Blockchain technology is developing at a rapid pace with a myriad of different blockchains and cryptocurrencies. One vital aspect for the mainstream adoption and success of these blockchains is the communication between these separate networks.
Efficient, fast communication will keep transaction fees low and facilitate the growth of Decentralised Finance. However, until recently, individual blockchains were not designed with this in mind. Cosmos, calling itself “The Internet of Blockchains”, has plans to change this.
What’s in This Guide?
What is Cosmos?
Jae Kwon and Ethan Buchman (also co-founders of Tendermint) envisioned that the future of cryptocurrency would be an ecosystem of independent blockchains with different uses, all capable of communicating with each other and conducting transactions.
To this end, they wanted to design a decentralised network of independent Proof-of-Stake blockchains with a focus on scalability and blockchain interoperability. Together they designed and launched Cosmos Network. In partnership with The Interchain Foundation, a Swiss non-profit that funds open-source blockchain projects, they brought it to the public in 2016. They held a highly successful Initial Coin Offering in 2017 that raised over $17 million.
Cosmos Network is a network of blockchains, called Zones . These independent blockchains are all interoperable, meaning they can communicate with each other seamlessly and conduct transactions. Underpinning this network is the blockchain, Cosmos Hub, which helps maintain the connections as an intermediary and is powered by the native token, ATOM.
Cosmos Atom Use Case: Governance
This coin functions as a governance mechanism for the network and Cosmos uses a proof-of-stake consensus mechanism, Tendermint, in which users can “stake” their ATOM tokens to validate transactions and earn rewards. Users also pay the nominal transaction fees in ATOM.
Since its launch, Cosmos has grown hugely with a number of successful projects, such as Terra (a blockchain of algorithmically pegged stablecoins) and Gravity DEX (a decentralised financial crypto exchange). It has over 260 projects listed on its website to date. It has also developed bridges between its network and other blockchains, notably Bitcoin.
It has plans to create a bridge with Ethereum. Cosmos also aims to make it easier for developers to create their own blockchains and applications within the network with the Cosmos software development kit, CosmosSDK and other open-source tools such as Tendermint Core and the Inter Blockchain Communication protocol.
Cosmos Atom Use Case: Connecting Blockchains
Cosmos can be seen as a network of Zones and Hubs. Zones are independent blockchains with specific applications, uses and methods of governance. This means they can authenticate transactions, create tokens and enact changes on their own blockchain by themselves. Hubs are blockchains that act as an intermediary between Zones for transactions and keeps track of the state of each Zone.
Although there can be other Hubs, Cosmos’ primary Hub is its main blockchain, Cosmos Hub. Cosmos Hub is a proof-of-stake blockchain that was designed to function as a main ledger for the entire ecosystem and monitor the state of every Zone using the Inter-Blockchain Communication Protocol (IBC). It is designed with scalability in mind and is able to process thousands of transactions in a short period of time.
The Cosmos Inter-Blockchain Communication protocol essentially functions as a messaging system built to transfer data between blockchains. Previously most blockchains existed in silos and were unable to communicate with each other.
This was due to different languages, consensus methods and differences in design. IBC tackles this issue and allows Cosmos Hub to monitor the state of each Zone and allows the secure transfer of tokens between zones. Once a Zone is connected to Cosmos Hub using IBC, it is then interoperable with all other connected Zones or other IBC-enabled blockchains.
Cosmos Atom Use Case: Fees and Staking for Rewards
The native cryptocurrency of Cosmos Hub, ATOM, underpins the entire ecosystem. It has several uses in Cosmos. Cosmos Hub uses a Tendermint BFT Proof-Of-Stake consensus algorithm. Holders can lock in or “stake” their ATOM tokens to take part in validating transactions on the blockchain. Validators receive ATOM as a reward based on the amount of ATOM staked.
Validators are randomly chosen but the probability of being chosen depends on the amount of ATOM locked in. It is possible to delegate tokens to a validator and receive a percentage of the staking rewards in return. Staking can be seen as collateral and if a validator tries to validate a block with false information they can lose some or all of their ATOM. This increases security across the network.
Cosmos users pay a small transaction fee in ATOM token equivalent to around $0.01. Having even a nominal transaction fee prevents a huge amount of spam transactions. This means ATOM provides another use as a fraud prevention mechanism. ATOM coin is also a governance token meaning that ATOM token holders can vote on platform decisions. Voting power is determined by the amount of ATOM coin held.
Cosmos Use Case: An Ecosystem of Blockchains
Cosmos developers Jae Kwon and Ethan Buchman wanted to make it easy for developers and software engineers to create independent, interoperable blockchains. Previously they created an alternative to Proof-of-Work consensus mechanisms (like that used in Bitcoin), believing them to be limiting in terms of scalability and interoperability.
They designed Tendermint, a proof-of-stake byzantine fault-tolerant consensus method in 2014 and launched Tendermint Core, an consensus engine for building blockchains using this algorithm. They would then use Tendermint as the default consensus mechanism built into the Cosmos Software Development Kit (CosmosSDK).
CosmosSDK is an open source tool that facilitates building a custom, independent blockchain. Its main focus is to be user-friendly while providing all the security and features associated with blockchains. Developers can use pre-built modules or custom-made modules and test them before launching them on their own mainnet. It also lets developers use the Inter Blockchain Communication protocol to connect their blockchain to the Cosmos Hub and the Cosmos Network.
The combination of Tendermint, CosmosSDK and IBC has made Cosmos a very attractive network to set up new interoperable blockchain applications in or connect other blockchains to. As a result the Cosmos ecosystem has grown hugely with a wide variety of blockchain projects such as Akash (a decentralised cloud service), Sentinel (a bandwidth marketplace) and Cronos (a smart-contract enabled decentralised finance provider).
Cosmos and the Future
Cosmos has grown hugely over the few years since its launch in 2016 and shown the ability to stay at the cutting edge of blockchain technology. It has made it easier for developers to create their own application-specific blockchains with huge potential and growth. With a passionate tech-focused community, they are making great strides towards their vision of an interconnected network with mainstream adoption.
With connections to major cryptocurrencies, like Bitcoin and Ethereum, and plans to expand into the world of NFTs and DeFi, Cosmos looks capable of becoming a major player in the industry. However it is not alone in its field, Polkadot is another successful network of connected blockchains and there are others sprouting up.
And as Ethereum grows in popularity, many developers are building sidechains for Ethereum rather than independent blockchains. If Cosmos can continue to grow and innovate, the future looks bright.