ATOM Endgame - Moneyness, Security, Liquidity

Greetings Cosmos Hub,

In this post, I want to outline what I believe the $ATOM endgame can look like. There has been multiple potential pathways that have emerged that can accrue value back to $ATOM - many of which have different risk profiles, resources, and timeframes by which they could come into fruition. However, I believe $ATOM as interchain money is the best foundation by which both security and utility of $ATOM can exponentially scale.


Methodology

  1. Economic security as a function of liquidity
  2. Liquidity as a function of utility
  3. The Path To Maximal ATOM Utility

Security as a function of liquidity
Proof of stake security hinges on the idea that validators must bond tokens in order to be part of the block creation process. This act of bonding token creates “skin in the game” in a way that is an alternative to proof of work. Simply put, there needs to be a cost to creating transactions and ordering transactions in a way that is secure against a variety of network attacks. The most infamous network attack is of course, the 51% attack. The process whereby a single actor can control block production in a way that is no longer neutral, and can ultimately maliciously extract value from other account holders and users of the underlying blockchain. Proof of stake discourages this attack vector with the following assumption:

The more tokens bonded to validators, the less supply available on the open market. The less supply available on the open market, the more expensive (if not entirely infeasible) it is for an external actor to acquire 51% of the supply. As the actor buys up supply off the open market, the price of the underlying token securing the network increases - making it increasingly more expensive to perform the 51% attack.

This baseline assumption undergirds the defense against the lowering of inflation. Less tokens bonded = weaker security. Why would the network ever vote for a policy that would potentially lower the bonded ratio? Within a minimalism + security maximalism mindset, anything that lowers the bonded ratio could be seen as counter-intuitive if not malicious.

Let’s go one layer deeper and attack the above assumption.

There are 100 ATOM tokens in existence, 99 are bonded to validators and 1 ATOM is available left on the open market. Assume this 1 ATOM is in a liquidity pool trading against USDC. The market rate of ATOM is currently 1 ATOM = 1 USDC in this pool. With the traditional PoS assumptions, the attacker would only have access to 1 ATOM that it would be buying (on an XYK pool assumedly) for an infinite amount of value. The 51% defense is extremely strong in this scenario, and there is no way the attacker can acquire on the open market enough ATOM to overcome the 99% bonded ratio.

Thus the crux & counter-claim.

An attacker can still 51% attack the network in the above scenario.

The attacker would do so via approaching stakers / validators and performing an OTC for their underlying collateral. They would do this slowly, and could essentially acquire enough private keys tied to X amount of staked tokens to perform an attack.

Let’s go deeper within this game theory: as a delegator or validator, how are you pricing the 99 locked up ATOM? Presumably, you would be performing the OTC using the open market pricing / available liquidity for your locked ATOM.

This is because were you to unbond, the available liquidity is ultimately what defines the value of the illiquid bonded tokens.

Because of this paradigm, bonded ratios (in a vacuum) are not an absolute defense against a 51% attack. In fact, open market liquidity plays an extremely important part. The economic security that bonded ratios comes from is by proxy of open market valuations and available liquidity.

If the above claim is true, then ultimately a focus on both the underlying value of the token as well as its liquidity is absolutely critical to security. The more price discovery there is (with deep liquidity) the more expensive the OTC strike price starts at.

And if we zoom out even a tiny bit, this is common sense. If the open market collectively does not value the ATOM token, the net value of security securing the chain is dramatically lowered.

Economic security is a function of liquidity.


Liquidity as a function of utility
There are four different types of economic utility:

  • Form utility (value inherited to the object/service via composition of underlying components)
  • Time utility (ability of the service to be provided when needed)
  • Location utility (where does the interaction take place, and is it convenient)
  • Possession utility (what is gained from passively owning the underlying thing)

More specifically, value (the driving consensus debate behind liquidity) = scarcity + desiredness, where desiredness is derived from a subjective interpretation of utility. The driving force behind liquidity in the ATOM markets comes from the desire of users to buy/sell the possession of ATOM, which provides a given utility.

Those primary utilities are as follows:

  1. Staking (secure the chain, earn yield)
  2. Governance (govern the chain)
  3. Transaction Fees (use the chain)
  4. Money (use the asset outside both on & off the chain)

The stronger the value of these utilities, the more demand there is for the possession of ATOM in order to interact with these underlying utilities. The more demand there is for ATOM, the more demand there is for a mature market by which users can, in essence, come to an ever changing consensus on the value of these underlying utilities. The more participants within this ever changing consensus (in aggregate equating to price) the more money can be made by market makers to facilitate and provide a service for this price discovery.

Security is a function of liquidity.

Liquidity is a function of utility.


The Path To Maximum ATOM Utility
Now that we have laid the groundwork that improving the utility of ATOM is not in opposition to improving it’s security, we can now begin with a set of recommendations for how the Cosmos Hub can expand this utility.

Everything listed below is a result of a simple question: “…how can we make ATOM the best possible interchain money?”

The most exponential path to ATOM utility is to focus on its properties as the best native interchain money with respect to: interoperability, usability, liquidity, and integrations.

  1. Relayers as first class citizens - if roads/trains/airplane/internet is the medium by which we can interact with an economy and use our money, then it stands to reason that the improvement of the underlying infrastructure that touches ux IS MISSION CRITICAL to ATOM. The IBC experience will only ever be good as its relayer infrastructure. We need a massive investment into this part of the ATOM economy, or the baseline ux of ATOM will be lacerated by the lack of investment.

  2. Cosmos Hub Bridge - invest in and create the best in class IBC bridge interface. With a high degree of security, and leveraging the best relayer/validator set in Cosmos this experience should be utterly seamless and completely trusted. If relayers are the actual life blood & organs of the UX, the bridge experience is the skin that most users see & touch. Invest in a branded, best in class IBC bridge interface experience owned by the hub.

  3. Cosmos Hub Wallet + ATOM as first class citizen in IBC wallets - invest in a Cosmos Hub owned wallet as well as intimately incentivize other Cosmos wallets to put ATOM front & center. The ease of spendability of ATOM will only ever be as good as the wallets that ATOM gets integrated and adopted with. Continued investment into the wallet vertical is key.

  4. ATOM As Gas - this is probably one of the harder ones to pull off, but arguably if you want to experience the full benefits of the AEZ, there should be a strong encouragement towards chains accepting ATOM in addition to their underlying token as gas. If not direct acceptance, there should be a strong investment into abstracting away the friction of using a different token (such as ATOM) as gas on any given chain. If users can seamlessly traverse the entire Cosmos DeFi experience with just ATOM, this drastically improves the perceived utility / simplicity of ATOM as IBC money.

  5. Cosmos Risk Team - invest in a team that will create a risk framework & risk measurement (audit team) of Cosmos DeFi projects, opening the doors for ATOM to be used through-out a variety of scoped IBC DeFi hubs that are considered safe.

  6. Cosmos DeFi Bank - to improve both the liquidity profile of ATOM while also improving revenue to the Hub, I would encourage the Cosmos Hub to lend out large amounts of ATOM to Umee, Mars, Ghost, etc. Accelerating and investing into the money markets tied to ATOM will rapidly accelerate the usefulness of ATOM within the interchain economy.

  7. LST Support - this has been phenomenal support so far, can only applaud this part of the Cosmos Hub in 2022 - 2023. Excellent growth here.

  8. Invest in Cosmos X Stablecoin Liquidity - the liquidity profile of ATOM and its respective excellence is strongly correlated with its ability to seamless interact with stablecoin liquidity. Invest in liquidity tied to USDC, USDT, IST, etc.

  9. Resolve Security Budget Distribution - with recent inflation props, there are discussions around smaller validators not being able to outpace the cost of operations. Right now, the problem with Hub inflation is not the size of the security budget, rather, the distribution. Invest in a working group to resolve this (heavier APR for smaller validators / potential Sybil protections).

  10. IBC Experimentation - with a hyper focus on ATOM as interchain money, the embrace of IBC and the respective experimentation around it becomes even more critical. Continue to invest in IBC.

  11. Invest into the Brand of $ATOM as Interchain Money - it’s always scary to invest in marketing, but I think a focus on a 2.0 esque moment around ATOM as the de facto interchain money is a huge opportunity.

Claim:

As a whole, Cosmos has the massive opportunity to spread ATOM as a powerful IBC export. The Cosmos Hub would strongly benefit from investing into / owning as many portions of the ATOM “money” user story / experience as possible. Obsession with ATOM UX with respect to interchain primitives (wallets, gas, bridging, liquidity) are where the strongest network effects and growth for ATOM can take place.

Appreciate anyone who took the time to read this little essay, would love to get your thoughts :slight_smile:

-Carter Woetzel (Lead Researcher @ Shade Protocol)

24 Likes

Great post. Always like to hear your takes.

Despite some of the hysteria and governance clown show would lead some to believe, Atom is still ok, but it could be so much more. There’s some doom (noise) due to it’s market performance, especially when you’re looking relative to other L1’s like Solana, but Atom still has an opportunity to remain important within the rapidly-growing Cosmos ecosystem, and I think that’s fine while it evolves.

To me, it is very clear that it’s use in liquid staking and making it the prime $$ of Cosmos is still alive and well. That’s a good path to keep trending down. The key for this is just getting more protocols that make use of Atom derivatives and encouraging people to buy and use Atom. Protocols should crave that easily accessible Atom liquidity.

Tech advancements to make consumer chains cheaper to run and everything Informal has slotted for next year are nice on paper, but it will also need to find a way to improve the Consumer ↔ Hub relationships and revenue share for the AEZ narrative to hold on. Having a direct mechanism for the Hub to participate in consumer chain governance is a good step in that, imo.

More than anything, I think what’s really important is finding a way to bring more collaboration and alignment with the Hub and making it a desirable place for all Cosmos chains to get value from (and give something in return!).

For that, I think we need fresh leadership to step up and make it a point to help improve the Hub’s culture and utility among other chains, create new DAO’s in the AADAO vein who want to make a difference and actually talk to and try to work with those who have different beliefs. If there’s a cultural shift with new, thoughtful leaders, everything else will find a way organically.

Having folks around like you, @effortcapital, @Elijah, @Spaydh, etc. is a good sign for the plebs like me who want to see some progress. I still get the sense that everyone in Cosmos is rooting for the Hub to succeed, and instead of just taking from it, I hope there’s more people who try to contribute and help it fulfill it’s potential.

2 Likes

Just a quick comment for all readers - there is no such thing as a 51% attack on the Cosmos Hub. In the above piece it might be used seeing as its also the name for a consensus take over but…

One would need >66.6% of the staked voting power to alter the consensus of any CometBFT network.

" Security over liveness"

1 Like

Great post sir!

I would like to highlight these there which are getting funded by AADAO.

  1. regarding the wallets and decentralized identity, we have funded Anima to build. Proof of Personhood which is a claim and identity protocol compatible with the Cosmos wallets and ecosystem. This grant goal is to have Cosmos hub be the central chain in which Cosmos users identities are created from.

  2. Atom as gas: both Mystic Laps and Leap wallet are building their own mechanisms of utilizing ATOM as the interchain gas token.

  3. Cosmos risk team:
    Due to the result of some grants we funded that are building on cosmos sdk, Jehan proposed CHIPs which is a proposal that aims to provide a framework for making technical changes to the Cosmos Hub, this ensures a good review process and minimizes security risks as new changes are implemented. More can be found here: Cosmos Hub Improvement Process (CHIPs).

We are also funding Range Security for AEZ. This product provides IBC security monitoring which is a crucial public goods which isnt provided elsewhere in Cosmos. The goal is to cover the IBC activity on the ATOM Economic Zone, providing needed data to partner chains like Stride and Neutron. Cosmos hub and consumer chains can easily set-up monitoring / alerting in case any unusual activities occur for example.

Of course the Tokenomics RFP which has been one of AADAO’s most important tasks this year is taking its course. The goal is to strengthen the value of ATOM and maintain its brand as interchain money.

This isn’t meant to be an AADAO related response however I wanted to highlight these features we are working on providing as it seems this is a shared vision for fellow cosmonauts.

3 Likes

I also actually thinking about to have ATOM as a native currency for new blockchains by default. So it still might be a customizable option but first one would be always ATOM.

And maybe some kind of percentage of transaction fees or something probably could go to the Cosmos community pool or something like that.

Just for your information I’m not a tech person

Good post, thank you for putting this together.
I think for the future of ATOM point 4. ATOM as gas, 6. COSMOS DEFI bank lending out ATOM and 11. branding ATOM as Interchain money will be key.

AADAO is funding the development of Proof of Personhood, an identity assertion and authentication protocol compatible with Cosmos wallets and ecosystem. The goal is for Cosmos Hub to become the central chain for creating user identities. Mystic Laps and Leap wallets are working on mechanisms to utilize ATOM as an interchain gas token. This could potentially increase the utility of ATOM on the Cosmos network. Jehan proposed CHIPs (Cosmos Hub Improvement Process) to provide a framework for making technical changes to Cosmos Hub, ensuring a thorough review process and minimizing security risks. Of course when thinking about how to buy proxies, other nuances come into play, but more on that later. Funding for the Range Security for AEZ program, which monitors IBC security in the ATOM Economic Zone to improve security and provide valuable data to partner networks.

1 Like

Feedback on “The Path To Maximum ATOM Utility”:

We extend our sincere appreciation for the comprehensive and thoughtful exploration you have presented. Your work reflects a deep understanding of the challenges and opportunities facing ATOM, and we commend the quality of your analysis. In our response, we aim to engage with the points you’ve raised, offering constructive feedback and contributing to the ongoing discourse.

  1. Relayers as first-class citizens:
  • Positive Aspect: Recognizing the importance of infrastructure (relayers) for a seamless user experience.
  • Critique: While emphasizing the significance of relayers, we would have appreciated more concrete strategies or proposals for the massive investment into relayer infrastructure mentioned.
  1. Cosmos Hub Bridge:
  • Positive Aspect: Advocating for an excellent IBC bridge interface, acknowledging its role as a crucial touchpoint for users.
  • Critique: Due to its close relation to relaying, we would suggest to group these two in a joint operative framework.
  1. Cosmos Hub Wallet + ATOM as first-class citizen in IBC wallets:
  • Positive Aspect: Recognizing the importance of wallets in enhancing the spendability of ATOM.
  • Critique: Creating another wallet would likely turn to be very costly, we clearly suggest the path of collaboration and business agreement with existing top service providers in the Cosmos.
  1. ATOM As Gas:
  • Positive Aspect: Recognizing the challenge but proposing an innovative idea to encourage the acceptance of ATOM as gas.
  • Critique: The proximity between gas fee token and wallet means this two parameters should be joint as well.
  1. Cosmos Risk Team:
  • Positive Aspect: Identifying the need for a risk framework for Cosmos DeFi projects.
  • Critique: ABSOLUTELY agreed on this one. We have also been advocate for this for a long time.
  1. Cosmos DeFi Bank:
  • Positive Aspect: Proposing a strategy to enhance ATOM liquidity and revenue.
  • Critique: There seems to be a pattern here as it would also make a good companion the previous point. Globally we think that the Hub needs more financial related profiles in its workforce. Therefore we really appreciate to see that we are not alone to support this thesis.
  1. LST Support:
  • Positive Aspect: Acknowledging and praising the support for LST.
  • Critique: No specific critique, as it is commended for the support provided.
  1. Invest in Cosmos X Stablecoin Liquidity:
  • Positive Aspect: Recognizing the importance of stablecoin liquidity for ATOM.
  • Critique: Pairing with stable introduces impermanent loss risks and therefore we suggest this to be coupled with point 5, 6 & 7 and should be assessed by a proper risk management committee.
  1. Resolve Security Budget Distribution:
  • Positive Aspect: Identifying a potential issue with the distribution of the security budget.
  • Critique: We entirely agree with that, we like the initial work provided by @effortcapital and the vote power tax he presented in this post. There might be additional measures required but it provided a very good baseline to debate and improve upon.
  1. IBC Experimentation:
  • This one is a no-brainer
  1. Invest into the Brand of $ATOM as Interchain Money:
  • Positive Aspect: Recognizing the lack of investment in marketing and the pivotal moment we are at.
  • Critique: We would have enjoyed specific marketing strategies or campaigns to achieve this branding goal.

In summary, the post provides valuable insights into maximizing ATOM utility, but further details and elaboration on specific strategies could enhance the clarity and feasibility of the proposed recommendations. But we clearly recognize its large scope and the fact that this constitutes a solid baseline vision for the community to start working on. We recommend the formation of specific committees related to each of the aforementioned “groups”: infrastructure (relaying & bridging), business development, risk management & marketing.


Thanks for reading !
Greetings from the Govmos team, the governance arm of the PRO Delegators Validator
pro-delegators-sign

2 Likes

This is great, but what are the steps to implement it. Is it something that you just are dropping here hoping that somoene will do something, because it will never happen. My wild suggestion for you @Carter_Lee_Woetzel is that you start to build a team, and request a funding to the Cosmos Hub as a competing proposal compared to the recent exagerated request of AADAO. Time to have some competitiong going for DAO aiming to contribute to ATOM. This is one of the biggest chain in blockchain and deserves more teams wiling to represent it. Let’s have some healthy competition going, you have strong ideas, but now you have to make concrete steps to bring it to life. DO IT and THANKS!

Thanks for sharing Carter, some terrific ideas here. We’ll be discussing with AADAO team to try to learn as much as we can from this set of ideas.

1 Like

The whole idea of gluing the words endgame when it comes to a utility of economics of a market, sounds like a bad idea. Just saying =)

A token doesn need to have an endgame

@Carter_Lee_Woetzel this is the post that made me sign up for this forum (it was referred to on Algorand Discourse this week).

2 Likes

How can we elect @Carter_Lee_Woetzel to AADAO?

1 Like