Cosmos Hub 2.0 - What Could It Bring for $ATOM Holders?


Cosmos Hub released its 2.0 whitepaper at the end of September, outlining an overhaul of tokenomics. The new $ATOM emission schedule has brought a lot of debate and hence a revised version of the new whitepaper (v1.2) was released on Oct 25 with fine-tuned token emission plan. Since there are already plenty of analyses for the new functionality of Cosmos Hub, this article would like to focus on $ATOM token and try to answer a simple question: What benefits can $ATOM holders get from the new Cosmos Hub design?

Four Revenue Generators for Cosmos Hub

Cosmos Hub is only one of the many application-specific chains in the Cosmos ecosystem, and it doesn't accrue value from the development of the ecosystem. Cosmos Hub 2.0 gives four initiatives to empower the Hub and $ATOM token. Namely, Interchain Security, Liquid Staking, Interchain Scheduler, and Interchain Allocator. Among these, Interchain Security and Interchain Scheduler provide two new sources of reward for $ATOM holders. Liquid Staking and Interchain Allocator provide additional services for the ecosystem.

Source: Whitepaper of Cosmos Hub 2.0

Interchain Security

App chains in Cosmos ecosystem are independent PoS blockchains secured by validators who stake respective native tokens to validate transactions and produce new blocks for the App chain. Bootstrapping new validator sets are expensive. By Interchain Security, App chains can rent their security from the Cosmos Hub, thus lowering the entry barrier for new App chains. (Recommended Reading: Cosmos Hub & $ATOM - What's Their Role in The Cosmos Ecosystem, for a more detailed explanation of the Cosmos Hub’s role as an inter-chain service provider)

Currently, $ATOM holders can only get $ATOM staking rewards by staking $ATOM. At the same time, App chains will rent Cosmos Hub's verifiers for higher security by paying their native tokens as the service fee. This means, in addition to the $ATOM rewards from token issuance, stakers will also receive App chain's native tokens as part of staking rewards.

Rewards from staking $ATOM in the future will thus include four elements:

  1. $ATOM new issuance. (i.e. inflation) The current reward rate is around 18%.
  2. Transaction fees. This part of the reward is minimal, total transaction fees paid by Cosmos Hub users are only $1 million per year currently.
  3. Other App chains’ native token from using interchain security services.
  4. Revenue from Interchain Scheduler

Interchain Scheduler

Interchain Scheduler is a MEV market for the Cosmos ecosystem.

MEV - a short explanation

Maximal (formerly ‘miner’ in the context of Proof of Work) extractable value (MEV) refers to the maximum value that can be extracted from block production in excess of the standard block reward and gas fees by censoring and/or changing the order of transactions in a block. When someone sends a transaction in the blockchain, there is a delay between the time when the transaction is broadcasted to the network and when it is recorded into a block. During this period, transactions sit in a pending transaction pool called the mempool where contents are visible to everyone. Arbitrageurs can monitor the mempool and find opportunities to maximize their profits e.g. by frontrunning transactions.

One way to solve MEV - creating a MEV open market

MEV is bad for users and different schools of solution are designed to tackle it. One popular way is to create an open market for the MEV opportunities. Validators auction off the right to front-run users, selling block space to an open market of arbitrageurs. Arbitrageur traders will need to pay a fee to block producers to ensure their transactions get preferential treatment.

The Interchain Scheduler is expected to form an interchain market that let users bid on block space across chains connected to the Cosmos Hub. By bidding block space on different chains, arbitrageurs can lock in profit with strong execution guarantees. The Interchain Scheduler will redirect fees generated from the cross-chain MEV marketplace into the Cosmos Hub treasury.

An overview of Cosmos Hub’s new revenue streams:

Source: Whitepaper of Cosmos Hub 2.0

On the left-hand side of the above diagram, Interchain Security, transaction fees, new token issuance, and Interchain Scheduler are the four sources of revenue for the Cosmos Hub. Interchain Allocator is similar to a venture capital fund that deployed generated capital to bootstrap Cosmos DApps and other initiatives.

Revenues will be either distributed to validators/delegators and the community pool, or be directed to Cosmos Hub Treasury to fund public growth and future growth.

New Inflation Schedule of $ATOM

$ATOM’s token inflation has previously received a lot of criticism for its high inflation rate. Inflation is between 7% and 20% depending on the percentage of total $ATOM staked. The inflation rate has stood above 10% for most of the time.

The tokenomics for $ATOM is completely revamped with a new token issuance schedule in the Cosmos Hub 2.0 whitepaper (the first v1.0 version)

Source: Whitepaper of Cosmos Hub 2.0

The dotted line represents the old issuance schedule, which is continually increasing over time. The solid line represents the new issuance schedule, the new issuance schedule will have two-phase.

  1. A transition phase will last for 36 months. During this phase, 10 million units of $ATOM will be issued in the first month, decreasing over time until it reaches the steady state. This will drastically push up inflation to almost 20% (about 55M new tokens will be minted in the first year).
  2. After 36 months, entering the steady phase. $ATOM issuance will decrease to 300K per month, bringing $ATOM inflation rate below 1%.

In addition to the staking rewards, a portion of the proposed issuance will be directed to the new Cosmos Hub Treasury and will be used to support initiatives that increase the adoption, growth, and capitalization of the Cosmos ecosystem.

After the release of the Cosmos Hub 2.0 whitepaper, the initial high inflation has raised serious concern from the community, fearing their $ATOM holding would be diluted. The Cosmos Hub team heard the concern and published a revised version of the 2.0 whitepaper with an adjusted $ATOM inflation schedule.

Under the newly revised schedule, a one-time issuance of 4,000,000 $ATOM will happen before the transition phase. After that, 10 tranches of 4,000,000 $ATOMs may be issued to the Treasury at any time per $ATOM token holder vote.

Comments on the New Tokenomics

The problem with the current tokenomics is that no direct benefit could be gained by Cosmos Hub from the development of the Cosmos ecosystem and the lack of value accruing for $ATOM token. Interchain security and Interchain scheduler are trying to tackle this issue, empowering the hub and bringing value to $ATOM.

The originally proposed new $ATOM issuance scheduler in the transition phase has massive inflation. Its purpose is to raise additional funds for the Cosmos Hub treasury from the new token issuance. Together with an adverse macro backdrop, the high inflation is worrisome, especially given the elevated token issuance will start right after the rollout of the Cosmos Hub 2.0 updates, while new revenue streams such as Interchain Security and Interchain Scheduler need time to truly materialize.

In the revised v1.2 version, the inflation concern has largely been reduced. Only 4 million of additional $ATOM is set to mint, this is only 1.4% of the total circulating amount. The subsequent 10 tranches of 4 million $ATOM would only be minted subject to token holder vote. This tranched plan also allows for more time to develop other revenue streams and could somewhat offset the inflation impact if Cosmos Hub’s revenue starts to materialize.



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