Cosmos Hub is stagnant, highlighting five major issues

Original Title: 《Can the Cosmos Hub be saved? The fight to rescue the heart of a visionary Crypto Ecosystem》

Author: Lukasinho, GCR Research Team Member

Translation: Elvin, ChainCatcher

Cosmos Hub is a renowned center for cryptocurrency innovation, having pioneered many technologies that are now widely adopted. Notably, the founder of Cosmos is the inventor of the proof-of-stake consensus mechanism, which exemplifies the ecosystem's knack for creating new technologies. However, despite such strong technological originality, Cosmos has lost its momentum. The market value of the Atom token has declined. Cosmos lags behind competing ecosystems in metrics such as total value locked, active users, and revenue. Confidence in the ecosystem has weakened, raising concerns about the lackluster performance of Cosmos, a network celebrated for its spirit of innovation.

In this article, we will analyze the factors behind Cosmos's stagnation. What went wrong? More importantly, how can Cosmos regain its position as a leader in the cryptocurrency space?

Competitive Advantage

From its inception, Cosmos foresaw that no single blockchain could solve the "blockchain trilemma" problem—namely, the balance between decentralization, security, and scalability. This stems from the inherent trade-offs between these characteristics. For instance, increasing transaction throughput often requires larger block sizes, which leads to centralization, as only a few nodes can handle and store larger blocks.

Years before the entire crypto industry reached the same conclusion, Cosmos recognized that only a multi-chain architecture could overcome these trade-offs. Thus, they pioneered a vision focused on horizontal scalability, where each app is powered by its own sovereign blockchain that is decentralized yet seamlessly interoperable.

To realize the vision of a multi-chain structure, Cosmos developed the groundbreaking Inter-Blockchain Communication (IBC) protocol. IBC enables seamless interoperability between chains, allowing funds to be transferred between different chains in seconds with minimal fees. This far surpasses the bridging experience of Ethereum, layer 2, and other crypto ecosystems.

Compared to the challenges faced by Ethereum, Cosmos has established and is ready for seamless interoperability. This is Cosmos's greatest competitive advantage and the best interoperability solution in the industry to date.

IBC Connection Map

Cosmos is Facing Many Issues

Unfortunately, as the founder of this exciting key technology, Cosmos has not reached the heights many envisioned. Why is this the case? The reasons for Cosmos's struggles are both internal and external. So let's delve into the various issues facing Cosmos and try to propose potentially effective solutions.

1. The Expensive Reality of Appchains

As mentioned earlier, Cosmos is designed around the theory of appchains, which envisions each application running on its own sovereign blockchain. Unfortunately, this appchain theory faces several challenges. Whether in engineering resources or ongoing operational costs, the expenses of establishing and maintaining appchains are quite high. This creates a significant financial burden, especially for early-stage startups.

To address this challenge, most Cosmos chains have turned to inflation as a means of paying validator fees. While this approach works well in bull markets, it exposes its drawbacks in bear markets. As validators continuously sell inflation rewards to sustain operations, the token price plummets. Even after the recent market recovery, many projects, including well-known ones like Osmosis, have still declined by 90% or more.

This makes launching an appchain a poor business decision for many developers. With layer 2 solutions making Ethereum scalable and various alternative fast layer 1s emerging, the decision to launch an appchain is becoming increasingly unwise for many developers.

Exceptions: The Benefits of Appchains

However, there are exceptions. Mature projects with strong user bases and tangible products can benefit from launching their own appchains. These projects can internalize the benefits of MEV (Maximal Extractable Value), achieve higher throughput, and have complete control over their blockchains. Once a solid user base is established, the product can generate sustainable revenue, making the transition to an appchain worthwhile if the returns from a specific business model exceed the additional costs.

dYdX is one of the recent projects embarking on this journey. Its success or failure will significantly impact the future of the appchain theory. If dYdX proves that its exceptional products created on its appchain can outperform competitors like Gains Network or GMX, it will provide a substantial boost to the appchain concept. Conversely, if dYdX underperforms, it will raise doubts about the legitimacy of Cosmos and similar appchain-centric ecosystems.

Cosmos Faces Intense Competition

To alleviate the cost pressures faced by appchains, various solutions have been developed. Thanks to solutions like Eigenlayer, Optimism Superchain, and Polygon 2.0, appchains will be able to launch their own roll-ups or chains on Ethereum, benefiting from a larger community, more liquidity, and lower setup and maintenance costs. Within the Cosmos ecosystem, Celestia offers a solution for building customized roll-ups—providing a level of customization nearly equivalent to that of Cosmos-based appchains.

In addition to cheaper, newer appchain solutions, Cosmos also faces competition from Layer-2 and rapidly evolving Layer-1 blockchains. These solutions offer fast completion, low transaction fees, and good scalability, rendering the advantages of appchains obsolete. For many developers, launching on such blockchains is a more cost-effective solution, at least in the initial stages, with almost no downsides.

This is evident from recent developments. Current trends suggest that the future of blockchains will likely involve several powerful Layer-1 chains, with their Layer-2 networks hosting most apps. Therefore, for the Cosmos ecosystem to thrive, it needs strong Layer-1 smart contract platforms to launch apps. These platforms should leverage Inter-Blockchain Communication (IBC) to facilitate communication between them and with large apps running on their own blockchains.

Several initiatives are already underway to connect Cosmos with other ecosystems. For example, Composable is connecting Polkadot and Cosmos through IBC. Landslide is developing an Avalanche subnet integrated with IBC, and TOKI is bringing IBC to Binance Smart Chain. On the surface, these chains should bring significant funding and users to the ecosystem. However, this remains to be seen.

Simply establishing connections is not enough. To truly realize the vision of these chains becoming leading Layer-1s based on Cosmos, these new chains need to actively integrate and collaborate with various Cosmos-native projects. Companies like Avalanche and Binance Smart Chain may currently lack the motivation to do so.

Thus, having Cosmos-native Layer-1 chains (such as Neutron, Injective, Archway, or Juno) become significant competitors with large user bases and capital will be an important step for the entire ecosystem. Injective has already made strides in this area, and if it can maintain a trajectory of rapid growth for the benefit of the entire ecosystem, it would be ideal.

2. The Failure of the Integrated Service Hub to Provide the Much-Needed Value Proposition for the Hub

When designing Cosmos, its founders made a thoughtful choice: to provide Inter-Blockchain Communication (IBC) as a public good. They decided not to conduct all IBC transactions through the Hub or impose small taxes on IBC transactions, but rather to stimulate innovation and growth by providing open access to this powerful tool. Cosmos would play the role of a trusted neutral service provider within this ecosystem.

https://informal.systems/blog/building-with-interchain-security

In May 2023, the highly anticipated Interchain Security (ICS) was launched amidst much attention. It aims to ultimately provide a revenue model for Cosmos Hub and make appchains economically viable. However, about five months later, disappointment began to set in. Adoption rates have remained low, with only two ICS chains launched: Neutron and Stride, and Noble is in the planning stages. Stride has even hinted at the possibility of being acquired by Cosmos Hub.

This situation highlights a fundamental issue—there are four options for launching within the Cosmos ecosystem: your own appchain (where Cosmos Hub earns no revenue), on another L1 (where Hub earns no revenue), on an ICS chain (where Hub earns a percentage of gas fees), and finally on the Hub itself (where Hub earns 100% of gas fees). Many projects find it wiser to launch on layer-1 chains rather than on ICS chains or on the Hub. If this trend continues, Cosmos Hub could risk becoming a bystander in its own ecosystem. Placing these apps on the Hub through permissioned CosmWASM, allowing the Hub to earn 100% of transaction fees, would be the most beneficial outcome for the Hub.

If running apps on Cosmos Hub is the best financial outcome for the Hub, then running apps on ICS chains is the second-best option, but even then, Cosmos Hub cannot win significantly. ICS chains actually pose financial challenges for Cosmos Hub. Hub validators must verify all transactions, thus scalability is limited. Chains like Stride or Noble, while valuable to the ecosystem, do not generate high-frequency transactions. Low transaction volume means low revenue for the Hub. Permissionless first-layer ICS chains like Neutron can bring considerable transaction volume, but they also consume most of the Hub's bandwidth while only paying 25% of transaction fees to the Hub. Therefore, whether high or low transaction volume, ICS chains are unattractive to the Hub, indicating that the business model of Cosmos Hub itself has not been well thought out.

Essentially, Neutron has the potential to undermine the revenue potential of the Hub. Choosing CosmWASM to capture 100% of gas revenue may be a wiser choice for the Hub. While the Hub and its ICS model have their advantages, they are economically unsatisfactory. In a world where many blockchains are already struggling to be profitable, especially those promising low transaction fees, further reducing revenue seems unwise.

3. Unsustainable Atom Token Economics

Inflation in the Cosmos ecosystem is not just a minor appchain issue; it also affects Cosmos Hub. The continuous sale of block rewards exerts downward pressure on the price of the Atom token. Without a substantial source of revenue, Atom faces the same predicament as its smaller competitors.

We are working to address these token economic challenges. While there were expectations for a new Cosmos Hub token economics model to be launched at this year's Cosmoverse, this has not materialized. However, the EffortCapital presentation by Blockworks Research at Cosmoverse 2023 has given us insight into planned changes.

To strengthen the economic value of Atom and transform it into a true interchain currency, we propose two specific measures:

First: Accelerate the decline of the inflation rate to reach the final target of 7% more quickly. To expedite this process, Cosmos core contributor ZakiManian proposed a "halving" proposal aimed at immediately halving the Atom inflation rate. This proposal has passed the governance process and should be implemented soon. The governance process is a very rigorous decision and not without controversy. Most large validators who benefit the most from high inflation voted against it. On the final day, the proposal seemed to be narrowly defeated. Thanks to several prominent members of the Cosmos community (including Osmosis founder Sunny Aggarwal) purchasing large amounts of Atom, additional votes in favor were added on the last day, allowing the proposal to pass.

Second: Introduce a liquidity staking tax. Once a specific threshold is reached (Blockworks suggests 25% of all circulating Atom), liquidity stakers must pay taxes to the Cosmos Hub. If the liquidity staking rate exceeds the specified target rate (Blockworks suggests 33% of circulating Atom out of total issuance), the tax rate for liquidity stakers will significantly increase. The aim of this approach is to maintain a balance of the ideal liquidity staking ratio and prevent uncontrolled growth, which is a problem we have recently seen on Ethereum, causing intense debate within that ecosystem.

These additional revenues can reduce Atom's inflation through a burning mechanism or serve as liquid funds for the protocol, stimulating economic activity in the Atom economy and generating more revenue. This creates a virtuous cycle: increasing revenue reinvested to stimulate more activity, which in turn generates more revenue.

These proposals hold promise for building a sustainable token economy for Atom. While details are still being developed, and Binary Builders and the Blockchain Innovation Center at RMIT are working on other aspects, initial impressions suggest that Atom is moving in a hopeful direction to address these challenges.

4. Liquidity Fragmentation, Poor User Experience, and Low Adoption Rates

Appchain infrastructure presents two major challenges: poor user experience and liquidity fragmentation.

Compared to more streamlined single-chain blockchains like Solana, conducting simple token transactions on Cosmos requires additional steps. Users must initiate an IBC transfer to send tokens to the exchange's chain for trading, and then execute another IBC transfer to return the tokens to the app's chain. Although Cosmos apps and wallets provide user-friendly interfaces for these transfers, these extra steps can create confusion, hindering new user adoption.

Another significant challenge is liquidity fragmentation. In the Cosmos ecosystem, liquidity is dispersed across different chains, leading to reduced liquidity on each chain. As a result, users (especially large traders) encounter higher slippage when trading within the Cosmos ecosystem, reducing its appeal to this segment of users. This fragmentation also complicates arbitrage activities, which play a crucial role in maintaining price stability between different chains.

These challenges are evident in the adoption metrics of the Cosmos ecosystem. Compared to peer ecosystems, total value locked (TVL) and daily active users remain significantly low.

5. Lack of Organization, Guidance, and Capital Efficiency

A major issue facing the Cosmos ecosystem is the lack of a clear and unified vision. In fact, the situation is quite the opposite. Core contributors often hold conflicting views, with no unified goal that everyone is striving to achieve. This article has already discussed issues such as product-market fit, token economic problems, and the lack of compelling value propositions. Due to its decentralized structure, Cosmos lacks a clear plan or roadmap to address these issues and make Cosmos Hub and ATOM more attractive products.

Cosmos is built by many small companies, each developing features aligned with their own interests and preferences. There is no higher coordinating organization to prioritize tasks, create a comprehensive plan, and ensure that all efforts are aimed at achieving a common goal. The absence of a central coordinating body that can take responsibility, seek solutions, and guide the ecosystem in the right direction has led to stagnation.

As a result, the progress of the ecosystem is hindered by disputes among major participants and their organizations, each advocating different approaches and solutions. This lack of cohesion has paralyzed the ecosystem. In the innovative Web3 space, success often relies on experimentation, hypothesis testing, and agile adaptability, which requires a clear vision and a willingness to change strategies.

The governance processes in Cosmos are slow, with influential participants pursuing their own interests, contrasting sharply with the agile leadership needed to succeed in the fast-evolving Web3 environment. The result is a lack of coordination and widespread inaction. Moreover, each independent company within the Cosmos ecosystem must manage administrative costs related to legal, accounting, management, and other functions. In contrast, single organizational entities like Polygon Labs or Solana Labs only need to pay administrative costs once for their respective ecosystems, leading to redundancy and inefficiency. To cover these costs, these companies charge additional fees to the Interchain Foundation and community pools, increasing the overall costs of ecosystem development and maintenance.

Actions Needed

Compared to other ecosystems, Cosmos still possesses significant technological advantages, particularly through its unparalleled interoperability solution, IBC. However, competitors are not resting. Ethereum has long recognized that a multi-chain future is inevitable. Great projects like the actively developing Superchain and Polygon 2.0, which can rival or even surpass the capabilities of IBC, are already in development. While these solutions are still being developed, their ecosystems are already far ahead in user adoption and total value locked.

This puts pressure on Cosmos. It likely has about a year to launch applications that can successfully attract users and capital into the interchain. If this effort fails, and competitors launch interoperability solutions while Cosmos lags significantly in adoption rates, the prospects for Cosmos may be bleak.

Therefore, what Cosmos needs most is proactive business development. Rather than focusing solely on infrastructure building, the ICF should take the initiative to encourage serious developers to build on Cosmos. Together with the ATOM community pool, the ICF should concentrate on providing funding incentives for killer applications. Our idea is not to cast a wide net and pray for many small projects, but to offer substantial grants to organizations that have not yet participated in the Cosmos ecosystem but have experience launching successful products. Our goal is to replicate the success of projects like Friends.tech within the Cosmos network.

These products should not be launched as standalone industry chains. They need to directly bring value, users, and transaction volume to Cosmos Hub. Ideally, they could launch directly on Cosmos Hub through permissioned CosmWASM. However, given the direction chosen by Cosmos Hub, consensus on this may be difficult to achieve. Therefore, creating ICS chains or launching them on Cosmos Hub, in alignment with Layer-1 Neutron, is the next best option. Ideally, they could launch without tokens, instead utilizing ATOM. If there are one or two killer applications that align with Cosmos Hub, it could drive the growth of ATOM.

Economically, Cosmos Hub needs a significant redesign. We are already making some promising efforts, particularly in token economics. Support from the broader ecosystem is crucial; even if the proposed changes are not perfect and may not align with everyone's interests, stagnation is the worst choice in the current situation, and these efforts represent a positive step forward.

The ultimate aspiration should be to make Cosmos Hub the core of the Cosmos ecosystem, just as Ethereum is the core of its ecosystem—keeping the ecosystem running and positioning Atom as a cross-chain token. This positioning can create excitement, attract the necessary users and capital, and transform the ecosystem into a thriving Web3 activity center.

As the Hub strengthens, and with successful cross-chain projects like Kujira and Injective gaining traction as first-layer blockchains and DeFi hubs, the Cosmos ecosystem will attract more developers seeking to launch projects. This will benefit the Atom community as well as first-layer blockchains like Injective and Neutron. A virtuous cycle of adoption driving further adoption can be initiated, and the vision of interconnected first layers, flagship apps on their own chains, and a vibrant hub centered around ATOM can become a reality.

To achieve this vision, all participants in the Cosmos ecosystem must collaborate, implement necessary changes, and support those initiating change. While certain challenges posed by the decentralized structure may still exist, the outcomes can be improved. The Cosmos ecosystem is home to outstanding and creative talent, and bold decisions are clearly needed to transcend the status quo. Despite facing significant challenges, underestimating Cosmos would be unwise; a brilliant resurgence is certainly possible.