized blockchain without the cost of an additional consensus layer. It has currently launched the second phase of the testnet Blockspace Race.
In October last year, Celestia completed a financing of US$55 million, with well-known investors including Bain Capital Crypto, Polychain, Placeholder, Delphi Digital, Spartan Group, FTX Ventures, Jump Crypto and other VCs behind it.