When it comes to decentralized finance, the networks that make it run are divided into layers.
What lies below Layer 1 blockchains are made up of stalwarts such as Bitcoin or Ethereum. Layer 2 networks comprise next-generation projects such as Aribitrum. And Layer 0 networks may be the least understood.
Cosmos is a key Layer 0. It connects different blockchains into a meta-blockchain system.
On Layer 0, a smart contract on one network may execute a transaction on another. This blockchain interconnectivity is at the heart of Cosmos. Moreover, Cosmos provides a framework to build blockchain networks themselves.
Cosmos (ATOM) Origin and Purpose
Often referred to as the “internet of blockchains” or blockchain 3.0, the Cosmos project has two main goals:
- Create a cross-chain network that connects blockchains.
- Create a plug-and-play toolkit that makes it easier for developers to deploy blockchains of their own. The most notable Cosmos SDK-based projects are Binance Chain (BNB), and Crypto.com Coin (CRO).
The non-profit Interchain Foundation (ICF), based in Switzerland, manages Cosmos’ development. Just like Ethereum Foundation, ICF is a coordinating body that bridges coding flows between different software development teams.
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Key Cosmos developers are Jae Kwon, Zarko Milosevic, and Ethan Buchman. They started working on the Cosmos project in 2014, powered by the Tendermint consensus protocol. In 2016, they published Cosmos white paper. The Cosmos network itself came online on March 13, 2019.
A year later, Kwon shifted from an active to an advisory role, while Buchman remains at the head of the ICF.
Cosmos has been used for CBDC pilot programs, stablecoin (USDF) transfers, and by U.S.-based banks for payment versus payment settlements and multi-currency exchanges.
How Does Cosmos Work?
The primary purpose of the Cosmos network is to move transfers from one smart contract to another. Let’s say Adam wants to send 10 ETH from blockchain A to blockchain B. Coins are first deposited into chain A and locked, with the validation proof sent to chain B.
Then, chain B verifies if over two-thirds of chain A validators have confirmed the locked amount. After this proofing, Adam’s 10 ETH are unlocked and now available on chain B, in whichever dApp Adam picked. For this interoperability process to reliably work, Cosmos relies on three key technologies:
- Tendermint Core (TC)
- Cosmos SDK
- Inter-Blockchain Communication (IBC) protocol
This allows interoperability with other Proof-of-Stake (PoS) networks. Cosmos has its own PoS network, dubbed Cosmos Hub, which keeps track of other networks’ states. How all this works becomes clearer once all pieces of the puzzle are put in place, starting with Tendermint.
Tendermint Core (TC)
Like most blockchain consensus algorithms, Tendermint Core is based on a Byzantine Fault Tolerance (BFT) protocol. Meaning, the network can function even if some percentage of network validators fail or act maliciously. In the case of Tendermint, it is a PoS consensus that allows up to 33% of nodes to fail without adversely impacting the Cosmos network.
Furthermore, by ditching Proof-of-Work (PoW) consensus and employing vertical scalability, TC offers enterprise-grade performance:
- Up to 10,000 transactions per second (tps) for 250 Byte transfers
- Instant finalization because TC instantly validates new data blocks
What makes Tendermint Core stand out the most is its fusion of networking and consensus layers. This vertical scalability makes it possible for developers to focus on deploying dApps instead of worrying about the underlying mechanics. In other words, TC’s scalability is only limited by the application’s bottleneck itself.
Cosmos Software Development Kit (SDK) is a set of open-source tools for building decentralized applications (dApps). Additionally, developers can use Cosmos SDK to build sovereign blockchain apps dubbed zones, serving as smart contracts instead of relying on single Layer 1 chains.
This way, it is possible to create an inter-linked zone hub, which powers Cosmos’ cross-chain interoperability. Dubbed Cosmos Hub, zones connected to it are not itself interacting with one another, but through the central Cosmos Hub.
Therefore, Cosmos SDK saves developers huge amounts of time and money, as each zone (smart contract tied to a dApp) doesn’t need a separate blockchain to function. This not only speeds up transactions, but it avoids high transfer fees because the application is built vertically, on top of the consensus and networking protocols.
Cosmos offers modular infrastructure, which is much faster and easier to deploy than on other PoS networks like Ethereum.
Inter-Blockchain Communication (IBC) Protocol
The Inter-Blockchain Communication (IBC) protocol connects Cosmos’ zones, blockchains, and layers. Using instant transaction finality provided by TC, IBC connects heterogeneous chains.
This means no matter how each blockchain is set up in terms of governance, consensus, and applications, they can connect to Cosmos.
So when a user wants to send digital assets from chain A to chain B, IBC handles it through four steps:
- Tracking – both chains track each other’s validators
- Bonding – ATOM tokens are locked — bonded — on chain A
- Proof relay – the proof of bonding is sent from chain A to chain B
- Validation – verifying the sent proof. When done, ATOM-vouchers are generated on chain B, completing the transfer from chain A to chain B.
The ATOM-vouchers are not real ATOM coins, because they already exist on chain A. In essence, this is a tokenized inception, as ATOM-vouchers are tokens of tokens.
Cosmos (ATOM) Coin
Cosmos ATOM token has an umlimited supply, just like ETH.
Moreover, 80% of that supply is in the hands of investors, while the remainder is equally divided between the Interchain Foundation and All In Bits. The latter is a U.S.-based for-profit company specialized in cloud computing, BFT, state machine replication, and P2P networks.
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Like on other PoS networks, ATOM coins can be staked in Cosmos HUB to secure the network and yield rewards, typically at 4–6% annual percentage yield (APY). When validators and delegators (those who pick validators as proxy ATOM holders) verify transactions, they receive the paid ATOM fee as a reward.
ATOM stakers can also join hub zones, further customizing their slashing mechanism for misbehavior. If that happens, validators’ ATOM stake is burned, i.e., permanently removed from circulation.
With the exception of Cosmostation, the most popular wallets to hold ATOM are generic ones, able to hold hundreds of different coins:
- Atomic Wallet
- Math Wallet
- Trust Wallet
When it comes to ATOM staking voting power, it is distributed between exchanges and venture capital (VC) firms. Although no single entity holds a double-digit share, the voting power is distributed between Coinbase Custody, Kraken, Binance Staking, Polychain, SG-1, MultiChain Ventures, and many others.
Therefore, it is safe to say that the Cosmos network is moderately centralized, likely to enact government edicts, whatever they may be.
This series article is intended for general guidance and information purposes only for beginners participating in cryptocurrencies and DeFi. The contents of this article are not to be construed as legal, business, investment, or tax advice. You should consult with your advisors for all legal, business, investment, and tax implications and advice. The Defiant is not responsible for any lost funds. Please use your best judgment and practice due diligence before interacting with smart contracts.