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24 Mar 2023

Cosmos (ATOM): What it is & how it works

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This article is not intended to be financial, investment or trading advice. This article is for information and solely for education purposes. It does not protect against any financial loss, risk or fraud.

Written by Lydia Pallot

The current crypto market

Recently, regulators have been focused on crypto staking – a way of potentially earning rewards while holding onto certain cryptocurrencies.1

For context, in February 2023 the United States Securities and Exchange Commission (SEC) issued a $30 million fine against crypto exchange, Kraken. The SEC and Kraken have since come to a settlement; however, there have been no legal changes based on the view that the SECs suggested that staking products could be classified as a security.

Brian Armstrong, CEO of Coinbase, said in relation to their own Coinbase Earn program that:

‘Our staking product is not a security. Customers never turn their assets to Coinbase for instance. And we really just are providing a service that passes through those coins to help them participate in staking, which is a decentralized protocol’.2

Beyond being a product offering from certain crypto exchanges, staking is key for decentralized networks such as the Cosmos Network. The native token for Cosmos Hub is ATOM, and its key use case lies in staking.


What is Cosmos?

The founders of Cosmos describe themselves as ‘The Internet of Blockchains’3, but what do they mean by this?

Cosmos itself is a network of numerous independent blockchains, all of which are brought together by open-source tools to streamline transactions between them.4 Put simply, open-source code is code posted publicly online, meaning anybody can access or propose changes to it. Bitcoin and Ethereum are other examples of open-source systems.

This helps us to understand the objective of the Cosmos network, which is to empower developers. The network offers an entirely autonomous solution for developers building application-specific blockchains that interconnect. Meaning, unlike other blockchains, developers are not required to create smart contracts to exist on someone else’s chain.

What is a smart contract? A smart contract is like a traditional contract; it outlines the terms of an agreement. However, with a smart contract the terms of agreement are implemented as a code and stored on a blockchain like Solana or Ethereum.

Smart contracts enable developers to build apps on these blockchains, and these smart-contract-powered apps are known as ‘decentralized applications’, or ‘dapps’ for short.

Circling back, the Cosmos Network itself is an ecosystem of independent blockchains that developers can access. Each of the blockchains within the Cosmos network are called zones. The Cosmos Hub, a proof-of-stake (PoS) blockchain, was the first zone created and acts as an intermediary for all the other zones in the network.

ATOM and the Cosmos Hub

Cosmos (ATOM) is the native cryptocurrency of the Cosmos Hub and aims to secure the Hub’s interchain services5. Predominantly, there are three key areas that ATOM leverages to power the Cosmos Hub.6

  1. Spam-prevention mechanism
    ATOM are used to pay fees to prevent transaction spam. Fees can be proportional to the amount of computation required by the transaction.7
  2. Staking
    ATOM’s core use case is as a staking mechanism, helping to secure the Cosmos Hub as deposits in the staking process.8 The more ATOM you stake, the more you can earn in block rewards.
  3. Governance
    Once a holder of ATOM, you can vote on any changes proposed by the Cosmos Hub. This means that any proposals from the Cosmos Hub are governed by those who have a vested interest.












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