Cosmos Network and ATOM explained — AAX Academy
Cosmos Network aims to provide the solution to the lack of interoperability between blockchains in the DeFi world. Referring to themselves as the “internet of blockchains”, the project can be considered as being part of the third generation of crypto, by creating the tools we need to scale into the next level of decentralized finance.
The problem Cosmos is solving
Today, there are many different blockchains on top of which services and their respective tokens are built. Most of these blockchains cannot communicate with each other directly, and the supporters behind individual blockchains tend to resort to bickering and competing in a maximalist way rather than focusing on the goals they have in common in a collaborative way. It’s a generalization but on the whole it rings true. New perfect-for-DeFi protocols are labelled Ethereum-Killers in a bid to own a bigger piece of the pie, which particularly short-sighted considering we are only at the start of this journey and the size of the pie is yet to be defined.
There are however workarounds for separate blockchains to connect with each other, and many protocols have built or are in the process of creating bridges between blockchains, but they are not ideal.
For example, you can’t use BTC on Ethereum-based platforms directly because the two are on different blockchains. If you want to use Bitcoin in an Ethereum-based DeFi, you first need to wrap your BTC into what is called wBTC. This is essentially a token that acts as a stablecoin for Bitcoin, meaning 1 WBTC will always represent 1 BTC in value. Minting the token initiated by merchants and performed by a custodian, which means you need to place trust in centralized players — the opposite of what decentralized finance is about.
Cosmos is solving the issue by building an ecosystem that can connect all blockchains using a single platform, removing the need for centralized players or the building of multiple bridges between multiple blockchains.
What is Cosmos Network?
Cosmos Network was created by Jae Kwon and Ethan Buchman in 2014, who at the time created Tendermint, the consensus protocol that would go on to power Cosmos and parts of the wider DeFi ecosystem.
Cosmos aims to enable every blockchain to communicate, share data, and transact with each other. By enabling real interoperability at scale, there is less need for networks both old and new to compete for the role of primary provider of DeFi infrastructure. Instead, multiple blockchains can co-exist, taking on specialized roles based on unique advantages.
As a complete technology stack, Cosmos goes beyond simply connecting different blockchains. They have created tools for developers to create their own custom blockchains in a matter of months or even weeks, instead of years. Tendermint, the consensus mechanism developed by one of the founders of Cosmos, plays a big role in making this happen. Blockchains built on Tendermint are considered to be some of the most secure and scalable protocols, while also being highly customizable. They can handle up to 10,000TPS, even if 1/3rd of the validator nodes are offline or corrupt, with the trade-off being a cap on total validator nodes set at 125 — which is scores low on the decentralization points.
How Cosmos works
Cosmos can essentially connect every proof-of-stake blockchain, as well as proof-of-work blockchains like Bitcoin. They do this by connecting blockchains with Hubs and Zones, in what can be visualized as a simple hub-and-spoke model.
Zones are regular heterogenous blockchains and Hubs are blockchains specifically designed to connect Zones together. When a Zone creates a connection with a Hub, it can automatically access every other Zone that is connected to it. As a result, each Zone only needs to establish a limited number of connections with a few Hubs. When a Zone receives a token from a Hub, it only needs to trust the origin Zone of this token and the Hub.
In the WBTC example we touched upon earlier, the Bitcoin and Ethereum blockchains would be zones that connect using a single Cosmos Hub. Any interaction between the two blockchains would be conducted using smart contracts, which reduces the need to rely on a centralized party to make it work.
With Cosmos, we can also bypass the need to create multiple bridges to connect today’s blockchains and the ones going live tomorrow. For example, we won’t have to build a bridge between Polkadot and Bitcoin, Polkadot and Solana, and Bitcoin and Solana, but instead all three chains could plug into each other using a single Cosmos Hub.
The ATOM token
ATOM is the native token of the Cosmos Network. The tokens were created when Cosmos mainnet launched, distributed to initial donors, token sale participants, the Cosmos Foundation, and core developers. Holding ATOMs gives the holder the ability to stake and validate blocks, vote on governance issues, and pay for transaction fees.
The total supply of ATOM tokens is 260,906,513 exactly, with current circulation just over 218 million roughly. These tokens are not mined but earned through staking. Cosmos has compared ATOM tokens to the ASICs that are used to mine Bitcoin. As a technical paper written by the Tendermint team explained: “It is a piece of virtualized hardware (economic capital) that you need to obtain in order to participate as a keeper in the network.”
By delegating your ATOM to a validator of your choice, you’re expressing your trust in them, which makes them more powerful on the Cosmos blockchain. As validators get paid for confirming blockchain transactions, they in turn pay back to those who supported them. Un-staking takes a total of 21 days during which you do not earn any interest.
Originally published at https://academy.aaxspace.com on August 10, 2021.
