2022 EOY Report: Looking back, and what’s to come for Cosmos

Key insights

• This report aims to assess the performance of Cosmos based on its initial vision, which was to become the "blockchain of blockchains" with multiple interoperable application-specific blockchains
• Despite the industry experiencing significant challenges in 2022, including rising inflation rates and the depegging of TerraUSD, Cosmos has remained relatively competitive in terms of valuation, and there has not been a considerable decrease in monthly active users
• However, another application-specific blockchain on Cosmos has struggled to gain widespread adoption among users, as the majority of Cosmos’ valuation comprises the Hub
• Cosmos has made progress in terms of the ease of creating new application-specific blockchains, and Interchain modules coming out in 2023 will make it much easier
• In conclusion, we believe that 2023 will be a turning point for Cosmos, with the predicted development of over 100 interconnected zones and the majority of valuation spread across various application-specific blockchains by year-end of 2023

State of Cosmos in 2022

2022 has been an eventful year, following 2021’s bull run in Q1 of 2022, and into an era of decimation for the crypto markets in the following quarters, with major turning events rubbing salt on the wounds of crypto-native users who are both new and old… which brings us here today.

In this report, we dive into how Cosmos has performed over the year, and based on this qualitative and quantitative analysis, we then take a gander at what is next for Cosmos.

First, I want to preface this report by saying that if this is your first time hearing about Cosmos, you can read our article here which describes what Cosmos is, so that you can have a better understanding of the concepts and terminologies that we will discuss in the next sections.

But if you’re short on time, here’s a quick primer on Cosmos: Cosmos is a decentralized network of independent blockchains that can interoperate with each other through a central hub called the Cosmos Hub. The network uses a proof-of-stake consensus algorithm and modular architecture to enable the creation of scalable, customizable blockchains for a variety of use cases. The native token of the Cosmos network is $ATOM, which is used for transactions, governance, and to reward validators. The network is designed to be high performance and fast, and is suitable for a range of applications.

In the following sections after the macro setting of the economy, we aim to find out the answers to these questions that are grounded in our metric of success for Cosmos — based on the initial vision of the Whitepaper — and that is:

1. Has Cosmos achieved its vision of becoming the blockchain of blockchains by having multiple application-specific blockchains that are interoperable?
2. If so, what is the next for Cosmos?

As we’ve said in our introduction, this year was riddled with significant turning events that further pushed the trajectory of the cryptocurrency markets downwards — so to give a fair comparison of the strength of Cosmos and anything connected to it, we must also consider these.

Rising Inflation Rates

The worldwide increase in inflation happened in mid-2021, and many countries saw their highest inflation rates in decades, which was caused by various factors. This included the fiscal and monetary stimulus provided by governments during the pandemic and a supply chain crisis caused by increasing consumer demand.

Geopolitical tensions, such as Russia’s invasion of Ukraine and the rise of protectionist trade policies, also affected inflation, as it further devaluated certain currencies and dampened oil prices.

These situations combined created the highest inflation rates in decades. This was one of the critical external factors that affected the industry during 2022, with countries worldwide feeling the effects.

But how does this affect prices in the crypto industry? Well, given that cryptocurrencies are the most risk-on asset because it is new, this means that in a market downturn, these assets are the first to go off an investor’s portfolio, thus contributing to the volatility.

Implosion of TerraUSD ($UST)

With the external problems of a never-ending increasing inflation rate already towering over the crypto industry, the challenges that the industry faced this year sadly ran deeper than that, with internal problems such as the depegging of TerraUSD ($UST) — which was a stablecoin intended to be pegged to the U.S. dollar such that “USD 1 = $1 UST” via an algorithmic backing with LUNA — burgeoning the industry even further.

The vision for an algorithmic decentralized stablecoin for the industry was killed when, on the 7th of May this year, TerraUSD depegged because of large sell-offs, which caused LUNA to spiral downwards. This downward pressure for LUNA continued throughout the week as UST could not regain its peg, and by the end of the week, $45B worth of market cap had been erased from the face of the earth, and essentially the project was dead as UST traded at less than $0.20, and LUNA trading at less than $0.

But that was only the beginning.

The ripple effects from the implosion of TerraUSD became apparent in late June, and Three Arrows Capital (3AC) — one of the most prominent crypto hedge funds that borrow and invests money across the crypto ecosystem — filed for insolvency. According to the documents, the firm had lost hundreds of millions of dollars due to the collapse of TerraUSD, in addition to being underwater on various other investments.

This collapse of 3AC was shortly followed by other crypto lenders — such as Voyager and Celcius — filing for bankruptcy in the weeks ahead for similar reasons.

The Demise of Centralized Exchanges

After the collapse of lenders in the industry getting wrecked, we had a few months of peace… until the unimaginable happened.

This brings us to recent days, where we saw one of the biggest centralized exchanges, FTX, collapse after a scoop on CoinDesk, which revealed that Alameda Research, the quant trading firm that was run by none other than Sam Bankman-Fried (SBF) held a position worth $5 billion in FTT, the native token of FTX and sparked concern amongst industry leaders regarding SBF’s companies’ undisclosed leverage and solvency.

In the days after that scoop by CoinDesk, FTX faced a liquidity crisis, as customers were scrambling to withdraw funds from FTX, and this was further aggravated by Binance announcing that they were going to sell FTT tokens under the notion of “risk management” — which eventually led to FTX filing for bankruptcy on the 11th of November.

This saga caused a major out spark in the entire industry as users pitchforked other centralized exchanges because of the misplaced trust caused by the FTX saga, and this story is still unfolding even as we come to the year's end.

Lastly, let’s look at some of the highlights we have achieved in the Cosmos ecosystem. Based on our previous weekly check-ins, we know there has not been a slowdown in developments and everything else that is alike — but has it been aligned with the Cosmos vision?

Highlights from Cosmoverse 2022

This year’s Cosmoverse was held in Medellin and saw well over 1400 Cosmonauts who attended to hear from 85+ speakers and attend 10+ side events. During the event, many important announcements were made — such as the unveiling of ATOM 2.0; a sneak peek into what Mesh Security could do in future iterations of Interchain Security, Zero Knowledge coming to Juno, and Neutron unveiling updates to their governance roadmap.

Last but not least, the Cosmoverse Awards were given out, with the title of the most active community going to the Hub (of course), the most promising launch going to Injective for Project X, the most decentralized chain going to Stargaze, and the best developer going to Sunny Aggarwal from Osmosis Labs.

Developments for ATOM 2.0

The development of ATOM 2.0 was one announcement that many Cosmonauts have been waiting for. The plan for a new vision to upgrade ATOM was unveiled during Cosmoverse, with the proposal for ATOM 2.0 going live shortly after — however, this proposal, also known as Proposal 82, has been rejected because of the lack of information in terms of the new economic changes and changes in structure for governance.

Newer proposals will come up in the next few months to fix this issue, except for Interchain Security, which is still on track and scheduled to be live on chain within the first few months of 2023. The chains that will be live then to implement Interchain Security for their chain include the native USDC chain, Quicksilver (liquid staking), Neutron, and a few others.

Bringing Cosmos to other chains

This is one of the more essential pieces of the puzzle that will allow Cosmos to become the blockchain of blockchains. If you were wondering what that is, it's allowing Cosmos IBC chains to connect with non-IBC chains.

This year, we've had multiple announcements from various parties who are working tirelessly on solutions to make this a reality, such as Composable Finance building the infrastructure to connect Cosmos with Polkadot, Electron Labs building the infrastructure to connect with EVM chains (with the focus on Ethereum and Near) through zk-snarks, Polymer Labs building a consumer chain which utilizes ZK-IBC to allow connection between IBC-enable chains and non-IBC chains, and finally, Babylon aiming to provide Cosmos chains with the security of Bitcoin through checkpointing.

The great migration to Cosmos

We have also had the opportunity to see other larger projects port their project over to Cosmos, such as dYdX — a decentralized trading platform with popular CEX-like features and averaging a high amount of transactions daily because of their derivatives feature — announcing in late June that they would build v4 of dYdX on Cosmos to meet their needs of decentralization and high performance for traders.

Much more recently, we also heard that Syntropy has decided to build their vision of creating a decentralized internet on Cosmos and is porting over from Polkadot. The syntropy stack is compatible with the current internet infrastructure, so we are excited to see what they have in store.

Developments happen fast in crypto, especially in Cosmos — and if you want to stay updated, be sure to follow our outpost, and join our Discord & Telegram!

Diving deep into the metrics

Next, we look at the metrics of the Hub and the Cosmos ecosystem to get a better understanding of how both the Hub and the ecosystem has performed over the year, and to give us an insight of what might lack, and how we predict future developments can fix these metrics, in 2023 and beyond, for Cosmos.

In this section, we look at the valuation of the Hub over the year, by its market capitalization and monthly active users, followed by the bonded ratio and aggregated unbonding amount, and finally, the performance of the Hub in terms of the block count vs. the block delay, to understand the state of the Hub this year.

When we look at the aggregated valuation of the Hub, we see the Hub has been holding up against events such as the Terra collapse that happened in May and, most recently, the FTX collapse in November — and to top it off, the number of monthly active users (MAU) has increased over the past quarter, which we think is attributed to users from other ecosystems looking at the “app-specific blockchain” thesis and exploring the Cosmos ecosystem.

For the bonding ratio, we see that the amount of bonded ATOMs has been relatively similar throughout the year, about 60%. However, there are two periods where unbonding spiked — during May after the LUNA crash and another in the past quarter. We believe this is attributed to the rise in liquid staking protocols and liquid staking derivatives (LSDs) like Stride and pSTAKE.

Last but not least, the performance of the Hub has not disappointed this year. From this chart, we see the block delays of the Hub have been decreasing month over month, although there have been an increased amount of block counts, which is further aggravated by the doom events that have transpired this year.

However, Cosmos isn’t just about the Hub.

The aim of Cosmos, once again, is to be the blockchain of blockchains. And to achieve that goal, the ecosystem has to flourish with/without the Hub. So in this section, we look at the overall metrics of the ecosystem.

Over the past year, we have grown the number of active zones from 44 in Q1 of 2022 to 53 at year-end. However, there has been a slowdown in the growth of new chains in the past three quarters (Q2 to Q4 2022) compared to the growth between Q3 2021 (I know we can't see the data here) to Q2 2022.

When we look at the amount of volume that IBC handled, we see it has dealt with $30.3 billion worth of cross-chain transfers, with a significant slowdown happening in the previous two quarters (Q3/Q4), which we can assume and are assuming is because of the economic meltdown. However, when we look at November's numbers, we see it increased, which is most likely because of the increase in people transferring their assets out of centralized exchanges to self-custody methods after the downfall of FTX.

But how does the Cosmos ecosystem's valuation compare with the industry? And how much of the valuation comprises the Hub?

Overall, the Cosmos ecosystem remains competitive in terms of valuation against the global valuation of the industry. It comprises about 0.7% to 1% of the entire industry, despite LUNA’s collapse, which took up some of the valuations from the Cosmos ecosystem.

However, when we take a closer look at the ecosystem’s valuation, we see that the market capitalization of the Hub is starting to make up the majority of the Cosmos ecosystem, with the increase only happening after Q2/Q3, after the industry-wide slump in valuation.

This is not a good sign, as apart from the Hub and a few other app-specific blockchains, other “zones” have been relatively unsuccessful in securing long-term users who value these other “app-specific” blockchains.

However, this slump in terms of valuation has yet to translate into a decrease in active users, as seen in the chart above. In fact, there have been more users in the past quarters, which again, we can assume, comes from users from other blockchains exploring the Cosmos ecosystems.

What the future of Cosmos looks like

Now that we have laid out the groundwork, let’s come back to our first two questions, which were:

1. Has Cosmos achieved its vision of becoming the blockchain of blockchains by having multiple application-specific blockchains that are interoperable?
2. If so, what is next for Cosmos?

In our opinion, the answer to the first question is still mixed.

While the Cosmos ecosystem has grown tremendously in terms of the ease of creating new “app-specific blockchains,” we have yet to see significant adoption of the Cosmos vision, which can be seen from the fact that the Hub comprises most of the valuation from the Cosmos ecosystem, which we believe should not be the case for the next few years ahead.

Of course, that’s the reason ATOM 2.0 was unveiled. To expand the facilitation of coordination capabilities between zones while keeping it economically sustainable and secure. In the first few years of the creation of ATOM, the core focus was on getting the technology right.

But don’t trust that statement from me; trust it from the fact that the technology and valuation of the Hub and the Cosmos ecosystem have performed relatively well in the face of doom events such as LUNA’s demise and the collapse of multiple centralized entities, and that big applications are looking towards Cosmos to build their grand vision such as dYdX and Syntropy.

So what is next for Cosmos?

It would be to create a port city, with Hub in the middle of it all. The first step of this vision to be realized would be the launch of Interchain Security, early next year, to bootstrap the creation and security of new chains, so that these developers can focus solely on building their chain and garnering more users. From there, other Interchain modules, such as Interchain Accounts and Interchain Queries will come into play to make other application-specific blockchains on Cosmos viable and attractive for users.

We believe that 2023 onwards will be a huge turning point for Cosmos, and that there will be over 100 interconnected zones by the end of 2023, with the majority of valuation spread across the various application-specific blockchains.

Appendix

Credits to Mapofzones, specifically Daniel, for providing the data regarding the monthly active users (MAU) over the past year in 2022.

Limitations

* Data from Coingecko — this dataset for MCAP excludes Axelar, Sommelier, Bitcanna, Konstellation, OmniFlix, Desmos, Dig Chain, Ixo, Space Pussy, Shentu, Lum Network, Jackal, Gravity Bridge, Crypto.org, Stride and Chihuahua, because of the lack of circulating supply and in the interest of time. We have accounted for any deviations in data, with an estimate of 10% error rate.*

** Data provided by mapofzones — this dataset for MAU excludes the month of January 2022, February 2022 and December 2022. We have accounted any deviations in data with an estimate of 10% error rate.

About Flagship

Here at Flagship, we make it easy for you to get updated across emerging crypto sectors, through our cross-chain ecosystem of decentralized funds and a network of experts.

• Join our Discord to be part of our active community and discover new assets and opportunities
• Check out our website and whitepaper here
• Get in touch with the team

We’d love to have you onboard!