Cosmos is “the internet of blockchains,” touting a design that prioritizes interoperability among the multiple blockchains connected to its network.
The Cosmos network, or Cosmos Hub, is the cornerstone of a rich ecosystem of interconnected blockchains. It is a blockchain itself, using its native ATOM token to secure the network, allow for governance, and reward network participants with staking rewards and proceeds from transaction fees.
However, whereas apps built on Ethereum are designed as smart contracts that share one blockchain (i.e. Ethereum’s), projects built on Cosmos host their own blockchains that can connect with the Cosmos Hub and other chains through the Inter-Blockchain Communication (IBC) protocol. Because of this, even though Cosmos is commonly considered a layer 1 blockchain, some may argue it serves in a similar role as Polkadot’s “layer 0” Relay Chain.
Cosmos allows for interoperability by providing an open-source software development kit (SDK), which creates the opportunity for developers to build application-specific blockchains that connect, forming a “network of networks.” It additionally uses a novel Proof of Stake consensus mechanism called the Tendermint Byzantine Fault Tolerant algorithm, which boasts particularly fast transaction processing.
By prioritizing interoperability, providing easy-to-use development tools, and promising fast and cost-effective transactions, Cosmos has become a popular platform on which to build new blockchain projects.
How was Cosmos developed?
The Cosmos whitepaper was authored by Jae Kwon and Ethan Buchman. The two co-founded the company Tendermint Inc. in 2014, in order to develop the Tendermint Core that powers Cosmos. They launched the Cosmos mainnet in March 2019.
The code of the original Cosmos Hub, developed by Tendermint and the Swiss-based non-profit Interchain Foundation (ICF), was used as a foundation for newly minted projects as the years went on. It was essentially a “clean copy” that developers adapted to their specifications, allowing their projects to connect easily with others built on that same foundation. This led to impressive growth of the Cosmos ecosystem since its inception. By November 2022, more than 40 blockchains were connected to the Inter-Blockchain Communication (IBC) protocol and 250+ apps were active on the network.
A new whitepaper was released at the Cosmoverse Conference held in Medellín, Colombia in September 2022. Among other changes, the Cosmos 2.0 proposal included adjustments to ATOM’s token economics and a new kind of interchain security that allows connected chains to use the Hub’s validators to secure their networks.
Of note, Tendermint Inc. split into two companies in February 2022, called Ignite and NewTendermint. Although Kwon had stepped back from the company he founded in 2020 to focus on his own smart contract platform, he returned as CEO of NewTendermint which continues to contribute to Cosmos.
ICF still funds the teams that build the Cosmos Hub, the Cosmos SDK, and other components of the Cosmos ecosystem. Additional financial support has come from multiple funding rounds, with participants like crypto venture capital firm Paradigm. Cosmos’ ICO raised over $16 million in April 2017.
How does Cosmos work?
There are three primary components of the Cosmos ecosystem. These are the Tendermint platform, the Inter-Blockchain Communication protocol, and the Cosmos Software Development Kit. Together, they provide the basis for a functional blockchain and firm basis for building new and interconnected blockchains.
Tendermint
Tendermint is a software platform that provides the tools necessary to run blockchains and their applications. It consists of two components: the Tendermint Core and the Application BlockChain Interface.
The Tendermint Core lays out the rules by which the same state can be reached on all computers connected to a network (* onsensus*), thus providing the Cosmos network’s consensus mechanism. By ensuring transactions are also recorded in the same order, it creates the chronological public ledger we call a blockchain. Tendermint additionally uses a concept called Byzantine Fault Tolerance (BFT) that allows for finalization of transactions even when some (up to one-third) nodes fail to agree with the rest of the network.
The Application BlockChain Interface (ABCI) creates the opportunity for developers to write blockchain applications in any programming language, as it essentially acts as a translator between the Tendermint Core and all applications built with the Cosmos SDK (described below). This flexibility has allowed for unique functionality like bringing Ethereum’s blockchain to the Cosmos ecosystem—in its original code, more or less—in a form called Ethermint.
Tendermint uses a Proof of Stake model, in which validators (block creators) must commit ATOM to the system to process transactions and secure the network. Interchain security was introduced in the “Cosmos 2.0” whitepaper (2022), presenting a way for consumer chains in the ecosystem to use the Cosmos Hub’s validators to secure their own networks.
Inter-Blockchain Communication (IBC) protocol
The IBC protocol was launched on Cosmos in 2021 and allows for different blockchains to communicate and interact with each other. This enables transfer of data—and tokens—across the chains, providing users seamless experiences as they navigate the many applications in the Cosmos ecosystem. This is how decentralized exchanges on Cosmos can let users swap tokens on different chains.
The two layers of the IBC are the transport, authentication, and ordering layer (TAO) layer and the application layer. The TAO is the “lower” layer, providing the foundation for authenticating data across blockchains and allowing them to connect. The “higher” application layer is used to then package and interpret the data as it is sent chain-to-chain.
Cosmos Software Development Kit (SDK)
The Cosmos SDK is an open-source resource for software developers to build application-specific blockchains that are compatible with the Cosmos ecosystem. Developers of new blockchains can use tools like composable modules to customize their projects in whatever ways they deem necessary. There are modules that authenticate accounts, create new tokens, allow for staking, and accomplish many other standard functions in a blockchain network.
Developers who use the Cosmos SDK ensure that their chains are set up to use the Tendermint Core, just like the Cosmos Hub and other interconnected networks. Among others, some important projects that were designed with the Cosmos SDK include the Cosmos Hub itself, the Osmosis DEX, and even the BNB chain.
How is the ATOM token used?
ATOM is the native token of the Cosmos blockchain (Cosmos Hub). Validators stake ATOM in order to process transactions and secure the network, and in return they receive rewards in the form of ATOM. Users of the Cosmos Hub pay transaction fees in the form of ATOM, which get paid out to network validators. ATOM is also used to participate in network governance.
Approximately 68% of ATOM’s initial supply was released to ICO investors, and the remaining were allocated to the ICF (10%), Tendermint Inc. (10%), early adopters (7%), and seed contributors (5%).
Tokenomics
Originally, Cosmos was designed to balance security of the network with asset liquidity by incentivizing users to stake approximately two-thirds of the ATOM supply. Token issuance would increase to meet that staking goal, if necessary, with no maximum supply and a target inflation rate between 7% and 20% depending on network use.
However, the Cosmos 2.0 whitepaper recognized there are shortcomings with this model, and it proposed multiple changes to ATOM’s use and token economics.
Liquid staking: By allowing users who stake ATOM to also use their tokens on the market, this increases liquidity in the Cosmos ecosystem.
Interchain security: The use case for ATOM expands with the introduction of interchain security, as individual chains can use the validators (and thus native tokens) of the Cosmos Hub to validate their networks.
Decreased issuance: As issuance of new tokens decreases over the course of 3 years, to a final rate of 300,000 monthly ATOM.
Cosmos essentials
Cosmos is the “internet of blockchains,” as it is a platform that connects multiple application-specific blockchains.
The three components of the Cosmos ecosystem are the Tendermint Core, the Inter-Blockchain Communication protocol, and the Cosmos SDK.
The native token of Cosmos is ATOM, which is used to validate transactions on the Cosmos Hub, govern the network, and reward stakers. It has an expanded use case and tokenomics under the proposed “Cosmos 2.0” proposals that include liquid staking, interchain security, and decreased issuance.