Cosmos: Staking in the Internet of Blockchains

Cosmos: Staking in the Internet of Blockchains

Understanding the unique features of the Cosmos ecosystem unlocks the potential of participating in a blockchain that enables users to stake and continually re-stake, leveraging its inherent characteristics for accumulation and compounding.

Early Western philosophers, known as cosmologists (from the Greek word "kosmos", meaning "order"), were driven by a profound curiosity about the universe's structure and underlying principles. They envisioned the cosmos as more than chaos; they sought to understand the universe as a structured entity with an inherent, rational order. While chaos may appear on the surface, they believed in a deeper interconnection and an underlying harmony in everything from the grandest galaxies to the smallest subatomic particles. This inherent order, the "cosmos" within, was the driving force behind everything.

The Cosmos ecosystem is a Layer 1 decentralized network of interconnected blockchains; its structure, similar to a solar system assemblage, enhances a “gravitational center” that enables chain interaction, in which each one has its own autonomous rule but can interact and exchange information between each other.

Cosmos is characterized by printing scalability to the network, enabling the chains to handle their transactions. It gives them sovereignty because every zone is customizable and can adapt to their needs. Still, simultaneously, the zones can communicate between them and build common forms of interaction, enabling interoperability between chains.

Cosmos Ecosystem

Cosmos' ecosystem empowers scalability by allowing every chain to handle its transactions autonomously, effectively "printing" additional capacity across the network that lowers the probability of bottlenecks and opens the space for better chain performance.

Each planetary system or “zone” within Cosmos operates independently as a sovereign system with its governance and tokenomics. This capability concedes complete control and customization to its developers and opens the zone to new opportunities.

Despite their sovereignty and independence, zones can interact with each other and communicate seamlessly through the Inter-Blockchain Communication (IBC protocol). This feature enables cross-chain interactions and data exchange, promoting collaboration and interoperability.

The Cosmos Hub, powered by the ATOM token, serves as the gravitational center for the network. ATOM holders can stake their tokens to validators who secure the network and validate transactions. This participation earns them staking rewards, incentivizing network security and governance participation.

The IBC protocol is essential in unlocking Cosmos' potential. It enables seamless asset and data transfer between interconnected zones, strengthening liquidity, data transactions, and application collaboration. Projects like Osmosis (decentralized exchange), Injective (derivatives trading), Celestia (interchain data availability), dYdX Protocol (decentralized margin trading), and THORChain (cross-chain liquidity facilitator) leverage IBC to create an interconnected and scalable ecosystem.

Staking in the Cosmos ecosystem

For this exercise, we will use the native Cosmos wallet Keplr to stake and re-stake the tokens in the ecosystem. Here's a detailed guide to the process:

• Install the Keplr wallet using the Cosmos website.

• Open the Keplr wallet extension. You can deploy the dashboard to have an extensive view of the wallet.

• Select the chain where your tokens are located (Cosmos Hub and Atom token, Osmosis and OSMO token, Celestia and TIA token, etc). In this case, the Cosmos Hub and Atom are selected for this example.

• Click on "Stake". You'll see a list of validators, and each validator's voting power and commission are displayed. 

• To filter and choose a validator based on proper research, we recommend going to Staking Rewards to deploy the list of validators and their reward rate, fee, performance, and participation percentage on the chain. You can delegate to multiple validators to spread your risk.

• If a validator belongs to the Top 10, you'll be advised to choose another one to avoid centralization. 

Now enter the number of tokens you want to stake (consider leaving some unstaked for transaction fees).

• Review the details (commission rate, estimated rewards, unbonding period).

• Click "Stake" and "Approve" to confirm the transaction in your Keplr wallet.

• In Staking Rewards you can use the calculator to display the long-term effect of staking, choosing different assets, validators, staking amount, and price scenarios over time.

Staking and re-staking as a compounding strategy instead of holding is advisable, as staking rewards in the Cosmos ecosystem can be claimed over time, and fees are low enough to make it profitable and practical.

For example, if you stake $10,000 at an APR of 15.74%. After 365 days, you'd earn a simple interest of $1,574:

Simple Interest: $10,000 * 15.74% = $1,574

However, if you re-stake your rewards every seven days (compounding), you'd earn slightly more due to compounding. Here's the breakdown:

• Week 1: You earn $1,574 / 365 days/week = $4.31 daily interest.

• Week 2: You earn the same $4.31 daily interest plus interest on the previous day's earnings (compounding). This adds up to $4.31 * (1 + daily interest rate) = $4.31 * (1 + 0.0043) ≈ $4.33.

• Week 52: to get the full year return you follow the following formula: new_total = investment * (1 + weekly_return) ^ number_of_periods

new_total = 10,000 * (1 + 0.1574/52) ^ 52 = $1,701.85

Note: We are assuming no fees here, as these vary based on many factors yet are generally low, currently being as low as 0.15% on an invested amount of $10,000 (13 cent to unstake across multiple validators in parallel and 2 cent to restake - this may vary). 

By re-staking your rewards every week, you earn interest on your interest, leading to a slightly higher total return at the end of the year. In this example, after 365 days with compounding, staking every 7 days, you'd earn somewhere below $1,701 instead of $1,574.

Therefore, even though the difference might seem small initially, the power of compounding can significantly increase your returns over time, especially with longer staking periods and higher APRs with different validators.

Remember, this is a simplified example, and actual returns may vary depending on the specific validator, fees, staking APRs and token price.

Exposure to Cosmos ecosystem.

Staking and re-staking in the Cosmos ecosystem are valuable ways to earn rewards and compound to increase ownership, participate in network governance, and contribute to its security. Both strategies offer an attractive way of active participation instead of just holding assets since Cosmos chains are known for their low transaction fees, making staking and re-staking more profitable and practical than other Proof-of-Stake (PoS) blockchains. Furthermore, the interconnection among chains enables the possibility of participating in different zones within Cosmos and diversifying the interaction in projects with their unique purpose and functionality.   

The Cosmos ecosystem offers a dynamic, interconnected landscape with attractive growth potential. The open and interoperable nature of the ecosystem and the increasing participation among chains have created a fertile ground for airdrops, where new projects often distribute their tokens freely to Cosmos stakers. This provides early access to high-growth opportunities within the blockchain space.