What is the functionality of ATOM? What are the Tokenomics? What does IBC do?

What is the functionality of ATOM? What are the Tokenomics? What does IBC do?

When talking about Cosmos, these questions are asked a lot, but the answers are always changing because ATOM continues to evolve. I went ahead and did my own little rabbit hole of research and tried to answer them below, as concisely as possible to avoid confusion and also to show the purpose of each aspect of ATOM’s functionality, atleast as much as I could gather. I am not a financial advisor and none of this is advice, it’s just little windows of research into a bigger space, so, as always, please do your own research.

Inflation?

First, many people wonder about inflation. What is the point of it? Inflation is important to give incentive to staking. Why? Because in a POS (Proof of Stake) model, staking secures the network. So, by implementing inflation, new tokens are created and distributed to the network participants who participate by securing the network and voting on new governance. Keep in mind, inflation is very useful in the early stages of a network’s growth, and as alternative incentives to staking arise, inflation can be slowly phased down after the network is healthy and robust. For now, ATOM employs the following model:

The inflation has a floor of 7% and a ceiling of 20%. The target percentage of total supply coins staked is 66%. The network uses an algorithm to maintain this level. When the staked percentage of total supply is above 66%, the inflation heads down to the floor of 7%. When the staked rate is below 66%, the inflation starts heading up towards the ceiling, 20%.

The rate at which the inflation changes is proportional to how far you are away from 66%. The further the staked ATOM percentage is away from the target of 66%, the faster the inflation changes to help encourage the amount of ATOMs staked to go back above the target by rewarding extra atoms for staking.

Supply Cap?

As mentioned above, some inflation is always necessary in order to create an additional, non-transaction reward for validators and to maintain strong security. With the Proof of Stake model, there can be potential consensus instability issues if the entire reward for validators is based on transaction rewards and not the overall block reward. Because of this, Proof of Stake is generally not designed to have a maximum supply, which necessitates inflation eventually going to zero once that supply is reached.

Burn?

This doesn’t exist yet, however, ATOM is a heavily weighted governance functionality token, it is very possible to change parameters on the hub through governance proposals, but even small changes will be heavily scrutinized and debated by the voting community.

ATOM’s Current Functions

This is a list of the functionalities that are proposed on the website, Cosmos.Network . In just about a week the incentivized Testnet for the Gravity Dex begins, shortly after that we’ll likely see the implementation of the Dex on the hub and shortly after that, we’ll see what happens with Althea’s Gravity Bridge! Here comes ATOM DeFi!

1. Securing the Cosmos Hub — Staking is the process of locking up a digital asset to provide economic security for a public blockchain.
2. Staking for Annual Percentage Yield — The total supply of ATOM is inflated to reward stakers, the APY rewards for ATOM is currently ~ 9.7%
3. Key to On-Chain Governance —Staking ATOM grants the right to vote on proposals and make decisions on the future of the network, every member participating in Governance is key to ensuring the democratic governance functions of ATOM is preserved.
4. Stakedrops — New chains building with Cosmos SDK have incentives to stakedrop to ATOM holders because they will also likely stake the tokens dropped to them, providing instant stability to a new chain. Some recent examples of stake drops include Osmosis, Juno, Persistence.One, and SifChain.

ATOM’s Function in the Very Near Future

This is mostly a section about functionality that is forward-looking and speculative, some of it is announced on the roadmap on the Cosmos Website, some of it are little tidbits floating around the space, I linked and tried to explain what I could find.

1. Gravity DEX launching end of May. — With the DEX, it becomes easy and convenient to route transactions through the Interchain port (Hub). These transactions will create rewards to be shared between validators and delegators (stakers) of ATOM and can be processed with many tokens in the ecosystem.
2. ATOM decentralized liquidity pools — Swap rewards can be collected by providing ATOM for liquidity pools.
3. Gravity Bridge to Ethereum — Gas rewards for use of the bridge will be shared between ATOM validators and delegators.
4. ATOM Defi — Because the DEX and Gravity Bridge have low gas costs thanks to batched transactions, as well as the significance of the broader Cosmos ecosystem, ATOM is positioned to become a central hub for DeFi functionality.

For further reading on these upcoming features, check out: https://cosmos.network/features/

ATOM’s Function in the Slightly Further Future

This is mostly a section about functionality that is forward-looking and speculative, some of it is announced on the roadmap on the Cosmos Website, some of it are little tidbits floating around the space, I linked and tried to explain what I could find.

1. Inter-Chain Staking “Shared Security” — According to the proposed shared security model in the works, new blockchains in the Cosmos ecosystem might be able to pay as needed to rent security from the Hub’s validators.
2. Bridges to other blockchains. — Like the Ethereum bridge, more bridges to other blockchains are likely to follow, these bridges will come with transaction rewards to be shared between validators and delegators.
3. Liquid Staking — ATOMs that earn rewards remain bonded and cannot participate in the DeFi ecosystem, liquid staked ATOM can change that.
4. NFT minting & Interchain marketplaces — The InterNFT working group is currently developing interchain standards for NFTs
5. General Hub for Inter-Blockchain Communication (IBC) — This is the key to the Cosmos as a whole, and creates a huge range of possibilities for ATOM. But, it’s worth noting that these capabilities are still latent — they have not been created yet (many haven’t even been thought of yet).

Possible Applications for IBC

The inter-blockchain communication protocol (IBC) is an end-to-end, connection-oriented, stateful protocol for reliable, ordered, and authenticated communication between heterogeneous blockchains arranged in an unknown and dynamic topology. IBC can be used to build a wide range of cross-chain applications, which include token transfers, atomic swaps, multi-chain smart contracts (with or without mutually comprehensible VMs), and data & code sharding of various kinds.

Few seem to understand that IBC for Cosmos chains means that one chain can hold another chain’s tokens! This kind of functionality increases the potential of any IBC enabled chain with all sorts of possible applications. Here are a few ways chains can use IBC based off of small pieces of information I’ve gathered and my own speculation.

1. Interchain Transactions — The beginning of interchain transactions are already starting with the Gravity DEX and the Gravity Bridge to Ethereum, which will allow ATOM and ETH tokens to travel back and forth between their respective chains.
2. Interchain Collateral — ATOM as collateral on other chains — i.e., using ATOM as collatteral on Terra to lend or borrow other assets.
3. Interchain Payments — ATOM as payment for services on other chains — i.e., using ATOM to pay for cloud-computing on Akash, or as payment for a decentralized vpn from Sentinel.
4. Interchain Transaction Proofs — A transaction proof can be used retrospectively to verify the authenticity of the proposed activity within a chain.
5. Interchain NFT/DID exchange — A zone agnostic wallet that could potentially hold NFTs and Digital ID’s from any chain in the IBC ecosystem.
6. Interchain Accounts — “Universal” wallets will make holding all of your assets in one place a lot easier.
7. Interchain Governance — The ability to use ATOM to participate in governance in other chains within the ecosystem.
8. Interchain Smart Contracts — Using ATOM as part of a smart contract on another chain.

Each developer you ask will likely have a different answer for what they want to do with IBC. This post has been a bit abstract but rest-assured — concrete examples are coming on-chain in the near future. IBC is the puzzle piece that enables vast possibilities for decentralized exchanges, staking derivatives, and Interchain accounts. Plus, there are many more functionalities that haven’t even been discovered yet. IBC makes Cosmos flexible, adaptable, and robust because it turns competition into collaboration.

With the friction-less transference of data and assets between chains, Cosmos opens the door for people who aren’t even aware of the word “blockchain” to transact with the powerful, efficient tools that blockchain technology enables. Cosmos’ open source toolkit makes it easy to build and deploy a blockchain. Inter-chain staking makes it convenient to secure it. The DEX and IBC allow seamless connection to other chains within the ecosystem. This is why we say that the functionality of Cosmos is limitless. It can stretch as far as we can take the technology, and the technology is incredibly flexible. It’s impossible to list what’s possible because the project is still in its infancy. To end the post, I’ll leave this fantastic quote from Dean Tribble of Agoric that seems to encapsulate the anticipation most Cosmos fans feel,

“It’s like dropping a crystal into a supersaturated solution: The pent-up need for interconnection between chains will be unleashed. Some of the most interesting connections will be between chains that we have never heard of, accomplishing things not currently feasible.”