Evolution of the Cosmos | Why Flipside Governance Supports Prop 82
The Flipside Governance team supports Proposition 82: ATOM 2.0: A new vision for the Cosmos Hub. We believe that this signaling proposition paves the way for not only the future development of the Cosmos Hub, but the greater Cosmos ecosystem. In this article, we dig into the proposed development of the Cosmos Hub, the impact these developments will have on the ATOM token, and our reasoning as to why we believe this proposal will be a net positive for the ecosystem.
Updating The Cosmos Hub
The Cosmos Hub has fully achieved the vision of interoperability and IBC-connected chains as laid out in the original whitepaper written in 2017. Core technologies of the Cosmos Hub, such as the Cosmos SDK and Tendermint consensus engine, also serve as a valuable template for developers looking to create their own IBC enabled zone. While these technologies have enabled the creation of multiple promising zones, they have failed to drive value to the holders and stakers of ATOM. What is missing from the Cosmos Hub is a utility for the ATOM token, and the creation of this utility is what will drive further value to ATOM token holders and stakers.
The ATOM 2.0 whitepaper expands the vision for the Cosmos Hub by proposing future functionality that will allow it to play a more central role in the Cosmos ecosystem. The whitepaper also presents the creation of a new treasury that will allow for the rapid onboarding of developers who will create further utility for the Cosmos Hub. Proposition 82 is a signaling proposition that will set the development of this ATOM 2.0 whitepaper in motion. It is by no means a finalization of this whitepaper, all topics can be subject to change via future governance votes.
Interchain Security
The first proposed upgrade in the ATOM 2.0 whitepaper is interchain security, which will allow new zones to “rent” security from the Cosmos Hub instead of having their own active validator set. In other words, the Cosmos Hub will be able to run multiple blockchains in parallel and be able to provide the same level of security that the Cosmos Hub has to new zones within the ecosystem.
This is valuable to both the stakers of ATOM as well as the creators and users of the new zone. How ATOM stakers will gain additional benefit is clear — they will receive their regular ATOM staking rewards as well as tokens from zones that elect to use interchain security. The zones that enable interchain security will benefit by the cost of a 33% governance attack substantially increasing, as this attack would now have to be carried out by claiming 33% of the voting power on the Cosmos Hub.
Interchain Scheduler
One inherent risk that comes with IBC is that major tokens are trading on numerous independent blockchains, which can give rise to maximal extractable value (MEV) opportunities. The ATOM 2.0 whitepaper adds a module called the Interchain Scheduler, which is a secure block space market aimed at avoiding off-chain cartelization and to provide more options for chains seeking to optimize the use of block space.
To simplify, ATOM 2.0 is looking to monetize MEV by selling the right to front run transactions through the use of block space auctions. Once a block execution is successful, a portion of the proceeds will be sent back to the partner chain and another portion to the interchain allocator.
Another unique facet of the interchain scheduler is that it brings MEV markets on-chain. Existing MEV solutions such as flash bots on Ethereum create off-chain markets, leading to a lack of transparency. On-chain MEV markets will facilitate a fairer system for individual users of the Cosmos Hub and IBC chains, opening the door for more traders to confidently use DeFi products within the ecosystem.
Interchain Allocator
As it currently stands in the Cosmos ecosystem, when a new zone is created the developers must also come up with a mechanism to drive liquidity into the zone. While the Cosmos Hub had the luxury of using ATOM tokens to fund the development of its core components in the past, not all chains have sufficient liquidity at their genesis to fully fund their vision. This problem will amplify as new developers enter the ecosystem and wish to create their own zones and dapps.
Hence the creation of the interchain allocator. The interchain allocator is a monetary system that incentivizes long-term alignment between the Cosmos Hub and a secondary chain, as well as helps bootstrap liquidity and users for that second chain. For initial liquidity, the secondary chain will receive ATOM to hold in its treasury and the Cosmos Hub will receive the token of the secondary chain in return.
The interchain allocator will be controlled by the ATOM stakeholders, who can form DAOs or teams and access funding from the interchain allocator via governance vote.
Tokenomics — Issuance Overhaul and a Controversial Transitory Phase
The ATOM token does not have a maximum supply and rewards stakers by minting new tokens, which incentivizes a target supply of ATOM being staked. With liquid staking on the horizon, users will now be able to use their tokens while still being staked. Thus, a new monetary policy is needed to ensure rewards from staking and other actions such as LPing do not result in hyperinflation.
A new monetary policy is laid out in the ATOM 2.0 whitepaper that involves a transitory and steady phase. This transitory phase is likely the most controversial piece of the ATOM 2.0 whitepaper.
The transitory phase begins with a significant increase in the issuance of the ATOM token that lasts for 36 months. The issuance rate starts at 10 million ATOM per month and steadily declines until a steady issuance rate of 300,000 ATOM per month is reached. Once the issuance of ATOM has reached the steady state, it is expected that organic revenue from fee sharing mechanisms replaces the need for additional issuance.
The purpose of the initial high issuance is three-fold. The first reason is that stakers of ATOM continue to see the rewards they expect and choose to continue securing the chain. The second is to allow consumer chains time to join Interchain Security. If the ATOM 2.0 whitepaper passes, it is currently expected that Interchain Security goes live in Q1 of 2023 and will represent the first generated revenue from ATOM 2.0 chain upgrades. Lastly, the increased issuance is used to fund a new Cosmos Hub Treasury.
The new Cosmos Hub Treasury is being created to support initiatives aimed at increasing adoption, growth, and capitalization of the Cosmos Hub. This provides a clear path to funding for worthwhile projects to develop on the Cosmos Hub that does not currently exist. As it stands right now, the developer pool on Cosmos is small compared to that of Ethereum or Solana. We believe that funding the right people and projects will ultimately off-set or supersede the initial issuance by driving even additional revenue via the collection of transaction fees.
In addition, the amount of ATOM tokens issued under the old issuance model will pass that of the tokens issued by the new model in month 20. After 60 months, the new issuance model will have minted less than 200 million new ATOM tokens compared to the old model. Assuming prop #82 passes, it is likely that from now until month 20 that the crypto market as a whole maintains a bearish macro-trend. While increasing the issuance might lead to an additional short-term micro downtrend in price for the ATOM token, future value will also be derived from the applications built on top of it using funds from the Cosmos Hub Treasury.
Future of the Interchain
We at Flipside Governance believe that the vision laid out in the ATOM 2.0 whitepaper is the right path to help the Cosmos Hub fully realize its philosophy of sovereign interoperability. The Cosmos Hub at its genesis was imagined as a long-term project. In its current state, the Cosmos Hub is still a long-term project. There is still much work to be done to integrate Cosmos into the broader crypto landscape. The ATOM 2.0 whitepaper presents a development path for the core team as well as a path for developers wishing to join the ecosystem. Without the passage of ATOM 2.0, these pathways simply do not exist on the Cosmos Hub.
Analyzing the economics of ATOM 2.0 suggest that there may be some short term downward price movement of the ATOM token as a result of the issuance model. However, we trust the core team to deliver on the technical specifications outlined in the whitepaper that will bring increased future value to ATOM holders and that the treasury funds will be used to spearhead additional innovative development on the Cosmos Hub.
Additionally, given that Prop 82 is a signaling proposal we believe that this outlines an essential foundation for the next evolutionary phase of the Cosmos Ecosystem while also providing the necessary flexibility in implementation.
