Article by Austin Foss Edited by Kornket Cover Art by Chamelon

Cosmos launched their mainnet on March 13, 2019, and about 6 weeks later, on April 22, ATOM token transfers were enabled. In almost four years, the Cosmos ecosystem has grown to more than 200 apps and services including many in the DeFi category. Touted as the “Internet of Blockchains”, Cosmos is aiming to solve the blockchain scaling challenge using its unique strategy. In this article, we’ll explore what makes Cosmos different from other Layer 1 (L1) blockchains and how DeFi (Decentralized Finance) has evolved in that ecosystem.

Cosmos’ origin can be traced back to the Tendermint white paper published by Jae Kwon in 2014, five years before the launch of the network mainnet. Jae Kwon and Ethan Buchmann later founded All In Bits Inc. in 2017, doing business as Tendermint Inc. to further develop the Proof of Stake (PoS) consensus technology that would later power the Cosmos Ecosystem. In the same year, Jae Kwon became the president of the newly founded venture firm called the Interchain Foundation (ICF) to help fund the development and stewardship of the ecosystem.

Cosmos’ Tendermint is quite different from the consensus protocol used by some other PoS chains. Ethereum officially made the merge to PoS but unlike Cosmos’ Tendermint, Ethereum’s strategy is called Casper. A technical deep dive was published from the ICF in 2017 by the current host of the Interchain.fm podcast, @Chjango, who summarized both with the following properties:

Tender Mint Core:

• Provable liveness in partially synchronous network

• Safety threshold: ⅓ of validators

• Public/private chain compatible

• Instant finality: 1–3 seconds depending on number of validators

• Consistency-prioritizing

• Consensus safety

Casper:

• Available: Casper’s nodes can have their blocks fork until they come to consensus

• Asynchronously safe: Casper’s decisions can be live in partial synchrony, but are not live in asynchrony

• Cartel-resistant: Casper’s entire premise is built upon resisting an oligopolistic attacker so that no colluding set of validators can overtake the protocol

• Safety: Depends on each validator’s estimated safety threshold

These differences in protocol properties allow the Cosmos network to scale by using a network of L1 blockchains without the need to use Layer 2 methods like rollups. A new L1 created using the Cosmos Software Development Kit (SDK) can communicate with other L1s using a standard “Inter-Blockchain Communication protocol” (IBC). Each of these L1s connected to the Cosmos Hub chain is called a zone.

Map of Zones on the Cosmos Ecosystem. Source: Map of Zones

This leads to the elimination of a major drawback to any app chain: isolation. An app chain in the Cosmos ecosystem can communicate with the rest of the network.

In 2020, following the Cosmos launch, Jae Kwon stepped down from his role at Tendermint.

Two chains that were created using elements of Cosmos but not connected directly to the greater Cosmos ecosystem are Polygon and Binance’s BNB Beacon Chain. Polygon used a forked version of Tendermint called Peppermint as part of their consensus protocol. It’s possible for Polygon to implement IBC and communicate with the rest of the Cosmos Hub, but for now they haven’t. Peppermint’s differences include:

• Changes to the signature scheme

• Changes to voting to make it verifiable on Ethereum smart contract

• Changes to vote encoding scheme

Prior to Binance’s EVM-compatible Smart Chain (BSC), they originally launched their BNB Chain, now referred to as the BNB Beacon Chain, using a forked version of the Cosmos SDK. Similar to Polygon, while it can use IBC, it has not been enabled for the wider Cosmos ecosystem.

Meanwhile, Binance has been using IBC to facilitate a bridge between its BNB and BSC chains. At the start of October last year, a critical vulnerability was used to hack the bridge. With the help of Ethan Buchman this vulnerability was fixed before repeat attacks could occur.

The Cosmos network is secured by stakers who stake the ATOM token and delegate it to a validator that is building the network’s blocks. Delegators receive the network fees paid in ATOM and pay a commission back to the validator for producing a valid block.

In addition to the fees paid in ATOM from user transactions, blocks contain a reward, issuing new ATOM tokens, thereby making it slightly inflationary. ATOM’s inflation rate is variable, with the goal of having at least 67% of all ATOM tokens staked; if it’s less than that, inflation increases to a maximum of 20%, otherwise inflation decreases to a minimum of 7%.

In September 2022, a proposal for an on-chain vote to implement an updated Atom 2.0 was published on the Cosmos forums along with a white paper authored by twelve contributors including Ethan Buchman. Atom 2.0 prompted a significant debate within Cosmos including a response by Jae Kwon on twitter.

https://twitter.com/jaekwon/status/1590478003691479040

Source: Twitter

On October 31, Jae submitted an alternative on-chain vote for a new constitution called Atom One and a few days later it was also being discussed in the forums. Both votes ended on November 14, 2022 and both were rejected. Fundamentally, this debate was surrounding the unknown risks associated with the introduction of liquid staking to the Cosmos ecosystem. Atom 2.0 was in favour of liquid staking, same as Atom One, but with a different framework than what was proposed in Atom 2.0.

On her personal channel, the host of Interchain.fm shared a twenty-minute deep dive into the nuances of each proposal. At the opening she addressed the suggested change to issuance in the Atom 2.0 white paper:

What that means is that mid-flight, while the Cosmos Hub is running in prod we’re saying we’re gonna change the tokenomics underpinning this entire system. So what that does is it changes the social contract.  

— @CHJANGO

For the time being ATOM’s tokenomics will stay the same.

Cosmos wallets function differently from Ethereum wallets, so if we want to interact with its ecosystem we won’t be using MetaMask. Perhaps the most common wallet used is the Keplr wallet, but there are other varieties to choose from. The first step in order to start using DeFi in Cosmos is to get funds into the ecosystem. Asides from transferring to a Cosmos address from a centralized exchange, you can bridge directly from Ethereum using a tool called Gravity Bridge, “neutral Ethereum to Cosmos bridge.”

Terra was one of the biggest blockchains built with Cosmos SDK. The collapse of the Terra DeFi ecosystem had a great splash on the crypto industry, it was like the fall of the elephant in the room. Following the dramatic collapse of Terra in May 2022, two chains emerged representing two sides of the community: Terra Classic, which maintains the old token renamed LUNC, and Terra 2.0, which uses the rebranded LUNA token.

At the time of writing, Terra 2.0’s LUNA token was sitting at a market cap just short of 400M USD, and LUNC is a little less than 1 million USD. What happens to Terra next? Will both projects continue separately or merge as one? This is all still to be decided.

Following Terra’s collapse, the ripple effects emanating from UST’s unwinding kicked off the 2022 bear market, bringing with it a trend of austerity in the crypto ecosystem. A project called Emmeris, built and funded by Ignite, is still listed on the Cosmos home page under the Gravity DEX (Decentralized Exchange) project although it has been put on hold since at least June 2022.

Unfortunately, building Emeris is not cheap, and, given current market conditions, Ignite, Inc. has taken the decision to prioritize other initiatives. As a result, Emeris will be shutting down for a period of time.

Having IBC-enabled blockchains does help the UX of DeFi users of multiple L1s. Still, traversing the different Cosmos zones can be a bit of a learning curve. Paired with Emeris, Gravity DEX was originally aimed at enabling “…DeFi across multiple chains. Swaps and pools of digital assets between any connected blockchains…” to create a smoother UX. 

Now, it has been rebranded as Crescent and is acting as its own Cosmos Zone and specialized DeFi app chain. Crescent is innovating as a DeFi platform by creating a hybrid AMM (Automated Market Maker) and order book DEX. At the time of writing, its zone holds a market cap of nearly 32M USD, and Crescent’s native token (CRE) has a market cap of 14M USD.

Osmosis is the most highly trafficked AMM in the Cosmos Hub ecosystem with 384M USD of volume in the last months and a 501M USD market cap of the zone’s native OSMO token.

From the Osmosis documentation, their described value proposition is “Inspired by Balancer and Sunny Aggarwal’s ‘DAOfying Uniswap Automated Market Maker Pools’, the goal for Osmosis is to provide the best-in-class tools that extend the use of AMMs within the Cosmos ecosystem…” Osmosis has implemented self governing liquidity pools that enables voting of parameters of each pool, like the fee structures, on an individual basis.

A very new protocol in Cosmos, yet to launch, is the Mars Protocol. From their documentation, Mars Protocol is intended as “…a fully automated, on-chain credit facility…”

Almost all existing crypto-lending DeFi protocols like Aave and MakerDAO use an over-collateralized system. Having an under-collateralized loan hasn’t been explored in DeFi just yet.

In the physical world, repossessions or getting law enforcement involved are both options when dealing with an unpaid loan. However, in web3, there is no incentive keeping an anonymous account from borrowing and never repaying a loan. It could be interesting to see how this experiment plays out given the inherent risks of under-collateralized loans.

Similar to how Binance developed two different chains  —  one using the Cosmos SDK and the other as a fork of go-ethereum  —  Crypto.com has deployed two of their own. In March 2021, the first was called the Crypto.org chain and was built using the Cosmos SDK. Eight months later their second chain called Cronos launched.

Both Binance’s BSC and Crypto.com’s Cronos chain are EVM-compatible, but instead of being a fork of go-ethereum, Cronos is built using a tool called Ethermint. Ethermint is developed by another Cosmos zone called Evmos and is “a Cosmos SDK library for running scalable and interoperable EVM chains”.

Both of Crypto.com’s chains use the same CRO token that has a market cap of 1.6 billion USD. Relatively young for blockchains, their ecosystems are still developing and can be accessed most easily using their Crypto.com DeFi Wallet, or MetaMask, by connecting to the Cronos network because it is EVM-compatible.

Another EVM-compatible Cosmos zone is Kava, a hybrid of both EVM and Cosmos SDK-based chains. Users are able to connect to it using both Keplr and MetaMask wallets.

SushiSwap announced that it would be deploying to the Kava network. Any user should be conscious of high slippage depending on trading pairs as liquidity builds up. Users can access it through the same web app and simply select the Kava network from the drop down.

In September 2022, Curve joined the Kava ecosystem and has collected more than 12M USD of total deposits. As with SushiSwap, users just have to navigate to the same front end they are familiar with and select Kava.

For a chain that has only been around for about 4 years, the technology and research behind Tendermint has had an outsized impact on the crypto ecosystem. It has provided an easy to use framework for centralized exchanges and independent projects to experiment quickly.

Cosmos Zone TVL:

Crescent: ~32,000,000 USD

Osmosis: ~700,000,000 USD

Crypto.com: ~1,538,000,000 USD

Kava: ~529,000,000 USD

Evmos: ~512,000,000 USD

Gravity Bridge: ~35,000,000 USD

One thing the Cosmos ecosystem has demonstrated is a lot of experimentation and new ideas for DeFi.

A version of this article initially appeared in BanklessDAO’s DeFi Dowload newsletter on November 26, 2022.

Author Bio

Austin Foss is a lifelong technology enthusiast with a passion for single board computers, micro-controllers, self-hosted software solutions, and distributed public technologies. He writes on these topics with the goal of promoting use of such technologies and the value they bring to each individual when paired with a free exchange of information.

Editor Bio

Kornekt is a writer and editor with strong conviction in the world Web3 creates.

Designer Bio

Chameleon is a designer and creator in the web3 space.

BanklessDAO is an education and media engine dedicated to helping individuals achieve financial independence.

This post does not contain financial advice, only educational information. By reading this article, you agree and affirm the above, as well as that you are not being solicited to make a financial decision, and that you in no way are receiving any fiduciary projection, promise, or tacit inference of your ability to achieve financial gains.

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