Cosmos Hub & $ATOM - What's Their Role in The Cosmos Ecosystem
What's the purpose of Cosmos Hub, and its native token, $ATOM?
Some basics for Cosmos hub
Cosmos Hub is a Proof-of-Stake blockchain with its native token ATOM used for transaction fees, staking, and as a voting mechanism in governance. $ATOM is currently ranked as the 20th largest cryptocurrency with a market cap of $8.4 billion according to Tokeninsight.
The project fundraising event was held back in 2017, and $ATOM vesting schedule for the team and investors has all finished by March 2022. There is no issuance cap for $ATOM, a dynamic inflation rate between 7% and 20% depending on the distance from the desired staking participation ratio.
A Hub for Cosmos Ecosystem
In Cosmos, every blockchain is called an application-specific chain, when they open IBC (inter-blockchain communication) with another App-chain, this chain will be called a Zone. A hub is a Zone that has a lot of channels connected to it, thus making the hub act as a center to facilitate IBC between chains.
Each zone is an IBC-enabled blockchain, our familiar App-chains like Terra, Osmosis, Juno are all zones. As you can imagine, if there are hundreds of Zones out there, having each of them connect to one another directly would be cumbersome. The hub act as a central point to facilitate communication between zones.
However, the hub doesn't need to be Cosmos hub, Cosmos ecosystem is entirely permission-less, any App-chain which opens IBC and has a lot of other app-chain connected to it can be created as a central hub to facilitate IBC transactions. And on the other hand, although one-to-one connection between chains can be cumbersome, it is still feasible for major App-chains to establish one-to-one connections, and most transactions actually happen between these major chains.
Osmosis, the largest DEX in the Cosmos ecosystem has actually the highest IBC transaction volume, followed by Terra, Cosmos hub only ranked third in the last 30 days. In terms of IBC connection, if the data is correct according to Map-of-Zone, Osmosis has actually the largest number of chains connected in the entire ecosystem.
So, again, what's the purpose of Cosmos hub?
Inter-chain service provider
In their current form, Cosmos Hub and $ATOM does not have much value accruing. This has also been reflected in its price performance. App-chain native tokens, $Luna, $Osmo, $Juno all have spectacular price performance compared to $ATOM.
Cosmos hub's value is based on the whole ecosystem, and several catalyzes that could significantly improve the importance of this chain are underway to deliver.
Every App-chain in the Cosmos ecosystem is a PoS blockchain. PoS networks are secured by validators who stake tokens on the network to validate transactions and produce blocks. This means each app-chain need to bootstrap its validator sets on its own.
The overall security of a PoS chain is roughly in proportion to the total market value of the staked token because the more tokens being staked, the higher cost of attacking the network. However, it is not easy for a newly launched App-chain to bootstrap a large enough staked value. For example, if there is a new chain with just $10 million in value staked, but has $20 million TVL. It is logical in theory for the chain operators to steal the locked value.
Even for an established App-chain, it is a real problem when the staking situation can not match the rapid TVL growth. Currently, Osmosis DEX has a TVL of $1.6 billion, but the staked ratio only sits at 35% with a value of $0.9 billion.
In PoS chain, validators stake native tokens and are responsible for validating transactions, reaching consensus, and producing new blocks. Interchain Security allows for a provider chain's validators (e.g. the Cosmos Hub), to be in charge of producing blocks for another chain. The participating validators would run two nodes, one for Cosmos Hub and one for the consumer chain, and receive fees and rewards on both chains.
Unlike the other two multi-chain ecosystems, Polkadot and Avalanche, Interchain security is an optional service that App-chain can choose to use or not. In Polkadot, the relay chain is responsible for the validation of transactions for parachain. And in Avalanche, subnet has to stake a required amount of $AVAX. $DOT and $AVAX in one way or another have a compulsory use case for parachain or subnet. In contrast to them, interchain security service is completely optional, and also not limited to Cosmos Hub and $ATOM holders.
The safer a chain is, the more suitable to be an interchain service provider. There is a philosophy called Practical Hub Minimalism that intentionally builds Cosmos Hub to have as few features as possible. $ATOM is a large-cap native token with a high staking ratio and there is no application built on it with almost no TVL to be secured. All security power of $ATOM can be used for interchain security to help bootstrap new App-chains in Cosmos ecosystem. Even Osmosis has expressed its interest to use Cosmos hub for security improvement.
In Ethereum, the composability contributes to a thriving DeFi landscape. However, in Cosmos, since each application is built on an independent blockchain, there is currently no composability between chains. Some chains like Terra develop their own ecosystem, and Dapps within that chain can interact with each other.
Current IBC-enabled chains can only transfer tokens, by the interchain account function, blockchains can control accounts on separate chains, meaning blockchains can interact with each other similar to the interaction of smart contracts on the EVM. This module will be firstly implemented on Cosmos Hub in the coming Theta upgrade, users will then be able to access the other chain from a local chain with the help of a Cosmos hub interchain account.
Similar to inter-chain security, my understanding is Cosmos hub is not the only chain that could facilitate this kind of interchain account transaction. However, due to its good security as no other Dapps compete for the consensus power, the hub stands to be the best suitable one for this function.
The function of Cosmos hub and $ATOM is now clear, it is a service provider for the entire Cosmos ecosystem. Its importance is based on the successful implementation of IBC, Interchain security, Interchain account, and a growing Cosmos ecosystem with many new App-chains to be built.
With all these elements being delivered in progress, the value of Cosmos hub is about to emerge, and $ATOM is in the pivotal position to capture the value of the development of Cosmos ecosystem. The price-performance of $ATOM has fluctuated around a wide range for almost a year, what it needs is just a catalyst to excite the market.