One Chain to Bind them All? How Cosmos Could Reach $1,000 per Coin

Tory Green
11 min readApr 11, 2023

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Cosmos is an L1 network built for interoperability (we’ll explain what this means in a bit).

It has a MC of $3.2B, and its $ATOM token trades at $11.11. In 2021, the price hit $44.70.

This article will cover:

  1. What are L1s?
  2. The problem with L1s
  3. How Cosmos solves this problem
  4. How the protocol works
  5. Market overview and competitive position
  6. $ATOM’s Traction
  7. Team
  8. $ATOM’s Tokenomics
  9. Valuation
  10. Risks and rebuttals
  11. Long-term potential

Let’s dive in…

What are Layer 1s?

Layer 1s (L1s) are the decentralized computers that run Web3.

They are the foundation on which other layers of the blockchain ecosystem — such as applications and services — are built.

When most people use the term “blockchain”, they’re talking about an L1.

Ethereum was the original “Layer 1”. It was launched in 2015 and now supports:

  • > 220M unique addresses
  • > 4K dapps
  • >$28B TVL in DeFi
  • > $38B in NFT sales
  • > 12K DAOs

Unfortunately, Ethereum has a problem…

The Problem with L1s

The L1 landscape is fragmenting.

High fees and slow transaction times have led to the launch of multiple competitors — BNB, Solana, Avalanche, Cardano, etc… — over the last 18 months.

This has caused Ethereum’s market share to decline from >95% to < 60%.

Unfortunately, these different Layer 1 blockchains can’t communicate with each other.

Each chain has its own set of unique rules, validation methods and data organization, making cross-chain interactions difficult.

Historically, the only way to transfer coins from one chain to another has been through the use of blockchain “bridges”.

Unfortunately, bridges are extremely unreliable and have led to billions in hacks and stolen funds.

Solution

Cosmos provides a unique solution.

It’s a blockchain that is designed to connect multiple independent blockchains, allowing them to communicate and transfer assets easily.

It does this through a “hub and spoke” model. Independent blockchains (called “zones”) connect to a central blockchain (known as the Cosmos “hub”).

The hub is responsible for facilitating communication and maintaining the security of the system.

That’s why many call Cosmos the “internet of blockchains”.

Like the internet connects independent websites such as Facebook, Amazon and Google, Cosmos aims to connect independent blockchains like Ethereum, Solana and Cardano.

How does Cosmos Work?

The primary components of $ATOM include its:

  • Tendermint consensus algorithm
  • Cosmos Zones
  • Cosmos Hub
  • Cosmos SDK
  • Inter-Blockchain Communication (IBC) protocol

Let’s take a look at each…

Tendermint Core

Tendermint Core is a proof-of-stake consensus mechanism pioneered by Cosmos.

It offers faster transaction processing and confirmation times compared to traditional consensus mechanisms.

Kyle Samani calls it the “gold standard” in PoS consensus mechanisms.

Cosmos Zones

In the ATOM ecosystem, individual blockchains are called “zones.”

Each zone is an independent blockchain, so it can have its own consensus algorithms, token systems, and governance structure.

Cosmos Hub

The Cosmos Hub is the central blockchain of the Cosmos ecosystem.

It connects all of the Zones and:

  • Enables secure and efficient communication between them
  • Allows zones to exchange data and tokens
  • Provides security to the network

While the Cosmos Hub is the first hub in the system, the protocol plans to expand to additional hubs.

Each of these Hubs can be connected to other hubs, creating the “internet of blockchains” structure.

Cosmos SDK

The Cosmos Software Development Kit (SDK) is a modular framework that simplifies the process of building custom, application-specific blockchains.

Developers can create new Zones using the SDK, incorporating only the modules they need for their specific use case.

Inter-Blockchain Communication Protocol

The IBC protocol allows blockchains to communicate with one another.

One blockchain sends a message to another through the Cosmos Hub, where a relayer transfer the message.

The receiving blockchain then verifies and executes the message.

Cosmos 2.0

In September of 2022, Cosmos released its whitepaper for “Cosmos 2.0”.

This proposed a revamp of the protocol’s tokenomics as well as several new features:

  • Interchain Accounts
  • Interchain Security
  • Interchain Allocator
  • Liquid Staking

While the proposal did not pass, $ATOM is still proceeding with several of these upgrades.

As such, I think it’s helpful to review them all.

(Cosmos has indicated that they will regroup and try again).

Interchain Accounts

Interchain Accounts upgrade the IBC to provide a greater level of cross-chain communication and composability.

For instance, one could now create a DeFi dapp that allows users to deposit collateral on one blockchain and take a loan against in on another.

Interchain Security

The Cosmos Hub provides interchain security by lending its validator set and staked $ATOM to its Zones.

This provides two benefits:

  1. Zones no longer need to bootstrap their own validator set
  2. Cosmos Hub receives a fee

Interchain Allocator

The Interchain Allocator manages the distribution of tokens across interconnected blockchains through on-chain governance proposals.

This allows for building “common good” applications on the Cosmos Hub, adding value to the ATOM token.

Liquid Staking

Liquid staking allows users to stake $ATOM and receive a “tokenized” version of their staked asset, which can be freely traded, used as LP tokens, used as collateral and even staked again.

This allows Cosmos to simultaneously increase the security and liquidity of the network.

Market overview

Major players in the Layer 1 space include Ethereum, BNB, Cardano, Polygon, Solana, Polkadot, Tron, Avalanche, Cosmos and Stellar.

Competitive advantage

When compared to Ethereum, Cosmos is fast, cheap and scaleable:

  • <$0.01 transaction fees
  • 7 second finality
  • 10K TPS

But that’s not the protocol’s strongest differentiator as many “alternative L1s” boast low fees, high throughput and fast finality.

What really makes Cosmos stand out are three features. Specifically, it is:

  • Interoperable
  • Customizable
  • Sovereign

Let’s take a look at each…

Interoperability

Cosmos is designed with interoperability in mind, enabling seamless communication between different blockchains through the IBC protocol.

This level of interoperability allows for efficient exchange of data and tokens across various networks.

Customizability

Cosmos enables developers to build application-specific blockchains tailored to their needs using the Cosmos SDK.

This contrasts with Ethereum’s one-size-fits-all approach, where all smart contracts and applications share the same underlying infrastructure.

Sovereignty

Each Cosmos Zone maintains its sovereignty.

It has its own governance, consensus mechanism, and token economy.

This allows for greater flexibility and independence compared to Ethereum, where all applications and projects are governed by the same network rules.

Perhaps the closest comparison to Cosmos is Polkadot, another chain that uses a “hub and spoke” model to facilitate interoperability.

The key difference between the two however, is while Polkadot focuses more on shared security, Cosmos emphasizes independence and connectivity.

Traction

The ATOM ecosystem has shown significant traction.

The number of zones grew from 32 at the end of 2021 to 53 at the end of 2022.

These chains host > 272 dapps and > $61B in digital assets.

The most popular by MC are:

  • Cronos ($1.7B)
  • Osmosis ($443M)
  • Kava ($405M)
  • OKExChain (386M)
  • fetch-ai ($380M)

Cosmos was also home to Terra Luna, which at one point was one of the largest protocols in web3.

In fact, if we aggregate the current market cap of all chains connected to the IBC, we can argue that the $ATOM ecosystem has a value of $8.2B.

This would make it the fifth largest ecosystem after Polygon and before Solana.

Some would argue this is conservative…

For instance, some chains — like BNB — were built using Tendermint and the Cosmos SDK, but aren’t connected to the network.

If we include these chains, the market cap jumps to $58.2B (making Cosmos the second largest ecosystem after Ethereum).

If you’d like to dig deeper into Cosmos’ recent progress, check out this thread by Satria Pamudji covering the networks EOY report for 2022.

Team

Cosmos was founded in 2014 by Jae Kwon and Ethan Buchman.

The protocol is backed by:

· Interchain Foundation(ICF): a Swiss non-profit that supports the development of the Cosmos ecosystem

· All in Bits (DBA Tendermint Inc): a software development company contracted by ICF to develop the Cosmos network

Community

Cosmos has a robust community, often known as the Cosmonauts.

The project has:

  • 504K Twitter followers
  • 77K reddit subs
  • 25K Discord members

Tokenomics

$ATOM is the native coin of the Cosmos ecosystem.

It has a circulating supply of 286M.

Below we will cover $ATOM’s:

  • Usage
  • Initial distribution
  • Emissions schedule

Coin Usage

$ATOM has three use cases:

  • Fees: $ATOM is used to pay transaction fees
  • Staking: Users can stake $ATOM to secure the network and earn rewards
  • Governance: $ATOM holders may govern the Cosmos Hub by voting on proposals with their staked coins

Initial Distribution

Cosmos raised $17 million in 2017 through an ICO. The initial distribution was as follows:

  • 5% to initial donors
  • 10% to Interchain foundation
  • 10% to Tendermint
  • 75% to the public

Emissions Schedule

$ATOM is an inflationary token.

The annual rate of inflation is between 7% and 20%, and is determined by the % of $ATOM that is staked.

(if under 67% are staked, the rate will increase towards 20%, if over 67% are staked, it will decrease towards 7%).

As mentioned, the “Cosmos 2.0” whitepaper intended to modify the protocol’s tokenomics.

It proposed to drop token issuance from 10M per month to 300K per month over a 36-month period.

While the proposal failed, the team has indicated that they will revisit in the future.

Valuation

Per the below analysis, I believe that the market opportunity for L1 coins — including $ATOM — is immense.

In short, they can function as a replacement for traditional money and, as such, have a TAM of $138T and SOM of $35T.

Assuming 3% market capture, Cosmos’ FDV could exceed $1T.

(3% is based on the approximate market share of chains connected to the IBC — if we use IBC chains as a % of TVL, that number jumps to ~7%)

Projecting the total number of tokens is more difficult.

To make things simple, I assumed that inflation would start at 13% per year and gradually decrease to 7% by 2040. This give us ~1 billion tokens.

$1T FDV and $1B tokens yields a price of ~$1,000.

It’s worth noting that several things can change this projection. On the positive side, Cosmos:

  • Could capture > 3% market share
  • Restructure the tokenomics to reduce inflation

On the negative side, $ATOM could fail to provide utility to holders.

(which is a common concern)

Risks

Critics of the Cosmos network generally point to four concerns:

  • Low adoption
  • Complexity
  • Security
  • No token utility

Let’s explore each, as well as provide some potential rebuttals…

Low Adoption

Critics argue that Cosmos is not as mature or widely adopted as Ethereum.

That said, $ATOM is still a relatively young project, and benefits like scalability, interoperability, and sovereignty have the potential to increase its adoption over time.

Complexity

The Cosmos architecture might appear more complex than competitor’s’ “single-chain” approach.

Cosmos would argue that this is a feature, not a bug, as it provides flexibility, customizability, and sovereignty, which are valuable features for developers and projects.

Security

Critics may argue that Cosmos’ security model, where each zone maintains its own security, is less secure than ETH’s shared security model.

But Cosmos’ approach allows for flexibility and interoperability, as each zone’s security can be tailored to its specific needs.

Furthermore, ATOM is working on shared security solutions like the Interchain Security protocol, which will enable zones to request security from the Cosmos Hub or other hubs, thus enhancing the overall security of the ecosystem.

No token utility

Critics often argue that $ATOM lacks utility, since zones can use their own coins.

But that’s not entirely true as $ATOM does provide shared security and governance.

Furthermore, future updates to tokenomics may enhance the utility of the coin.

Long-Term Vision

The bull case for Cosmos is to become the “Internet of Blockchains”.

In the same way the internet connects individual platforms like Facebook, Amazon and Google, $ATOM could connect thousands of individual blockchains.

There are several reasons to believe this scenario may occur:

  1. The L1 landscape will likely continue to fragment
  2. Cosmos is an ideal interoperability solution
  3. $ATOM is a complement, not competitor to existing L1s

Let’s explore each…

Fragmenting L1 Landscape

The L1 landscape will likely continue to fragment:

  • Platform economies trend towards multiple players
  • Increasing demand attracts new entrants
  • The need for specialization creates opportunities for niche players

More in this in the below thread:

Ideal Interoperability Solution

Cosmos may be one of the best interoperability solutions. It:

  • Is significantly safer than bridges
  • Offers builders more flexibility when creating their own chain
  • Allows protocols to retain there own token and sovereign economic systems

This may be a reason that major projects like @dYdX are migrating to Cosmos.

Complement, not competitor

Finally, Cosmos isn’t trying to be an “Ethereum Killer”. Instead, it’s a complement to existing L1s.

In fact, given that any blockchain can connect to the network, it’s theoretically possible for protocols like ETH and SOL to join the Cosmos network.

To clarify with an analogy:

Cosmos is like a shopping mall

Businesses (blockchains) can set up shop for free and profit from all the customers that enter the mall (the Cosmos ecosystem).

Each shop can choose its own currency (e.g. ETH), but the mall itself uses $ATOM.

Note: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

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Tory Green
Tory Green

Written by Tory Green

Fundamental analysis of Web3 protocols | VC + 3x tech COO | Author of Digital Nations | Ex- Stanford, WestPoint, Disney Strat, MerrillLynch M&A & Oaktree PE