State of Cosmos Hub Q1 2024

Key Insights

• Cosmos Hub revenue increased 90% QoQ. While there were some spikes from inscription-related activities, there was also more sustained fee demand throughout the quarter.
• Daily active addresses and daily transactions increased 56% and 43% QoQ, respectively. The growth was partially driven by inscription-related activities.
• After a community discussion and signaling vote, Permissioned CosmWasm is coming to Cosmos Hub. It will enable specific, pre-approved forms of programmability to be used for shared security, treasury management, and governance.
• Interchain Security now includes Partial Set Security (PSS) in addition to Replicated Security, as of Proposal 897. Elys Network is set to be the first network to implement PSS and use a portion of Cosmos Hub validators for security.
• Neutron and Stride’s TVLs grew 19% and 71% QoQ, respectively. They were the first two chains to be secured by Cosmos Hub’s Replicated Security and join the Atom Economic Zone.

Primer

Cosmos Hub (ATOM) is an individual appchain focused on interoperability and security. It is a Proof-of-Stake (PoS) sovereign blockchain with an account-based accounting model and no native smart contract functionality. Cosmos Hub pioneered technologies such as Cosmos SDK, CometBFT (Tendermint), ABCI, and IBC, which were later used by many Interchain networks. The Interchain consists of sovereign networks connected by the common interoperability protocol: IBC. The Interchain is also referred to as the Cosmos Ecosystem.

Cosmos Hub was launched in 2019, leveraging technologies built by the Interchain Foundation and Ignite (also known as Tendermint). Various groups continue to support the development of Cosmos Hub and the Cosmos tech stack, including the Interchain Foundation, Binary Builders, Atom Accelerator DAO, Informal Systems, Strangelove, and others. The Interchain is home to over 100 independent networks, each with its own unique supporting entities.

The Atom Economic Zone (AEZ) is an ATOM-aligned ecosystem set that includes networks with various affiliations and integrations with the ATOM token. Networks that rent security from Cosmos Hub validators, i.e., Consumer Chains, are part of the AEZ. Replicated Security (formerly referred to as Interchain Security) refers to sharing the Cosmos Hub validator set with another chain, permissioned by a governance vote. For a full primer on Cosmos Hub, refer to our Initiation of Coverage report.

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Key Metrics

Financial Analysis

ATOM price continued to increase in Q1, up 13.9% QoQ, following a 51.6% increase in Q4. ATOM’s market cap increased by a similar amount, 16.5% QoQ, with the discrepancy due to a 2.4% increase in circulating supply. Despite the QoQ increase, ATOM’s market cap rank fell from 22nd to 28th.

ATOM, the native token of Cosmos Hub, is ICS-20 compatible, which allows users to transfer ATOM between chains connected through the IBC protocol. The asset serves the following functions:

• Transactions on Cosmos require a transaction fee settled in ATOM.
• Tokenholders can stake ATOM to operate a validator, securing the network and earning rewards.
• Tokenholders can delegate ATOM to an existing validator to help secure the network and earn a portion of the validator’s rewards.
• All staked and delegated ATOM can be used to vote in the network’s governance process.

Revenue is measured as total transaction fees. Cosmos Hub revenue increased 90.3% QoQ. Last quarter, there was an activity spike on December 1, 2023, that drove daily revenue up to $50,500. The spike was 14x the Q4 daily revenue of $3,600, or 17x the Q4 daily revenue of $3,000 when excluding the spike. In Q1, another revenue spike occurred from January 17-19, 2024, where revenue exceeded $57,000. Those three days accounted for 7.5% of Q1 revenue, a lesser share than the December 1 spike which accounted for 15.1% of overall Q4 revenue.

The revenue spikes were caused by inscription-related activity. Inscriptions are arbitrary data included in a transaction, like using a blockchain network as a database. This transaction type was popularized on Bitcoin in early 2023 and has since popped up on almost every other large network, even causing outages on some of those networks from the high activity volumes.

Average daily fees, ignoring the inscription spikes, doubled in Q4 2023 and then again more than doubled in Q1 2024. The growth was partially due to Proposal 843, which passed in November to raise the minimum gas prices for global fees. As a result, the cost of all transactions doubled, except for those proposed by Binance (due to Binance’s apparently modified mempool/Gaia software). The purpose of the proposal was to reduce the DDOS vulnerability of the network. Proposal 844 then cleared the bypass_min_fee_msg_types list to avoid peer-to-peer spam.

ATOM Tokenomics

Cosmos Hub's real yield was 2.1% as of the end of Q1, its lowest in over a year. ATOM’s 11.9% inflation rate nearly offset the 14% reward rate given to validators and delegators. Staking rewards for validators and delegators primarily affects the circulating supply. Having such a high reward and inflation rate places a heavy tax on ATOM holders who do not participate in staking.

Proposal 848 was passed in November to reduce the max inflation rate from 20% to 10%. Its implementation immediately dropped the actual ATOM inflation rate from 14% to 10%. Since then, the inflation rate has trended back to almost 12%, but it’s still significantly lower than historical levels. Proposal 848 was the first of three proposals to reduce inflation, aiming to provide better incentives for staking and improve the security of the network. This proposal was highly controversial and had the highest turnout in Cosmos Hub Governance history. Proposal 868 tried to build on this step by reducing the InflationMin parameter to 0%, but it failed with 49% of votes against.

Research conducted by Blockworks Research found that ATOM is overpaying for security, suggesting that it should transition to a set supply schedule. Nearly all 180 validators are break-even or profitable at 10% max inflation off of commission alone, and validators have the option to increase their commission rate to help cover operational expenses.

Cosmos Proposal 826 passed in October, introducing a global minimum commission of 5% for validators. This initiative was presented to allow validators to generate revenue to reinvest in the security of the chain through improved operational capacity and better infrastructure. It was expected to reduce staking APR by 1%, which contributed to December’s MoM decrease in reward rate.

As of Q1, there are three forms of deflationary pressure on the ATOM token that contribute to deflation. Feeburning was added in Q4 via Proposal 842.

• Governance Burning - The Cosmos Hub features an onchain governance mechanism where ATOM tokenholders can vote and issue proposals, such as altering consensus parameters and community pool fund allocations. For a proposal to be submitted, a minimum of 250 ATOM deposited from any tokenholder. If the proposal is vetoed, the deposit is burned.
• Slashing - Validator node rewards in ATOM can be slashed if a transaction is double-signed or a validator is offline for an extended period. Slashed rewards are subsequently burned.
• Fee Burning - An EIP-1559-style fee-burning mechanism was implemented by adopting Skip Protocol’s SDK. Base fees on transactions are burnt due to this addition.

The rejected ATOM 2.0 proposal reimagined ATOM tokenomics. The goal of the overhaul was to drastically reduce ATOM’s issuance over a several-year period before removing inflation altogether. Additionally, ATOM 2.0 aimed to improve capital efficiency and position ATOM as the Interchain reserve asset via liquid staking. Ultimately, these actions would drive value accrual to the ATOM token.

While the initial proposal was rejected (possibly due to its wide breadth and quick introduction), various components continued to be explored as individual proposals. Of note, two proposals (an increase in the treasury size and a liquid staking feature to improve ATOM capital efficiency) both passed in subsequent proposals following their initial introductions in ATOM 2.0. Other ATOM 2.0 features still under discussion include permissionless shared security models and social coordination (i.e., governance) hubs for Interchain technologies (e.g., IBC, CosmWasm, etc.).

Fee burning (similar to EIP-1559) and improving the Cosmos Hub's fee mechanism to minimize spam transactions were realized in Q4’23 through Proposals 842 and 844, respectively.

In Q3 2023, the Atom Accelerator DAO (AADAO) selected Blockworks Research, Binary Builders, and RMIT University to put forth a new tokenomics overhaul for ATOM — the Tokenomics RFP. The five proposals from the teams explore governance, liquid staking, treasuries, public funding, relationships within the Atom Economic Zone, and ATOM issuance. Many of the recent protocol upgrades put through Cosmos Hub governance originated or evolved through this research relationship.

Network Analysis

Daily active addresses and daily transactions increased 56% and 43% QoQ, respectively. Cosmos Hub continues to transition to the center of a new type of multichain ecosystem, where it serves as a security provider rather than just an interoperability hub.

Inscriptions

Inscriptions found their way onto Cosmos Hub, accounting for a massive spike of 3.5 million transactions on December 1, 2023, and a second longer activity spike of 3.1 million transactions from January 17-19, 2024. The first activity spike came only days after Proposal 856 failed with over 90% of votes against. The proposal had sought to fund an inscription protocol from the community spending pool. The proposal details the development of COSS (crc-20) to build an inscription meta-protocol on Cosmos Hub, integrating trading, minting, and other functions. Asteroid, built by Delphi Labs, was responsible for the multi-day frenzy seen in January. Asteroid activity persisted throughout Q1 but at lower levels. Just after Q1 ended, Asteroid released a roadmap (Ragemap) detailing tooling and innovations and received a $105,000 grant from Neutron Grants and AADAO.

Inscriptions are a useful tool for storage on any network. Their primary use case, as seen by COSS and Asteroid, has been to combine inscribed data with offchain indexing to create token standards. However, meta-protocols for creating fungible and non-fungible tokens do not make sense on every network. Smart contract-enabled platforms such as Avalanche and Solana do not have much need for inscription-based tokens, as this is already possible through smart contracts. Cosmos Hub does not have native smart contract functionality, like Bitcoin, so it does require token standards built through such a meta-protocol. Cosmos Hub is the Schelling-point for the entire Interchain but has no programmability of its own for organizing community building or social coordination; the introduction of alternative native assets could see demand for these purposes. Additionally, Cosmos Hub offers much cheaper and faster transactions than Bitcoin, as well as IBC connectivity to more easily interop these new assets with other tools such as DeFi.

ATOM, the asset, has a larger community than Cosmos Hub, the network, in some ways. Users can deploy and interact with ATOM in various ecosystems, while functionality on the Cosmos Hub is limited. For this reason, inscriptions may yet find more sustainable use cases on Cosmos Hub.

Staking

Cosmos Hub’s 63.6% staking rate is one of the higher rates among other L1 networks. Stakers consist of both validators and delegators. Users who stake ATOM and meet the system requirements can operate a validator to secure the network and earn rewards. Tokenholders can delegate a minimum of one ATOM to existing validators to receive a portion of the associated validator’s rewards. Delegators earn rewards relative to the number of tokens staked, although they’re charged a commission set by the individual validator.

Only the top 180 validators earn rewards. All validators are ranked according to combined self-staked and delegated ATOM tokens. Of the 180 validators, the top seven control 33% of the total stake, giving Cosmos Hub a Nakamoto coefficient of seven.

When it passed in October 2023, Proposal 833 set the ValidatorLiquidStakingCap to 100. This parameter represents the percentage cap on the portion of a validator's stake that can be liquid. The previous 50% ValidatorLiquidStakingCap restricted liquid staking delegations to smaller validators. More details can be found in the Liquid Staking Module Forum Post.

IBC

Cosmos Hub had 67 IBC peers and 463 IBC channels as of the end of Q1. “Peers” refers to the number of distinct counterparties of Cosmos Hub with established IBC connectors; “channels” refers to the total number of routes available to connect to peers. Activity increased across the board for unique senders, unique receivers, and total transfers — both inbound and outbound. IBC transfers in and IBC transfers out increased 61% and 7% QoQ, respectively. Inbound IBC unique receivers had the largest QoQ increase, 70%.

For the most part, inbound and outbound transfers are tightly coupled. There are exceptions, such as the massive inbound spike in May 2023. In Q4, there were several spikes of outbound transfers unaccompanied by equal-sized inbound traffic. Q1 saw an overall increase in IBC activity, with inbound transfers trending upwards to catch up to the downward-trending outbound transfers.

Proposal 862 passed, which will provide a fee-grant support system to cover gas fees for IBC relaying activities. It’s a temporary solution proposed by the Cosmos Hub relayers to prevent service degradation and ensure the continuity of efficient IBC operations. A multisig group will manage the distribution of the FeeGrants to vetted relayers with various onboarding requirements outlined on the respective forum post.

Governance

Cosmos Hub uses a combination of offchain and onchain governance processes. Network improvement proposals and parameter changes are designed and discussed through offchain means, typically in the Cosmos governance forum. Anyone can propose a network or treasury management proposal and participate in the discussion regarding whether to pursue it. Users can also submit any network change request to the Cosmos Hub's onchain governance system as an official proposal. Once in the onchain governance system, ATOM stakers vote on whether to approve (and eventually execute) the proposed change.

In Q1, six out of seven governance proposals passed. The passed proposals include:

• 867 Validator Incetivization - 10,000 NTRN tokens were allocated from the NTRN airdrop to each Cosmos Hub validator running Neutron nodes.
• 871 Update Client: Revive client to Realio - The expired client on channel-645 between cosmoshub-4 and realionetwork_3301-1 networks was updated. In turn, this will allow users to transfer funds from Realio to Cosmos and vice versa.
• 877 Substitute IBC light client for doravota - Substituted the previously used IBC light client for Doravota to unblock the IBC channels between the two chains that rely on the subject client.
• 880 Signaling Proposal: Update instructions for ATOM POL 3 - This extended AADAO's stewardship of POL by an additional six months, until September 1, 2024.
• 885 Gaia V15 Software Upgrade - A software upgrade for Cosmos SDK, IBC, CometBFT, Interchain Security, and Packet Forward Middleware.
• 890 Signaling Proposal: IBC Rate Limiting - This limit would prevent massive inflows and outflows of IBC tokens in short time frames.
• Several proposals were passed between the end of Q1 and the publishing of this report:
• 895 Signaling Proposal: Permissioned CosmWasm - Following the rejection of Proposal 893 for permissioned CosmWasm, a forum discussion was brought forward, and the bounds were specified. This will bring programmability to Cosmos Hub.
• 897 Signaling Proposal ICS 2.0: Partial Set Security - This is a new form of Shared Security for AEZ chains, explored further in the Ecosystem Analysis.
• 899 DCF Agoric Cosmos Hub Proposal - This would activate the idle ATOM in the Cosmos Community Pool. Starting with 4% in the first quarter and later increasing to 10%, the ATOM would be staked through stATOM and stkATOM.

Grants

AADAO distributed its first batch of grants for 2024, worth $300,000, as well as a fifth Transparency Report. This brought the total to eight batches of grants worth $4.1 million from POL since 2023. AADAO was funded with 976,000 ATOM for 2024 via Proposal 865. The first batch of 2024 grants went to:

• Asteroid, for development and tooling around the inscription-based meta-protocol for NFTs and fungible tokens.
• Everstake, for the development of an “Atom Value Accural” tracker to present airdrop information for ATOM stakers.
• Cosmoverse, for 2024’s Cosmoverse conference. The conference has historically been the largest Cosmos conference with several thousand in-person attendees and more viewers through streams.
• Lava, for the development of an incentivized public RPC service.

In 2024, AADAO will use 50% of its funds to support multiple new RFPs, after seeing the success of the one (Tokenomics) RFP that was funded in 2023. The Tokenomics RFP has already led to tangible changes and improvements, as seen by the flurry of governance updates passed in Q4’23 alone. The remaining 50% of funds will go to public grants.

In Q1, AADAO has created new roles (i.e., marketing lead and grants lead), operating under an independent oversight committee, and a new strategy committee will be in charge of RFP-based grants.

Binary Builders’ ATOM Alignment Treasury (AAT) aims to increase the decentralization of Cosmos Hub governance and voting. AAT’s support was formalized by Proposal 864 passing with 98% of votes for. The formation of the AAT addresses two infrastructural problems: liquidity deployment in the AEZ and alignment between Consumer Chains and the Hub.

Blockworks Research’s proposal has implications for governance in addition to the fiscal policy changes outlined in the ATOM Tokenomics section of the Financial Analysis.

• The Vote Power Tax discourages delegating to validators with higher Vote Power to address stake centralization issues.
• The Dynamic Liquid Staking Tax would be imposed on liquid stakers and would increase as the demand for liquid staking grows. It aims to find a natural equilibrium for liquid staking market penetration while generating tax revenue for Cosmos Hub.
• The removal of the 25% liquid stake cap would allow more participants to benefit from liquid staking. Cosmos Hub does not natively support liquid staking, but it is available through Stride, a network in the AEZ. This was passed through Proposal 833.
• Cubic Delegation has the potential to fix the centralization concerns with respect to onchain governance while ensuring quorum can still be met.

Interchain Security

Cosmos Hub is the center of many crypto communities. It serves as a Schelling point for Interchain ecosystems and modular builders in general. Some of this alignment from other communities is formal, and some is informal. In Q1, the DYM airdrop was distributed in part to ATOM stakers, showing that the ideological alignment still exists with new builders. The SAGA airdrop was also announced to be eligible to ATOM stakers, and Aether went even further, pledging 40% of its upcoming airdrop to ATOM stakers (including holders of Stride stATOM).

The Atom Economic Zone (AEZ) is an ATOM-aligned ecosystem set, which includes networks with various affiliations and integrations with the ATOM token. Several networks exist in the AEZ in varying capacities. Stride and Neutron receive Replicated Security, and Osmosis enables fees to be paid with ATOM. Other networks (such as Kujira or Agoric) rely on ATOM for much of their liquidity.

Replicated Security (formerly referred to as Interchain Security) is a form of shared security. It is the AEZ strategy being explored most by the Cosmos Hub community and other Interchain networks. Shared security refers to allowing the validators of one network to use stake on that chain to participate in the consensus of another network. This setup would allow smaller market cap networks to “rent” security from larger networks. The Cosmos Hub has the largest market cap of all Interchain networks and is a prime candidate to rent out security. As of Q1, Neutron and Stride are the only chains utilizing Replicated Security.

There are several other versions of the shared security strategy in the Interchain. Through Proposal 897, Partial Set Security (PSS) has been accepted as an alternative shared security model (known as Interchain Security, or ICS). With PSS, a subset of validators from the Cosmos Hub can opt-in to support consumer chains, rather than requiring participation from the entire set. There are two main implementation models: opt-in consumer chains, which give validators the choice to participate in supporting consumer chains, and top-n consumer chains, where the top "n" percent of validators are automatically included.

The opt-in form of shared security is more flexible and scalable, as validators can simply opt out of specific chains if their hardware requirements are strained. This still requires governance approval, signaling Cosmos Hub's continued intention to only provide security for aligned networks. This approach would be unlike an agnostic approach such as Eigenlayer, where any network can pay for security without requiring approval from the security provider. Elys Network is set to be the first ICS consumer chain to use PSS.

Babylon and Informal Systems have proposed another dimension to ICS. The potential model would allow ICS consumer chains to access security from staked native BTC. Aside from natively staking BTC for security, Babylon aims to leverage Bitcoin for data availability (i.e., timestamping) of PoS chains and, in the process, mitigate security risks such as long-range attacks.

Neutron

With the passing of Proposal 792, Neutron became the first chain to leverage the Cosmos Hub’s validator set and security through Replicated Security. Neutron serves as a CosmWasm extension to Cosmos Hub and has effectively become its DeFi center.

Neutron’s TVL increased 19% QoQ, almost entirely driven by Astroport. Astroport is an Automated Market Maker (AMM) that also exists on other Interchain networks, such as Injective. Neutron is still a relatively new network, having only launched in 2023. Proposal 72 allocated Cosmos Hub funding for the development of Neutron, and Proposal 819 reallocated that funding directly to the Neutron Foundation. These funds may be used to build out the ecosystem further.

Proposal 835 authorized the Neutron DAO to transfer approximately 43 million unclaimed NTRN tokens (from the airdrop) to the Cosmos Hub community pool. Significant network and governance decisions in Q1 include:

• Proposal N-28, which passed to deploy $250,000 of liquidity on the NTRN<>OSMO pools on both Astroport and Osmosis.
• Proposal N-30, which passed to integrate Noble USDC as a gas token.
• A high-security security patch for CosmWasm and several other minor network upgrades.

Stride

Stride implemented Replicated Security shortly after Neutron. This network enables liquid staking for various Interchain networks and assets. As ATOM is a core part of Stride’s activity, it was an obvious early choice to adopt Cosmos Hub security. Liquid staking is a big market and a narrative across various other ecosystems. As such, the Cosmos Hub benefits from having a liquid staking solution in the AEZ via Replicated Security as the utility is aligned by governance.

Stride’s TVL increased 71% QoQ. Up until Q4, this TVL almost entirely comprised liquid-staked ATOM, with ATOM making up 80% or more of the total TVL (USD). This changed in Q4 when OSMO began to grow and challenge ATOM for TVL dominance. Then, in Q1 2024, stTIA was launched and was responsible for nearly all of the QoQ growth. In under a week, stTIA surpassed milkTIA as the largest staked TIA asset by market cap. Other tokens supported by Stride for liquid staking include STARS, EVMOS, JUNO, INJ, and more.

Stride-staked ATOM, stATOM, is integral for other AEZ networks as well. Cosmos Hub Proposal 805 (an amendment to Proposal 800 — Liquidity as a Service) will have AADAO deploy 450,000 ATOM to an ATOM/stATOM constant product pool on Astroport Neutron. On Osmosis, the ATOM/stATOM accounts for over $20 million in TVL.

Osmosis

Since its inception, the Osmosis AMM DEX has been deeply integrated with Cosmos Hub and ATOM. This integration deepened in Q4 when Proposal 810 on Cosmos Hub was passed, enshrining the Osmosis DEX for the purpose of flexible gas fee payments. The proposal allows for transaction fees on Cosmos Hub to be paid with any token, leveraging Osmosis to swap alternative tokens for ATOM.

As for integration on the Osmosis side, ATOM is an alternative gas token on the DEX. While ATOM is used for gas in certain cases, many of them are suspected to be bots due to their activity patterns.

In terms of liquidity, the ATOM/OSMO pool is the very first pool on Osmosis and is still the largest by TVL as of Q1 2024. In Q4, Proposal 858 passed to allocate 900,000 ATOM to the ATOM/stATOM liquidity pool. This LP allocation aims to bolster the stability of the staked ATOM peg and protocol revenue.

Elys Network

Elys Network is slated to be the first chain to use PSS. Elys is a DeFi-focused network, offering UX features akin to a centralized exchange, such as on/off ramps for major fiat currencies and email logins. However, Elys maintains a noncustodial model for its AMM and does not require KYC. Other noncustodial features include oracle-based index pools for diversified assets, native perpetual trading, leverage, borrowing, and EVM bridging.

Elys’ usage of PSS separates the roles of running hardware and participating in governance. The ELYS token is used for governance and, unlike most PoS chains’ tokens, is available to be utilized within the network because it’s not locked for staking. There is currently no cap on PSS, but it will be set via governance. If needed, a Cosmos Hub proposal can later change the amount of participating nodes in the top-N voting power model.

As a network grows, collecting more TVL and sustaining more activity, it logically demands more security. An increased network value would theoretically incentivize more Cosmos Hub validators to participate, scaling security with value. The flexibility of PSS is very intuitive from a cost-for-security perspective.

Closing Summary

Cosmos Hub continued to evolve in Q1, with a new form of shared security and new forms of programmability. Inscription activity helped drive revenue up 90% QoQ and transactions up 43% QoQ. Metaprotocols for inscriptions, such as Asteroid, are likely to sustain a level of activity on Cosmos Hub, given the demonstrated demand for community building through tokenization. There was also support for permissioned CosmWasm signaled through governance, further emphasizing the demand for added functionality.

Interchain Security evolved with the announcement of a new orientation of shared security: Partial Set Security. Elys Network is slated to be the first network to implement PSS and use a portion of Cosmos Hub validators for security. Existing networks in the Atom Economic Zone, Stride and Neutron, continue to grow in TVL and develop new use cases, such as adopting new LSTs like stTIA.

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