The Tie Research
Creating the App-Chain Internet: Avalanche Subnets vs. Cosmos 2.0
Before the internet, computers had no method for transmitting data to other computers. Once computers could transmit data through a common language, or protocol, the internet rapidly expanded. The internet protocol, TCP/IP, established a network of computer networks that was much more useful, capable, and valuable than any individual computer network. This network of networks is the internet and it is the backbone of modern life.
In general, cryptocurrency networks are shared, open, distributed computers. Most cryptocurrency networks, however, do not have a shared protocol and consequently cannot communicate effectively with other networks. They are siloed, just like the early days of the internet.
Avalanche and Cosmos 2.0 are two cryptocurrency projects at the forefront of connecting cryptocurrency networks, laying the groundwork for a new kind of internet. These projects give developers the ability to customize blockchain networks and applications - something that is not possible with a single, monolithic network like Ethereum or Solana.
This article covers the upcoming changes to Cosmos 2.0, provides a brief overview of Avalanche, and compares the unique value proposition, token value accrual, and risks associated with each project.
- Cosmos 2.0 introduces a vision for an interconnected, financially-aligned network with built-in economic drivers
- Cosmos’s software development kit, or SDK, reduces the time required to launch a new project making Cosmos an attractive ecosystem for developers
- Avalanche provides a faster time-to-finality, more decentralized smart contract platform that avoids risks associated with DAO governance and liquidity centralization.
What's New in Cosmos 2.0
The first Cosmos whitepaper outlines the backbone of the Cosmos ecosystem, including a hub and spoke architecture, a Cosmos SDK, an inter-blockchain communication (IBC) protocol, and an application-blockchain interface (ABCI).
The Cosmos Hub, a central communication blockchain, facilitates transactions between its spokes, or consumer chains, through the IBC protocol. If you are unfamiliar with Cosmos, here is our first deep dive.
The Cosmos 2.0 whitepaper, released in late September 2022, outlines several fundamental changes and developments on top of the current backbone. Interchain Security and liquid staking are two mechanisms designed to improve the security of the network, while the Interchain Scheduler and Interchain Allocator are new economic engines. Additionally, this whitepaper outlines the tokenomics changes necessary to accommodate funding the treasury necessary for these engines.
Interchain Security is a mechanism for sharing validation infrastructure between the Cosmos Hub and fledgling application specific blockchains, or app-chains. Prior to Interchain Security, the app-chains in the Cosmos ecosystem were responsible for launching on their own validation infrastructure. For new app-chains, Interchain Security dramatically reduces the cost to launch and bootstraps security for new projects. Cosmos Hub stakers also benefit as they gain exposure to both the fees generated by interchain-secured projects and the ATOM block rewards schedule.
In Cosmos 2.0, staked ATOM is the interchain reserve currency. With liquid staking, there is greater alignment of incentives for network participants. As the amount of staked ATOM in circulation increases, network security increases and capital remains liquid for deployment in the ecosystem.
The Interchain Scheduler
The Interchain Scheduler is a new feature of the Cosmos Hub that establishes a secure blockspace market. The new ABCI++ allows for transaction inclusion and ordering to be segregated. The ordering rights for a future block can then be tokenized and traded between blockchains. The Interchain Scheduler creates a transferable, blockchain-agnostic blockspace reservation that establishes an on-chain MEV market. After successful block execution, a split of the proceeds from the Scheduler auction are sent back to the app-chain.
In other words, the Interchain Scheduler matches buyers and sellers. The buyers are users that want to lock-in arbitrage opportunities or schedule cross-chain settlement transactions with strong execution guarantees. The sellers are blockchain projects that sell reserved blockspace.
The Interchain Allocator
The Interchain Allocator is a system for capital allocation and incentive alignment that exists on the Cosmos Hub. There are two tools that power the Interchain Allocator, a Covenant and a Rebalancer.
The Covenant is a system for establishing multilateral agreements with designated chains and IBC-enabled entities. Functionally, it is a Cosmos Hub smart contract containing a liquidity pool that reduces friction for inter-protocol transactions. Two or more parties (often blockchains governed by DAOs) enter into a Covenant by depositing funds into the contract. Once the contract is fully funded, the deal terms activate and mutual stakeholding is established.
The Rebalancer is a tool that executes third-party swaps and rebalances the pool of funds in the Covenant towards a target portfolio using a set of exchange policies.
Together, these tools create the foundations for decentralized, collateralized agreements that manage capital, align stakeholding, and establish trust between chains. Examples of how protocols may use the Allocator include protocol-to-protocol collaboration, expanding liquid staked ATOM markets, or providing guarantees on auction price floors.
The Interchain Scheduler and Interchain Allocator create a self-reinforcing economic feedback loop. The Interchain Scheduler grows the IBC market and generates revenues for the Interchain Allocator. The Interchain Allocator deploys capital according to policies set by a decentralized autonomous organization, or DAO, increasing interchain liquidity. The increased interchain liquidity leads to increased arbitrage opportunities, therefore bolstering the value of the on-chain MEV market.
In order for the Cosmos Hub to enter agreements with consumer chains using the Interchain Allocator, the Cosmos Hub must establish a substantial treasury. To accommodate this necessity, the whitepaper outlines changes to Cosmos tokenomics.
Cosmos 2.0 Tokenomics
The Cosmos Hub treasury is filled by issuance of new ATOM (inflation) and revenue generated by the Allocator and Scheduler. See the following diagram for a visual of capital flow:
The new monetary policy occurs in two phases: transition and steady state.
The purpose of the transition phase is to allow consumer chains time to join Interchain Security and to give the community an opportunity to develop the social infrastructure necessary to effectively manage a sizable treasury.
At the start of the transition phase, 10 million ATOM are issued per month. The rate of issuance is calculated according to the following equation:
The transition phase ends 36 months after the shift to the new monetary policy. After the transition phase, the network continues in the steady state phase in perpetuity during which the network will issue 300k ATOM monthly.
Despite the hefty initial inflation, in less than 10 months, the $ATOM inflation rate should be lower with the new model than the old.
The structure of Avalanche has been covered in previous articles, but here are some key highlights:
- At its base layer, Avalanche has among the fastest time-to-finality and lowest fees in the industry
- Avalanche’s consensus protocol enables unbounded decentralization with minimal impact on time-to-finality
- Avalanche has an Ethereum Virtual Machine, or EVM, blockchain called the C-Chain
- Avalanche scales horizontally through app-chains deployed using subnets
- Avalanche subnets can use any state machine
Avalanche and Cosmos 2.0 share many similarities in overall vision, customizability, scaling approach, and optionally shared security.
Both platforms abstract away the complexities of the networking and consensus layers, so application builders can focus on building applications.
Both platforms allow flexibility in the virtual machine that runs the app-chain. This means that each app-chain is free to make their own design choices including state machine and monetary policies. Flexibility in the virtual machine allows protocols the ability to design revenue distribution policies, deploy different permissioning schemes (public vs. private blockchains), and adhere to different regulatory requirements.
Both projects scale horizontally. Scaling vertically or horizontally largely depends on how platform designers decide to manage the state of the blockchain. Vertically scaling blockchains are monolithic blockchains like Solana, and these blockchains manage a single shared state across the network. Managing a single, large shared state while maintaining performance poses technical challenges. Horizontally scaling blockchains break up managing state into small, independent blockchains that are relatively simple to maintain and can be customized for different use cases. Horizontal scaling comes at the cost of increased difficulty of composability, or chaining together protocol invocations, across blockchains.
Both projects provide options for new projects to onboard to their ecosystem by using a shared validator set. For Avalanche, new projects generally deploy on the C-Chain. This means that the C-Chain validators provide security for C-Chain projects, and these projects do not incur the additional cost of bootstrapping a validator set. Cosmos 2.0 shares its validator set through Interchain Security.
The framework includes value proposition, native-token value accrual, and risks.
Unique Value Proposition
The Cosmos 2.0 interchain includes any blockchain that implements integration with the IBC protocol. This is in contrast to Avalanche app-chains that must be deployed using a subnet.
Cosmos 2.0’s new economic engines take advantage of market inefficiencies by bringing MEV on-chain. This market serves as a sustainable source of liquidity for the ecosystem that incentivizes new projects to deploy in the interchain.
Cosmos 2.0 provides an SDK to build app-chains. Comparatively, Avalanche has limited developer tools.
Cosmos 2.0 blockchains can perform atomic cross-chain transactions, or AXC transactions. With AXC transactions, users of two different blockchains can make transfer transactions that are committed together on both ledgers. For instance, transactions between the Bitcoin and Ethereum blockchains are possible, although AXC requires both parties to be online for a trade to occur. In contrast, Avalanche can currently only swap between subnets through bridges.
Native-Token Value Accrual
Staked ATOM accrues value through IBC activity, settlements through the Interchain Scheduler, and reserves for cross-chain alignment through the Interchain Allocator.
Cosmos 2.0 relies on DAOs for treasury allocation and governance. Without the widely accepted use of reliable decentralized identity solutions for governance, DAOs are subject to centralization risks as governance tokens, like other forms of capital, tend to centralize. This could lead to a select group of powerful individuals that have unfair influence in the governance, capital deployment, and evolution of the interchain.
Even though there can be many Cosmos Hubs in the interchain, the hub and spoke architecture centralizes liquidity in Cosmos Hub treasuries. As Cosmos Hub treasuries grow with the inflation schedule and economic activities, they become a more appealing attack vectors.
A single SDK can be a great tool for rapid ecosystem growth, but a bug in the SDK creates wise-spread vulnerabilities.
Finally, there are risks introduced by the new economic engine that could lead to uncertainty, perverse incentives and unintended consequences. Prior to Cosmos 2.0, on-chain MEV markets have not been a primary economic driver of an ecosystem. How will the engines fare when MEV becomes less profitable through solutions like Flashbots?
Unique Value Proposition
Avalanche is among the most decentralized and fastest smart contract platforms in the industry. While Cosmos reaches finality within 6 seconds, Avalanche achieves finality within 2 seconds.
While there is upfront complexity in understanding Avalanche’s architecture, Avalanche’s protocol deployment architecture remains relatively simple as it does not necessitate an L2, even though L2s are possible. This is in contrast to the many technical, economic, and game theoretic considerations that are proposed with the new Cosmos 2.0 economic engines.
Avalanche is headed by former Cornell computer scientists Gün Emir Sirer and Kevin Sekniqi. This is in contrast with the development of Cosmos, which has largely been executed by open source contribution.
Native-Token Value Accrual
The native token for Avalanche, AVAX, gains value through the lock up of AVAX in validators, burnt C-Chain gas fees, and burnt subnet gas fees (optional).
Prior to distribution, the token allocation between the Ava Labs team and foundation account for 34.3% of AVAX tokens in circulation.
With the current bridging environment, there exists smart contract risk transferring assets between subnets. Furthermore, there is a high level of trust required in the Bitcoin bridge as it requires only 6 of 8 known custodians to corrupt the bridge.
Without slashing, the economic disincentive for malicious behavior may not be enough to dissuade attackers.
Avalanche faces competition from competing zero-knowledge technology and other scaling solutions. Vertically scaling blockchains challenge horizontally scaling blockchains if composability challenges are insufficiently addressed.
A Unified Vision
The Cosmos 2.0 and Avalanche visions are not mutually exclusive. Landslide Network is an Avalanche subnet that implements IBC integration, creating an on and off-ramp between the two ecosystems. The aim of the Landslide Network is to decrease the time-to-finality of Tendermint consensus and port over Cosmos and Terra ecosystems to Avalanche.
After understanding the value proposition, value accrual, and risks of the Cosmos 2.0 and Avalanche projects, it's worth taking a step back to reflect on what the the long-term value proposition of an App-Chain Internet can do. Web2 users can surf the web without any fundamental understanding of internet protocols, a level of abstraction that does not yet exist in crypto.
As it stands, any time you interact with a cryptocurrency network, you have to know which network you are interacting with. An open, interoperable app-chain internet connects liquidity and facilitates communication between networks, helping realize this missing abstraction layer. This could remove technical overhead and friction for onboarding new cryptocurrency users, taking cryptocurrency one step closer to mass adoption.
This report is for informational purposes only and is not investment or trading advice. The views and opinions expressed in this report are exclusively those of the author, and do not necessarily reflect the views or positions of The TIE Inc. The Author may be holding the cryptocurrencies or using the strategies mentioned in this report. You are fully responsible for any decisions you make; the TIE Inc. is not liable for any loss or damage caused by reliance on information provided. For investment advice, please consult a registered investment advisor.
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