As the COVID helicopter cash came flowing into bank accounts across the U.S. in 2020, retail investors, without the ability to go outside, immediately poured that money into risk-on assets across the investment landscape. The depths of Twitter and Reddit spurred major moves both in crypto (Defi Summer 2020) and traditional markets (WSB).
For the more crypto-initiated, DeFi summer was blessing, allowing those who suffered through the bear market to start the bull run with massive gains. The pro-crypto narrative continued to gain steam through 2020 and early 2021, until we hit a May pullback that saw many move out of “traditional” crypto (DeFi) and into the next mainstream - NFTs.
NFTs, while providing some with riches and others with rug pulls, highlighted a major problem with Layer 1 Ethereum: gas fees. While gas has always been a constant pain for Ethereum operators, the demand that OpenSea and other NFT marketplaces put onto the system caused GWEI to skyrocket — an issue without a solution. It became apparent to most that Layer 1 Ethereum could not be the long-term solution:
Enter, SoLunAvax. Alt-layers 1s became the trade of 2021, seeing SOL (+2426.0%), LUNA (+6928.9%), and AVAX (+456.1%) all outpace ETH (+86.1%) on the year. Each alt-L1 had its day in the sun, despite battling their respective negative storylines—namely compromising on decentralization for more scalable throughput. Although the SoLunAvax trade is down off its highs and has underperformed ETH in the last 60-days, alt-L1s introduced a phrase into crypto-jargon last year: the ETH-killer.
The Ethereum blockchain being the be-all end-all has always been a hotly contested debate — even Vitalik has come out saying the future is multi-layered (i.e., modular) in his latest article ‘Endgame.’ Yet, we anon crypto traders have been tasked by Cobie to “trade the meta.” And trade we shall.
As 2021 closed and 2022 began, the baby was not thrown out with the bath water when it comes to alt-L1s. Many who stayed abreast of crypto’s 2022 Thesis szn at the close of the year may be familiar with a new moniker: FLAMingo.
Potentially coined by Money with Carter, FLAMingo is long trade made up of:
$FTM: Fantom (Andre Cronje’s new preferred blockchain)
$LUNA: Terra Luna (still holding strong in the L1 wars)
$ATOM: Cosmos (bringing Inter-Blockchain Communication to the mainstream)
$MATIC: Polygon (the old ETH L2 scaling solution has now firmly transitioned into the L1 conversation)
While Unit Zero plans on covering each piece of the FLAMingo trade, one of my strongest convictions lies in one of the most unique approaches to Layer1 we have seen to date: Cosmos.
A major reason Cosmos has not been the center of attention in the past, is due to its unique ecosystem. Delphi Digital puts it best: Cosmos is just built different.
For starters, recent Twitter debates have highlighted that the name Cosmos can be confusing, as it refers to both the Cosmos Ecosystem and the Cosmos ($ATOM) Hub, both of which Unit Zero is bullish on.
The Cosmos Ecosystem is not one singular blockchain providing the foundation for dApps to build on top of, but rather an ecosystem of blockchains. Commonly referred to as “the internet of blockchains” is the community of blockchains that utilize the Cosmos SDK (Tendermint). Each of these blockchains is independent and sovereign, but, when connected, make one scalable ecosystem of modular blockchains.
Modularity has become a hot topic these days and is the current tailwind pushing EVM-based L2s like Optimisim, Arbitrum and ZK-Sync to the forefront of the scalability conversation.
No one denies that scalability is important for the growth of Web3. However, it really is how you scale that is important, which is often overlooked. When it comes to blockchains, three components must be considered when deciding how to scale: execution layer, consensus layer and data availability layer. Without getting too technical, here are some basic definitions pulled from an amazing overview of modularity by Plaintext Capital:
Execution: the computation of transactions that are included in a block. Simply put, it’s the process of taking the number of coins a user has on Ethereum, subtracting the amount of Ether she is sending, and saving the result.
Consensus: needed to order these transactions. Without a consensus algorithm, it is impossible for a group of computers to come to an agreement on the order of transactions, and thus reach the same state.
Data Availability (or Networking): the process of guaranteeing blocks are fully published to the network.
Layer 1 Ethereum faces issues with scaling because all three layers are run concurrently each demanding resources and clogging the network. Within the Cosmos Ecosystem on the other-hand, the Cosmos SDK natively runs a consensus layer via Tendermint, allowing for each independent blockchain dApp to specialize and focus solely on optimizing the execution component. As for the data availability layer, the Cosmos Ecosysmtem is incorporating Celestia, further modularizing the blockchain tech stack and unlocking new possibilities for decentralized application builders. (Note: Celestia development is ongoing and Tendermint currently supports both components as shown below)
The ideas of specialization and opportunity cost are so fundamental to the markets that dictate our lives, they are taught the very first day you walk into Econ 101. You are an 18-year old college student, fresh off a bender of a first weekend in college. Eyes bloodshot and groggy you stroll into your 9am Econ class, slump down into your seat, and stare up at an archaic professor in a tweed jacket who begins to tell a story about Country A producing berries and Country B producing bananas. A few day-dreams and some illegible notes later, the result of this 60-minute lecture is that you learn specialization is good for production. Which begs the question as to why at the bleeding edge of technology, do we expect a single blockchain to do everything? In an age where we move factories across continents to save cents on the dollar in operating costs, do we accept $100+ transaction fees?There must be a better way! Monolithic blockchains will not succeed, because monolithic blockchains cannot succeed. Monolithic blockchains have become a whale’s game, marginalizing those that decentralization swore to protect - the little guy trying to build an economic safety net for his family.
Through the standardization of the consensus and data layers, the Cosmos Ecosystem is flourishing into a cluster of nation-states all focused on specialization. However, as any good student who continued paying attention to the dusty ramblings of their professor would know, what good is specialization without communication?! Since the earliest days of the Cosmos Ecosystem, its major drawback as been lack of communication and data transferability. At its core, a smart contract platform requires interoperability to thrive in this competitive industry. Without interoperability, dApps are not “money legos,” but rather children engaged in parallel play.
Pictured another way, the ecosystem without communication/interoperability is like your starting settlements in Catan - spread across the map lacking synergies. More often than not, the person who wins the game of Catan is the one who connects their settlements, utilizing roads to expand their claim of land. In Cosmos, rather than building roads, the Interblockchain Communication Protocol (IBC) builds an information superhighway, much like the original ideations of the internet. IBC enables independent blockchains to connect, transact, exchange tokens and other data, scale, and thrive in an interconnected network. The incorporation of IBC has truly unlocked Cosmos’ broadband moment. In 2021, a robust internet of chains has been created, with 25 new protocols adopting the IBC standard. As of early December, these chains have seen a massive 5.8 million IBC transactions occur and are collectively worth over $60billion! And, while many of the chains showed in the illustration below may be new to those reading this, the team at Cosmos is working to bring more “mainstream” connections to the table, including Bitcoin, Harmony and Avalanche.
While the ultimate goal of Unit Zero is to provide detailed commentary on all the value traveling across the IBC rails of the cosmos (get it?), I want to keep this high-level while still emphasizing how important IBC is to the future of Web3. In a world of competing L1s, duct-taped together with blackbox bridges and sometimes day-long lockups, IBC & Cosmos flips the game on its side, unlocking a true foundational piece for Web3 to build upon: interoperability.
In a recent thread, Chris Dixon of a16z discusses the importance of interoperability in Web3 compared to Web2. Interoperability as an inherent parameter of a Web3 world forces networks to work together, dramatically increasing their TAM and synergies. For the world to truly embrace Web3 and “the metaverse”, current builders must blur the lines between different chains, different protocols. The friction must be removed. To cut this short, I have found a tweet to some up my thoughts perfectly:
Given that IBC helps Cosmos build an information superhighway across the blockchain world, how this network of blockchains is built is of equal importance. Theoretically, you could connect each blockchain in the network to every other blockchain; however, exponential growth may simply lead us back to the L1 network congestions issues we are trying to improve. Thus, Cosmos has designed an architectural framework containing two different types of blockchains: Zones and Hubs.
As already discussed, the Cosmos Ecosystem is made up of independent blockchains, called App-Chains. Any App-Chain, or non-Cosmos SDK chain for that matter, that has integrated IBC is considered a Zone. Thus, a Zone is a blockchain that is able to send data packets to another blockchain. A Hub, is a Zone that is optimized to facilitate data transfers between Zones.
Although technically any Zone can become a Hub, the most popular hub in the ecosystem today is its namesake...
Whew...I never thought we’d get here. Although the Cosmos Ecosystem currently has a few Hubs transferring data cross-chain, none is more popular the Cosmos Hub with its native token, $ATOM. Cosmos’ ATOM functions similarly to a standard PoS blockchain utility token. ATOM is staked to validate the PoS nodes and allows all stakeholders in the network to pay transaction fees, earn rewards, and participate in governance.
I think for many people reading this, especially those that have been following Cosmos for a while, it may seem odd that ATOM did not see the same outsized gains in 2021 that other alt-L1s did. Well, the main reason for that is truly what makes Cosmos so compelling: its interoperability and freedom. All App-Chains using Cosmos SDK, like Osmosis for example, can have their own native token, $OSMO, each with their own set of utilities. Use of the Cosmos SDK does not require value to flow back directly to those staking ATOM to validate the Cosmos Hub. When architecting the network, the builders of Cosmos valued frictionless data transferability over building a moat around the Cosmos Hub itself, which, until now, has made it difficult for ATOM to accrue value as the network grows.
So we are left with a major question: when your most popular app is also your largest competitor, how do you balance network growth with value accrual? Well, Cosmos’ 2022 roadmap is specifically designed to target both sides of this equation. Let’s begin by focusing on Cosmos’ two upcoming upgrades, Theta and Rho.
The two biggest enhancements in the Theta Upgrade are Liquid Staking and Interchain Accounts, both aimed at catalyzing the Cosmos’ DeFi sector.
Liquid Staking V1 will allow ATOM holders to send transactions that immediately convert their staked/bonded ATOM into transferable representations that can be used in liquidity pool and other activities. Allowing users to participate in-ecosystem and maximize their ATOM while still earning staking yields will create a Cambrian explosion for Cosmos DeFi. This innovation reminds me of Joey Santoro of TRIBE’s EIP-4626 proposal. EIP-4626 is aimed at standardizing yield bearing vaults on the Ethereum blockchain, in essence unlocking DeFi participants’ ability to leverage their yield-bearing assets for other DeFi functions. For example, if you are providing liquidity in AAVE, you can take your a-denominated assets and generate yield on them elsewhere. Increased composability and interoperability will spur innovations and help drive maturation in the ecosystem.
Interchain Accounts allow ecosystem chains to securely control accounts on other ecosystem chains, rather than simply transferring tokens from one chain to another. This will bring the Cosmos Ecosystem’s smart contract interactions more in line with that of Ethereum’s. Cosmos with IBC allows you to move tokens between networks (Cosmos → Osmosis), but you do not have the ability to trigger an action on another chain as you do with smart contracts on Ethereum. Interchain Accounts change all that by providing interoperability, which will further catalyze Cosmos’ DeFi Big Bang.
Both Liquid Staking and Interchain Accounts are efforts to move the execution layer of Cosmos more in-line with what current crypto-natives are used to, while still optimizing for scalability and cheap transactions. While Interchain Accounts are more of a boost to interoperability, Liquid Staking will increase the use and importance of ATOM moving forward.
With the creation of true money legos occurring in Q1, the Cosmos Ecosystem as a whole should pick up steam heading into the spring; however, I personally believe the most important upgrade to the system will occur with Rho: Interchain Security.
Currently, each App-Chain built on Cosmos must bootstrap their own validator sets to secure the network. For a new chain with low liquidity, it is a tall order to generate enough value staked to secure the protocol. But, if new apps were able to outsource this to an external party, they could focus more resources on their true project build. Enter Interchain Security. Adapting the current Ethereum security model, Interchain Security will all Cosmos chains to lease out validator space and security services to one another, allowing new chains to plug in to the existing infrastructure. By staking ATOM on the Cosmos Hub, validators and delegators will be able to collect rewards on multiple chains in different tokens. ATOM stakers will therefore benefit from early access to new and innovative projects and greater token utility, while at the same time allowing new chains to get exposure of their tokens to Cosmos community members early on. While all three major announcements between Theta and Rho will drive liquidity and value towards Cosmos, Interchain Security is clearly the most value accretive to ATOM, directly.
The last two major growth catalysts for the Cosmos Hub and ATOM are those that have already hit the news towards the end of 2021: Gravity DEX and the introduction of IBC Hub.
Gravity DEX is the Cosmos Hub’s native DEX which has recently launched as a competitor to Osmosis. Upside here being that rather than fees accruing to Osmosis’ native $OSMO, we will see accrual back to $ATOM instead. As the focus for Cosmos has turned to building out its Hub for the future, we should see more work done to try to promote Gravity DEX over Osmosis moving forward. Gravity DEX improves on existing designs, by combining best-of-breed DeFi AMMs with an orderbook-based model. One big competitive advantage for Gravity in 2022 will be shipping the Gravity Bridge, used to bridge assets from Ethereum into the ecosystem. If most liquidity moving into Cosmos runs through Gravity Bridge, it may be safe to assume their first stop will be Gravity DEX into of jumping again to Osmosis, but we will see how this plays out over the next few months.
In October the concept of an IBC router, or a central location to facilitate all IBC transfers, was introduced to the Cosmos Ecosystem via Proposal 56. The reason behind the proposal is that with the current architecture of IBC, new zones and App-Chains need to maintain a large amount of infrastructure, in the form of relayers, to pass information cross-chain. Making Cosmos Hub the IBC Hub moving forward would allow it to facilitate all IBC passthroughs, both singular and multi-hop packets, throughout the Cosmos ecosystem. Currently, the processing fee for these transfers is set to 0 ATOM, to encourage adoption; however, it is expected that this fee will be increased through a governance vote in the future. If this is the case, between the current volume of IBC transfers in the ecosystem and future connections outside of Cosmos, the Cosmos Hub could pull in serious revenue through processing fees, with a % flowing back to ATOM stakers.
If we go back to my blockchains as nation states analogy, we can consider Cosmos to be a nation whose main economic driver is shipping. A seafaring nation covered in ports, specialized in information exchange. However, one successful nation state does not create a rich and thriving global economy. Rather than focusing on tariffs and shipping taxes, the Cosmos Hub favored more egalitarian trade routes, ensuring that its partners could thrive.
It is clear that Cosmos emphasizes the importance of sovereignty and interoperability in building an open ecosystem of blockchains that can scale for mass adoption. However, now that its fellow nation-states are firmly established, the main question is will reduce the Cosmos Hub’s importance in the long run? I am inclined to believe that the Cosmos Ecosystem will be a thriving environment of mulitple large Hubs. As mentioned, this is already playing out between Osmosis and The Cosmos Hub. Both can facilitate IBC and both have native DEXs built into them. However, with the roadmap laid out for 2022, I think that Cosmos will become an interesting ecosystem for developers to help grow and build.
Osmosis (Superfluid Staking in 2022)