Cosmos and inter-chain prospects under the new industry narrative

Topics covered in this study include:

1. The evolution of blockchain
2. ‘inter-chain’ vs ‘cross-chain’
3. Cosmos overview
4. Cosmos secondary market investment mapping
5. Cosmos primary market investment mapping (continuously updated)
6. Where did Terra Eco Top 20 Projects go after $UST Collapses
7. Discussion on Cosmos technology
8. Common myths about the ‘Hub-and-Zone’ model
9. Cosmos vs Polkadot

TL; DR

1. Cosmos app-chain has high requirements on the project team’s technical/tokeconomic capabilities. Compared with the smart contract dApps on single-chain, Cosmos app-chain has clear advantages for projects that reach a certain scale. Projects that stand out can be basically divided into two categories:1. The bottleneck & absent dApps in Cosmos ecosystem. The team is experienced in successful projects/has an official Tindermint background.2. Large-scale dapps that have already developed on a single-chain migrated to Cosmos to build app-chain.
2. With the standardization of the inter-blockchain protocol(network layer protocol), and having witnessed more and more security incidents of trust-based third-party asset cross-chain bridge, intern-chain standards at network protocol level will gradually be adopted by public chains. The future will tend to the era of inter-chain, and the head effect of the application layer will be more obvious due to the ever-expanding competition.
3. The reason why IBC is still unable to be adopted at scale is that its consensus engine, Tindermint, can support only isomorphic chains. In the future, the IBC inter-chain of heterogeneous chains will require a new consensus engine. The trade-off end of the cross-chain bridge(inter-chain) will be resolved with the support of IBC protocal by the heterogeneous chain. New IBC consensus engines are emerging one after another, and a large number of new potential projects are brewing.
4. The real market cap of Cosmos app-chains connected to IBC has not reached the general market expectation of the Cosmos ‘outbreak’ yet, but Cosmos is still worthy of long-term planning.
5. The beauty of Cosmos lies in its modularity, which provides infinite space for scalability and continuous optimization.
6. Polkadot is more secure for projects, and has a greater advantage for the team when the scale is limited in the middle and early stages; while Cosmos has more advantages for projects in the middle and early stages. Cosmos is suitable and more likely to produce a huge sub-ecosystem chain, but it is not recommended for small projects to build app-chains directly in the early days.

The evolution of blockchain

Gen 1.0 represented by Bitcoin blockchain in 2009, established a consensus mechanism that allows nodes in the network to collectively agree on the update of state of the Bitcoin ledger.

1. Lack of Turing-completenessMissing ‘loops’ for scripts, which lead to space-inefficiency(repeat ‘if’ statement)
2. Lack of stateUTXO can either be spent or unspent; there is no opportunity for multi-stage contracts or scripts which keep any other internal state beyond that.
3. Value-blindnessThere is no way for a UTXO script to provide fine-grained control over the amount that can be withdrawn.

Gen 2.0 represented by Ethereum in 2014. Provides an infrastructure layer for building dApps, emphasizing rapid development, providing shared security and the ability to interact for small dApps.

1. Lack of flexibilitySmart contracts are usually developed using a specific programming language that can be interpreted by the underlying virtual machine. These programming languages are often immature and inherently limited by the virtual machine itself.
2. Limited performanceThe smart contract needs to be compiled by the VM first, which causes the performance reduced by 10x.
3. Limited sovereignty of dAppsSmart contracts share the same underlying environment, resulting in limited sovereignty of dApps and eventually replaced by the governance of the underlying blockchain.

Gen 3.0 represented by Cosmos in 2015. IBC (inter-blockchain protocol) enables dApp projects to build their own application-specific chains and realize native interoperability between blockchains, becoming the “Internet of Blockchains”.

The industry is generally optimistic about app-chain ecosystems such as Cosmos. The following figure attempts to objectively compare the advantages and disadvantages of app-chain compared to the traditional smart contract single-chain:

1. Single-chain can provide shared security for dApps, while the security of the app-chain represented by Cosmos needs to be guaranteed by itself.
2. It is relatively easy to build a smart contract program on a single-chain, while building an app-chain is highly complicated and requires determination of third-party PoS validators. The time and labor costs are relatively high. The requirements for the technical ability of the project team are relatively high.
3. The tokeconomic of single-chain ecosystem is relatively stable, while the tokeconomic stability of the app-chain depends on the weakest chain, like Buckets Effect or Cannikin Law. Therefore, the requirements of auditing and tokenomics design for the project are relatively high.

1. App-chain enables the project to capture the value of MEV and transaction gas fee. However, in terms of the project on single-chain, the value is intercepted by the underlying chain.
2. App-chain allows the project to have complete sovereignty. However, the sovereignty of single-chain dApp may be inconsistent with the sovereignty of the underlying chain, and thus, there is a possibility of conflict.
3. Maximize throughput utilization, and greatly improve dapp performance compared to the single-chain.
4. Combinable modular design. No restrictions on programming language, consensus mechanism, VM, etc.
5. The encryption can be customized, and the security can be controlled independently.

In summary, Cosmos app-chain has high requirements on the project team’s technical/tokeconomic capabilities. Compared with the smart contract dApps on single-chain, Cosmos app-chain has clear advantages for projects that reach a certain scale. Projects that stand out can be basically divided into two categories:

1. The bottleneck & absent dApps in Cosmos ecosystem. The team is experienced in successful projects/has an official Tindermint background.
2. Large-scale dapps that have already developed on a single-chain migrated to Cosmos to build app-chain.

’Inter-chain’ vs ‘Cross-chain’

Blockchain industry leaders generally believe that the future trend will be ‘inter-chain’ rather than ‘cross-chain’, and will develop towards a more modular design, based on factors such as security, block time, and single-slot finality.

1. dApps need to be deployed in each independent ecosystem and actively tracked and managed.
2. dApps require a multi-chain strategy for each deployed ecosystem.
3. ‘Cross-chain’ is achieved through a third-party trust-based cross-chain bridge.

1. dApps only need to be deployed in one ecosystem, and could achieve cross-ecosystem interoperability.
2. No need for a multi-chain strategy anymore.
3. ‘Inter-chain’ is implemented through a network layer protocol similar to HTTPS, just like Cosmos IBC Protocol. No need for a trust-based third-party cross-chain bridge.

In summary, with the standardization of the inter-blockchain protocol(network layer protocol), and having witnessed more and more security incidents of trust-based third-party asset cross-chain bridge, intern-chain standards at network protocol level will gradually be adopted by public chains. The future will tend to the era of inter-chain, and the head effect of the application layer will be more obvious due to the ever-expanding competition.

Cosmos Overview

Cosmos is a blockchain network composed of independent parallel blockchains, with Tindermint as consensus engine, and providing the Cosmos SDK as development framework and IBC inter-chain protocol.

Its goal is to simplify the creationg of blockchains, create a network environment where blockchains can be interoperated, solve scalability problems of blockchains and reduce gas fees.

The statistical date of the above chart data is June 30, 22. It can be seen that the Cosmos IBC Market Cap, which open up the ‘blockchain internet’, is only $6.9B. It has not yet reached the general expectation that Cosmos will explode. The majority of Market Cap of Cosmos is from Binance Chain, which is not an IBC app-chain. However, Compare with other alternative layer1, Cosmos IBC ecosystem still ranks at the top. Cosmos is still worthy of long-term planning.

Cosmos secondary market investment mapping

Investing in the secondary market in the early stage of the bear market may not be a good choice, but Cosmos is worth a long-term planning.

The most noteworthy project is Evmos. The narrative that Cosmos achieves EVM compatibility means that applications of EVM chains such as Ethereum can seamlessly interoperate with Cosmos applications. The most intuitive example is that users can use the MetaMask wallet directly to operate $EVMOS and other Cosmos tokens.

However, Nomad, as the only official canonical bridge of Evmos, lost all stablecoin liquidity after the hack. TVL lost $8.8m and only $2M remained. According to the AMA of Evmos, the trust of Evmos ecosystem projects towards Evmos was seriously damaged. As a strong competitor, Kava also focuses on EVM co-chain, and as a Defi Hub, it has a TVL advantage reached $320M. The next steps of Evmos are crucial to the retention of ecosystem projects and users.

Precisely because of differences in judgment on Evmos. Now may be a rare time to make a plan towards Evmos(either bullish or bearish).

In my opinion, Axelar is the best among all trust-based third-party cross-chain bridge. Although I believe it will be ‘inter-chain’ instead of ‘cross-chain’ in the future, but in terms of the current ‘cross-chain’ bridge performance, Axelar has the most potential to become an inter-ecosystem hub. Axelar and LayerZero are two models worthy of separate analysis, please see the author’s follow-up article.

Broader Vision of Cross-Chain — Analysis of Axelar and LayerZer…In our July ’21 article ‘What Does the Ideal Cross-Chain Bridge Look Like’, we focused on the trade-off among different asset cross-chain bridges. Here, we made two points regarding the future of cross-chain bridges:mirror.xyz

Osmosis is the Swap Hub of Cosmos, and its token $OSMO could reflect the fundamentals of Cosmos better than the official Cosmos Hub token $ATOM (because Cosmos officials intentionally suppress the construction of its official chain Cosmos Hub, and $ATOM has no obvious value capture).

The projects marked in yellow in the above picture are the Cosmos projects that the author thinks are worth paying attention to. For the analysis of other projects, please refer to the author’s follow-up articles.

Cosmos primary market investment mapping (continuously updated)

Some good primary market projects that the author has come into contact with are listed as follow:

dYmension: Relying on the IRC (inter-rollup chain) SDK of the Cosmos ecosystem, build rollups for the L1s in the Cosmos ecosystem to improve scalability, which in turn supports ultra-high TPS. In addition, dYmension allows projects to build app-rollup that are much less difficult than app-chain.

Abucas: A cross-chain bridge similar to LayerZero, while optimizing security compared to LayerZero, and is lightweight enough without relying on an intermediate trust chain compared to Axelar. If you are optimistic about the third-party cross-chain bridge, Abucas is an early cross-chain bridge project that is likely to success after LayerZero and Axelar.

For specific analysis of other projects, please refer to the author’s follow-up articles.

Where did Terra Eco Top 20 Projects Go After $UST Collapses

After the collapse of Terra due to $UST, despite different levels of supporting policies for migration in other public chain ecosystems, except for 5 of the Top 20 that are no longer in operation, the rest remain in the Cosmos ecosystem. More than half of the projects choose to remain in Terra 2.0. Three projects migrated to Cosmos sub-ecosystem Juno, namely Loop Finance, ApolloDao, and Kado. Two projects are building independent app-chains — Mars Protocol, Kujira, and after announcing the construction of app-chains, the token prices in the secondary market have soared.

Discussion on Cosmos technology

Based on the layered structure of blockchain and computer network, compared with Ethereum and Bitcoin, the biggest change that Cosmos brings to Crypto is the innovation of network layer and data layer — IBC protocol.

As defined in the Cosmos white paper, the IBC Protocol is an interoperability protocol for communicating arbitrary data between arbitrary state machines. Almost all actions of the blockchain are based on state transition functions. IBC Protocol was born for information cross-chain rather than just assets. It is similar to the handshake in HTTP network protocol.

Compared with the traditional cross-chain third-party cross-chain bridge, regardless of the security mentioned above, for performance, LayerZero, which is considered to be the best performance cross-chain bridge, is selected for comparison. According to the white paper, Hub of IBC will synchronize the status with Zone in real time (note that there is no distinction between Hub and Zone, it can be understood that the status of different chains is synchronized in real time), so the cross-chain is “passive”.

On the other hand, with LayerZero, Endpoint in chain A needs to initiate a request. After the oracle confirms the protocol header and the relayer confirms the transaction request, chain B will process the remaining transaction process, so the cross-chain is “active”.

Because there is no need to wait, “passive” has inherent performance advantages over “active” processing. However, the reason why IBC still cannot be adopted on a large scale is that its consensus engine, Tindermint, can support only isomorphic chains. In the future, the IBC cross-chain of heterogeneous chains will require a new consensus engine. The trade-off end of ‘cross-chain’, the author believes, will be solved with IBC protocols for heterogeneous chains.

According to the Cosmos white paper, Tindermint, as a consensus engine, is an important module of Cosmos as a modular blockchain ecosystem. It ensures that the same transactions are recorded on each machine in the same order. Expose the Application Blockchain Interface (ABCI) to developers, separate the business layer from the base layer, and enable developers to focus on business.

However, the limitation of Tindermint is also obvious: the header verification cannot be reused by heterogeneous blockchains with different headers and different consensus protocols, so it is not compatible with heterogeneous chains.

Excitingly, New IBC consensus engines are emerging one after another, and a large number of new potential projects based on these are born, such as Ethermint and Evmos: native interoperability with the EVM chains, and native interoperability with IBC.

The beauty of Cosmos is modularity, which provides infinite scope for scalability and continuous optimization. Even though Tindermint has limitations, the Cosmos SDK for developers does not bind the consensus engine to Tindermint, nor does it bind the IBC Protocol, creating infinite possibilities for the birth and adoption of a new consensus engine and a new network layer inter-chain protocol.

Common myths about the ‘Hub-and-Zone’ model

There are some excessive interpretations and confusions about the Cosmos ‘Hub/Zone’ model on Twitter.

According to Cosmos white paper, at the model level, Hub refers specifically to the chain, while Zone refers to the shard of the chain. On the practical engineering level, according to developer feedback, there is no actual distinction between Hub and Zone, both refer to app-chain, and Hub is more of a reputation for the big app-chain.

Cosmos vs Polkadot

Also as an app-chain ecosystem, Polkadot is as popular as Cosmos, and was compared with Cosmos.

The author compares the characteristics and relative advantages and disadvantages of the two ecosystems, supplemented by data, and tries to compare the trends and applicable scenarios.

Cosmos adopts the ‘Hub-and-Zone’ model with independent security, and each chain needs to ensure its own security.

The advantage of this is that when the security of one chain is destroyed, it will not affect the security of other chains directly, but it requires higher security capabilities of app-chain team. States are controlled by the app-chain itself. App-chain is relatively independent.

Polkadot adopts the ‘relay-chain/para-chain’ model. The shared security is guaranteed by relay-chain. The requirements for the security of the para-chain project are relatively low. But once the security is destroyed, it will directly affect the entire Polkadot ecosystem. In addition, the relay-chain has the final say in the state transition of the para-chain. The membership is higher. Polkadot is more centralized and closed than Cosmos.

In summary, Polkadot is more secure for projects, and has a greater advantage for the team when the scale is limited in the middle and early stages; while Cosmos has more advantages for projects in the middle and late stages. Cosmos is suitable and more likely to produce a huge sub-ecosystem chain, but it is not recommended for small projects to build app-chains directly in the early days.

Conclusions

1. Because the construction of app-chain has higher requirements for project team, which limits the wide adoption of Cosmos currently, it may be difficult for Cosmos to become the next-generation narrative of blockchain directly.However, IBC Protocol, which represents the cross-chain protocol at the network level, as the network standard of the “blockchain Internet”, may subvert the traditional trust-based third-party cross-chain bridge, making the end of Crypto an ‘inter-chain’ rather than a ‘cross-chain’.
2. The future will be ‘Inter-chain + IBC’, at least not just ‘multi-chain + asset bridge’.
3. The consensus engine Tindermint has the limitation of isomorphic chains, but it is expected that innovative consensus engines like ‘Ethermint’ will be incubated in the future, even ‘WASMmint’, ‘Movemint’, ‘ZKmint’, ‘OPmint’. And represented by them, a large number of potential ecosystems will emerge, making the heterogeneous ‘blockchain Internet’ truly possible. These potential projects are worth looking forward to.

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