ATOM Staking Report: Cosmos On-chain Data Analysis 2023

Key Insights & Takeaways

The Cosmos ecosystem has shown significant progress in 2023, with Cosmos Hub leading development and improvements that have affected the ATOM staking landscape.

• Delegation Program Phase 1 by Interchain Foundation (ICF) caused the biggest yearly boost in total stake, delegating 10 million ATOM in Q1 to 93 qualified validators for a 6-month period.
• ICF’s Delegation Program Phase 2 in Q4 had minimal impact on total stake change but led to a redistribution of 8.5 million ATOM from Phase 1. However, the number of verified validators increased to 102, and the delegation period was extended to a 12-month.
• The top three Cosmos validators (Everstake, Coinbase, SG-1) gained around 22 million ATOM, while the other two big validators (Polychain, Paradigm) left the network with a total unstake of 14,2 million ATOM.
• The active validators set expanded to 180, adding 5 in Q2, managing 386k staked ATOM.
• The launch of Replicated Security, along with Netron and Stride joining as consumer chains, lays the groundwork for the future of ATOM Security-as-a-Service on the broader cryptocurrency landscape. This move aligns the tokenomics of consumer chains with ATOM.
• The US SEC’s lawsuit against Binance in June made waves around all involved tokens. The price temporarily dipped after the charges stated that ATOM, among other tokens, should be classified as a security. However, the arguments supporting this classification were questionable.
• The Cosmos ecosystem welcomed native stablecoins, including a $150 million USDT issued by the Kava Chain and a $75 million USDC issued on Noble in 2023. This implies that a portion of that liquidity can be synchronized with ATOM tokenomics through staking and DeFi.
• Liquid staking in Cosmos witnessed notable progress led by the major liquid staking provider Stride. Upon joining Replicated Security and implementing Liquid Staking module, Stride achieved a tenfold increase in its ATOM Total Value Locked (TVL) in 2023, reaching a total of 4.3 million locked tokens.
• November witnessed the approval of proposal #848, a pivotal moment that initiated the first significant alteration in ATOM tokenomics by reducing the upper limit of ATOM inflation from 20% to 10%. This adjustment impacted staking, as inflation is a crucial parameter in the APR formula.
• In 2023, the count of Cosmos chains compatible with the Inter-Blockchain Communication (IBC Protocol) doubled, reaching 107. Also, significant progress was achieved in connecting non-Cosmos chains to IBC. Polkadot has already been released, while Ethereum and Avalanche are expected in 2024. These advancements are poised to fuel broader adoption within the Cosmos ecosystem.
• Cosmos airdrops have sparked a notable resurgence in community interest following the successful Celestia campaign in November, which delivered fantastic additional rewards to ATOM stakers. Estimated gains for ATOM delegators from the TIA airdrop translated into a profit ranging from 30% to over 100% of their total stake. 

The Everstake team crafted this report to keep the community in the loop with annual updates on the staking landscape in Cosmos Hub. The focus is on key events that notably impacted staking within the blockchain.

This is our fourth report in the series, and we're committed to keeping these materials coming. If you have any questions, feel free to reach out to our Cosmos Blockchain Manager on   X. 

If referencing or using materials from this report, please attribute Everstake and provide a link to the original.

INTERACTIVE ANALYTIC DASHBOARD FOR COSMOS STAKING ANALYTICS

The data for this report was generated with our in-house analytical tool, Slurp, developed by Everstake’s engineers using Python and PowerBi. Graphs and diagrams featured in the report can be replicated through Everstake's free analytic dashboard, enabling you to create the same visuals or personalized charts according to your preferences.

• Use the dashboard to fetch staking data for any period starting from the Cosmos Hub’s mainnet launch in 2019 until the present.
• Convenient filters let you specify the number of validators by rate, specific validators, commission rate, timeframe, and redelegation beneficiaries.
• Adjust the display of the charts to show data by days, weeks, months, or years.

ESSENTIAL DEFINITIONS

The primary terms given in this report are the following:

• Stake (Voting Power)—the number of staked ATOM;
• Staking Ratio—a percentage of a cryptocurrency locked by users for network security, which is counted by the formula staked ATOM/Total supply;
• Validators—node operators in Cosmos Hub which secure the blockchain by confirming transactions and producing new blocks;
• Delegators—ATOM holders who delegated their tokens to validators performing staking to get staking rewards;
• APR—annual percentage revenue provided by the blockchain for staking;
• Inflation—the percentage of ATOM yearly supply.

INTRODUCTION TO COSMOS STAKING

Cosmos earns the moniker "Internet of Blockchains" for its role as a decentralized network comprising sovereign blockchains that interact seamlessly. At the core of this network is Cosmos Hub. 

Before examining the state of Cosmos staking in 2023, it's essential to understand why Cosmos has garnered substantial attention.

WHAT IS COSMOS?

Cosmos is a decentralized network comprising independent parallel blockchains with a proof-of-stake consensus mechanism. These blockchains operate via the Tendermint consensus algorithm, known for its Byzantine Fault Tolerance (BFT). Most Cosmos chains are expected to migrate to CometBFT, Tendermint’s successor.

The network's core purpose involves establishing an ecosystem where interconnected blockchains can avoid the restrictions of the traditionally isolated ones. To achieve this, Cosmos facilitates the development of tailored blockchains using the user-friendly Cosmos SDK. SDK simplifies application-specific blockchain development, providing high security, performance, and adaptability.

The Cosmos Hub is the main hub or central connecting point for various blockchains within the Cosmos ecosystem.

A pivotal feature within Cosmos is the Inter-Blockchain Communication (IBC) protocol. This protocol empowers distinct Cosmos blockchains to exchange tokens and data seamlessly.

WHAT IS ATOM?

ATOM is a native token of the Cosmos Hub that serves for staking, liquid staking , governance, and paying transaction fees, thus providing the entire chain operation.

WHAT IS ATOM STAKING?

Staking ATOM involves locking up a certain amount of ATOM crypto tokens as collateral to support the security and operations of the Cosmos Hub. It is available through operating a node or delegating tokens to validators. In return, stakers receive rewards in the form of additional ATOM tokens. 

ATOM staking is a critical mechanism that helps secure the Cosmos network, encourage active participation, and align the interests of token holders with the network's health and growth.

STEADY RISE AND Q4 CORRECTION: 252 MILLION PEAK, 10 MILLION CORRECTION

The surge in staked ATOM saw a record yearly growth of 21%, accompanied by a remarkable 29.5% increase in the number of delegators, reaching 1,012,140 unique staking addresses.

A significant spike in stake occurred during Q1, driven mainly by ICF’s Delegation Program and inflow provided by Coinbase validator, totaling 27.7 million ATOM.

The steady increase in staking continued until August, reaching its peak at 252 million staked ATOM. However, a subsequent market downturn in Q4 led to a correction of approximately 10 million.

As the chart below shows, the spring months, spanning Q1-Q2, were the most successful in staking. The only months with a net stake outflow were October and November, with a loss of 3.16 million. 

However, that gap was covered in December, with a net increase of 3.26 million, partially due to the substantial stake brought by the Coinbase validator. 

Surprisingly, the main surge in ATOM stakers occurred in Q4, with 186,500 new staking addresses, reflecting 62,6% of the total yearly inflow. This is noteworthy despite Q4 being the least favorable regarding net stake inflow. 

This trend can potentially be explained by the price revamp that began in October, followed by positive sentiments about the Cosmos ecosystem and the release of the new Liquid Staking Module in September, providing new use cases for ATOM staking. Among them is the instant conversion of already staked ATOM into liquid staking tokens, avoiding the unstake period needed before.

Following the Cosmos Hub upgrade v12, which introduced the Liquid Staking Module, Stride , the primary Cosmos liquid staking provider, attracted around 1 million ATOM in September, which increased its Total Value Locked by 25% in several days. 

Another factor that could contribute to such disproportional growth is the assumption that some ATOM stakeholders flooded the chain with numerous spam accounts, each with a minimal stake (0.01 ATOM and less), which might be used to benefit from Cosmos airdrops or to affect Cosmos governance.

One such case can be associated with proposal #848 , where 127,500 (73,9% of the turnout) dust accounts were involved, which is atypical for usual voting in Cosmos.

Source: Smart Stake Analytics

POST-HALVING RECOVERY: YIELDS BOUNCE BACK DESPITE REDUCED APR

In 2023, the average monthly profitability of ATOM staking stood at approximately 19.65% per annum. 

The staking yield in Cosmos Hub is intricately linked to the Staking Ratio and inflation. Inflation increases when the Staking Ratio falls below 66.7%, impacting the Annual Percentage Rate (APR) growth. Conversely, inflation and decrease of benefits if the Staking Ratio surpasses 66.7%.

According to the Cosmos documentation: 

APR = inflation/Staking Ratio - 10% (Community Pool tax), where Community Pool tax stands for deductions made in favor of the Cosmos Community Pool.

The chart above shows that the highest APR values, exceeding 22%, were encountered in Q1 before a significant stake inflow in March-April. Subsequently, there was a gradual decrease in APR continuing until September, when it reached a local minimum of 18.51%. 

Afterward, the Staking Ratio dropped below 66.7%, leading to an increase in inflation and APR. This trend concluded on November 23 with a value of 19.9%.

On November 24, a noteworthy shift occurred due to the ATOM halving proposal #848. The proposal lowered the maximum inflation rate from 20% to 10%, narrowing the inflation change range to 7-10%, fundamentally reshaping ATOM tokenomics for the first time since the mainnet launch in 2019.

Despite the main formula not changing, the inflation shift led to APR's significant decrease by around one-third. But given that Staking Ratio kept lowering, APR recovered from 13,7% in November to 14,15% at the end of December.

Proposal #848 was backed by the assumption that ATOM, having high inflation compared to other tokens, faces greater volatility and dilution, hindering its growth in market cap and appeal to a broader audience. Despite the Staking Ratio remaining below historically high values, December witnessed a record inflow of delegators.

Despite reduced Cosmos staking rewards, the subsequent cryptocurrency market adjustment offset the impact. ATOM's APR in December only slightly decreased, around 10% in USD compared to November before Tokenomics changed. This difference is expected to be negated when ATOM reaches approximately $12.6.

Moreover, delegators shouldn’t overlook Cosmos airdrops, as nearly every new project joining the ecosystem seeks to engage the ATOM community by distributing its new tokens.

Thus, staking ATOM with a non-custodial validator like Everstake presents the chance to earn significantly more than just staking rewards, as exemplified by the successful Celestia’s airdrop in November.

DELEGATOR DYNAMICS: 53.91% OF THE TOTAL STAKE CONTROLLED BY ADDRESSES WITH 100K+ ATOM

Cosmos Hub remains a whale-dominant blockchain, and stake distribution barely changed, with 83% of total stake concentrated in groups staking in ranges: 

• 100,000+ ATOM
• 10,000-100,000 ATOM 
• <0.5 ATOM

Delegators staking above 100,000 ATOM now command 53.91% of the total stake, with their count increasing by 10 in 2023 to reach 193 addresses.

However, the influence of these whale addresses on decentralization through Cosmos Hub governance seems improbable. Their stakes are distributed among approximately 125 validators, and a significant portion of these addresses are associated with custodial validators such as Coinbase and Kraken. These custodial validators refrain from participating in governance proposals due to legal limitations, mitigating the potential threat to the network’s governance control.

PROPOSAL SURGE IN 2023: 60 VOTED-ON PROPOSALS, TWICE 2022'S COUNT

Having no single core team responsible for the chain makes Cosmos Hub unique in terms of governance. Occasional drama accompanies many proposals (referred to as Cosmos drama), underscoring a high level of decentralization.

In 2023, there were 60 voted-on proposals (with 51 passing), which is twice the number from 2022, excluding spam proposals. This marks the highest yearly rate throughout the chain’s operational period and accounts for approximately half of all governance proposals.

These proposals reached the required quorum of 40% of voting power, with 45 surpassing a 50% turnout, marking a considerable enhancement in community engagement within the governance process. 

The most-voted proposals in Cosmos in 2023

Source: Smart Stake Analytics

In 2023, several proposals garnered significant support, with the highest voting rate achieved by #848. ATOM Halving, setting the maximum inflation rate to 10%, with a remarkable 72.75% turnout. This proposal passed with a 2.6% dominance of supporters over opponents.

Other notable proposals with high turnout rates and overwhelming community support include:

• #804 v11 Software Upgrade to update Replicated Security and the Global Fee module – 64.5% turnout
• #843. Increase Global Fee minimum gas prices to avoid spam transactions in the Hub – 64,2% turnout 
• #844 Update Global Fee parameters – 64% turnout
• #845. Proposal to increase MaxBlockSize against peer-to-peer spams – 64,31% turnout

Notably, the last three top proposals took place in December, following the record-setting #848. That one sparked community awareness and encouraged active participation in governance. 

Besides, all top-voted proposals addressed issues affecting the Hub's performance and security, highlighting the Cosmos community's deep engagement in critical matters.

DIVERSIFYING RISKS: ATOM DELEGATORS OPT FOR VARIOUS VALIDATORS

A key decentralization feature in the Cosmos Hub is the ability for ATOM stakers to redelegate their assets to different validators.

Decisions on redelegations are frequently influenced by the validator's uptime rate, the quality of staking service, commission rate, brand recognition, slashing protection, and contributions to the network. Also, ATOM delegators may choose to distribute their stake among several validators to diversify risks of slashing and contribute to decentralization.

In 2023, stake redelegations rose by 25% to reach 45.7 million ATOM. 54,060 unique delegators initiated these redelegations, covering the entire active set of 180 validators. This signals an increased awareness of staking, enhancing network decentralization.

COMPOUNDING SUCCESS: MORE STAKED ASSETS, MORE RESULTS, PROVES EFFECTIVE

The straightforward "more staked assets, more results" formula proved effective for Cosmos Hub in 2023, with one-third of ATOM delegators acknowledging its success by adding assets previously accumulated from staking back into staking to increase their initial stake. This represents substantial growth compared to the previous year's average index of 18.14%.

During the first half of 2023, around 26.5% of stakers practiced reward compounding, showing stable behavior without significant spikes. 

However, the second half showed a growing trend, reaching an all-time high in September with 36.7% of restaking delegators. October set a record for total restaked rewards, amounting to 590,000 ATOM.

December slightly cut the uptrend with 28,8% of restaking delegators.

The Restaked delegators ratio depicted in the graph above represents all ATOM stakers compounding their rewards, whether manually or automatically. 

By putting ATOM received from staking back into staking you can amplify the compounding effect and boost your overall results. Thus, the base staking APR can be increased by up to 1,3%, aligned with the actual staking APR of around 14% per annum.

The automated method is possible with the Authz module, a legitimate component of the Cosmos SDK , which can be integrated into cryptocurrency wallets that support ATOM. 

Currently, this feature is available in wallets like Exodus, Leap, and Trust. Keplr wallet users can utilize auto-compounding by connecting with third-party platforms like yieldmos.com and restake.app. 

Everstake validator is compatible with all these solutions, enabling our delegators to begin auto-compounding anytime.

TOP 20 VALIDATORS DOMINANCE: 30 MILLION ATOM ATTRACTED WITH 61% STAKE SHARE

In 2023, the top 20 validators garnered approximately 30 million ATOM in staking, maintaining a steady 61% share throughout the year. This share has not notably changed, reflecting on December 31 a total of 149.3 million staked ATOM. 

Coinbase holds the highest voting power among the group, 22.3 million, while Upbit Staking has the lowest, with 3.3 million ATOM staked.

At the same time, the share of delegators staking with the 20 best cosmos staking validators declined by approximately 5% over the year, accounting for 47% of all ATOM delegators or 478,000 unique staking addresses by the end of 2023. 

This decrease signals a slight but notable decentralization trend in the network. 

REPLICATED SECURITY LAUNCH: A NEW ERA FOR COSMOS HUB IN 2023

The 2023 year opened a new chapter in the Cosmos Hub development with the launch of Replicated Security, the first iteration of Interchain Security. Two blockchains, Stride and Neutron, are already connected to the Replicated security and have all of their blocks and transactions successfully processed by Cosmos Hub.  

The essence of the Interchain Security concept is to align Cosmos Hub with supported chains, offering security-as-a-service. This approach aims to enhance the value of ATOM, as consumer chains benefit from the high-level security provided by the Cosmos Hub right from the launch of their mainnet.

Consumer chains achieve heightened security without forming their validator set, contributing a portion of profits to Cosmos Hub and enhancing ATOM's staking appeal. 

The Hub's validator set operates in parallel on the provider and consumer chains, sharing slashing risks. While maintenance expenses on the Hub are compensated through stakes, costs for consumer chains still need to be met due to the early development stage and the lack of a viable revenue-sharing model. 

With an average node operation cost of $600, each consumer chain must generate $1.3 million annually for the Hub's valset break even.

According to the data of datalenses.zone, both consumer chains together generated $72,300 in 2023. 

However, the revenue growth from Stride continues to increase and is currently around $1,300 daily, which, optimistically, can cover about 50% of the average validators’ costs in 2024. At the same time, a significant spike in Stride's TVL can elevate a revenue rate much more.

Conversely, Neutron, positioning itself as a Cosmos DeFi hub, presently yields minimal revenue. However, there's potential for compensation by partially distributing the unspent airdrop of NTRN tokens to validators. 

These assets, totaling 42.7 million NTRN ($47.8 million as of Dec 31, 2023), were directed to the Hub’s Community Pool in November, aligning with the initial terms of Neutron's addition to Replicated Security.

Another expected shot to bolster Interchain Security involves reducing validator operational costs, which is achievable through code improvements. Specifically, the proposed Atomic IBC and megablocks features in the roadmap presented by leading developers at Replicated Security Informal Systems and Hypha Worker Co-operative have the potential to enhance this technology significantly.

RESOURCE BOOST FOR COSMOS DEVELOPMENT: INITIATIVES UNVEILED FOR 2024

Cosmos Hub evidently needs decent resources for comprehensive development to move forward at a fast pace and technologically compete with other blockchains. 

There were several initiatives targeted at this matter: 

1. ATOM Accelerator DAO, a community-driven fund wholly funded from the Cosmos Hub Community pool, got approval from the Cosmos community via proposal #865 to prolong their mandate in 2024 with a total input of 975,800 ATOM. Their commitment to careful selection and sponsoring notable Cosmos projects can strengthen the ecosystem and ATOM.
2. Interchain Foundation will direct $26,4 million to the comprehensive development and adoption of the Cosmos Interchain Stack, covering CometBFT, Cosmos SDK and IBC Protocol.  
3. Under the ICF Delegation Program Cycle 2, released in December, 8,5 million ATOM of delegations have been provided for 12 months to 102 Cosmos Hub validators chosen for their contributions to the Hub.
4. Informal Systems and Hypha-Coop were granted approximately 1.12 million ATOM from the Community Pool to support the comprehensive development of Replicated Security and Cosmos software. Additionally, the funds will contribute to stewarding the Hub's upgrades and testnets in 2024.

ATOM PROSPECTS FOR 2024

The positive trend in ATOM staking witnessed in 2023 is expected to continue into 2024. This optimism is fueled by the favorable prospects for the Cosmos Hub, advancements in Cosmos SDK, the introduction of CometBFT, and the anticipation of significant airdrops specifically targeting ATOM, all contributing to increased staking activity.

As a result of this growing staking activity, the Cosmos Hub is likely to solidify its position as one of the most secure chains within the Cosmos ecosystem. This enhanced security becomes an attractive feature for other chains looking to align their tokenomics with ATOM through Replicated Security.

A noteworthy proposal introduced in December, labeled #864, proposes the concept of a community-driven Protocol Owned Liquidity managed by Atom Alignment Treasury. This initiative carries significant potential for generating substantial profits, which would be advantageous for the overall success of the Cosmos Hub.

The excitement surrounding the Cosmos ecosystem is translating into rapid growth for the IBC Protocol. A highly anticipated event for the year is the establishment of a connection between Cosmos and Ethereum through IBC, presenting boundless opportunities for both ecosystems. This connection is expected to bring about a substantial increase in liquidity.

In the coming year, governance is set to take center stage, unlocking the value of ATOM and indicating a mature involvement of the community in shaping the Cosmos Hub agenda.

Established in 2018, Everstake is a non-custodial staking provider. Our customer-driven approach and cutting-edge technical expertise have propelled us to the leading position among all staking validators, as recognized by Staking Rewards.

Addressing Cosmos Hub challenges, we released a Wallet SDK. This nifty tool makes it super easy to implement ATOM staking into non-custodial cryptocurrency wallets in just 1-2 days. 

And to make life easier for those delegating to us, we've put all the info and guidelines you need for ATOM staking on our website . We've covered all the essentials to make the staking process smooth.