$ATOM's song
why the most hated token in the market might actually be the most attractive
Disclaimer: M31 Capital may hold positions in tokens mentioned below.
Universally hated, ATOM ironically represents one of the best investment setups (risk/reward) in the market today. This post will illustrate the token’s all-time low sentiment, the impressive growth of the broader Cosmos ecosystem, and why “this time it’s different”.
Cosmos & ATOM Refresher
Cosmos is not a blockchain, but a network of sovereign blockchains (app-chains or zones) connected by the IBC (Inter-Blockchain Communication) protocol. Instead of sharing blockspace with other applications (like most blockchains), developers can customize and deploy their own app-chain on Cosmos, which gives them more design flexibility (different applications have different performance/functionality requirements), better scalability / less blockspace competition, and maybe most importantly, a native gas token for applications to accrue value with.
ATOM is the native token of the Cosmos Hub, the first blockchain launched on Cosmos. For the last few years, the Interchain Foundation has mostly focused on developing the Cosmos SDK, or software development kit, which enables developers to customize and launch app-chains quickly & easily. This move was highly strategic: focus on application/developer recruitment first to grow network effects, then add more functionality to the Hub & its native ATOM token.
However, since the project’s inception, there’s been constant infighting within the community about the Hub’s role in the broader ecosystem and the token’s right to extract value. The Hub’s constant identity crisis has held the token back, in spite of the broader ecosystem’s exciting growth.
ATOM INVESTMENT THESIS:
Sentiment at an all-time low
Sentiment for the Hub is currently at an all-time low, which is evident in ATOM’s absolute and relative price performance over the past few years:
Performance vs. ETH has been down only for the past year and a half.
The token has missed out on the recent market-wide recovery,
and is down 18% over the last 12 months (BTC is up 120% over the same period).
Cosmos has become a top-tier Web3 ecosystem
The ecosystem currently ranks third in developer activity:
(Developer Activity | Artemis Terminal)
Has ~$50B in run-rate annual IBC transaction volume:
(Map of zones - Cosmos network explorer)
Has a total ecosystem market cap of $82B, $25B of which has been onboarded to the IBC:
(Market Capitalization - Ecosystem - Cosmos: The Internet of Blockchains)
The ecosystem includes industry leaders across major Web3 verticals, including blockchain infrastructure (Sei, Celestia, Dymension, Axelar, Neutron), DeFi (dYdX, Injective, Osmosis, Thorchain, Stride), DePIN (Akash, Pocket, Jackal, Syntropy, Cudos, dVPN, Soarchain) AI (Fetch.ai, Oraichain, AIOZ), and RWAs (Provenance, Noble):
Complete list: Market Capitalization - Ecosystem - Cosmos: The Internet of Blockchains
Combined IBC TVL of $12.8B, when including Provenance, quietly making it the second largest ecosystem by TVL. (DefiLlama and other data providers do not aggregate Cosmos TVL since it isn’t (yet) connected through a common token)
Why “this time it’s different”
Jae Kwon finally out of the picture
ATOM holders have made many attempts to increase value accrual in the past. The Hub community has historically been split into two factions: 1) those who want to keep ATOM’s design simple to maximize security (led by Co-Founder Jae Kwon), and 2) those who want to improve the token’s value accrual, specifically by leveraging the economic activity of the broader Cosmos ecosystem.
Below is a brief summary of the Hub’s contentious history:
(Discussing The Future of Cosmos Hube and Stride)
Despite continuous rejection, the Hub’s outlook completely changed in November 2023 when Proposal 848 (to reduce ATOM inflation from 14% to 10%) surprisingly passed. While not a huge win at face value, it was the last straw for Jae Kwon who immediately announced his intention to fork the Hub with his loyal followers. The new chain, AtomOne, is set to launch this month.
With Kwon finally out of the picture, the reenergized Hub community is determined to finally improve the value accrual, and perception, of the ATOM token. Although no significant changes have been made yet, there are many exciting ideas floating around the Hub Forum (ATOM Endgame - Moneyness, Security, Liquidity) and there will likely be an influx of potentially game-changing proposals soon.
Recent introduction of IBC fee abstraction by Osmosis
One of the most common Cosmos user complaints is the need to own native tokens from different zones in order for them to be interoperable. Osmosis, the leading Cosmos DEX, recently introduced a fee abstraction module, allowing users to pay for IBC gas in any Cosmos token (as long as the receiving blockchain has approved the upgrade). The module is still early days, but if it becomes widely adopted ATOM has a legitimate chance of becoming the default gas token of the IBC:
Bablylon integration supercharges the Hub’s shared security model
Another under-the-radar development is the Hub’s recent partnership with Babylon, the Bitcoin restaking protocol. The partnership, which launches testnet this month, will allow bitcoin holders to stake their BTC to secure Cosmos Hub ICS consumer chains which will:
(Bringing Bitcoin security to the Cosmos Hub with Babylon)
To sum it all up:
ATOM sentiment is rock bottom
Cosmos ecosystem has never been stronger
With Jae Kwon gone, ATOM governance can finally pursue meaningful value accrual (among other call options)
I don’t have a specific catalyst or price target; I simply believe the market is neglecting ATOM’s long list of bullish developments given its complication & contentious past. This dynamic gives the token a highly attractive risk/reward profile today (for context, the FDVs of ETH and SOL are currently 100x and 15x ATOM’s FDV). Given the favorable setup, I believe the Hub is one governance proposal away from a serious valuation re-rate.