Why does the Cosmos application chain become the first choice of many developers?

Question

By Kyle Liu, Investment Manager, Bing Ventures

Key takeaways:

The rise of hybrid application chains is an inevitable trend in the development of public chains, which can not only improve the scalability and security of public chains, but also provide more flexible and efficient solutions for different scenarios. In this process, security will be a key factor in the development of the public chain, and new technologies and solutions such as Interchain Security (ICS) will lay a solid foundation for the public chain.
Because blockchains built on Cosmos are often difficult to start their own validator set. ICS aims to solve this problem and will enable projects to take advantage of the economic security of the Cosmos Hub. Going forward, building a blockchain on Cosmos will become cheaper and as easy as building a website on WordPress.
These chains can serve as a fluid bridge between the huge ecosystems of Cosmos, and can also symbolically connect different public chain communities and bring them closer. As these teams gradually break down boundaries, future developers will be able to easily choose how they want to build the network without having to make huge compromises.

The public chain world is getting bigger and bigger, users and liquidity bring transaction volume and usage rate, and also make block space scarce and expensive. This makes the narrative of Super Appchains attractive. Blockchains such as Ethereum are transforming into larger settlement layers, and most economic activity will take place on the many different L2/L3 chains built on top of it. A similar situation is playing out in Cosmos, where the Cosmos Hub is striving to become the canonical security layer for other application chains.

This issue of Bing Ventures research article will sort out the advantages and ecological opportunities of the Cosmos application chain from the logic of the development of the public association. We believe that security will be a key factor for the further development of the Cosmos ecosystem. Whether it is used as a standard security layer or as an application chain, the security of the public chain cannot be compromised, and the proposal of Interchain Security (ICS) provides a new solution for security. At the same time, the architecture of the hybrid public chain also provides Cosmos The security of the upper application chain provides more guarantees. This makes the future of the Cosmos application chain promising.

The logic of public chain development

With the continuous development of major public chains, some large-scale ecosystems have emerged on the market, such as Ethereum and its various L2 and side chains, Appchain on Cosmos, Avalanche and its subnets, Polkadot and Kusama’s parachains, etc. . Each of these ecosystems contains a large number of chains, for example, there are more than 50 Appchains in the Cosmos ecosystem. These chains are interconnected through Inter-Blockchain Communication (IBC), forming a vast network. In this context, new opportunities for the development of the public chain will follow.

Source: mintscan

New Opportunities Emerge

Cosmos is a hybrid public chain, and its application chain has a wide range of opportunities and advantages. The Cosmos infrastructure is ready to attract new applications by adding new chains horizontally through the IBC ecosystem. This means that developers can create new application chains more easily, and form a more complex ecosystem by interoperating with other chains. Secondly, through asset issuance chains (such as USDC) and through IBC to connect to other ecosystems, Cosmos can attract a large amount of capital inflows and promote the development of the ecosystem. Additionally, Cosmos will stand a higher chance of increasing its market share in the coming year as other ecosystems continue to suffer from bridging vulnerabilities.

Analogous to the way people chose settlements in the past, that is, people tend to gather at the intersection of trade routes for value exchange, we can foresee that similar opportunities will appear in the field of application chains on Cosmos, that is, through Build intersections between large ecosystems to achieve liquidity aggregation. In this way, a series of new products will also emerge, such as stable currency exchange, arbitrage, MEV capture, DeFi protocols that pool revenue from two or more ecosystems, etc.

ICS is the cornerstone

Interchain Security, or ICS, but now, the team also calls it Replicated Security. It is an important evolution in Cosmos, allowing Lisk to benefit from the Hub's validator ecosystem. It enables other blockchains to drop their own validators and use the Cosmos Hub's security and validator pool. In this way, other blockchains can save cost and time and get reliable and stable network protection provided by Cosmos Hub.

ICS can also establish a closer cooperative relationship between Cosmos Hub and other blockchains to form an ATOM Economic Zone (Atom Economic Zone). For example, the blockchain (consumer chain) using Replicated Security can pay a certain percentage of tokens or fees to the Cosmos Hub (provider chain) as a security service fee. These revenues can be distributed to validators and delegators who staked ATOMs on the Cosmos Hub to increase their earnings. At the same time, the consumer chain can also get more attention and support from validators and delegators who pledge ATOMs on the Cosmos Hub.

The launch of ICS brings new opportunities for Cosmos. ICS enables AppChain to obtain the security provided by Cosmos Hub from the very beginning without the need for months of validator testing, thus facilitating the development and construction of AppChain. ICS can bring a larger scale development to Cosmos, it allows the Cosmos Hub to enter into agreements with consumer chains, thereby generating revenue. These revenues can be used for the development of the ecosystem, or distributed to ATOM holders.

Source: Informal s

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

ICS-based application chains start quickly, making it easier to start new chains;
ICS allows the new chain to rent the security of Cosmos Hub verifiers and pledgers, and appchains does not need to build or rent a set of verifiers by itself, which reduces the security cost and risk of new chain startup;
Cross-chain interoperability: Cosmos can use ICS to enable frictionless asset transfers, logic calls, 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 functionality and enjoy the services and value offered by other appchains.

Advantages of Cosmos Application Chain

The Appchains application chain is an important part of the Cosmos public chain, and its core is to restrict state access. Unlike Universal Chains, which allow anyone to launch new applications without permission, Appchains coordinate to decide which applications they will run. Similarly, cross-chain communication also needs to establish a connection through IBC.

There is an inherent tradeoff here. Appchains lose the agility of permissionless innovation in exchange for sovereignty over their applications. Additionally, they can optimize their chains to address specific use cases, providing a more reliable user experience. Another important advantage of Lisk is incentives. On the Universal Chain, revenue is typically leaked into the underlying gas token. Even the most popular dApps struggle to capture most of the revenue they generate. In the hybrid public chain track, the Cosmos application chain has huge opportunities and advantages. One of the biggest enablers is that Cosmos is one of the few infrastructures that makes it easy to launch new chains.

Hybrid public chain ecology

Under this trend, some new projects that poured into Cosmos from other Layer1 public chains also emerged as the times require. Such as the L1 network on Kusama — Picasso Network, built by Composable Finance, aims to be a cross-chain hub that attracts liquidity from the larger DeFi space. Picasso does this 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 the two ecosystems.

Another project is the Avalanche subnet Landslide, which, with the help of IBC, aims to migrate the Cosmos ecosystem to Avalanche and shorten the finality time of the Tendermint consensus. The chain will run on COSM/WASM SDK-based open-source code, which enables 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 in Rust, making it more applicable than the EVM in terms of interoperability.

The team at Sei Network is also aware of this, and they are developing the Nitro project, the first Solana virtual machine chain built on Cosmos. Nitro allows developers to easily access these applications using Solana wallets without changing existing Solana smart contracts. Nitro is actually a gateway between Solana and Cosmos, through which cross-chain interaction between the two public chains can be achieved.

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

Compared with other public chains, Nitro's advantage is that it is built on Cosmos, which means that it can directly obtain the advantages and applications of the Cosmos ecosystem, while still retaining the performance and advantages of Solana. The establishment of Nitro can help Solana to better expand the ecosystem and attract more developers and users. At the same time, it can also make Cosmos more diversified and further enhance its market competitiveness.

The ecological opportunity of the application chain

When we think of Lisk, we think of Cosmos because the Cosmos SDK is the most mature toolkit that allows new chains to be built from scratch without permission. The representative of Appchain today is Cosmos, because the Cosmos SDK is currently the most mature toolkit, which can build a new chain from scratch without permission. In the long run, we expect Appchain as Rollup (or Rollapp) will be more widely used as the technology matures. Some existing and upcoming Lisks to watch include:

1. Neutron: PoS smart contract chain

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

In short, this is a completely 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 smart contract dApp innovations within the Hub economic zone. One of the first projects to launch is Lido, which will be issuing their ATOM liquid staking derivatives on Neutron.

2. Osmosis: The Liquid Skeleton of Cosmos

Osmosis is the most active chain in Cosmos and the most liquid chain in IBC, with a monthly transaction volume of over $1 billion. At the same time, it also serves as the liquidity skeleton of the tokens on the Cosmos chain. The first major innovation of Osmosis is Superfluid staking, a module that allows the underlying OSMO tokens in the liquidity pool to simultaneously provide liquidity and stake to ensure the security of Osmosis. The latest Fluorine upgrade adds more features such as stablecoin trading automated market maker (stableswap AMM), IBC rate limiting, and multi-hop routing. IBC rate limiting is a response to cross-chain bridge hacks that cap the supply of tokens 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, cooperating with Skip to "internalize" MEV (that is, let the agreement complete arbitrage transactions by itself), and launching tokens for lending liquidity. Mars Protocol, Interfluid staking similar to ultra-liquid staking (but staking for the underlying LP token that is not an OSMO token), mesh security, etc. The growth of Osmosis is largely due to its high token issuance/inflation rate, but upcoming features and integration plans in 2023 provide it with more opportunities to become the liquidity backbone in the entire IBC network, And provide the impetus for more robust growth.

3. Sei: A veritable hybrid public chain

As a Cosmos-based application chain, Sei has certain opportunities in the hybrid public chain track. Two highly optimized Rollup solutions will be launched on Sei, namely Nitro SVM and Paddle. The former runs SolanaVM and the latter runs MoveVM. MoveVM is a relatively new smart contract platform that has been adopted by fast monoliths such as Sui and Aptos, and is considered one of the fastest and most secure VMs. It is worth mentioning that Paddle will be the first Rollup solution to run MoveVM. Adopting an optimized Rollup solution helps to improve the performance and security of the blockchain system, thereby increasing the attractiveness of the ecosystem. Therefore, Sei has broad prospects for development in the DeFi field, and is expected to become a leader among hybrid public chains in the future.

At the same time, as more ecosystems adopt modular architecture, 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. The original design intention of Sei is to solve the problem of mutual isolation of existing public chains, and to achieve higher performance and lower transaction costs without sacrificing security and scalability. During this process, Sei adopted the framework of the Cosmos SDK and built a chain architecture with a high degree of freedom on top of it. This allows developers to easily build a variety of different types of applications, such as stake-based applications, asset-based applications, and more.

4. dYdX: Pure DEX Appchain

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

5. Injective: Decentralized Derivatives Trading Protocol

Injective aims to create a global trading market. Compared with traditional financial derivatives trading platforms, Injective allows anyone to freely trade various derivatives on its platform. In addition, Injective adopts a new type of transaction model called "trustless intermediary", which can guarantee the safety and fairness of transactions. Different from dYdX, dYdX is a pure application chain focusing on derivatives, while Sei and Injective are the basic layers for building infrastructure for applications such as perpetual contracts, options, and stable coins.

6. Duality: a hybrid between AMM and CLOB

The core function of Duality is to create pools of AMMs that allow swapping at a constant price. This differs from typical centralized AMMs, which determine price ranges through a price scale. Duality allows placing liquidity at a specific price, similar to a limit order on a CLOB. Arbitrary curves can be constructed on Duality pools, and traders can utilize market or limit orders to access liquidity shared across all pools. Like its main competitor, Osmosis, Duality aims to internalize and redistribute arbitrage profits from MEVs to LPs.

7. Stride: Liquidity Mortgage

Although Stride is an independent chain, once ICS goes live, it will become a consumer chain for economic security from the centralized Hub. When you consider Cosmos Liquidity Collateral Tokens, it is essential to ensure that the security of the underlying assets is not compromised by chains with low market caps and insufficiently tested validator sets. Stride has issued liquidity collateral tokens stATOM, stOSMO, and stSTARS, all of which have incentive pools on Osmosis. Stride’s main competitors will be Lido and Quicksilver, another Cosmos-native liquidity collateral solution.

8. Polymer: IBC protocol based on ZK technology

Polymer will be the first zk-IBC application chain on the Cosmos Hub. It allows assets to be transferred across chains without revealing 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 scheme to prevent "bad" MEVs through an Identity Encryption (IDE) scheme. **

Summarize

The current bottleneck of the hybrid public chain is the lack of a unified standard. Many projects are building their own interoperability solutions, leading to further market differentiation. Therefore, the missing link is a unified standard similar to TCP/IP for communication between all chains of the Internet. However, many Layer1 public chains living outside of Cosmos are using IBC technology to enter Cosmos, which means that this blockchain network is being adopted.

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

Network effects are the engine that drives economic activity. Every time a new blockchain (node) joins the Cosmos network, it increases the value of that network. Most importantly, the value of the network increases exponentially. In conclusion, future cryptocurrencies will be modular and combinations of different technology stacks will increase their sophistication.

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