Of Lords and ATOMs
Cosmos and its native token, the ATOM, offer a new take on token economics and the structure of blockchain networks. In particular, the value capture mechanism of the ATOM token differs from other digital assets. With Cosmos now live and ATOMs transferable, we take a medieval look into why the native token of Cosmos is valuable.
In medieval England, towns would hold weekly markets for traders to exchange their wares. These markets were absolutely necessary for two reasons. Firstly, coordination of trading was required due to the small number of inhabitants in villages and towns; individual settlements did not provide enough of a market for farmers and traders, meaning that larger markets were required. Secondly, medieval England was a dangerous place to do business. Markets were a physical location that provided security to market participants.
The lord of the manor was the organizer of these markets. In return for the right to trade in a secure environment, the lord would charge a tax on the traders. This tax guaranteed the security and safety of the traders and their goods. Indeed, at the opening of the market, the steward of the lord of the manor would read aloud a code of conduct. It prohibited quarrels and fights, and asked every participant to buy or sell only in open fair or market. The announcement ended with a warning that anyone who broke the code would forfeit the goods that they bought and sold. Medieval slashing.
Fractional lordship
In the Cosmos ecosystem, the Cosmos Hub is the market. This is where the different zones can coordinate with each other to trade digital assets. Zones are charged a tax for interacting with the Cosmos Hub and in return the Cosmos Hub guarantees security. In medieval England, the recipient of market taxes was the lord of the manor. In the Cosmos ecosystem, the recipients are ATOM holders that are staking their ATOMs and adding to the security of the hub. This security is maintained by validators who hold participants accountable to the code of conduct and take a small commission.
Owning ATOMs offers fractional lordship.
Value drivers
So what drives value to ATOM holders? In the medieval markets, the lord charged taxes per participant. The more people attending the market, the greater the fees collected. In Cosmos, what matters is transaction volumes. In order to drive fees to ATOM holders, the Cosmos Hub needs to connect many zones together and become the conduit through which transactions take place. Every transaction flowing through the hub owes a fee to ATOM holders that are staking their ATOMs.
In addition to earning fees from transactions, staked ATOM holders benefit from inflation. This is less of a value driver and more of an incentive mechanism to get ATOM holders to stake in the network at this nascent stage. Staked ATOM holders are also eligible to participate in decentralized governance, making decisions on how the network should operate. While not bringing direct value to ATOM holders, there is an intangible value that comes from controlling a system that manages value transfers.
Competing markets
Medieval markets were not immune to competition. As the lord of the manor, you would want to make sure that your market was the largest and most secure in the county. Network effects were key. The more traders you could gather at one market, the more diverse the goods for sale and the better the trading experience. In addition, the more secure the market, the more comfortable traders would be with bringing and transacting high value goods.
Similarly, in Cosmos, there are already competing hubs to the Cosmos Hub. It is possible that a competing hub will attract more zones than the Cosmos Hub, drawing trade and fees away from ATOM holders. Again, network effects are key. A hub with many connected zones becomes a more appealing hub to connect to. With its vibrant network of validators (security enforcers), the Cosmos Hub boasts superior security to other hubs and is on track to entice the largest zones to connect to it.
Possible futures
Cosmos has only just gone live and IBC (the ability to move assets through the hub and between zones) is not yet enabled. At this point there are a number of possible futures facing the network. We could see many zones created, but limited desire to move digital assets between them. We could also see a competing hub to the Cosmos Hub becoming the leading hub. Both of these futures would be suboptimal for ATOM holders. However, we could equally see a future with many vibrant zones connecting and trading with each other through the Cosmos Hub.
In this future, it pays to be the lord of the manor.
This article is the offspring of conversations with Sam Sutcliffe of CMCC Global and a livestream with Sunny Aggarwal and Jack Zampolin of Cosmos, hosted by Brian Crain of Chorus One.
Disclosure: CMCC Global is a blockchain venture capital company that invested in the Cosmos ICO in early 2017. Today it holds and delegates Cosmos ATOMs in its funds.
