Why has Cosmos become the first choice for many developers in application chains?

Why do developers prefer Cosmos for app chains?

Author: Kyle Liu, Bing Ventures Investment Manager

Key Points:

• The rise of hybrid application chains is an inevitable trend in the development of public chains, which not only improves the scalability and security of public chains, but also provides more flexible and efficient solutions for different scenarios. In this process, security will be a key factor in the development of public chains, and new technologies and solutions such as Interchain Security (ICS) will lay a solid foundation for public chains.
• Because blockchain built on Cosmos often find it difficult to launch their own validator set. ICS aims to solve this problem and will allow projects to leverage the economic security of the Cosmos Hub. Looking ahead, building a blockchain on Cosmos will become increasingly cheaper and as easy as building a website on WordPress.
• These chains can serve as liquidity bridges between the vast ecosystems of Cosmos, symbolically connecting different public chain communities and bringing them closer together. As these teams gradually break down barriers, developers will be able to easily choose how they want to build their networks without making huge compromises.

The world of public chains is becoming increasingly large, with users and liquidity bringing transaction volume and usage rates, as well as making blockchain space scarce and expensive. This makes the narrative of Super Appchains attractive. Blockchains such as Ethereum are transitioning into larger settlement layers, with most economic activity taking place on many different L2/L3 chains built on top of them. A similar situation is unfolding on Cosmos, where Cosmos Hub is striving to become the normative security layer for other appchains.

In this issue of Bing Ventures research, we will outline the advantages and ecological opportunities of Cosmos appchains from the development logic of the public chain. We believe that security will be a key factor in the further development of the Cosmos ecosystem. Whether as a normative security layer or as an appchain, the security of public chains is non-negotiable, and the proposal of Interchain Security (ICS) provides new solutions for security, while the architecture of hybrid public chains provides more security for appchains on Cosmos. This makes the future of Cosmos appchains promising.

The logic of public chain development

With the continuous development of various public chains, some large ecosystems have emerged in the market, such as Ethereum and its various L2 and sidechains, Appchains on Cosmos, Avalanche and its subnets, and parallel chains of Polkadot and Kusama. Each of these ecosystems contains a large number of chains, such as more than 50 Appchains in the Cosmos ecosystem. These chains are interconnected through Inter-Blockchain Communication (IBC) and form a huge network. In this context, new opportunities for the development of public chains also emerge.

• Dark Side of NFT History: Reviewing the Darkest Moments of 5 Blue Chip Tokens
• Conversation with Coinbase Protocol Director: How is Base, as a highly anticipated new Layer2, building its ecosystem step by step?
• How does ERC-6551 change the game by turning NFTs into Ethereum accounts?

Source: mintscan

Emerging Opportunities

Cosmos is a hybrid public chain with extensive opportunities and advantages in its application chains. The Cosmos infrastructure is ready to attract new applications by horizontally adding new chains to the IBC ecosystem. This means that developers can more easily create new application chains and form more complex ecosystems by interoperating with other chains. Secondly, by issuing asset chains (such as USDC) and connecting to other ecosystems through IBC, Cosmos can attract a large influx of capital and promote ecosystem development. In addition, in the coming year, Cosmos is expected to increase its market share due to other ecosystems continuing to suffer from bridging vulnerabilities.

Analogous to the way people in the past chose places to settle, where people tended to gather at the crossroads of trade routes for value exchange, we can anticipate similar opportunities in the application chain field on Cosmos, where liquidity aggregation can be achieved by building crossroads between major ecosystems. This will lead to a series of new products, such as stablecoin exchanges, arbitrage, MEV capture, and DeFi protocols that converge returns from two or even multiple ecosystems.

ICS is the cornerstone

Interchain Security, or ICS, but now the team also refers to it as Replicated Security. It is an important evolution in Cosmos that allows application chains to benefit from the validator ecosystem of the Hub. It allows other blockchains to give up their validators and use the security and validator collection of the Cosmos Hub. In this way, other blockchains can save costs and time and gain reliable and stable network protection provided by the Cosmos Hub.

ICS can also allow closer cooperation between Cosmos Hub and other blockchains, creating an Atom Economic Zone. For example, blockchains using Replicated Security (consumer chains) can pay a certain percentage of tokens or fees to Cosmos Hub (provider chains) as security service fees. These revenues can be allocated to the validators and delegators who pledge ATOMs on the Cosmos Hub, increasing their income. At the same time, consumer chains can also get more attention and support from validators and delegators who pledge ATOMs on the Cosmos Hub.

ICS brings new opportunities to Cosmos. ICS allows application chains to obtain the security provided by the Cosmos Hub from the beginning, without the need for months of validator testing, providing convenience for the development and construction of application chains. ICS can bring larger-scale development to Cosmos, enabling Cosmos Hub to reach agreements with consumer chains to create revenue. These revenues can be used for ecosystem development or distributed to ATOM holders.

Source: Informal Systems

The introduction of ICS has brought tremendous value to application chains. Application chains can benefit from the security provided by Cosmos Hub, while still maintaining a high degree of sovereignty in terms of consensus and data availability. In addition, ICS can bring more business opportunities to application chains, such as transaction fees, MEV capture, block space auction, and revenue sharing. In summary, we believe that the opportunities and advantages of Cosmos application chains mainly lie in the following three aspects:

1. Application chains based on ICS can be launched quickly, making it easier to launch new chains;
2. ICS allows new chains to rent the security of Cosmos Hub validators and stakers, so that appchains do not need to establish or lease validator sets themselves, thereby reducing the security costs and risks of launching new chains;
3. Cross-chain interoperability: Cosmos can use ICS to enable frictionless asset transfers, logic invocations, and event notifications between appchains. ICS allows appchains to use different consensus algorithms and smart contract languages without affecting communication and collaboration with each other. This way, appchains can focus on their core functions and enjoy the services and values provided by other appchains.

Advantages of Cosmos Application Chains

Appchains are an important part of the Cosmos public chain, with their core being restricted access to the state. Unlike general-purpose chains that allow anyone to launch new applications without permission, Appchains coordinate to determine which applications they will run. Similarly, cross-chain communication also needs to be established through IBC.

There is an inherent trade-off here. Appchains lose the agility of permissionless innovation, but gain sovereignty over their applications. In addition, they can optimize their chains to address specific use cases, thereby providing a more reliable user experience. Another important advantage of application chains is incentives. On general-purpose chains, income usually leaks into the underlying gas token. Even the most popular dApp struggles to capture most of the revenue it generates. In the hybrid public chain arena, Cosmos application chains have huge opportunities and advantages. One of the biggest driving factors is that Cosmos is one of the few infrastructures that can easily launch new chains.

Hybrid Public Chain Ecosystem

Under this trend, some other Layer1 public chains have emerged, and new projects have also emerged in Cosmos. For example, the L1 network on Kusama-Picasso Network built by Composable Finance, which aims to become a cross-chain hub and attract liquidity from the larger DeFi field. Picasso achieves this goal through its new cross-chain infrastructure layer called XCVM. It is the first chain in the Polkadot ecosystem to be connected to Cosmos through IBC and will also serve as a bridge between these two ecosystems.

Another project is the Avalanche subnet Landslide, which aims to migrate the Cosmos ecosystem to Avalanche and shorten the finality time of Tendermint consensus with the help of IBC. The chain will run on open-source code based on COSM/WASM SDK, which allows any Tendermint-based DApp to run natively within the AVAX ecosystem. This will combine the high throughput of the AVAX consensus with the powerful VM built with Rust, making it more suitable for interoperability than the EVM.

The team of Sei Network also realized this, and they are developing the Nitro project, which is the first Solana virtual machine chain built on Cosmos. Nitro allows developers to access existing Solana smart contracts without modification, and users can easily access these applications with Solana wallets. Nitro is actually a gateway between Solana and Cosmos, enabling cross-chain interactions between the two public chains.

Cross-chain collaboration is actually a trend and demand based on the development of current public chains. Solana, as a high-performance public chain, has a very wide range of application scenarios, but there may be some bottlenecks in other areas, while Cosmos, as a cross-chain collaborative public chain, can provide more possibilities. The establishment of Nitro provides a new way for collaboration between these two public chains, and also provides new ideas for cross-chain interactions between other public chains.

Compared with other public chains, Nitro’s advantage lies in its establishment on Cosmos, which means that it can directly obtain the advantages and applications of the Cosmos ecosystem, while continuing to retain the performance and advantages of Solana. The establishment of Nitro can help Solana better expand its ecosystem, attract more developers and users, and also make Cosmos more diversified and further enhance its market competitiveness.

Ecological Opportunities for Application Chains

When we think of application chains, the reason why we think of Cosmos is that the Cosmos SDK is the most mature toolkit that allows for permissionless construction of new chains from scratch. The representative of Appchain today is Cosmos, because the Cosmos SDK is currently the most mature toolkit that allows for permissionless construction of a new chain from scratch. In the long run, we expect that as the technology matures, Appchain as Rollup (or Rollapp) will be more widely used. Some existing and upcoming application chains worth paying attention to include:

1. Neutron: PoS Smart Contract Chain

Neutron provides a smart contract platform for the Cosmos Hub to try out all the new/experimental things they want to use and develop. This includes CosmWasm contracts, the ICA for cross-chain operations, the ICQ for reading data from other chains, and combining them to achieve innovative products such as Interchain DEX while maintaining the isolation of the Hub.

In short, this is a fully permissionless, general-purpose smart contract chain secured by the Hub. Anything that can be developed on the CosmWasm smart contract chain can be deployed on Neutron, which is also an incubator for intelligent contract dApp innovation in the Hub economic zone. One of the earliest projects launched is Lido, which will issue their ATOM flow staking derivatives on Neutron.

2. Osmosis: The Liquidity Backbone of Cosmos

Osmosis is the most active chain in Cosmos and the most liquid chain in IBC, with a monthly trading volume of over $1 billion. It also serves as the liquidity backbone of tokens on the Cosmos chain. Osmosis’s first major innovation is Superfluid Staking, a module that allows underlying OSMO tokens in liquidity pools to be used for both liquidity provision and staking to ensure the safety of Osmosis. The latest Fluorine upgrade adds more features such as stableswap AMM, IBC rate limiting, and multi-hop routing. IBC rate limiting is a response to cross-chain bridge hacking attacks that limits the upper limit of token supply that can enter and exit Osmosis within a defined time window.

Osmosis has more plans in 2023, including centralized AMM, reducing MEV through threshold decryption, partnering with Skip to “internalize” MEV (i.e., let the protocol itself complete arbitrage transactions), launching Mars Protocol for lending liquidity provision tokens, Interfluid staking similar to Superfluid staking but for underlying LP tokens other than OSMO tokens, mesh security, and so on. Osmosis’s growth is largely attributed to its high token issuance/inflation rate, but the functionalities and integration plans to be launched in 2023 provide more opportunities for it to become the liquidity backbone of the entire IBC network and provide impetus for more robust growth.

3. Sei: A Genuine Hybrid Public Chain

As an application chain based on Cosmos, Sei has certain opportunities in the hybrid public chain race. Sei will launch two highly optimized Rollup solutions, Nitro SVM and Blockingddle. The former runs SolanaVM, while the latter runs MoveVM. MoveVM is a relatively new smart contract platform that has been adopted by fast monolithic machines such as Sui and Aptos and is considered to be one of the fastest and most secure VMs. It is worth mentioning that Blockingddle will be the first Rollup solution to run MoveVM. Adopting optimized Rollup solutions helps to improve the performance and security of blockchain systems, thereby increasing the appeal of the ecosystem. Therefore, Sei has a broad development prospect in the DeFi field and is expected to become a leader in the hybrid public chain.

Meanwhile, as more ecosystems adopt modular architectures, Cosmos and other public chain platforms will also face new opportunities and challenges. In Sei’s architecture, it allows developers to build different blockchain applications while also allowing these applications to communicate across chains. Sei’s design goal is to address the problem of the isolation between existing public chains, and hopes to achieve higher performance and lower transaction costs without sacrificing security and scalability. In this process, Sei adopts the Cosmos SDK framework and builds a highly flexible chain architecture on top of it. This makes it easy for developers to build various types of applications, such as equity-based applications, asset-based applications, and so on.

4. dYdX: Pure DEX Appchain

dYdX will be launched simultaneously with Cosmos Hub’s “Noble” consumer chain. Circle will issue USDC on this chain, and dYdX is the largest first customer. This will greatly accelerate the circulation of native USDC on Interchain, which has always been lacking in Cosmos and IBC. Essentially, dYdX’s growth is beneficial to the growth of native USDC on Cosmos. The growth of native USDC on Cosmos is beneficial to the economic activity growth of the Hub as an Interchain security provider. The growth of the Hub as an ICS provider is also beneficial to the adoption of other consumer chains, and native USDC can accelerate its launch. The growth of native USDC and the economic growth of the Hub have a positive and promotional effect on the overall liquidity of other Appchains.

5. Injective: Decentralized Derivatives Trading Protocol

Injective aims to create a global trading market. Unlike traditional financial derivatives trading platforms, Injective allows anyone to freely trade various derivatives on its platform. In addition, Injective adopts a new trading model called “trustless intermediaries,” which can ensure the security and fairness of transactions. Unlike dYdX, which focuses on derivatives, Sei and Injective are the underlying layers that build infrastructure for applications such as perpetual contracts, options, stablecoins, and so on.

6. Duality: A Hybrid Between AMM and CLOB

The core feature of Duality is to create AMM pools that allow exchanges at constant prices. This is different from typical centralized AMMs, which determine price ranges through price scales. Duality allows liquidity to be placed at specific prices, similar to limit orders on CLOB. Arbitrary curves can be constructed on the Duality pool, and traders can access liquidity shared between all pools using market or limit orders. Like its main competitor Osmosis, Duality aims to internalize and redistribute arbitrage profits from MEV to LP.

7. Stride: Liquid Staking

While Stride is an independent chain, it will become a consumer chain once ICS is live to receive economic security from centralized hubs. When considering Cosmos liquid staking tokens, it is important to ensure the safety of the underlying asset is not affected by low market cap, untested validator sets chains. Stride has issued liquid staking tokens stATOM, stOSMO, and stSTARS, all of which have incentive pools on Osmosis. Stride’s main competitors will be Lido and another Cosmos-native liquid staking solution Quicksilver.

8. Polymer: IBC Protocol based on ZK Technology

Polymer will be the first zk-IBC application chain on the Cosmos Hub. It allows for cross-chain transfer of assets without leaking any information. Due to the high privacy and security provided by zk technology, Polymer has great potential in the field of cross-chain asset transfer.

9. FairBlock: A solution for preventing “bad” MEV through an Identity Encryption (IDE) scheme.

Summary

The bottleneck in the race of hybrid public chains currently lies in the lack of a unified standard, with many projects building their own interoperability solutions, leading to further market fragmentation. Thus, the missing link currently is a unified standard for communication between all chains, similar to TCP/IP for the internet. However, many Layer1 public chains living outside of Cosmos are entering Cosmos using IBC technology, meaning that this blockchain network is receiving adoption.

In this case, the trend of development for hybrid public chains is inevitable. These public chains can choose quality features from various chains to combine into a more scalable and secure whole. In this hybrid public chain, their L1 layer can act as a settlement layer, while its L2/L3 layer can carry more actual business. This hybrid public chain can not only solve the bottlenecks and problems of existing chains, but also provide more flexible and efficient solutions in different scenarios.

Network effect is the engine that drives economic activity. Whenever a new blockchain (node) joins the Cosmos network, it increases the value of that network. Most importantly, the value of the network grows exponentially. In short, the future of cryptocurrencies will be modular, and the combination of different technology stacks will enhance their advancement.

We will continue to update Blocking; if you have any questions or suggestions, please contact us!