Cosmos: a brilliant ecosystem in decline?

What are the qualities of the Cosmos ecosystem?

The Cosmos ecosystem has always stood out for its ability to foster interoperability and scalability between different blockchains within its ecosystem. Thanks to its inter-blockchain communication (IBC) protocol, Cosmos enables various blockchains to communicate and exchange information in a secure and decentralised manner, paving the way for an ecosystem of interconnected networks.

"This design currently has no equivalent in any ecosystem," says Ken Timsit, in charge of Cronos Labs, a structure responsible for the development of Cronos PoS, a blockchain developed with the Cryptocom exchange and based on Cosmos technology.

Cosmos uses the Tendermint consensus mechanism, renowned for its speed and reliability, which ensures fast transactions and robust security. Finally, its modularity allows developers to create custom blockchains using the Cosmos SDK, facilitating innovation and the expansion of new decentralised solutions.

Cronos is one of them, as is dYdX, a decentralised exchange that enables advanced trading with margin calls and perpetual contracts. "The advantage over a layer 1 or 2 is that we have total control over the technical stack," explains Charles d'Haussy, chairman of the dYdX foundation. "We can develop the product that meets our needs without being dependent on the roadmap of generalist blockchains", he insists.

What difficulties does it face?

Cosmos was deeply affected by the collapse of Terra, the blockchain that developed the UST algorithmic stablecoin and whose value was linked to its LUNA governance token. This project, which was worth almost $40 billion, collapsed in the spring of 2022.

"I don't think the ecosystem has fully recovered from this event yet," says Adrien Faguet, founder of StakeLabs, a staking platform on Cosmos. According to him, this has slowed down its development and institutionalisation.

"Stablecoins are developing, particularly with the USDC and the Noble blockchain, but it will still be another year before we have sufficient liquidity to attract more users," he continues. The presence of stablecoins is crucial for decentralised finance, a sector not yet very present on Cosmos.

For users, Cosmos is mainly seen as an ecosystem that offers significant staking remuneration (around 17% annual on ATOM) and has offered some fine airdrops, such as Celestia and Dymension between late 2023 and early 2024.

"To date, there is still not enough business implementation and the ecosystem lacks market makers to increase volumes and therefore visibility", he insists. "Many tokens are not yet listed on the major exchanges."

On the other hand, developers have not jumped ship, as the latter are benefiting from financial incentives deployed by protocol DAOs and venture capital funds that are gradually entering the space.

The Interchain Foundation (ICF), the main funder of the ecosystem, has a reserve of $300 million. Binary Builders, Chorus and Interop are all involved in helping it grow. "This money, which wasn't there before, has been coming in over the last few months, and will help to retain developers and strengthen projects", says Adrien Faguet.

"Cosmos lacks a bit of leadership; we need more projects capable of guiding the community in a specific direction", says Ken Timsit of Cronos. "The main leader today is Osmosis, I think that other big players should be able to get together and invest."

If Cronos and Cryptocom do not occupy this position, it is mainly for reasons of "dispersion": Cronos manages three different blockchains (Cronos PoS, Cronos EVM and Cronos ZkEVM). "We'd like to get more involved, our developers are very attached to this ecosystem, but we don't have enough time to invest more," murmurs Ken Timsit.

How is the fall in the price of ATOM affecting the ecosystem?

At present, the price of ATOM is around 6 dollars, the same level it was at in 2019-2020. This has no impact on the overall security of the ecosystem, as most large projects manage their security themselves and do not rely on Cosmos Hub (the platform that allows security to be delegated for projects that wish to use ATOM).

"The price of ATOM may be an issue, but a project like dYdX is sovereign and its security does not depend on Cosmos," explains Charles d'Haussy, president of the dYdX foundation. "Admittedly, this is not good news, but it doesn't block our growth," he points out.

For some supporters of the Cosmos ecosystem, it is a shame that the use of the IBC does not benefit ATOM via the levying of fees or a burn mechanism. "It would have seemed logical, Cosmos has developed a technology and its use could have supported ATOM, which is at the centre," regrets Adrien Faguet of StakeLabs.

"I think that the attraction of Cosmos should rather come from successful projects that will make others want to come on it," explains Ken Timsit. "Initially, Terra and Osmosis played this role, whereas today it's more Osmosis, Celestia, dYdX and perhaps Akash that are enjoying a certain notoriety thanks to the AI boom," he stresses.

"Cosmos is the perfect illustration of open source," says Charles d'Haussy, meanwhile. "Anyone can use it in the same way that you can choose Javascript or C++ programming languages without paying any fees". In his view, "it's up to Cosmos to find a value proposition that goes beyond its code by offering something indispensable to different projects."

Several reforms to tokenomics have been proposed in recent months (such as reducing staking rewards), but none have come to fruition.

Why have prices for tokens in the ecosystem also fallen significantly?

"Many projects have seen the price of their tokens fall because of selling pressure from DAOs to pay their developers," Adrien Faguet points out. "It's crucial for projects to be careful with their spending, not to overpay, to maintain healthy growth in the ecosystem."

Another problem is that some projects like Celestia have allowed venture capital funds to stall their tokens (vesting), which allows them to regularly sell their rewards and therefore exert selling pressure. "With an annual return of 10% on large positions, that's a lot of money being dumped on the market," says Adrien Faguet, who notes that almost all Cosmos projects "have made the same mistake".

What are the best projects in the Cosmos ecosystem?

Osmosis: this is the main DEX in this ecosystem. Around 4.5 billion dollars were exchanged in 2023 for an estimated global revenue of 8 million. In comparison, Uniswap recorded $450 billion over the same period in the Ethereum ecosystem.

dYdX: this is the first major project to switch from Ethereum (exactly from Starkware) to Cosmos. Since October 2023, its cumulative trading volume has reached $166 billion. It has redistributed $32 million in the form of USDC to the stakers of its token.

Celestia: this (read our analysis) project offers blockchains (across all ecosystems) to manage data availability for them. It's still in its infancy, but its promise is very significant. Arbitrum Orbit, AltLayer Axelar and Berachain are already working on it.

Cronos PoS: "This is a pure Cosmos blockchain on which the governance of the CRO token is managed. In particular, it is used to make payments and trade NFT custodially on Cryptocom", says Ken Timsit. Cronos PoS has recorded more than 37 million transactions since its launch.

Akash: this target open source market aims to democratise cloud computing by providing more flexible services. "The use case is there with AI and cloud computing, people can find a way to use their old graphics cards," notes Adrien Faguet.

‍