State of the Cosmos Ecosystem
Report

State of the Cosmos Ecosystem

February 14, 2024
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Introduction

Cosmos has seen the validation of the “app-chain” thesis with the emergence of Ethereum L2s and the migration of major projects like dYdX from being built on Ethereum smart contracts to now building on the Cosmos stack. With this maturation of the Ethereum roadmap, Cosmos faces stiff competition in battling the giant’s “network effect”. With that being said, Cosmos has a number of growth catalysts slated for the coming months.

This report dives into exciting developments and projects emerging in the Cosmos ecosystem. These include:

  • The ATOM Economic Zone
  • Osmosis, Stride, Berachain, and other projects
  • Native USDC enabled by Noble
  • The modular blockchain stack powered by Celestia, Dymension, and Eclipse
  • The intersection of crypto and AI, enabled by Akash

TLDR

  • The Atom Economic Zone in Cosmos simplifies the deployment of new consumer chains by adopting Replicated Security and exploring other shared security models.
  • Osmosis, the dominant interchain DeFi exchange, plans to introduce incentives for liquid staking tokens (LSTs) and launch Concentrated Liquidity (CL) for improved capital efficiency.
  • Noble aims to bring native USDC to the Cosmos ecosystem, providing a canonical and fungible version of USDC across IBC-enabled blockchains.
  • Stride, the first Cosmos-wide liquid staking provider, is adopting Replicated Security, enhancing security through IBC Native Rate Limiting, and exploring features like liquid governance and bridging stTokens.
  • dYdX is developing a standalone blockchain based on Cosmos, focusing on decentralization and scalability to become one of the largest exchanges in crypto.
  • Berachain, a smart-contract platform, combines Tendermint with Proof of Liquidity and introduces a Tri-Token System for efficient pricing, governance, and stablecoin usage.
  • Stargaze aims to create an active NFT marketplace within Cosmos, connecting traders on other chains to NFT DEX protocols through Outposts.
  • Celestia pioneered the modular blockchain thesis, providing abundant block space and customization options for developers.
  • Neutron offers a secure and permissionless smart contract platform with a focus on interoperability, enabling easy integration with other protocols through Interchain Accounts (ICA).
  • Eclipse provides scalability and flexibility for dApps through an evolved rollup solution, allowing seamless transitions between different networks and customization of components.
  • Dymension specializes in enshrined rollups, offering a settlement layer optimized for maintaining rollup states and verification proofs.
  • Kujira offers a suite of Fin-Tech products on their app-chain, generating real yield through staking, trading, lending, borrowing, and more.
  • Akash, a decentralized cloud infrastructure network, is launching the Akash GPU Testnet, offering participants the opportunity to earn rewards and shape the future of open-source cloud computing by contributing as GPU providers, deploying AI models, and benchmarking GPU performance, driving the intersection of crypto and AI.

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Atom Economic Zone

The Atom Economic Zone represents an alliance of Cosmos chains that adopt Replicated Security to enhance the security and deployment process for new consumer chains within the ecosystem. Consumer chains are secured by the Cosmos Hub, and validators running these chains are compensated with fees or inflationary rewards. This approach simplifies the deployment of new chains, as they no longer need to bootstrap a secure validator set from scratch.

In Replicated Security, the entire Hub, i.e., almost every validator runs a consumer chain meaning that Cosmos Hub governance must approve each chain. .However, there are other forms of shared security being explored in Cosmos. Opt-in Security, deviates from this approach as it allows validators to individually opt into running consumer chains, allowing permissionless launches without governance proposals.

Another design is Mesh Security, which works slightly differently to the previous 2 approaches in that it allows delegators to delegate to validators on other chains. The Cosmos Hub is not involved, and instead this design allows chains to increase eachothers’ security bidirectionally. This approach also requires consumer chains to have their own validator sets, unlike the previous two options, which may make it appealing to chains that already have their own validator sets. 

Map of Zones

Osmosis

Osmosis is the dominant interchain DeFi exchange in Cosmos. It plans to introduce a new incentives category for liquid staking tokens (LSTs). This new category will receive a 5% allocation of Osmosis incentives and aims to establish and maintain functional liquidity for LSTs in Osmosis dApps. Osmosis has been a primary hub for LST activity within Cosmos, and these tokens play a crucial role in DeFi within proof-of-stake systems as they improve capital efficiency and overcome the majority of the hurdle rate for a protocol wanting to incentive usage of a PoS token in DeFI, e.g., providing liquidity in an LP or as lending collateral. The proposal aims to solidify Osmosis' position as the liquidity hub for LST redemption across the Cosmos ecosystem.

Osmosis also plans to launch Concentrated Liquidity (CL), which is a liquidity provision mechanism similar to Uniswap v3 but with better UX, legible tick spacing at dollars and cents instead of long decimals, and access to the Osmosis ecosystem and the interchain.  Liquidity providers (LPs) concentrate their liquidity in custom price ranges where they expect assets to trade, instead of providing liquidity across the entire price spectrum. CL pools are highly capital efficient and offer excellent trade execution even with lower liquidity. 

Osmosis can reduce LP incentives as CL requires less pool liquidity for efficient trading, and LPs can be primarily incentivized with fees. However, LPing becomes more challenging with CL due to divergence loss as positions earn no fees when the price is out of range and higher impermanent loss since when the price of one asset moves through the range, the worse performing asset is bought. This leads to the LP being made up entirely of the underperforming asset when the position is out of range.

The introduction of strategy vaults on Osmosis can automate LPing and enable passive investing. Incentives for full-range liquidity may be provided to guard against oracle manipulation, subject to governance approval.

Osmosis leads the way in 30D IBC volume

Noble

Noble is an issuance platform that will bring native USDC to the Cosmos and IBC ecosystem through a partnership with Circle. This integration enables over 50 IBC-enabled blockchains to access USDC issued on Noble. The platform's vision is to become the gateway for all digital assets entering the IBC ecosystem, addressing challenges related to bridged assets from other ecosystems. Every chain will have access to a canonical and fungible version of USDC, in contrast to the fragmented liquidity of over 100 bridged, i.e., non-native versions of USDC, within the IBC ecosystem currently. 

Noble’s goal is to be the gateway for all digital assets coming into the IBC ecosystem, which can include stablecoins and any other on-chain digital representation of real world value. Noble aims to provide a simple, effective, best-in-class user experience for issuing and transferring assets within the IBC ecosystem, offering a turnkey institutional-grade asset issuance and integration solution.

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Stride

Stride, the first Cosmos-wide liquid staking provider, has made significant strides since its launch in 2022. It has onboarded several tokens including ATOM, OSMO, JUNO, STARS, LUNA, EVMOS, INJ, and UMEE, and its stToken liquidity pools on Osmosis have become some of the largest in Cosmos. Stride governance recently came to consensus on adopting Replicated Security, which should be implemented in the coming weeks. Along with this initiative, the protocol aims to enhance security through IBC Native Rate Limiting.

The team is also working on implementing liquid governance, allowing holders of stTokens to exercise the voting power of the underlying tokens. Stride also plans on integrating with the Liquid Staking Module, which will allow staked tokens to be directly liquid staked with the protocol without the intermediate step of unstaking. Core research focuses on features like the Bonded Liquidity Market, Protocol-Owned Arbitrage, Yield Indices, Validator Data Hub, Relayer Fee Market Middleware, and bridging stTokens to other ecosystems.

dYdX

dYdX is developing dYdX v4 as a standalone blockchain based on the Cosmos SDK and Tendermint Proof-of-Stake consensus protocol. It will feature a fully decentralized, off-chain orderbook and matching engine capable of scaling to higher throughput than any blockchain. The native token, $DYDX, is a natural fit to be used as the layer 1 token of dYdX v4. 

The Cosmos ecosystem was chosen due to its decentralization, scalability, and customizability. The main requirement for dYdX v4 is full decentralization, which can be achieved by building a decentralized off-chain network for the orderbook. Validators will run in-memory orderbooks that are never committed to consensus, ensuring high throughput while remaining decentralized. Traders on dYdX v4 will not pay gas fees but rather fees based on trades executed, which will accrue to validators and their stakers. It will be a fully sovereign chain, providing control to the dYdX community to build additional features and improve the underlying technology.

The goal is for dYdX to become one of the largest exchanges in crypto, and the focus is on developing a decentralized network that offers a competitive product experience. While Ethereum and Ethereum-based L2s are more decentralized than Cosmos, they are not performant enough for dYdX's needs. Cosmos was chosen as the best fit for dYdX's product tradeoffs and mission, but the team remains open to other chains and L2s in the future.

Berachain

Berachain is a high-performance, scalable, EVM-equivalent smart-contract and cross-chain interoperability platform built on the Cosmos-SDK. Recently, they have raised a $42M Private round led by Polychain Capital. 

 

The chain combines Tendermint with Proof of Liquidity, a sybil resistance mechanism, to achieve fast transaction speeds, low costs, and deterministic finality. Berachain has a Tri-Token System consisting of three native tokens: BERA (gas token), BGT (governance token), and HONEY (native consensus collateralized stablecoin). The Tri-Token System aims to address the need for pricing work (gas token), organizing consensus and decision-making (governance token), and transacting through a stable denomination (native stablecoin). Proof of Liquidity utilizes consensus vaults to calculate validator vote weights, distribute block rewards, and incentivize capital velocity and liquidity depth. 

Deposited assets are utilized in strategies to provide liquidity to decentralized exchange and lending markets while maintaining the peg of HONEY. Proof of Liquidity creates sustainable growth by aligning liquidity with utilization and market cap, and every protocol built on BeraChain has a vested interest in the network's future. The project aims to unify a DeFi-native community and attract projects across DeFi, GameFi, NFT-fi, and more.

Stargaze

Stargaze is the leading NFT chain in Cosmos. The team is working on Outposts, which allow Stargaze to connect traders on other chains to NFT DEX protocols like Infinity Swap. Outposts concentrate liquidity and allow other chains to engage with Stargaze without fully implementing IBC capability, streamlining cross-chain liquidity provision.

The vision is to create an active NFT marketplace within Cosmos, promoting NFT trading, lending, borrowing, and the development of NFT-focused DeFi protocols.. The benefits include seamless cross-chain NFT transfers, provenance preservation, increased liquidity, extended utility, and a thriving NFT ecosystem within Cosmos.

Top collections on Stargaze

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Celestia

Celestia is the pioneer behind the modular blockchain thesis. The protocol decouples consensus from execution, providing abundant block space and choice for developers. Modular chains like Celestia can increase their blockspace as their ecosystem grows, keeping fees affordable as more users join the network.

In contrast, monolithic chains restrict options for developers by requiring them to conform to their set of features and tradeoffs..Modular chains offer abundant options for developers to deploy chains with their desired features and tradeoffs. Developers can specialize in the execution environment, choosing from existing execution environments or experimenting with their own.. Celestia aims to address the problem of scarcity in monolithic blockchains by introducing abundance and options for users and developers.

The modular blockchain stack

Neutron

Neutron is a secure permissionless smart contract platform for Interchain DeFi, powered by Tendermint and built with the Cosmos SDK. It is also the first chain to adopt Replicated Security. It enables developers to launch smart contracts with minimal overhead and provides tools for interoperability with other protocols and app-specific blockchains.

Interchain Accounts (ICA) enables Cosmos blockchains to control accounts (wallets) on remote zones via IBC, allowing transactions to be executed on the remote chain. Neutron will be both a "host" and a "controller" and will implement ICA for smart contracts.

Neutron emphasizes security, composability, and easy integration with existing Cosmos SDK-based projects. It aims to provide a developer-friendly environment for building decentralized applications with strong security guarantees.

Eclipse

Eclipse is an evolved rollup solution that offers scalability and flexibility for dApps. It addresses the limitations of traditional blockchain networks in terms of data throughput, scalability, and interoperability. Eclipse is deploying as an optimistic rollup and is taking a modular approach, allowing developers to customize their preferred virtual machine, L1, and other components. 

By providing dedicated TPS for each dApp, Eclipse improves scalability and enables dApps to handle a massive number of users. Moreover, Eclipse allows dApps to seamlessly transition between different networks, reducing vendor lock-in and offering the best features of multiple chains in a single project. It acts as an interface between different blockchain networks, facilitating communication and providing a more adaptable and customizable development experience compared to traditional L2 solutions.

Eclipse differentiation

Dymension

Dymension is a new scaling solution for the Cosmos ecosystem that specializes in supporting enshrined rollups, which incorporate rollup logic into the protocol, benefiting from increased security and reduced fees. . It enables the deployment of dedicated rollups customized for high TPS demand and computational complexity. Dymension focuses on the execution and settlement layers, providing tools and infrastructure for building and running autonomous enshrined rollups.

Dymension aims to provide a specialized settlement layer optimized for maintaining rollup states, verification proofs, and fraud proofs. 

Kujira

Kujira has built a broad suite of Fin-Tech products on their app-chain with the aim of generating real yield for their stakeholders:

  • BLUE acts as the central platform within the ecosystem, where KUJI token holders can stake tokens, claim rewards, delegate to validators, vote on governance, and bridge tokens to and from other chains. 
  • ORCA is Kujira's first product, offering a revolutionary approach to liquidating loan collateral. Users can bid on various tokens using USK, the protocol’s native over-collateralized stablecoin.
  • FIN is an on-chain Decentralized Exchange (DEX) that provides limit orders, market swaps, and margin trading. It utilizes a fair distribution method for trades and offers a centralized exchange (CEX)-like trading experience.
  • BOW enhances the trading environment on FIN, allowing liquidity providers to earn a portion of fees and additional incentives by staking LP tokens. 
  • GHOST is a money market where users can borrow and lend using various financial instruments, providing opportunities to earn interest and secure short-term working capital.
  • PILOT is a launchpad developed in partnership with Fuzion, utilizing a unique sale method based on ORCA's bid process to ensure equal participation and a fair opportunity for all.

Akash

Akash is a Cosmos app-chain offering an open, efficient and cost-effective alternative to traditional cloud service providers by creating a marketplace for buying and selling unused computing resources. It allows cloud providers to be sovereign: own your cloud, deploy your own cloud infrastructure, and buy/sell unused cloud resources with others on the network.

Akash is launching the Akash GPU Testnet, offering participants the opportunity to earn rewards and help shape the future of open-source cloud computing in the AI era.

Participants can contribute in multiple ways, including setting up a GPU provider, deploying AI models, building AI deployment templates using the SDL (Service Description Language), and benchmarking GPU performance. Testnet participants gain access to powerful GPUs like the NVIDIA A100 and H100, which are often difficult to acquire elsewhere. They can leverage a network of idle consumer-grade GPUs and run the latest open-source AI models and modify popular open-source AI models using their own data.

By providing GPUs to the network and supporting AI, machine learning, and graphics-intensive workloads, participants have the opportunity to earn rewards. The maximum testnet incentives vary based on the GPU model provided, with rewards ranging from $200 for the Nvidia 3080 GPU to $4,000 for the Nvidia H100 GPU.

The testnet presents an opportunity for participants to be at the forefront of testing a revolutionary open-source marketplace for GPU compute while earning incentives. Akash is a tangible representation of the intersection of crypto and AI as a decentralized infrastructure provider for the imminent AI revolution.

Closing Thoughts

Cosmos is at a pivotal point in its ecosystem’s development. With so many exciting catalysts on the horizon, there is significant potential to capture the mindshare of developers and users alike. With the development of new shared security models, continued innovation of the DEX experience, Cosmos-native USDC, the migration of blue chips to the Cosmos stack, modular blockchains, the intersection of crypto and AI, and IBC as the messaging layer bringing everything together, Cosmos season could be just around the corner.

Sources

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