Greetings fellow Lefties, today we have a guest post from BowTiedPigeon. This post will be about Cosmos, and why applications specific blockchains are revolutionizing the token economy. A lot is going on behind the scenes, so this article aims to give some light on the ecosystem and its value proposition.
The vision of Cosmos
The vision of Cosmos starts with the premise that no single blockchain can satisfy all world applications’ needs since there will always be upper limits. So, to scale, you need vertical and horizontal scalability. Thus, the vision is to build a network of independent application-specific chains.
To achieve this goal Cosmos offers a set of modules (Tendermint core, Cosmos SDK and IBC) that allows you to build robust, customizable, sovereign blockchains. The first principle is that these chains need to be interoperable and to achieve this goal you need a standard layer-0 communication protocol. While everyone was claiming to be the next Efferium killer, the Cosmos contributors were busy building modules that everyone can use. Indeed, the Cosmos SDK is the most used framework by a wide margin. This incentivizes improvement of the shared modules and the creation of new ones. Link.
Now, I know this is left curve so I won’t get into the details of these tools but here’s a TL;DR:
- Tendermint Core: robust BFT robust consensus engine, fast finality. It can work even with 1/3 of the validators down. Time tested. Used also by other projects who are not built on the Cosmos SDK. See Anoma.
- Cosmos SDK: a modular framework for building a proof of stake blockchain. Luna, secret network, Thorchain crypto.com, Akash Network, Binance, Injective hub, Osmosis are some of the applications built with it.
- Interblockchain communication (IBC) protocol is a layer - 0 protocol that could be implemented between every PoS blockchain. You can see it as the TCP/IP for blockchains. Chains built using the Cosmos stack already have this capability. It is important to notice that, token transfers are just one of the many use cases of IBC. You could also send/receive data feeds, contract calls, commands, governance votes, etc. For instance, Injective protocol is using it to receive fully decentralized data feeds from Band protocol. This is live in production.
IBC at the heart of Interoperability
Since IBC was shipped this year on February 18, there are now 25 sovereign chains worth 60B+ connected to it. Osmosis was the first go-to-market product built around the protocol. Since then, Osmosis has been the clear leader in terms of IBC tractions between zones.
Due to its simplicity and adoption, IBC is being adopted also outside of Cosmos ecosystem too. Interlay is building an IBC bridge that will bring InterBTC into Cosmos DeFi. Link. Interlay is a candidate for the next Polkadot parachains. Composable finance, which already has a spot on Kusama’s parachain, has recently announced that they are building a substrate module of the IBC. Link. The objective is to provide an infrastructure that will connect the DOTSAMA with the Cosmos ecosystem. Astar is also building an IBC bridge on its stack. Link. Datachain has received a grant (link) from the Interchain foundation to build an IBC module in solidity. The aim is to connect private enterprise blockchains and help them reach Cosmos economy through IBC. This module will also be used to interconnect with Harmony, allowing IBC packets to flow in both ecosystems. IBC technology is also being built between Celo and the Cosmos Hub. Link. Octopus Network has also received a grant to build bridge infrastructure between Astar/Shiden and Cosmos chains which will support IBC. Link.
Hubs and zones design
Before we go straight to the good stuff, I’m sure there is a lot of confusion about what a Hub and zone are, so let me clear that out. In a nutshell, a hub is a blockchain that has bridges to other independent chains aka zones. The reasoning behind this architecture is because in world of thousands/million blockchains it makes little sense that every chain acts as a hub since it would require a lot of hardware and relayers to be implemented and maintained. To give an example, Akash network is specifically designed to offer cloud capabilities it can be seen more as a zone. It does not have to be connected with every chain. Only to the hubs. The Cosmos hub, on the other hand, focuses on bringing networks together through various bridges.
So, in this architecture ETH2.0, Solana, Polkadot, Kusama are all Cosmos zones by design. The difference with Polkadot GRANPA and ETH architecture, the Cosmos hub does not enforce shared security. The Cosmos stack allows you to use any coin accepted by the validators by governance to pay for gas. This design has created a healthy competition between all Cosmos chains to be base money. Luna for example is pushing really hard to archive this goal with UST. Nevertheless, it’s not a zero-sum game.
Atom’s Tokenomics
Let’s take a look at Atom’s tokenomics. At the moment, within the Cosmos hub there are 4 utilities for Atom: 1) as a medium of exchange 2) pay for gas fees 3) staking token (10 - 20% depending on the bonding rate) 4) Governance. From a distribution side, there are approx 284m tokens and the inflation rate is at 7.7%. The number of whale addresses with more than 1M dollar value is 127, and the total # of addresses is 615k. Unfortunately, there is no way to check the uniqueness of users.
Gravity DEX
Gravity Dex is MEV resistant DEX integrated on the Cosmos hub which has been live in June. The strategy of the launch though has not been great IMO. Tendemint inc, one of the core contributors of the hub, decided to launch the protocol without having an interface ready. Later in August they launched Emeris, the first interface for gravity dex which is still in beta, so not all the functionalities are available. Also, the farming module is not built yet, so the incentives to attract users are lacking. It will interesting to see how it will develop, but meanwhile, Osmosis growth as the interchain dex has been quite outstanding, to say the least.
Cosmos Hub: Future Products
In the near future (within Q1), the Cosmos hub aims to deliver Interchain security and liquid staking aka staking derivatives. Shared security will offer the opportunity to younger chains to loan security from the hub. This will translate into more rewards for atom shakers, based on the activity on these chains. Until this functionality is live and more data is available, the impact of this is hard to quantify. But, it is a good value proposition. Celestia is building the first modular data availability layer that will help archive this goal. For those of you who have read Vitalik’s latest paper Endgame, I suggest you also read this article. Staking derivatives will also alleviate the pain of opportunity cost while staking. This will increase the demand to secure the hub and free the assets to use in other DeFi protocol/chains in the interchain but also at other ecosystems. The future is bright IMO but the marketing of these products needs to improve.
Sovereignty matters
Now, to empathize the importance that sovereignty has in capturing value has in application-specific chains let’s take a look at Osmosis. Osmosis is a cross-chain balancer like AMM that uses Curve gauges to distribute rewards to LPs. Now, imagine if Uniswap had its own chain where the token is used to secure the network and as a utility token to pay for gas. Imagine also, if the UNI token was also the base pair of the protocol. Considering the all-time value traded (more than 500 billion) on the protocol and the fees generated, this scenario would’ve made UNI even more valuable than ETH. This is what osmosis is building with super-fluid staking and inter-fluid staking features. What super-fluid staking means is that you could use the LP token (say OSMO - SECRET) to stake it and secure the osmosis chain. By doing so, users earn LP rewards + swapping fees + staking rewards. Sounds good right? It’s about to get even better. With inter-fluid staking, suppose you have an OSMO - ATOM LP share, you could stake this LP token to secure the Cosmos hub and Osmosis chain at the same time. This is only possible due to the sovereignty and flexibility that the stack offers. These features are planned to come to life within February next year according to osmosis core dev Sunny. Another fundamental improvement featured by osmosis is solving the MEV problem from a consensus level using TSS. The transactions will be encrypted and broadcasted in the mempool. Eliminating MEV risks.
The main point is that interoperability + flexibility of having your own chain is extremely valuable. This is also why Jon Patten wants $MAGIC to have its own chain.
Osmosis growth
The quadratic fairdrop of the Osmo token to the Atom holders has created vibrant community around it. Since the launch in June, there have been more than 80 government proposals by the community. One of the outcomes is the creation of the Osmosis Marketing DAO. The continuous growth of users, new chains enabling IBC and the growth of the value traded has made it also a choice for new chains to create LBPs (Liquidity Bootstrapping Pool). This growth in activity has also made Osmo stakers and liquidity providers airdrop targets. The fees generated from the swap go entirely to LP. The daily fees generated by the protocol are higher than Polygon, Fantom, synthetics, and of course Cardano. LINK. The inflation of the Osmo token has been aggressive so far (70%), and surprisingly that has not had a negative impact on the price action. I would say the community knows the impact that superfluid staking will have on the demand for the Osmo token.
Side note: once these products are delivered, Osmosis could make use of CW (smart contract module) to build other products on top of the dex. This module is also used by Terra.
Side note: For those of you interested in a more detailed description of the Cosmos architecture check out this article from Paradigm. It is very well done. By the way, Paradigm has recently invested $21M into Osmosis. link.
Guide to Osmosis
To start, you will need to install Keplr wallet and create a new account. Create an account, connect to Ledger and you are good to go. Here is a tutorial if you need it. You can find $ATOM in all popular exchanges so get some and withdraw them in the Cosmos address. Your assets are now in the Cosmos Hub. To send to osmosis, you will need to make an IBC transaction. So, go to
https://app.osmosis.zone/
and connect your wallet. Then, go to asset and click on deposit and input the amount you want to transfer.
It should take around 10 seconds. Now, go to trade and swap your atoms for some Osmo.
ATOM – OSMO, UST – OSMO, LUNA – OSMO, LUNA – UST are the pools with the most liquidity.
OSMO – SCRT is also a good pool with nice 188% APR and double incentives. When designing your LP strategy, consider that Atoms coins have a high correlation. After providing liquidity, you have to bond your LP token to start earning rewards.
Exploring privacy
Secret network is a hub with private by default smart contract capabilities on the application layer. It has recently enabled IBC and, UST, OSMO, ATOM, DVPN could be wrapped into secret assets and do some secret DeFi. So, let’s do that.
Get yourself some SCRT and go to assets and click on withdraw. You are again using IBC to transfer an asset from Osmosis chain to secret network. Now, go to
https://wrap.scrt.network/
wrap some SCRT.
Now that you have sSCRT, you can use some of those secrets apps. On Sienna network for instance (app build on top of secret) it is now possible to do DeFi with monero pair, lol.
The Secret network has also bridges with Ethereum, BSC. Shinobi protocol is building a secret bridge with Bitcoin. This means that you could do private DeFi using secret preserving sBTC. Secret network also has capabilities to do secret governance (secret votes). This is live in production. As more regulation is introduced, the secret hub may represent an opportunity, and you will notice the friction in jumping from one chain to another is minimal.
Agoric & ZCASH
The beauty of the interchain is that there are also other chains innovating in parallel. I would expect other smart contracts chains such as Agoric to implement further utility for osmo lp token, borrow/mint some stables for instance. Alpha leak: Agoric will implement a MAKER DAO version for ATOM. Agoric is a smart contract chain built on the Cosmos SDK. The sc could be written in java scripts. I think this will be a focal point in welcoming the web2 devs into web3. Zcash has recently announced that it will transition into a PoS blockchain and it has chosen the
Cosmos SDK due to its interoperability features. Probably nothing. As you may have noticed, this architecture allows uniting different communities of users and developers.
Thorchain
Let’s talk Thorchain. While still technically in Chaosnet, permissionless cross-chain native swaps are working with 6 chains. Can it stay secure and can it scale? This will be a big challenge. There is a trillion-dollar opportunity to make this work and the community has shown resilience after the hacks IMO; this is by far the most impactful and most needed piece of infrastructure out there.
Doge, Atom, and Luna are among the assets that will be added next. ZCASH recently approved a grant for the integration. Monero swaps are on the roadmap too. Solana also. There is also progress with synthetics. If Thorchain makes it, implementing synthetics capabilities on top adds value since it dramatically reduces transaction cost, and you could also redeem at any time the synth with the underlying asset. As with any Cosmos SDK chain, Thorchain has IBC capabilities which will be enabled at some point. So, expect rune and synths to go interchain as well. The point here is not RUNE coin good or bad, but to show the power of the Cosmos SDK and IBC, and how the success of one chain brings value to the whole ecosystem.
Future chains coming to life
Gravity bridge built by Althea which is expected to launch soon. It will launch as a standalone chain secured by a set of 100 validators, making it one of the most decentralized bridges on the market. The bridge could be deployed on any EVM chain. The bridge processes transaction in batches which reduces significantly the cost. The Injective protocol uses a version of the gravity bridge in production in case you want to test it.
Side note: Injective is subsidizing the bridging cost and, there are some rewards to trade on the platform. It recently created an IBC channel with Luna too.
EVMOS (EVM hub) is also expected to launch in near future (end of January). This is particularly exciting since dApps could enjoy the composability with Ethereum tooling while leveraging interoperability through IBC.
Axelar Network is a decentralized network enabling cross-chain interoperability between all blockchain ecosystems. That includes Bitcoin. The stack offers a series of protocols through IBC, this will allow the developers to build dApps without sacrificing composability. The project is currently in testnet mode. They recently launched incentivized community program in case you are interested.
Pain points
Now, to cool you off a bit, let’s discuss some of the pain points.
1) The Cosmos SDK has limits on the number of validators that could join the network. Initially, the capacity was 100 validators, now has increased to 327.
2) Lack of tooling.
3) Composability of the UX.
4) Fungibility of the IBC assets. the same asset coming from different channels are not fungible.
5) There is no incentive on the protocol level to implement a relayer. So far, the infrastructure has been built by various projects and validators of the network. Delegating assets to them is the only way to give support.
6) During days of high congestions, like the recent crash, osmosis registered a new ATH in volume traded and some of the relayers went down. No funds were ever lost but this is of course a focal point for improvement.
Closing thoughts
Please let me remind you that the objective of this stack is not to evaluate the projects mentioned. Every one of these chains needs proper analysis. The aim was to showcase that:
1) Sovereignty is fundamental in designing application-specific blockchains.
2) Interoperability is key for these economies to exchange value without friction and that’s what IBC accomplishes.
3) The Cosmos SDK is the most adopted, and as the ecosystem grows, the incentive to build and innovate around this tool becomes bigger.
4) Horizontal scaling maters
If you have any questions or comments, feel free to reach me on the LCC discord.
Cheers Lefties.