Author: CloudY, Shawn

Editor: Vincero, YL

Review: Crystal

Introduction: Why Cosmos?

2021 is a year full of surprises for the blockchain industry. We have witnessed Bitcoin reaching its historical ATH of 69,000, the ingenuity of DeFi2.0, the flourishing of NFTs, and the initial signs of DAO. Everything is built on the blueprint of the world computer described by Ethereum; and with the Gas fee problem brought about by the high usage rate of Ethererum, the current situation of Ethererum's value spillover has been caused, and the cross-chain interoperability problem that was not considered when Ethererum was originally designed has also become a problem criticized by later generations.

The first principle for a new technology or product revolution is to improve efficiency and reduce costs, otherwise it cannot be popularized and commercialized. At present, the entire industry is still in the stage of building infrastructure: web3.0 is the infrastructure of the metaverse, blockchain and cryptocurrency are the infrastructure of web3.0, Bitcoin is the revolution of blockchain 1.0, Ethereum is the revolution of blockchain 2.0, and now, Cosmos is the revolution of blockchain 3.0 - the infrastructure of the "blockchain interconnection" multi-chain universe.

This report will start with the current status of Ethereum and interpret the development trends of Layer1 and Layer2 in the current blockchain world. It will introduce Cosmos, and then combine our comparative analysis of Cosmos/Polkadot design, and finally give our future outlook for the Cosmos ecosystem.

  • Ethereum with overflowing value, a foreseeable multi-chain future

With the rapid development of the blockchain field, a large number of on-chain interaction demands have caused Ethereum to be too crowded. The high gas fee has prevented a large number of users from entering the Ethereum mainnet. Ethereum's limited block speed and TPS have also limited the efficiency of user interaction. These drawbacks will remain an indisputable fact for a foreseeable period of time. In this context, we believe that the demands that Ethereum Layer1 cannot undertake naturally spill over to the following solutions to Ethereum's scalability issues:

Layer1: Competition in the Layer1 track that supports EVM is fierce, and various public chains are scrambling for ETH's overflow funds and traffic. At present, BSC is the leading EVM public chain besides Ethereum. Latercomers such as Fantom and Avalanche have also begun to exert their strength, and some popular projects have appeared on their chains. However, despite this, ETH still occupies more than 70% of the market share in the EVM public chain (see Figure 1). With the help of the bull market in 2021, Layer1 has attracted a lot of funds, but in the long run, it remains to be seen whether Layer1 other than Ethereum can cross the bull and bear markets and create value in the public chain ecosystem.

Figure 1: Total Value Locked EVM Chains and their share over time in February 2022 (data from Defilama)

Layer2: Although Layer2 sounds like the most perfect solution to the current situation of ETH, it is directly optimized based on Ethereum itself. Matic's performance in 2021, whether in terms of currency price or on-chain interaction and TVL, also reflects everyone's expectations (see Figures 2 and 3). However, Layer2 is not actually as effective as the side chain, because the optimized Gas fee still prevents a large number of users from entering Layer2. At the same time, using Layer2 to enter and exit assets still requires interaction with the Ethereum mainnet, which further limits users' willingness to use Layer2. But on the other hand, Layer2 provides a good soil for new applications. GameFi, which emerged at the end of 2021, needs to do low-value and high-frequency interactions, which has found a new direction for Layer2, that is, exclusive chains-chains that are only used for specific needs. At present, Ronin, Immutable X and other GameFi's Layer2 public chains are developing at a high speed.

Figure 2: Total Value Locked Layer2 Chains in February 2022 (Data from Footprint Analytics)

Other Layer1: New public chains independent of EVM such as Solana and Near have achieved significant growth in 2021. Although this phenomenon is partly due to the continued operation of external capital, the low Gas fee has indeed hit the pain point of Ethereum. , new public chains such as Solana and Near meet the needs of some users, create real value, and also attract many outside users. However, given that EVM is still the absolute core of the market (see Figure 3), it is easier for developers to reuse and there are many infrastructures developed based on EVM, Near launched Aurora, and Cosmos will soon launch Evmos to achieve integration with the Ethereum ecosystem. . In addition, similar to the exclusive chains of Layer 2, there are also many exclusive chains focusing on different fields in Layer 1, such as Flow, which focuses on the NFT field, and Oasis, which specializes in private transactions. In addition, there are many public game chains such as Gala, WAX, WEMIX, etc.

Figure 3: Total Value Locked of ETH and other non-EVM chains in February 2022 (data from Defilama)

We believe that Ethereum's Layer1 may be mainly responsible for processing important data or become a public chain for the B-side in the future. Its essence is the data settlement layer of the entire blockchain world and the function of providing a consensus layer. The public chain for the C-side or primary users and facing more diversified market needs is likely to become a role that creates value in the long term. Based on such a future vision, the demand for interaction between many public chains will also rise accordingly. Therefore, there are currently many cross-chain projects between public chains. The most famous of them is Multichain (formerly known as Anyswap). However, the security of such cross-chain bridges has been criticized since the birth of the project, and the subsequent theft of coins has also confirmed people's concerns. So people turned their attention to another solution-the multi-chain model. This model aims to connect each chain in the form of a parent chain or hub, so that it can achieve atomic-level interaction and fundamentally solve the cross-chain problem. Representative projects in this model are Polkadot and Cosmos, and this article will focus on Cosmos. As mentioned above, the Cosmos ecosystem, which was born for the multi-chain universe, will play an important role in the future market. More blockchains focusing on niche applications will be born in the Cosmos ecosystem. At the same time, through the IBC protocol, Cosmos can solve the cross-chain problem of the ecosystem while achieving docking with the Ethereum ecosystem (see Figure 4).

Figure 4: Schematic diagram of Cosmos multi-chain universe connection

  • Cosmos is born for the multi-chain universe

Different from the narrative of Ethereum, Cosmos adheres to the concept of applied blockchain and believes that the future is a multi-chain universe composed of blockchains focusing on different functional applications. Based on this concept, Cosmos contains three basic components: 1) Tendermint consensus protocol, 2) Cosmos SDK, and 3) IBC (Inter Blockchain Communication) cross-chain communication protocol. Cosmos hopes to create a universal development framework for blockchains and solve cross-chain problems, making a multi-chain universe possible.

Tendermint consensus protocol: Generally speaking, blockchain has a three-level architecture, from bottom to top, namely the network layer, consensus layer, and application layer. The Tendermint consensus protocol generalizes or encapsulates the development of the complex network layer and consensus layer, allowing developers to focus on business-level research and development, and supports multiple programming languages ​​at the application layer. As shown in Figure 5, Tendermint Core encapsulates the network layer and consensus layer.

Figure 5: Schematic diagram of Cosmos layered architecture (from official website)

Cosmos SDK and IBC cross-chain communication protocol: Cosmos SDK provides the basic functional modules of the current blockchain, such as staking, punishment, governance, and token supply allocation (as shown in Figure 6), which greatly reduces the user's development costs and avoids the cost of reinventing the wheel. IBC is an important module in the SDK, which solves the communication and asset transfer problems of various chains in the Cosmos ecosystem. For example, in the figure below, Hub1 and Hub2, as well as Hub and Zone can communicate through the IBC protocol, as shown in Figure 7.

Figure 6 (left): CosmosSDK module (from official website)

Figure 7 (right) Cosmos Hub and Zone structure (from official website)

  • Cosmos vs Polkadot

1. Differences in ecological philosophy

In the cross-chain track, Polkadot and Cosmos are often compared with each other. We believe that the core difference between the two lies in the ecological philosophy. The design of the Cosmos ecosystem is more open, while the design of the Polkadot ecosystem is relatively closed. First of all, there is no need for permission to join the Cosmos ecosystem. Any developer can use the Cosmos SDK to develop their own blockchain and achieve cross-chain communication through the IBC protocol. However, Polkadot developers must participate in the parachain slot auction to access the Polkadot ecosystem, which has a certain entry threshold. The resulting status quo is that blockchains developed based on the Cosmos SDK have produced projects with a market value of more than 1 billion US dollars, such as LUNA, CRO, and OSMO, and star projects such as LUNA have also prospered. At present, the Polkadot ecosystem does not seem to have any outstanding public chains that are eye-catching except DOT/Kusuma. In terms of ecological market value, the market value of the Cosmos ecosystem is second only to Ethereum and BSC, and is far ahead of the Polkadot ecosystem (see Figure 8).

Figure 8: As of February 6, 2022, the market value of the top public chain ecosystem (including itself and on-chain projects) excluding ETH

In Figure 9, a phenomenon worth noting is that the market value of Terra, a project in the Cosmos ecosystem, exceeds that of Cosmos, which makes Cosmos more special. For other public chains, the public chain is the ceiling of the market value of their ecological projects. Except for Cosmos, no other public chain ecosystem has a market value that exceeds the market value of the public chain. For ecological projects on Cosmos, there is a lot of room for imagination in terms of market value, which is also the unique "charm" of Cosmos. We believe that this trend will continue in the future, and more blockchains developed based on the Cosmos SDK will emerge, further prospering the overall Cosmos ecosystem.

Figure 9: Market capitalization of the top 10 Cosmos ecosystem projects as of February 13, 2022

2. Differences in token value capture

The openness of Cosmos also comes at a price. First of all, from the perspective of the economic model, the ability of the Cosmos token ATOM to capture the value of other public chains and their applications in the ecosystem is questionable. Compared with Polkadot, another leader in the cross-chain field, the value capture mechanism of its native token is clear and explicit. For example, the parachains bidding for the Polkadot cross-chain ecosystem need to pledge Polkadot's native token Atom, thus creating demand for tokens. In contrast, in Cosmos' cross-chain ecosystem, other blockchains that use the Cosmos SDK and Tendermint consensus protocol are theoretically unrelated to the Cosmos native token. ATOM is only used to ensure the security of the Cosmos Hub (see below for details). ATOM has given up capturing the value of each public chain on the hub, and each public chain has a strong autonomy, which is conducive to the development of the Cosmos ecosystem and is also the main difference between Cosmos and Polkadot. Cosmos and Polkadot actually made trade-offs in different directions in the cross-chain track: Polkadot is relatively closed, with clear value capture and deeper cross-chain (supporting cross-chain calls to contracts and asset interactions); Cosmos is relatively open, with vague value capture and shallow cross-chain depth (supporting cross-chain assets but unable to call contracts across chains).

Regarding the issue of value capture, in the subsequent development of the ecosystem, there may be improvement measures for this problem. Just as ETH has become the right-side trading pair in the Ethereum ecosystem, ATOM has the potential to become the right-side trading pair in the Cosmos ecosystem, becoming a carrier of value interaction in the ecosystem, and is widely used in various ecological applications to add liquidity or drainage to various applications in the ecosystem. For example, in the Cosmos ecosystem, Osmosis focuses on AMM, and the pool with the best liquidity is the OSOM/ATOM trading pair. In addition, we believe that in the future Cosmos ecosystem, when new projects are in the Bootstrap stage, because the overall market value of new projects is still small in the early stage, there are hidden dangers in security. These projects can rent ATOM from the Cosmos Hub for shared security (Shared Staking), thereby stimulating the market demand for ATOM and improving the value capture mechanism. Finally, staking ATOM can obtain airdrops from various projects in the ecosystem, which is attractive to users at least in the short term and enhances the value capture of tokens. As of February 21, 2022, there are 5 projects that have taken snapshots in 2022, namely Nomic (NOM), RAW (RAW), Racoon (RAC), Omniflix, and Orbem Wars / Domerium Labs.

In fact, tokens are like stocks, representing the market’s attitude towards the future development potential of the enterprise, and are also endowed with expectations for future growth in the track it is in. As the Cosmos ecosystem grows, its future development will be more certain, and the market will reflect these expectations in its token prices. Although ATOM’s ability to suck blood from Cosmos ecosystem projects is not strong, ATOM can also be used as a Cosmos index to represent the value of the entire ecosystem, thus having a good coin price performance. Solana can be a good example. Its transaction fees for nodes are very low, but the SOL coin price performance is very good. This is because SBF has been using the money it earns to buy back SOL. This phenomenon also shows that the support of the investors behind the project is also a support for the token price.

3. Security Differences

Secondly, from the perspective of security, the Polkadot ecosystem is safer overall because it relies on the credit of Polkadot itself, and all chains in the ecosystem have the same level of security. The security of each chain in the Cosmos ecosystem varies, and the security of early projects is relatively low. However, in future updates of Cosmos, shared security may be adopted, that is, sharing the security of the Cosmos Hub by staking ATOM, which is very beneficial for some early projects.

But from a macro perspective, in the context of Web3.0, openness is more advantageous than closure. Although some security is sacrificed, an open environment is more conducive to the growth of the ecosystem - related technologies and applications are more likely to emerge in an open environment. Cosmos is a more open path compared to Polkadot, with a lower threshold for joining the ecosystem, attracting more developers to join, which is conducive to the development and growth of the ecosystem in the long run.

  • The Future of Cosmos

If the upgrade of Ethereum is delayed, the optimization of Gas fee is not satisfactory, old users continue to flow out, and new users also flock to other public chains, then more and more new developers will choose to deploy on more suitable public chains, and the original developers may gradually transfer to the exclusive chain that is more suitable for their own projects, or create their own application chains on Cosmos, Pokadot, and Octopus. At the same time, web3.0 and the metaverse also give other public chains enough opportunities, so it is very likely that Ethereum's leading position will be greatly weakened or even replaced by revolutionaries such as Cosmos. The properties of Cosmos naturally fit the high degree of freedom and high frequency of interaction of web3.0 and the metaverse. In particular, as a new public chain, Cosmos has no "historical baggage" and can achieve many technical innovations for current needs to transform the underlying architecture of the public chain, such as Celestia's data availability layer technology, and ultimately serve as the infrastructure of Internet 3.0.

If Ethereum solves the problem of high gas fees and lowers the user threshold in the future, application developers will return to Ethereum, forming a situation of "one super" but not "many strong". At present, Ethereum still outperforms other public chains in terms of user quality, brand, developer ecology, decentralization, the number and quality of on-chain applications, and it is likely to maintain its leading advantage for some time to come. Despite this, Cosmos still has room to make a difference in the two new directions of web3.0 and the metaverse, and can occupy a certain market share in these two tracks after Ethereum achieves considerable optimization. Because there will still be many non-EVM public chains to solve different user needs, Cosmos' open multi-chain model will still have a place. In addition, as mentioned above, due to the lack of "historical baggage", Cosmos can explore more feasibility in technology, especially to extend its own advantages and establish a unique ecological structure.

Reference

https://medium.com/@edwardyw/%E6%BD%9C%E5%8A%9B%E6%97%A0%E9%99%90%E7%9A%84layer-1%E5%85%AC%E9%93%BE-b73aef999590

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https://www.panewslab.com/zh/articledetails/1643867534028470.html

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