Market Analysis

Cosmos governance has approved the v9-Lambda upgrade, including interchain security and possibly kicking off a “virtuous real yield cycle.”

The Cosmos community has approved a vote to add “replicated security (RS)” to its chain, with 99.99% of votes in favor of the motion. The much-awaited upgrade is set to go live on March 15, 2023, with the v9-Lamba upgrade. 

RS is the first version of Cosmos’s Interchain Security (ICS) feature, allowing blockchains in the Cosmos ecosystem to share validation resources for improved security.

Only protocols approved by Cosmos governance will be added as consumer chains in the upcoming update. Eight consumer chains are potential candidates for selection, including Neutron, PolymerDAO, Duality, Stride, Simply Staking, FairBlock and Comdex.

Cosmos’s interchain security could start a virtuous real yield cycle

The Replicated Security feature will distribute up to 25% of the consumer chain fees to Cosmos Hub stakers. The protocols can also allocate a portion of token inflation and revenue streams to Cosmos (ATOM) stakers.

The ICS implementation allows consumer chains to focus entirely on the growth of the network’s economy, as Cosmos Hub’s validators provide reliable security against 51% attacks and double-spending. This will bring additional yield to ATOM stakers and allow consumer chains to optimize for growth.

The staking reward for ATOM after adjusting for inflation is 6.82%, with 24.37% annual returns. The additional consumer chain yields will improve ATOM holders’ annual yield, encouraging more buying and staking activity.

Neutron is a smart contract platform that will likely be the first consumer chain to use the new ICS feature. Avril Dutheil, general manager of Neutron, told Cointelegraph:

“As a result [of RS], Neutron does not have to inflate the Neutron (NTRN) supply continuously to keep validators honest or pay staking yield to governance participants since they do not contribute to securing the network.”

Dutheil added, “Instead, NTRN can afford to have a fixed supply, a release schedule indexed on on-chain activity and constant buy-and-burn pressure from Neutron’s three streams of revenue.”

This will allow the consumer chains to focus on the blockchain’s real yield and bring additional yield to ATOM stakers as the price increases. Consequently, high yields for staking ATOM will motivate more users to purchase and stake ATOM. Hence, potentially giving rise to a virtuous investment cycle in the Cosmos ecosystem.

Bullish Cosmos ecosystem growth appears

The Cosmos ecosystem has grown significantly in the last two years as more chains use the Cosmos-SDK and Tendermint consensus mechanism to spin up application chains. Implementing improved cross-chain features like RS will allow blockchains to benefit from the liquidity in the Cosmos ecosystem.

Circle’s announcement of a native USD Coin (USDC) blockchain on Cosmos will likely be a potent catalyst to improve the ecosystem’s liquidity. Dutheil mentioned multiple decentralized stablecoin projects like Agoric’s Inter Stable Token (IST) and Kujira’s USK, which look to replicate the success of Ethereum-based decentralized stablecoins on Cosmos. It will also help establish ATOM as a reliable collateral and improve its value proposition. Dutheil added,

“Whether or not these decentralized alternatives will succeed in scaling their offering across the Interchain remains to be seen, but at least the building blocks are there to finally bring a well-integrated DeFi ecosystem to Cosmos.“

Technically, the ATOM/USD pair has formed a bullish ascending triangle pattern since forming the June 2022 lows at $6. A breakout from the triangle around the $14 and $15 resistance levels could see the asset tap 2022 bearish breakdown levels around $33, with a slight chance of tapping the all-time highs around $46. However, the bullish thesis would be invalidated if the price breaks an falls below the triangle’s base, currently hovering around $10.

CryptoQuant data shows that ATOM’s relative strength index and Stochastic indicator are in the oversold category, suggesting a possible trend shift.

While a bullish ATOM thesis looks plausible, its realization will depend on the usage and whether or not consumer chains can bring meaningful returns to ATOM stakers.

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