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.
- Economic security as a function of liquidity
- Liquidity as a function of utility
- 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:
- Staking (secure the chain, earn yield)
- Governance (govern the chain)
- Transaction Fees (use the chain)
- 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.
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.
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.
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.
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.
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.
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.
LST Support - this has been phenomenal support so far, can only applaud this part of the Cosmos Hub in 2022 - 2023. Excellent growth here.
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.
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).
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.
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.
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
-Carter Woetzel (Lead Researcher @ Shade Protocol)