What Is Cosmos? A Complete Guide
Cosmos is gaining momentum. dYdX will build its V4 as a Cosmos app-chain, while Delphi Labs will focus its development efforts around the Cosmos ecosystem. Cosmos looks well-positioned to achieve that envisioned multi-chain future. But what is Cosmos? What are the most promising Cosmos projects? This is a complete guide.
What Is Cosmos?
Cosmos is a network of blockchains. Each individual blockchain is an independent, fully-functional PoS blockchain like Ethereum and has its own validators and produces its own blocks. But they are also interconnected such that cross-chain communication is built-in. In the future, being part of the network could also mean constituents share security (validator capacity) and liquidity.
Cosmos is supported by the Interchain Foundation. Initial software development was started in 2014 by Tendermint (company). However, Cosmos does not rely on Tendermint (company) as its exclusive core developer, who is responsible for maintenance and improvement. Over the years, development has grown to include many contributing teams.
Cosmos is a complex system. The best way to understand it is to view it as a federation of city-states. Each federation member is sovereign, but the same principles govern them. The federation’s capital is called a Hub, whereas the member states are called Zones. In the Cosmos ecosystem, there can be many Hubs and many Zones.
Currently, the only Hub is the Cosmos Hub. The Cosmos Hub is traditionally the central router for all Cosmos transactions. It also serves as the ecosystem’s collective memory, tracking the state of each member blockchain to prevent double-spending. The Cosmos Hub keeps track of activities across connected blockchains to ensure everyone is on the same page. The native currency of the Cosmos Hub is $ATOM. The Cosmos Hub does not force its choices on other member blockchains. For example, while gas is paid in $ATOM on Cosmos Hub, Zones can establish their own native currency and do not need to use $ATOM. While this freedom allows each entity within the network to have flexibility around managing their local economy, it prevents $ATOM from benefitting from the growth of the Cosmos ecosystem because the value is captured by various native tokens rather than by $ATOM. Suppose each member of the Europe Union still issues their own currency. It would render the European Central Bank almost useless.
The primary pillars that support the Cosmos ecosystem are Tendermint, Cosmos SDK, and the IBC Protocol.
What Is Tendermint?
Tendermint is the consensus mechanism developed for Cosmos. Tendermint is also the name of the company which started the Cosmos project. In other words, Tendermint (technology) was initially developed by Tendermint (company). Luckily, Tendermint (company) has changed its name to Ignite, so all other references to Tendermint throughout this article refer to the consensus mechanism unless otherwise noted.
Tendermint consists of two technical components: a blockchain consensus engine and a generic application interface. The consensus engine, called Tendermint Core, ensures that the same transactions are recorded in the same order on every machine in a distributed network. Tendermint Core works even if up to 1/3 of network nodes fail in arbitrary ways.
However, the Tendermint design is not perfect. If there are an excessive amount of nodes participating in forming the consensus, the network’s speed will be reduced. Therefore, Cosmos Hub imposes an arbitrary limit of 300 validator nodes on its network. To ensure performance, a certain degree of decentralization is sacrificed.
The application interface, called the Application BlockChain Interface (ABCI), enables the transactions to be processed in any programming language. Unlike other blockchain solutions, which come pre-packaged with a built-in scripting language, ABCI allows developers to use whatever programming language and development environment that is right for them.
What Is Cosmos SDK?
The Cosmos SDK is an open-source developer stack for building customized Proof-of-Stake (PoS) blockchains and permissioned Proof-of-Authority (PoA) blockchains.
The Cosmos SDK aims to allow developers to create custom blockchains that can natively interoperate with other blockchains. Cosmos SDK consists of many composable modules, most of which are open-source and readily available for any developer. In the toolbox, developers can find items such as the Tendermint consensus mechanism, interoperability with the Cosmos ecosystem, and IBC Protocol integration, among other features. Effectively, developers can create a new blockchain from ready-to-use existing building blocks instead of starting from scratch. Integrating already-built modules into customized blockchains is as simple as importing them. Minor modification is required.
Cosmos SDK is a robust framework developed by a collective effort. Anyone can create new modules for the Cosmos SDK, so all ecosystem participants become contributing members at the same time.
The Cosmos SDK is written in Golang (a programming language) based on specific design considerations to allow for the customization of modules. However, expanding across many programming languages is crucial to growing developer adoption. CosmWasm is a project enabling WebAssembly (WASM) virtual machines (VMs) in the Cosmos SDK. Adding WebAssembly to the Cosmos SDK allows software written in many languages to run securely on a blockchain. WASM serves as an intermediate language that compiles the developer’s language of choice into a portable virtual machine. CosmWasm was first introduced in 2019 and has since been adopted by many protocols/blockchains.
Much of the Cosmos ecosystem’s appeal is that it makes building customized blockchains easy through the Cosmos SDK. Cosmos SDK has proven to be a powerful tool. Many prominent projects have built their own blockchains powered by Cosmos SDK, including BNB Chain, Terra (pre-collapse), Cronos Chain (Crypto.com), etc.
Developers can utilize only some pieces offered by the Cosmos SDK. As it is modular, developers can create different combinations to meet various demands. Like bartenders mixing a tailored cocktail, developers can choose whatever is available to accomplish their goals.
Paradigm has shown that it is possible to combine the Cosmos SDK with a different consensus mechanism other than Tendermint to create blockchains. Paradigm made a prototype Cosmos/ABCI application that used Narwhal/Bullshark (utilized by Sui) as the consensus algorithm instead of Tendermint. They discovered during the process that ABCI is quite Tendermint-specific, despite its aspiration to be more generic. We may see more Cosmos chains being built with Cosmos SDK and a newer and more advanced consensus mechanism than Tendermint.
What Is the IBC Protocol?
The IBC Protocol is the Cosmos standard for interchain communication. It is a reliable, ordered, and authenticated way of relaying arbitrary messages between independently distributed ledgers (blockchains). IBC was planned early but was not launched until 2021, seven years after the inception of Cosmos. Regardless, IBC has quickly become a critical piece of infrastructure.
IBC defines a set of basic standards for authentication, transport, and ordering and a set of application-level standards for asset and data semantics. Blockchains that enable IBC can be connected together without further special permissions.
IBC is built as a stack of components with various specifications and properties. Implementing one element at a particular layer can vary as long as it satisfies specific requirements. Blockchains need only understand compatible subsets of IBC to interact safely.
IBC is not limited to Tendermint-based blockchains. It can be implemented by any consensus algorithm that supports verifiable finality. Furthermore, IBC makes no assumptions about the topological structure of the network of blockchains in which it operates. IBC can reason about security and correctness at the level of a single connection between two modules on two chains.
What Is an App-Chain?
A Cosmos blockchain is often called an app-chain because blockchains built with the Cosmos SDK are generally created to accomplish a specific purpose. For example, Osmosis ($OSMO) is the “Uniswap” of Cosmos, and Axelar ($AXL) bridges Cosmos to other blockchain networks. But both are not DApps but sovereign blockchains themselves. App-chains differ from general-purpose blockchains like Ethereum, which are often called “monolithic” blockchains, as they do not expect to support all kinds of DApps on the network. While millions of smart contracts have been deployed on Ethereum, only a few applications are usually built on a Cosmos app-chain.
The reason is apparent. While it is already a headache for developers to pick Cosmos out of all the available layer-1 blockchains ecosystems, developers also need to decide whether they would like to build a new app-chain or build something on top of an existing app-chain.
One of the hottest topics in crypto is whether the future will be “monolithic” or “multi-chain.” That is, whether there will be a dominating public blockchain that serves as a universal base layer or many blockchains that collectively perform the execution duties.
The monolithic theory predicts that crypto activity will primarily center around a single network, which is likely to be Ethereum. Ethereum is battle-tested and boasts the most liquidity and developer activity. Building on Ethereum also assumes its security, so developers do not have to worry about setting up validators.
More importantly, a monolithic scenario offers perfect, “synchronous” composability. It is effortless for Ethereum smart contracts to interact with each other. For example, it is seamless to purchase NFTs on OpenSea via Gem, an NFT marketplace aggregator. No permission is needed for this kind of collaboration, and no bridge is required. A monolithic future is enticing because bridge remains one of the most hacked categories in crypto.
A multi-chain future, on the other hand, allows for greater flexibility and customizability. Building an app-chain provides much more freedom in the underlying architectural decisions than modifying smart contracts to fit one’s demand.
For example, dYdX plans to make its dYdX app-chain gas-free. Validators will be compensated via trading fees. Traders must pay both the trading and gas fees when using a decentralized exchange on Ethereum. A Cosmos app-chain can optimize this experience.
But something like this is simply impossible despite how many rollup layers one adds to the Ethereum base layer. Block space is a fundamental resource for users. On monolithic blockchains like Ethereum, blockspace is shared across network participants. Gas fees are inevitable, like death and tax. Users of one smart contract can be forced to pay higher gas fees because other smart contracts suddenly become popular. This poses a significant systemic risk for some. Imagine the Nasdaq has to pause trading because Disney Park is celebrating its anniversary.
Cosmos fits perfectly into the multi-chain narrative. It grants sovereignty and complete control to builders and their chains.
When building on a monolithic blockchain, developers are subject to the governance decisions of the blockchain. While the blockchain will optimize its choices based on the collective interest of the entire ecosystem, that collective interest sometimes can be different from one’s individual desire. This is another systemic risk that is alleviated by a multi-chain design.
In the end, everything is a tradeoff. Between monolithic and multi-chain, there is no clear winner. While building app-chains on Cosmos has merits, the lack of synchronous composability and the extra effort required to make a more bespoke blockchain solution are significant drawbacks. Costs to secure the network also cannot be ignored, which would be free in a monolithic setting. However, if the future is a mix of monolithic and multi-chain, does that mean that it is multi-chain after all?
Promising Projects
Despite all the hype, Cosmos is still small. According to DefiLlama, Cosmos’s total value locked (TVL) is currently $1.2 billion. The TVL of Ethereum sits at $25 billion. The entire Cosmos ecosystem represents less than 5% of Ethereum.
According to the official count, the Cosmos ecosystem offers 263 apps and services combined. As a comparison, the Solana 2022 Summer Hackathon attracted 750 submissions.
However, the Cosmos ecosystem managed to attract some heavyweight players. For example, most centralized exchanges turn to the Cosmos SDK when they launch their own blockchain. The list includes Binance, Kucoin, OKX, and Crypto.com, among others. Polygon uses Tendermint as its consensus mechanism, and THORChain is another well-known blockchain created based on the Tendermint + Cosmos SDK combo. dYdX will become the next prominent member, as it is currently the leading decentralized perps exchange and commands significant transaction volume. Lastly, although the infamous Terra blew up and took down crypto with it, it was built by the Cosmos SDK and was the biggest sub-ecosystem in the Cosmos network.
There are gems other than the big players.
Osmosis ($OSMO) is the largest decentralized exchange in the Cosmos ecosystem. It was launched in 2021 by Sunny Aggarwal, who previously was the lead researcher at Tendermint (company). Osmosis utilizes an automated market maker (AMM) model that allows traders to build customized AMMs with sovereign liquidity pools. Built using the Cosmos SDK, Osmosis utilizes IBC to enable cross-chain transactions. Now Osmosis pools have the most pairs and the deepest liquidity. Osmosis has become the liquidity hub and the trading post of the Cosmos universe, a role that was reserved for the Cosmos Hub.
Axelar ($AXL) is another essential component. Axelar enables secure communication across blockchains, regardless of consensus mechanism or message payload. It has two basic functions:
- Token transfers: Axelar allows users to send and receive fungible tokens from any chain to any chain, including between Cosmos and EVM and other complex transfers.
- General messaging: Axelar enables Cosmos smart contracts to perform cross-chain calls of any kind and syncs state securely between smart contracts on various ecosystems, meaning Cosmos app-chains are allowed to call any function on any EVM chain, such as performing DeFi functions, moving NFTs cross-chain, etc.
Axelar has become the primary source to bridge $BTC and $ETH to the Cosmos ecosystem. Simply put, it is the primary gate that connects Cosmos to the outside.
There are also quite a few general-purpose Cosmos chains such as Kava ($KAVA), Juno ($JUNO), Kujira ($KUJI), and Evmos ($EVMOS). Kava and Evmos are EVM-Compatible, while Juno is based on CosmWasm. However, such projects do not necessarily provide unique offerings. Functionalities are similar across different chains, which makes users wonder why they should use one chain but not the other if not for the Ponzi-ish native token staking yields.
DeFi-focused chains form another large sub-group. Notable members include Injective ($INJ), Sei (no token yet), and Crescent ($CRE). For example, both Injective and Sei hope to provide powerful on-chain financial primitives, such as a fully on-chain orderbook, to allow developers to create a more native DeFi experience for users. This path, if successful, will be ground-breaking. Even dYdX still plans to keep their order-matching off-chain in their Cosmos edition.
On the privacy side, Secret Network ($SCRT) currently dominates the privacy sector in Cosmos. Originally called Enigma, Secret Network was one of the first projects to adopt CosmWasm smart contracts. Since its inception, it has established itself as a privacy hub, providing related solutions for other app-chains.
Lastly, of course, there will be a Doge in Cosmos. Chihuahua ($HUAHUA) is a meme-themed blockchain built using the Cosmos SDK and Tendermint consensus. $HUAHUA is the native token.
Other exciting projects include Mars Protocol ($Mars), Akash Network ($AKT), Stargaze ($STARS), Agoric ($BLD), Sommelier ($SOMM), Umee ($UMEE), etc. Surely more names will join the ranks as the ecosystem grows.
Closing Thoughts
Since the idea of Cosmos was first brought up in 2014, Cosmos has gone through quite a journey. Cosmos held its annual event, Cosmoverse, in Medellín, Colombia, this fall. It was well-received and attracted broad attention from the wide crypto community. Bankless, famous for being diehard Ethereum fans, released a positive episode covering Cosmos’ recent developments and future paths.
Cosmos 2.0 was released during this year’s Cosmoverse, updating the vision of $ATOM and the Cosmos Hub, including shared liquidity and security. For example, new Cosmos app-chains may borrow validator capacity from the Cosmos Hub and pay $ATOM in the future. As such, these new chains need not worry about setting up their own validator set. We have recently explored this topic in more depth as well. (Related Reading: Cosmos Hub 2.0 — What Could It Bring for $ATOM Holders?). It’s the right move, as $ATOM has long been criticized for not benefitting from the growth of the Cosmos ecosystem.
But, as discussed earlier, Cosmos does not have a single team behind it as the exclusive developer. Its decision-making is more democratic than almost every other major blockchain ecosystem. And the Cosmos community sometimes goes in different directions. For example, Jae Kwon, one of the co-founders and key developers of Cosmos 1.0, has challenged Cosmos 2.0 with a proposal of his own. Do Kwon, the infamous Terra founder, also planned to build his own version of shared security in Cosmos.
At the moment, the developer scene in Cosmos is chaotic, with prominent members going in different directions, sometimes in direct contradiction to one another. This may be destined given the multi-chain vision at the Cosmos design’s foundation. One cannot expect different sovereigns to have the same opinion on every matter. Overall, this flexibility/freedom will slow down the speed at which Cosmos is moving ahead, but it may prove to be the right path. There were projects moving at lightspeed in a unified direction, and their collapse was faster.
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