As the price of Ethereum, and usage of the Ethereum network exploded in 2021, the cost of the limited Ethereum block space soared. With the cost of a routine trade on Uniswap consistently reaching $100, all but the crypto elite were priced out. To make matters worse, as NFT’s exploded in popularity, hyped up mints would cause further network congestion.
The result was frustration among users, who began to loath the thought of touching the Ethereum mainchain. This frustration manifested itself in Twitter rants and many questions about when, and if, Ethereum would scale. All the while, the Ethereum community was working day and night to build bridges and rollups to meet network demand.
In many ways, these issues boil down to how Ethereum is built.
On Ethereum, the decentralized applications (dApps) run on the same virtual machine (the Ethereum Virtual Machine, or EVM), and effectively compete for limited block space. As noted above, it can prove difficult to run NFT minting, decentralized finance (DeFi), and crypto gaming all on the same blockchain. The cost of block space leaves certain users, and use cases, on the sidelines.
This can be counteracted with alternative layer 1 (L1) blockchains, or vertical scaling with layer 2 (L2) rollups, but middleware (bridges) is then necessary to create an interoperable system. The problem is that bridges often rely on centralized entities and are prone to exploitation. In recent days, Wormhole (a bridge between Solana and Ethereum) was exploited for $326.0 million (one of the largest hacks in history). This exploit brought even more attention to comments recently made by Ethereum Co-founder Vitalik Buterin, who noted his skepticism towards the viability of cross-chain bridges at scale.
While the market was focused on bridges, rollups, and “Ethereum killer” alternative L1 blockchains, a different vision of the future of blockchain architecture was quietly coming to fruition. This vision is the Cosmos “internet of blockchains” (or Interchain).
What exactly is Cosmos?
Cosmos is not one blockchain but rather a framework for creating blockchains. This framework is used by developers to build blockchains for specific use cases (application-specific blockchains). These blockchains connect to, and communicate amongst one another over channels (using the inter-blockchain communication protocol or "IBC"). This linkage of blockchains built is the Cosmos Network.
The framework for building blockchains is comprised of three fundamental pieces: Tendermint Core, Cosmos Software Developer Kit (SDK), and IBC.
- Tendermint Core: Byzantine Fault Tolerant (BFT) proof of stake (PoS) consensus algorithm that sequentially elects one validator in the network to execute a block. It is unique in offering fast finality, and in being programming language agnostic (ABCI protocol allows state machines to be written in any language); the EVM runs Solidity.
- Cosmos SDK: software developer kit comprised of many modules that give developers a framework to build app-specific blockchains (all code is open-source). Containing fundamental modules (governance, staking, IBC), and many others built by community developers over time, which are then used at developers discretion to build their app-specific blockchains as needed.
- IBC: protocol that sets a standard for app-specific blockchains to communicate, and thus, transact between each other. This creates interoperability.
Blockchains in the Cosmos ecosystem use Tendermint Core as their consensus mechanism and the Cosmos SDK modules to build their app-specific blockchains. The IBC protocol then allows all the blockchains in the ecosystem to communicate, and thus, interoperate. Blockchains in the Cosmos ecosystem are called zones; hubs are blockchains that have many IBC integrations, and thus, serve as central nodes in the network.
The Cosmos Hub
The Cosmos Hub is an app-specific blockchain built utilizing these fundamentals, which serves as a hub for the Cosmos Interchain. It is secured by the staking of ATOM tokens (PoS consensus via Tendermint). Historically, the Cosmos Hub has not been focused on building dApps on the Cosmos Hub, but rather the focus has been on providing a secure base for the ecosystem. Many protocols have also launched (via airdrop) to ATOM stakers. As the ecosystem has grown, discussions around what the Cosmos Hub could, or should, be have also evolved.
One of the main debates within the community is whether the Cosmos Hub should remain neutral by not adding specific functionality. While neutrality is important, others worry about the lack of value accrual to the ATOM token (and the threat to security that this could have). There are three important ideas on how ATOM could accrue value: shared security, dApps live on the Cosmos Hub, and IBC transfers.
- Shared security: this is unique to IBC blockchains. The idea is a blockchain can effectively rent validators from the Cosmos Hub (or other IBC blockchains that have their own validators) to secure their own blockchains (and thus, do not need to have their own PoS validators).
- dApps on the Cosmos Hub: The Gravity Bridge is a decentralized exchange which allows transfers between Cosmos and Ethereum. It launched in December 2021 with the potential to port to the Cosmos Hub. This has been contentious as having a DEX live on the Cosmos Hub could help drive value to the ATOM token but puts the Cosmos Hub in direct competition with other blockchains and/or dApps in the ecosystem.
- IBC transfers: Proposition 56 added an IBC router to the Cosmos Hub to help foster interoperability as the ecosystem expands. The idea is that it is not going to make economic sense for each app-specific blockchain to connect to every other blockchain within the ecosystem (routers are not free). Thus, by connecting to the Hub via IBC, the Hub can connect blockchains that otherwise would not be able to communicate. The proposition establishes a tax on these transactions, which will be set at zero initially to focus on growth but can increase in the future.
These are important issues that will demand a lot of attention as the ecosystem grows. That said, the Cosmos Hub sits at the center of the Interchain and helps connect the entire ecosystem.
App-specific blockchains that have been built using the Cosmos SDK, “plug-in” to the Cosmos Hub (for example, Terra and Osmosis). The major advantage of app-specific blockchains is they can be designed and built for their own respective use cases (as compared to EVM chains that are general purpose to ensure all dApps can develop and deploy to the same blockchain). The result is a “hub-and-spoke” architecture; the spokes in Cosmos are “zones”. Unique to Cosmos, each blockchain (or zone) has its own set of validators that ensure security of the blockchain; thus, each blockchain is “sovereign” (that is, unless utilizing shared security).
IBC is how these app-specific blockchains all interoperate, but what is IBC?
Think of each blockchain within the Cosmos ecosystem as a sovereign nation, and each nation would like to engage in trade with other sovereign nations. As in the physical world, shipping containers are used to conduct trade. Paramount for this trade network is a set of standards (a protocol) for shipping containers so that the ports and ships used are outfitted in a uniform manner. Without a uniform protocol, trade between nations (blockchains) would be near impossible. Within the Cosmos ecosystem, IBC acts as this protocol for shipping container standards. This effectively allows app-specific blockchains in the Cosmos ecosystem to transact amongst one another; the cargo is transported via relayers (who adhere to the IBC protocol for standards on how to transport the cargo).
This begs and important question, what are the security differences between EVM bridging and IBC transfer transactions?
When a user is attempting to transfer from chain A to chain B, this is how IBC works:
- User locks assets in contract on chain A
- A message with this transaction (and a proof) is relayed to chain B
- Chain B verifies the proof of chain A. Specifically: chain B verifies and validates the message happened on chain A and transaction details. Importantly, chain B assumes that if the message is indeed from chain A, then the message (and the block it is included in) is valid (Tendermint consensus finality allows this assumption to hold).
- If the proof is correct, the assets are unlocked on chain B
The important takeaway is that IBC transfers rely on the security of each chain in the transaction (chain A and chain B in the above example), rather than a centralized multi-sig (as is often the case with EVM bridges). Thus, in an IBC transfer, a user is trusting the security of the blockchains he/she is interacting with (and not middleware, like bridges).
Cosmos Architecture: Pros and Cons
The two most striking advantages of the Cosmos architecture are:
- Scalability: Cosmos app-specific blockchains scale horizontally (compared to vertical scalability on Ethereum). Each blockchain is built for specific purposes (whereas on Ethereum, all dApps deploy to the same general purpose blockchain). These app-specific blockchains, combined with IBC, enable a more secure scalability solution.
- Developer experience: developers have more degrees of freedom, as SDK modules can be used to build specific to their needs (rather than being constrained by the general purpose EVM environment).
Other benefits include the ability to better defend against MEV, and defensibility against potential competitors (app-specific blockchains with their own validators are more difficult to fork than a dApp running in EVM).
While app-specific blockchains open a world of possibilities, there are always tradeoffs in theworld of blockchains:
- Security: dApps that deploy to an EVM chain rely on the L1 blockchain for security. App-specific blockchain in the Cosmos ecosystem have their own PoS validators (and tokens to align incentives). Or, via IBC, blockchains can share security with hubs in the Interchain (thus, relaying on their validators for security).
- Synchrony: blockchains in the Cosmos ecosystem can transfer assets between one another but are not synchronous. In a synchronous network, there is a known upper bound on message delivery times and differences between speeds. IBC transfers are dependent on each blockchain in the transaction, and these blockchains run independently. As a result, IBC transfers are asynchronous.
- Developer complexity: the ability to use the SDK to build a unique blockchain is powerful and has the added benefit of making it more difficult to copy (fork). The downside is however, that it is then more complex.
Cosmos Ecosystem: IBC and Developer Activity
The adoption and usage of IBC is at the very core of the Cosmos ecosystem. The IBC protocol went live in February 2021, though Terra (the largest TVL blockchain in the Cosmos ecosystem) did not enable IBC until Fall 2021 via their Columbus-5 upgrade. Osmosis, another prominent blockchain built utilizing the Cosmos SDK, went live in June 2021 and has expanded IBC adoption.
In analyzing the health and growth of the Cosmos ecosystem, the number of IBC transfers is crucial; IBC transfers indicate the network effects the Cosmos Interchain is achieving. Late in 2021, IBC transfers in the Cosmos ecosystem went parabolic. This was on the back of Terra integrating IBC and Osmosis launching and subsequently growing to over $1.0B total value locked (TVL).
Another valuable metric is the amount of TVL locked in Cosmos ecosystem blockchains. The largest Cosmos ecosystem blockchains (including Terra, Osmosis, Cronos, and Secret Network) now have over $15.0B in TVL. This is a long way away from Ethereum with $122.0B TVL but ranks above darlings Avalanche ($10.5B TVL) and Solana ($7.8B TVL).
Developer activity is important for sustained long-term development. As the Cosmos ecosystem has gained traction in the market, it has also gained support among developers. A recent report from Electric Capital, that does a deep dive on developer activity, indicates that Cosmos ranks third among ecosystems in development (behind Ethereum and Polkadot).
The Cosmos Ecosystem Now
At present, the two most prominent live projects in the Cosmos ecosystem are Terra and Osmosis; Juno is more nascent but very promising.
Terra is a sovereign PoS blockchain built using the Cosmos SDK by Terraform Labs. Terra’s ambition is to create a decentralized financial ecosystem with the Terra algorithmic stable coin (UST for US dollars; EUT for Euro) as the currency for this ecosystem. To do this, Terra utilizes a dual token model with the Luna token absorbing volatility that algorithmically keeps UST stable with the US dollar. Effectively, if UST adoption expands, (thus, the demand for UST grows), then Luna is burned to mint more UST (all else equal, causing the price of Luna to rise). Given this, perhaps the best way to measure the success of Terra is the supply of UST.
Two important events have led to the proliferation of UST in late 2021: in September 2021, Terra integrated IBC; and Anchor protocol gained traction, offering 20% APY on UST stablecoin.
In early 2022, Terra has built on its momentum and signed a massive partnership with the Washington Nationals.
Osmosis launched in June 2021 and is a decentralized exchange (running an automated market maker, or “AMM”) that is not a dApp built on the Cosmos Hub, but rather a sovereign (own set of PoS validators for security) app-specific blockchain serving as a hub, in and of itself, for IBC communication.
As an AMM, Osmosis is unique in that nothing about the underlying structure of the AMMs is hard-coded. What this means is that there is a high degree of customizability, which allows for iteration-based evolution over time. In practice, liquidity providers (LPs) to Osmosis can create new pools with customized parameters (ex: the AMM curve, swap fees, and pool weights are all parameters that can be adjusted). Thus, instead of having to upgrade the protocol, or launch an entirely new version of the protocol, Osmosis positions itself to be on the cutting edge of constant AMM experimentation and innovation.
This customizable AMM model (and some juicy APR’s) has led to strong TVL growth for Osmosis. Interestingly, after OSMO (Osmosis’ native token), ATOM, UST, and LUNA are the tokens with the most liquidity in the protocol, the power of IBC in action! Coming in fifth on that list, JUNO.
Juno is an interoperable smart contract platform, built as an app-specific blockchain, serving as a hub within the Cosmos ecosystem. It is a community driven effort, aiming to maintain the neutrality of the Cosmos Hub by off loading smart contract development to Juno. What is unique about Juno is that it utilizes CosmWasm (Cosmos WebAssembly) smart contracts. CosmWasm is a module enabling WebAssembly (WASM) virtual machines in the Cosmos SDK. WASM serves as an intermediate programming language by compiling developers programming language of choice into a virtual machine. Importantly, this allows developers in the Cosmos ecosystem to develop applications in different programming languages (for example, Rust), previously unavailable within the Cosmos ecosystem.
Development on Juno is still very nascent. JunoSwap is the main dApp that is live, with current TVL of over $20.0 million. Despite the early stages of development, the JUNO token ranks fifth in total liquidity on Osmosis. The public market also sees the potential; the market capitalization of JUNO has surged to $1.1 billion (which puts it inside the top 100).
The Cosmos Ecosystem in the Future
There are currently a few exciting projects soon to launch within the Cosmos ecosystem: Umee, EVMos, and Stargaze.
Umee is an app-specific blockchain (built using the Cosmos SDK, with IBC integration) that aims to be a cross-chain lending and borrowing market. There are three pillars to the Umee project:
- Inter-chain leverage: be able to leverage assets on one blockchain to borrow on another blockchain.
- Ex: working with the Gravity Bridge, Umee’s vision is to allow a user to deposit ETH on the Ethereum blockchain, and mint uETH. That uETH could then be transferred to Cosmos, deposited in Umee, and used as collateral to borrow ATOM (or other assets). The ETH technically stays on the Ethereum blockchain.
- Multi-chain staking: the goal is to allow staking derivatives to be borrowed against.
- Ex: user stakes ATOM, gets uATOM, then can deposit that asset into Umee. Once deposited into Umee, the user could borrow UST against the uATOM.
- Cross-chain DeFi rates: this is more abstract, but Brent Xu (founder of Umee) started his career on Wall Street trading bonds. He is thinking about how the term structure of interest rates could be applied to crypto.
Umee is currently running a testnet and is planning on going live on mainnet February 15. The UMEE token will serve the PoS blockchain, and holders will handle governance matters.
EVMos is an interoperable smart contract platform, running an EVM development environment, and built as an app-specific blockchain utilizing the Cosmos SDK. The project's goal is to be the port of entry for Ethereum into the Cosmos ecosystem. It will be the first EVM to intregrate with IBC.
Similar to other alternative EVM L1 blockchains (Fantom, Avalanche, Harmony), developers will be able to deploy both new and existing EVM dApps to EVMos. What makes EVMos unique is being interoperable with the Cosmos ecosystem via IBC. As such, EVM dApps will be able to deploy on EVMos and interoperate with all the IBC enabled app-specific blockchains built in the Cosmos ecosystem.
EVMos is set to be a PoS sovereign blockchain secured by EVMos validators who stake the EVMOS token. The Rektdrop airdrop of EVMOS tokens to users of both the Cosmos and Ethereum ecosystems will launch the token (EVMos was initially funded by a grant from Cosmos).
One of the most fascinating things about EVMos is the novel approach to tokenomics. The fees paid for using the blockchain will be split 50/50 between the PoS validators and developers who have deployed dApps on EVMos. This creates, by web2 analogy, a “dApp store” in which developers will be rewarded based on usage of the dApp they have deployed.
EVMos plans to launch on mainnet on February 28.
To date, the Cosmos ecosystem has had limited NFT activity. This is largely because the necessary NFT infrastructure has been non-existent (no minting platform or NFT marketplace). Stargaze will soon change all of that.
Stargaze is a Cosmos SDK app-specific blockchain built for NFT’s. Stargaze aims to provide the Cosmos ecosystem with the tooling to mint, as well as the marketplace to buy/sell NFT’s on Cosmos. Compared to NFT marketplaces on other blockchains, Stargaze is unique in that (like other zones in the Cosmos ecosystem) it is its own blockchain.
To ensure a fair distribution, Stargaze conducted a liquidity bootstrapping pool on Osmosis for its token, STARS (there was also an airdrop to Cosmos ecosystem participants). STARS can be used to participate in governance, stake, interact on Stargaze, and mint NFT’s.
Stargaze plans to come to market on March 2, 2022, with a genesis mint of specific projects that have applied (Stargaze notes that, out of approximately 500 applications, the top 10 to 20 will be selected).