What Is Cosmos Protocol?

As crypto and blockchains become increasingly popular, developers are exploring several scaling methods. Solana has chosen to build a layer-1 blockchain able to scale by itself. Ethereum is attempting to scale vertically with layer-2 rollups. Cosmos, the subject of this article, is scaling horizontally with AppChains.

In this article, part of our Blockchain Protocol series, we’ll introduce Cosmos, discuss why the protocol has been successful thus far, review some of its top projects, and address the challenges it faces ahead.

What Is Cosmos?

Cosmos describes itself as “the internet of blockchains.” However, perhaps the best description for Cosmos comes from Paradigm: “If Ethereum is a mainframe computer, Cosmos is a protocol for networking independent servers.” 

At a high level, Cosmos is a network of sovereign blockchains that communicate via the IBC (Inter-Blockchain Communication). However, it is important to note that Cosmos is not a blockchain. It is instead a blueprint and set of tools for designing AppChains known as Zones. These Zones are attractive to developers as they allow greater control over design choices and present more opportunities for capturing value.

To facilitate this network of blockchains, Cosmos provides developers with almost everything they need to design their own AppChain. Tendermint and the Cosmos SDK make spinning up a Zone as simple as building a smart contract on Ethereum, while the IBC ensures that each zone is interoperable. The only thing that Cosmos doesn’t provide is security, with each chain being responsible for its own validator set. However, this is due to change with ATOM 2.0.

The Cosmos model has proven successful, with 263 different apps and services currently existing in the Cosmos ecosystem. 

Why Is Cosmos Successful?

Cosmos’s success comes down to the appeal of AppChains, which are blockchains dedicated to a specific application.

There are a few different reasons why developers are drawn to AppChains:

• Scalability: Monolithic chains such as Ethereum are limited in their scalability, and rollups, while effective, add another layer of complexity for users. AppChains allow Cosmos to scale free of additional complexity for users. 

• Customizability: Developers always want more flexibility in designing their dApps and chains, and it is impossible to get more flexibility than offered by AppChains and Cosmwasm contracts. With AppChains, developers can customize their dApps throughput, finality, security level, composability, and more. Smart Contracts running in CosmWasm add valuable development speed to Cosmos SDK chains, while integrating with all existing SDK modules.

• Value Capture: dApps on monolithic chains cannot capture value from transaction fees to validators and MEV. However, AppChains can capture this value, providing additional revenue for the dApp, the developers, and its users. 

For these reasons, developers are drawn to AppChains, and, thus, Cosmos. 

Cosmos Composability and Top Projects

Cosmos has no shortage of exciting and innovative projects in its ecosystem:

• Osmosis ($203M TVL) has become the liquidity hub of Cosmos, and it provides one of the smoothest trading experiences in all of crypto. It is also the originator of superfluid staking, in which users can stake and liquidity provide their tokens simultaneously. 

• dYdX ($365M TVL) is not yet a Cosmos Zone, but it is in the process of moving over to Cosmos. This is a massive get for Cosmos, as dYdX is one of the largest decentralized exchanges (DEX) by volume in all of crypto. 

• Thorchain ($100M TVL) is a DEX that facilitates cross-chain swaps and liquidity pools with no pegged or wrapped tokens.

• Secret ($10M TVL) is a Zone that is building decentralized finance dApps and infrastructure focused on privacy.

• At the heart of it all is the Cosmos Hub, the original Cosmos proof-of-stake blockchain secured by the token ATOM. Although the Cosmos Hub has been relatively ignored up to now, this is about to change with ATOM 2.0, which will turn the Hub into the center of security and staking for Cosmos. 

The beautiful thing about Cosmos is its IBC-enabled composability and interoperability. As you can see with the map of Zones, Cosmos Zones are remarkably connected, improving the experience of both developers and users.

Problems with Cosmos

The biggest issue with Cosmos has been a lack of usage and poor token price-action. 

Previously, much of Cosmos’s value and usage came from Terra. With the unfortunate demise of Terra in May, this value no longer exists. Accordingly, TVL for the Cosmos ecosystem has taken a big hit. It is currently about equal to ETH L2s Arbitrum and Optimism and much less than L1 giants Ethereum, Tron, and Binance Smart Chain. 

Relatedly, poor tokenomics and low usage of Cosmos have made price-action for Cosmos’s central token ATOM stubbornly weak. This turns into a vicious negative cycle, as poor token price-action prevents the speculation that drives value to blockchains, which keeps the token’s price down. 

The introduction of ATOM 2.0 improves the tokenomics, but ultimately, Cosmos needs increased adoption for ATOM holders to retire early.

The Future of Cosmos

Although Cosmos has not yet seen the widespread adoption it would like, its future appears bright.

The future increasingly looks like it will be multichain. AppChains are already popular among developers and show no sign of slowing down. Because of Tendermint, Cosmos SDK, and the IBC, no network is better positioned to capitalize on the multichain future than Cosmos.

With an ever-growing ecosystem, improved security and tokenomics on the way with ATOM 2.0, and an increasing amount of researcher and developer attention, Cosmos is well-worth keeping an eye on in the coming years.