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Cosmos and the ATOM Token Explained

I have been fascinated by crypto for a long time now, and I enjoy sharing what I have learned about it on ToughNickel.

The Cosmos and ATOM logo

The Cosmos and ATOM logo

What Is Cosmos?

There are many different cryptocurrencies and blockchains, and at the moment most of them cannot communicate with each other. Cosmos aims to solve this problem and wants to become an "internet of blockchains" where different blockchains can work and interact with each other. This would have a huge impact on the entire world of cryptocurrencies, for that reason many people see Cosmos as the third generation of crypto.

Right now, Bitcoin cannot be directly used on Ethereum and other smart-contract platforms because they run on different blockchains. Non-Ethereum tokens cannot be used on Ethereum. So if you want to use Bitcoin on a DeFi protocol there, you first need to first "wrap" your BTC into a wrapped version Bitcoin, which can then be used on Ethereum. With Cosmos, you could wrap BTC in an automatic and decentralized way.

Cosmos is a united universe of different blockchains.

Cosmos is a united universe of different blockchains.

Currently, BTC is mostly used on Ethereum in the form of Wrapped BTC (WBTC), which is controlled by a centralized organisation called BitGo. As there is a growing number of cryptocurrencies and growing demand to use them in the various DeFi protocols of different blockchains, there is a strong need for a decentralized solution to use cryptocurrencies on other blockchains because there is simply no point in using decentralized finance if you have to depend on a centralized institution.

Cosmos can theoretically connect every proof-of-stake blockchain together, and it can also connect many proof-of-work blockchains like Bitcoin.

Cosmos holds crypto on one blockchain and creates tokens of it on the new blockchain where you want to use them.

Cosmos holds crypto on one blockchain and creates tokens of it on the new blockchain where you want to use them.

How Does Cosmos Work?

The way this works is by connecting different blockchains with a "Hub" that serves as an automatic bridge.

If you want to use your Bitcoin on Ethereum, then you can do that by sending your BTC to an address that is owned by the hub. The hub will then hold your BTC and automatically create BTC tokens on Ethereum and send them to the Ethereum address that you provided so you can use their DeFi protocols.

If you want the real BTC back, then you have to send your new Ethereum BTC token back to the hub first. The advantage of having a hub other than a centralized organisation is that the hub works as a smart contract that handles transactions automatically and can't manipulate them.

A hub can connect more than two blockchains together. Cosmos itself is just one such hub. It is possible to use the cosmos technology to create a new hub that connects all the important blockchains and therefore makes Cosmos irrelevant, but Cosmos is already established and connects many big blockchains together.

Using a hub to transfer different crypto assets between their blockchains costs transaction fees that are being paid in the cryptocurrency of the hub; in Cosmos' case, this is the ATOM coin. The Cosmos hub itself also uses a proof-of-stake protocol where the ATOM coin needs to be staked in order to run a node.

The ATOM Token

While the Cosmos hub connects many different cryptocurrencies, and it has its own native token called ATOM. ATOM is used for:

  • paying fees and therefore prevent spam.
  • staking.
  • governance.

Cosmos has fees similar to Ethereums gas fees. They are proportional to the amount of computation power required by the transaction, and they get higher during times of high usage.

Cosmos uses proof-of-stake, and therefore, ATOM holders can freeze their coins to help process transactions and earn staking rewards. There is a 21-day un-freezing period if you choose to stop staking. This means that it is would take about 21 days for most long-term holders to dump their coins on the market should the price rise a lot suddenly.

Finally, the Atom token serves as a governance token for Cosmos, which means it can be used to vote on changes to the Cosmos hub, like which cryptocurrencies should be added. This means that ATOM tokens are basically shares of the Cosmos hub.

ATOM price performance from April 2019 to April 2021

ATOM price performance from April 2019 to April 2021

Is ATOM a Good Investment?

Currently, there are about 260.906.513 ATOM is circulation. There is no max supply and it has a yearly inflation rate of 7–20% depending on how much ATOM is being staked. This sounds off-putting but the inflation is being distributed as staking rewards. This means that holders that stake their ATOM are not losing any value; only holders that don't stake lose. This is done to incentivise people to stake.

The price of the ATOM token depends on how much Cosmos is used. With more adoption, there will not only be more transaction fees that need to be paid, but there will also be more demand to have voting rights on the hub. These are both use cases for ATOM.

As the world of DeFi is still in its early days and growing rapidly, there could soon be huge demand for a tool like Cosmos. The ATOM token could be a very promising long term investment, so long as you stake your holdings.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Krypton Currency

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