Addressing the Value of Cosmos
What’s the expected value baked into Cosmos $ATOMs today?
Aug 2021 update: Due to the valuation changes since May 2019, I’ve made the calculation changes below. The predictions remained intact. Previously titled as “Questioning the Value of Cosmos”.
And I quoted as of May 2019:
“The Cosmos blockchain has the expected value of running 40,000 TPS and beyond”
Here’s why…
Comparing Cosmos to a real world system
You have to pretty much compare what Cosmos’ interconnected blockchain can be used for in today’s real world for applications hosted on the Cloud. This is really difficult and unfair to compare with, but it’s a comparison that I’m very familiar with.
Foreword
Think of Cosmos Validators as a set of computers tied together with some sort of agreed upon relationships or protocol (e.g. TCP/IP, Practical Byzantine Fault Tolerance, etc.) and that it can serve the higher network layers, to serve users a specific purpose. For what purpose? Well, it’s merely passing on messages as “transactions,” changing a state like increasing and decreasing ownership of ATOMs in wallets, recording other blockchain transactions, etc. So, it’s like a global database, and dumbing this down further, it’s like an accounting ledger system that tracks changes of states in everyone’s accounts. The closest I can think of in comparison with today’s Cloud offerings is AWS’s Simple Storage System (or S3 for short). Storing files of ledgers that records transactional changes, simple as that. But it has database-like features, to perform Create, Read, Update and Delete (or CRUD) operations so that you can read what the latest state looks like (e.g. how much ATOM is left in a Cosmos wallet). Technically there’s no Delete in the blockchain immutability construct, but that’s beyond the point of this article.
Let’s start with transaction costs
So, how much does it cost to run a transaction?
As of May 2019, each block proposer is rewarded about 3.69 ATOMs, and each block is proposed every 6.855 seconds (see StakingRewards.com for ATOM).
Since then, activity in Cosmos has increased, and the block rewards have averaged around 7.25s with block rewards naturally trending up to 4.46 ATOMs due to the more latent block times to match the targeted inflation (or dilution) of 7%
And the price of ATOMs per CoinMarketCap.com (it fluctuates a lot!) averages at $4.13 USD in May 2019, and has now floating around $20 USD.
How much do transactions cost in the public Cloud today?
Now, let’s compare with AWS S3 pricing. Imagine you’re recording a company’s accounting practices, and you will be Creating (or POST-ing) new batches of files into S3, and later asking to Read a LIST of transactions from time to time, and retrieving it as needed. There’s also Reading (or GET-ing) the ledger to figure out what’s in the ledger.
Prices hasn’t changed since May 2019!
I’d imagine there’s no more than an average of 1 POST/PUT to record a new transaction and an average of 5 requests to GET the file over its lifetime, and approximately 4 LIST-ings an entire block’s transactions for audits and searching the file locations in an S3 bucket. That’ll be $0.005 x 1 POST + $0.0004 x 5 GETs (and the ledger file is really small, I’ll approximate this to 1MB). There’s also data transfer, or bandwidth, costs that are really small but it adds up, ranging from $0.05 to $0.09 per GB depending on volume. Every 1,000 transactions could be 1GB in total, so it’s another $0.05. This means every 1,000 transactions equals to $0.057.
… every 1,000 transactions on AWS costs $0.057
Besides transaction costs, there’s also the cost of storage which is more interesting. Cosmos validators can set these parameters and has left them at a default max transaction bytes of 1MB, with max number of transactions at 5,000 within the mempool (block). Assuming we’re at capacity, we’ll take 1MB for every transaction then which equates to adding about 10GB data per day (i.e. adds 300GB every month). Cost of storage is cheap (and getting cheaper) at about $0.02 USD per GB per month. So cost to store the transactions accumulate at $6 USD more every month to one’s invoice for Cloud storage.
… cost to store the transactions accumulate at $6 USD more every month …
How much does Cosmos transactions cost today?
That’s the wrong question to ask. Cosmos is designed to scale horizontally, hence it could scale to an infinite number of transactions per second (or TPS). The right question is, how many TPS is expected of Cosmos based on the price today?
There IS a finite TPS for Cosmos
Cosmos, or more accurately Cosmos Hub which powered by the ATOM tokens, is one of many possible hubs that’ll be surrounded by validators, incentivized by receiving block proposal rewards. Cosmos runs on top of the Tendermint Core consensus engine, and in theory it could run at 10,000 transactions per block proposed (see Tendermint’s blog on A-to-Z of Blockchain Consensus). But according to Paradigm’s writeup and analysis, with 64 validators, the throughput drops to 4,000 TPS. Hence at best, with 100 to 125 validators for Cosmos Hub powered by ATOM tokens, it is at best capped around 4,000 TPS. Since one can spin up as many hubs as possible, some powered by ATOMs, others could be powered by a different token, hopefully most will be powered by ATOMs. Hence there’s no real ceiling on the TPS for ATOM-powered Hubs.
Let’s reverse into the TPS equation
Calculating Cost per TPS
Assuming each Cosmos block can retain as much data as the above accounting example, we can reach parity in this calculation. The retrieval of historical data (the GETs and LISTs) is FREE once you run a validator node (with or without stakes). You can query the state of the Cosmos blocks at any point in time. The only true cost is recording the transaction (the POSTs/PUTs). Since we can run at max 4,000 TPS, fitting into 1 new block every 7.25 seconds, there’s 29,000 transactions per block.
Each block costs (in rewards to validators) 4.25 ATOMs. At USD $20 (updated Aug 2021) per ATOM, that’s $85 per block, with a maximum capacity of carrying 29,000 transactions. That means each 1,000 transactions costs $85 ÷ 29,000 x 1,000 = $0.67 USD? In other words, with a single Cosmos Hub, every 1,000 transactions on Cosmos costs $2.93!
… every 1,000 transactions on Cosmos costs $2.93!
and that’s 50-times more expensive than running transactions on AWS S3!
Note: as for cost of storage for blockchains, it’s baked into this price
50-times more expensive…
Well, to be fair, my comparison above between Cosmos and AWS is quite skewed. Cost of storage is one. It’s “included” in the “price” of each transaction. Validators are “paid” to verify/sign these transactions as well as storing the transactions in the ledger forever (and it can’t be changed — “immutable”).
The example used in AWS uses S3, only stores static content and periodically served from the S3 bucket itself, or via a cached edge-delivery mechanism called Content Delivery Network (CDN). But it doesn’t let you perform any intelligent logic (has Bob sent to Alice?) type of transactions. So, S3 cannot perform logic — or smart contracts — on the content to change its future state.
Blockchains like Cosmos has the ability to perform logical transactions / introspections that require compute power that typically runs through a Cloud service (using CPU, memory, storage and network throughput). My example with AWS S3 above merely was to record a ledger entry on a static file stores a file into an S3 bucket, and reading from it periodically.
Also, Cosmos Hub acts as an intelligent messenger to route between chains, offering CPU, memory, and network connectivity, much like a network (or API) gateway. Plus it comes with being a Decentralized, Scalable and Secure solution, which is solving a blockchain trilemma. And this is a really difficult Computer Science problem to solve.
As of May 2019, Cosmos was in its infancy. Two years later, Cosmos has matured a bit, helping build out the underlying Tendermint protocol, now tapped by other sister chains such as Terra — with its Anchor protocol and Mirror Finance; Kava Lab — with its lending protocol, and Solana — a high throughput (fast!) blockchain aimed at disrupting the traditional stock exchanges (see Raydium, built on Solana).
There’s a Cloud provider disruptor called Akash Network — as a marketplace connecting data center providers looking for business owners who want a low cost and resilient Cloud solution — providing CPU, memory, storage and network bandwith. They could potentially displace Amazon Web Services (AWS), Google Cloud and Microsoft Azure!
Then there’s Osmosis and Gravity DEX, launching Emeris, which both are in its early stages (as of Aug 2021)
Summary
Speculators are baking in that the network effect around Cosmos — interconnecting all the blockchains around the Tendermint ecosystem (and beyond) — will justify its underlying valuation.
Who knows, there could be improvements on the chain that helps increase block size (hence increasing the number of transactions possible per second) or speed-up block confirmations, both of which will bring Cosmos to parity with today’s Cloud offerings. Minor upgrades are happening all the time and major upgrades occur every year (we’re up to Cosmos Hub v4.0 as of Aug 2021).
There’s something different in the air in Aug 2021 vs. back in May 2019. We now see a dozen other Tendermint-based chains surrounding the Cosmos ecosystem — Terra, Solana, Kava, Akash, CosmWasm, IRISNet, Agoric, Regen, etc. They are running as independent initiatives yet they’re cooperating and collaborating to ensure all that the underlying blockchain protocol — Tendermint — is continuously improved upon, in an organic fashion.
I look forward to see how history plays this out.
DISCLAIMER: The author is a co-founder at KysenPool which operates as a validator for several blockchains, including Cosmos. This disclaimer informs readers that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author’s employer, organization, committee or other group or individual.
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