How ATOM 2.0 Will Change the Cosmos Ecosystem Forever

#1. Reissuance

The Cosmos 2.0 whitepaper proposes a new mechanism to issue ATOM that balances interchain adoption and growth with fiscal responsibility “while preserving the security afforded by the original regime.” The end goal is to increase ATOM’s value.

The current method adjusts ATOM’s issuance based on how much ATOM is staked. That means if the ATOM staked falls below a specific target, the ATOM issued increases until the amount staked to a particular target is also reached. If the amount staked rises above a certain target, the amount issued starts to decrease. This is good for liquidity but bad for security (since staking also decreases).

In short, Cosmos incentivizes stakeholders to stake more through issuing more tokens — which strengthens security but causes decreased liquidity. As such, there’s a constant balancing act between staking and security.

It also means a significant chunk of the token supply is locked up to ensure security. The result is an enormous capital burden that hinders growth and prevents more participants from entering the system. This problem will be solved by liquid staking, discussed below.

#2. Liquid Staking

Liquid staking is an emerging modern staking alternative that circumvents the drawbacks of the traditional staking method. Liquid staking involves locked assets stored by a service but in a way that you can still access your funds. The funds are stored in escrow, but are immediately accessible should the user choose to withdraw them.

This differs from traditional staking wherein the user must wait the duration of the lockup period before gaining access to their funds. Liquid staking has recently become popular as Ethereum transitioned into proof of stake (PoS).

Staking solution Lido is an avid user of liquid staking and has introduced it for several layer 2 blockchains, including Kusama, Polkadot, and Polygon. BNB Chain now offers liquid staking for the Web 3 protocols Ankr, Stader, and pStake. Coinbase, the largest crypto exchange in the US, recently announced plans to offer a liquid staking token called the Coinbase-wrapped ETH (cbETH) in the future.

Liquid staking solves the problem of security and liquidity. For Cosmos, it will improve capital efficiency since users will now be able to stake ATOM and, at the same time, “use the claims” on the funds as working capital. Cosmos can now direct its attention to token issuance and opportunities, including interchain adoption and growth.

#3. New Tokenomics

Under the new regime, the issuance of tokens will have two phases: the transition and the steady state. The transition phase will allow consumer chains to join Interchain Security and let the community develop a social infrastructure capable of managing a “sizable treasury.” The transition phase will begin when Cosmos switches to the new monetary policy and will take place for 36 months, after which the steady state takes over and lasts indefinitely.

Early in the transition phase, issuance will increase for nine months (at 10,000,000 $ATOM monthly) to bootstrap funding for the Cosmos Hub treasury that will support the expansion of the ecosystem.

Issuance will then progressively reduce from the nine months and achieve a constant rate (300,000 ATOM monthly) by the end of 36 months (a reduction of 97%).

#4. Fee Model

Something else that will change dramatically is the fee model for Cosmos. In the old setup, transaction fees were paid to the Cosmos Hub and distributed between the community pool, delegators, and validators. With the entry of Interchain Security, that changes.

A fraction of fees from each chain will go to the Cosmos Hub distribution module and contribute to securing all chains — and replacing the current issuance subsidy. So, Interchain Security will change how validators and delegators are rewarded.

Cosmos 2.0 will also feature a global fee model where it will first have a whitelist of accepted tokens and fee minimums. These will be maintained by Cosmos Hub governance. It will also implement a single ATOM floor fee, with the base fee algorithmically adjusted in response to demand.

According to the whitepaper, that works better than governance-determined pricing, which is often susceptible to resource mispricing. It’s also tricky to determine the price for every accepted token individually. Other applications, such as the Allocator, may elect to design their fee mechanisms/fee structure.

Cosmos Ecosystem – The Internet of Blockchains

Cosmos is an internet of blockchains that facilitates inter-blockchain-communication (IBC). It’s a Layer 1 blockchain that allows developers to create customized blockchains built on the Cosmos Hub.

Cosmos is talked about a lot lately. The dramatic fall of the terraUSD algorithmic stablecoin, whose Terra blockchain was built on Cosmos, brought the platform under scrutiny. But the reality is that the Cosmos was unaffected by Terra (other than losing two, admittedly, large chains on IBC).

But also, it garnered positive attention when decentralized exchange dYdX ditched Ethereum’s Layer 2 Starkware and moved to it in June. The exchange cited the platform’s “decentralization, scalability, and customizability” as motivation for the move.’

September’s relaunch is an exciting chapter for the cosmos of blockchains. Atom 2.0’s new utility and issuance regime heralds a new future for the platform.