Cosmos Ecosystem: Building an interoperable multi-chain future
The Cosmos ecosystem has piqued the interest of investors, developers and users significantly in the past one year. We try to understand this ecosystem by answering 5 simple questions.
What is Cosmos?
Cosmos provides a sovereign approach to building blockchains in a multi-chain paradigm by offering immense flexibility to developers. The vision of Cosmos is to make it easy for developers to build blockchains which can maintain sovereignty, process transactions quickly and communicate with other blockchains through IBC (an inter-chain communication protocol), making it optimal for a variety of use cases.
The Cosmos ecosystem operates as a network of modular chains interconnected, some directly, some through the Cosmos hub. It promotes a “hub and spoke’’ model, complete with protocols, SDK, tokens, wallets, applications, repositories, services, and tools. The development of Cosmos infrastructure has been driven by multiple key contributors such as Ignite, Inter Chain Foundation and Confio. Developers can use existing modules of Cosmos SDK, modify them or create new modules to enable functionality as per their requirements. Developers also have the flexibility to choose coding language, security model and types of transactions supported, amongst other choices.
What are the current challenges which Cosmos is trying to solve?
General purpose layer 1 blockchains face issues like scalability, two layered governance, and more value accrual at the base protocol layer instead of the application layer. “Interoperability” is one of the most common reasons cited by projects building on Cosmos SDK. Application specific blockchains lack interoperability with other chains. Cosmos provides a solution to these issues through its sovereignty and flexibility focused framework. Customized blockchains built using Cosmos SDK are interoperable with other IBC-enabled Cosmos blockchains. Applications can scale easily by building their own chain and accrue more value to their native token by using it for validation. Using the Tendermint consensus algorithm allows Cosmos blockchains to avoid chain re-org due to instant finality. Projects looking for EVM compatibility as well interoperability with other IBC zones can leverage EVMOS, Ethereum-compatible PoS blockchain built in the Cosmos ecosystem. Bridging solutions and overlay networks like Gravity bridge and Axelar Network allow token and message transfer with non-Cosmos chains.
How has the adoption been so far?
Since the mainnet launch of Cosmos Hub in March 2019, Cosmos has experienced significant adoption. The number of active Cosmos zones increased from 8 in Q2 2021 to 48 in Q2 2022. 15 of these blockchains have >= 15 peers (other blockchains connected by IBC) and are tightly integrated with the Cosmos ecosystem. As of 9th August 2022, the combined market cap of all the Layer 1 native tokens of the IBC connected Cosmos Zones is $10.2bn¹ (32 out of 48 zones). It reached an ATH of $38.48bn in November 2021.
The total number of accounts on Cosmos Hub has increased from 125k at the start of 2021 to 1.2mn in July 2022. These numbers could increase significantly once the ATOM token value accrual increases after the launch of inter-chain security.
What are the current challenges in the Cosmos ecosystem?
In its quest to offer sovereignty and flexibility, Cosmos ecosystem has multiple challenges such as weak value capture of ATOM token, fragmentation issues and non-fungibility of tokens due to path dependency in IBC. Since each zone currently uses its own token for validation and gas fees, the ATOM token does not capture value due to increasing activity on other zones. Inter-chain security is supposed to address this by making Cosmos Zone the primary contract zone, but alternatives to Cosmos Hub such as Osmosis (the liquidity hub), EVMOS (EVM hub), Juno (WASM hub) and Axelar Network (Non-IBC asset hub) are also emerging.
Transactions spanning the Cosmos ecosystem require routing information across the Cosmos Hub or, in some cases, multiple hubs (undergoing the pegging process at each stop), which adds an extra layer of friction and trust. Tokens sent through IBC are “path dependent”. The same asset taking a different path is not fungible. At a user level, users might not be comfortable with managing tokens across hundreds of blockchains.
How can the Cosmos ecosystem grow in the future?
The liquidity and TVL in the Cosmos ecosystem has been severely impacted by the fall of Terra but the ecosystem itself has survived which is a testament to the resilience of the multi-chain vision of Cosmos. Cosmos offers a wide array of flexibility in blockchain development which opens multiple possibilities for growth:
- Inflow from other ecosystems: Emergence of EVM compatible blockchains like EVMOS, bridges to Ethereum like Gravity bridge and major Cosmos DEX like Osmosis supporting ERC-20 tokens can provide an impetus to liquidity migration from Ethereum to Cosmos. USDC and DAI(to a lesser extent) have replaced UST as the main source of liquidity on Osmosis, though they don’t currently compare with historical UST liquidity. Cosmos NFT platform, Stargaze, is working with Gravity Bridge to send NFTs from Ethereum into Cosmos. Cross chain integration between Moonbeam, a polkadot parachain, and Osmosis via Axelar Network has been established. IBC connections to non-Cosmos blockchains will enable Cosmos to achieve its vision of an inter-operable multi-chain world. Penumbra, a fully private proof-of-stake network and DEX, recently became the first non-Cosmos blockchain to make an IBC connection to the Cosmos Hub.
- Interconnectivity of Cosmos ecosystem projects and Cosmos Hub: Upcoming inter-chain security will improve the value accrual for ATOM tokens, which can bring in investment from retail as well as institutional investors. Price increase in ATOM token will make the ecosystem more secure allowing more projects to build their own chain and rely on ATOM validators for security. Smart contracting blockchains like Cronos, Oasis Network which are not currently tightly integrated² with the Cosmos ecosystem could leverage IBC in the future. Oasis Network is the second most held asset by 82 crypto funds tracked by Messari and is planning to bring IBC integration and Oasis-Etherem bridge soon. Integrations with these smart contracting platforms and upcoming native ones like Neutron will allow developers to easily build dapps without building their own chains.
- New Cosmos chains: Application specific requirements such high throughput, ability to use own validator set, predictability of transaction costs can prompt projects to move to Cosmos. dydx’s decision to build its own chain using Cosmos SDK is the most notable example. Sei Network is building a layer 1 blockchain purpose-built for an orderbook. Flexibility offered by Cosmos allows projects to explore blockchain applications beyond current use cases like finance and gaming. Althea, one of the fastest growing Internet Service Providers in the US, is building Althea telecom blockchain on Cosmos, which will create a decentralized platform for Althea’s pay-per-forward bandwidth market. Althea enables communities to build and maintain their own decentralized internet infrastructure.
- Growth of existing Cosmos chains: Existing Cosmos chains have the potential to grow more with possible catalysts such as increase in developer adoption and native stablecoins. The collapse of UST has left the Cosmos ecosystem without a reliable native stablecoin. Promising new native stablecoins like IST (Inter Stable Token), which works like MakerDAO’s DAI, are emerging. Silk stablecoin is another contender which is built on Shade Protocol and is Secret Network’s native stablecoin. Adoption of such native stablecoins will play a key role in augmenting trading activity and boosting investor sentiment.
One of the key differences so far between Cosmos ecosystem and Polkadot and rollup centric Ethereum has been the lack of shared security. With the upcoming inter-chain security, Cosmos is moving towards the central security model of Ethereum and Polkadot, however, multiple hubs will compete to provide security in Cosmos.
The Cosmos ecosystem provides a framework and infrastructure tools necessary for the realization of an interoperable multichain world. With focus on autonomy, sovereignty and scalability, Cosmos provides an easy way for developers and entrepreneurs to experiment and innovate without requiring high upfront investment. Growing community, on-chain governance and no centralized development team makes Cosmos a truly decentralized ecosystem. While the Cosmos ecosystem provides immense opportunities, developers and projects need to be aware of the challenges as well as complexities of building their own L1. The competition in the L1 space is intensifying and in the world of maximalism, Cosmos is building a more inclusive multi chain world which is steadily gaining traction.
¹ This does not include the market cap of tokens of applications built on top of the Layer 1 chain
² Cronos has IBC enabled but does not interact with any other chain apart from Cosmos Hub and Crypto.org