Monday, July 22, 2024

Are Cosmos’ ecosystem growth and roadmap enough to sustain ATOM’s current 50% monthly rally?

In September 2022, Interchain Foundation, the team behind Cosmos’ development , introduced the Cosmos ATOM 2.0 whitepaper. The document proposed significant changes to Cosmos’s design, including a tokenomics upgrade to fund the Cosmos ecosystem development and reduce ATOM inflation.

While the whitepaper launch acted as a bullish catalyst for ATOM price, the community vote to pass the proposal eventually failed, primarily because of its enormity. Some community members wanted to take a measured approach to each development feature listed in the whitepaper, starting with Interchain Security in Q1 2023.

Interchain Security will enhance the value accrual position of ATOM as a modular chain. New blockchains will be able to borrow the security from it and pay Cosmos Hub validators. 

Despite the rejection of the Cosmos 2.0 whitepaper, the team continues to work on the upgrades mentioned in it. The other improvements in tokenomics will be introduced as a separate proposal to the Cosmos community.

The first week of February witnessed a technical bullish breakout in ATOM’s price. If buyers continue to accumulate, there’s a solid chance of a short-to-medium trade rally.

Interchain Security to bring more value to ATOM stakers

The Interchain Security implementation remains the most crucial breakthrough in accruing value to ATOM holders. The feature will allow independent blockchains, called consumer chains in the Cosmos ecosystem, to rent security from the validators of Cosmos Hub. Existing Cosmos SDK-based blockchains can choose to be consumer chains too. This will bring additional staking rewards for ATOM holders.

The Cosmos team concluded its developers campaign called “Game of Chains” to test consumer chains before rolling out the mainnet version of Interchain Security. They will implement this feature in Cosmos’s Lambda upgrade (v9) some time in February.

Number of blockchains that are part of IBC. Source: Interchain Foundation

Development of Cosmos ecosystem and IBC expansion

One of the most prominent consumer chains will be the introduction of Cosmos-native USDC by Circle. The stablecoin will enhance the liquidity of Cosmos’s DeFi ecosystem. 

The Cosmos SDK is used to construct many popular blockchain and cryptocurrency projects, such as Binance DEX, Kava, Terra and more recently, dYdX. Until now, ATOM didn’t accrue any value from this implementation. However, slowly this will change with Interchain Security and other developments with cross-chain implementation.

The Inter Blockchain Communication (IBC), which enables interoperability between Cosmos-based blockchains, showcased impressive growth in 2022. Moving forward, the project’s team will implement the Interchain Scheduler, providing an open and transparent MEV marketplace for cross-chain transactions. It will look to standardize ATOM as the default gas token for IBC transfers, though the fees can be paid in multiple tokens.

Number of blockchains that are part of IBC. Source: Interchain Foundation

In the future, the IBC will help the Cosmos ecosystem expand to other blockchains, such as Ethereum, Near, and Polkadot, improving liquidity and traffic with it. The change in ATOM’s tokenomics with Interchain Allocator to fund ecosystem growth and eventually reduce inflation will also be implemented in time.

Related: Injective launches $150M ecosystem fund to boost DeFi, Cosmos adoption

Since the beginning of 2023, ATOM’s price has increased by 61%, which can be partly attributed to the broader rally in the crypto market. Nevertheless, the gains were still larger compared to Bitcoin (BTC) and Ethereum (ETH), which gained 48.10% and 43.20%, respectively.

Coinglass data shows a steep spike in the open interest (OI) volume for ATOM futures orders to $92 million from $65 million, setting the token up for increased volatility. The funding rate and long vs. short ratio suggest that the interest was primarily in long orders. An over-leveraged futures market can provide headwinds for buyers as sellers will look to run the stops of long players.

Open interest volume for ATOM. Source: Coinglass

The weekly chart of ATOM/USD broke above the 50-period exponential moving average (EMA) at $14.20. The metric has acted as a pivotal level for trend reversals. If the price closes above the 50-week EMA at the end of February’s first week, technical buyers will look to accumulate ATOM for a swing trade.

The bulls will target the resistance levels at $17.20 and $25.20 if the uptrend continues. On the downside, long term support lies at $6.50 and $3.10.

ATOM/USD weekly chart. Source: TradingView

The Cosmos community has long anticipated the Interchain Security feature. Thus, the token has a higher chance of sustaining its breakout, at least leading up to the launch. 

The growth and the proportion of yield it brings will either keep the bullish momentum alive before the Interchain Foundation moves to the next update or see a fading momentum until the proposal to improve ATOM emissions is finally passed by the community.