Disclaimer : I am relatively new to building in Cosmos (more on my story here), and have been building Duality for the past year+. There is also currently a proposal in progress for Neutron to acquire Duality which may be perceived as a conflict of interest. I ask that you please read as much as possible if you’re interested in commenting on it, this way we can have an informed, nuanced discussion on it. Also not sure if I have to say this or not but just in case : this is not financial advice. Here goes nothing !
The Value of Focus
Tldr : Focus is the most important but scarcest resource.
A piece of conventional startup wisdom that has been given to me more times than I can count is : more companies die of indigestion than starvation.
When you’re working at a startup for the first time and someone tells you this, it sounds incredibly counterintuitive. How could it be the case that more startups fail from doing too much ! Clearly you’d be more likely to never make a shot if you don’t take enough shots on goal.
But the reality is resources at startups are scarce : runways are finite and stagnation kills attention. To illustrate why scarcity matters, consider companies building crypto protocols :
- $10 million in runway, 3 theses - we will be the best at DeFi, Social DAOs and Rollups
- $4 million in runway, 1 thesis - we will be the best at DeFi
- $4 million in runway, 1 thesis - we will be the best at Social DAOs
- $4 million in runway, 1 thesis - we will be the best at Rollups
Even though startup #1 raised the most money and probably has the largest team, they can’t allocate more focus, thoughtfulness and capital to any individual vertical (~$3.3m, ~33% team) as the other three (~$4m, 100% team). Anyone who’s worked at a startup before also understands how much value is lost in coordination efforts.
The recent story on Hopin illustrates this very well. Capitalizing on venture fervor for remote-focused startups during the pandemic, Hopin - an online events platform founded in June 2019 - soared to a $7.75b valuation in August 2021. This has been recognized as the fastest growing European start of all time. They decided that the best use of the capital they had raised was to horizontally scale, and proceeded to acquire six different startups in deals totalling to hundreds of millions of dollars.
Within a year, they laid off ~40% of their team. Within two years, their CEO stepped down and sold their original online events platform for a mere $15m.
I didn’t work at Hopin, so I don’t know what actually happened. But what I do know is that building a great company, protocol, product or even feature, takes an immense amount of focus. New products incur switching costs on users - new user flows to learn, contents to transfer, communities to build… and existing solutions rarely suck in their entirety since the incumbents had a head start.
To build something special, you need a special team dedicated to making special things actually happen. Up and down the stack, that team needs to solely focused on becoming the foremost experts in the tradeoffs spaces that are being explored. If they’re not the best, then how will they supplant the best ? Why should users switch ? In some ways it’s almost unethical to make it so if you don’t believe you’re building the perfect storm.
If you got to this point, you’re probably asking yourself what this actually has to do with ATOM or even crypto…
In my opinion, the Hub is still a nascent protocol and community on crypto time horizons. The things we’re building haven’t nearly played out fully, and won’t for many, many, many years.
The Hub also has scarce resources. The community pool is not infinite. The ICF’s funding is not infinite. The will of the community is not infinite. The developer’s energy is certainly not infinite. Not yet at least.
As a nascent protocol and community with finite resources, the Hub owes its believers, its contributors, and its community - at the least - a thoughtful, well-defined vision forward. A focused mission on where it’s headed for the long run.
I recently made the point that ossification is not good for everything, even in crypto. However ossification is a really powerful tool for reducing uncertainty. Ossifying a focus reduces uncertainty. It allows partner projects to feel confident in knowing what niches to build for and investors to feel confident in knowing what they’re betting on. Without it, capital and talent will choose to move elsewhere - once again attention is scarce.
The 5 Powers : Foundations of Crypto Protocol Success*
Main takeaway : A borrowed mental model for evaluating strategic directions.
So the question then becomes : what should the Hub focus on ? If you couldn’t tell, I think a good starting place for answering this question is that the Hub should think of itself as a (decentralized) startup. In the “7 Powers : Foundations of Business”, Hamilton Helmer gives us a great framework - 7 powers - to evaluate a startups positioning by :
- Scale economies : marginal costs decline as production volume increases
- Network economies : the value increases as more users enter the network
- Counter positioning : differentiation from incumbents
4. Switching costs : the loss of value a user has when switching to another network - Brand : attribution of value from a company’s history
6. Cornered resources : value from access to a coveted asset at preferential terms - Process power : benefits from existing organizational structures and processes
In crypto, imposing unnecessary switching costs and cornering resources are considered anti-public good, so I chose to leave them out of the “crypto-adjusted” framework. Feel free to think about them on your own though.
ATOM as Interchain Money and Security ?
Tldr : Money and security are the largest crypto markets, they are not minimal.
Within this framework, I believe two focuses (that may actually be one as I’ll explain in a second), emerge as valuable focus points for the Cosmos Hub. Interchain Money and Security. The reason I say that in many ways it’s closer to one is that there is a natural, positive flywheel between the two. The greater the adoption of ATOM throughout the interchain, the more valuable ATOM is, the stronger it’s positioning as a security provider is, and the more adoption we’ll see! Let’s take a deeper look in the context of our modified 5 powers of foundations of protocol growth.
- Scale economies (
) : as the Hub takes on more security obligations, the marginal costs do not decline. - Network economies (
) : as more users hold ATOM and more security counterparties onboard to the Hub, ATOM becomes more useful as a gas token, store of value, and transferable commodity. - Counter positioning () : the Hub is the most secure chain within the IBC connected ecosystem.
- Brand () : ATOM and the Hub are synonymous with Cosmos in many circles and continues to be the largest force for public good development in Cosmos.
- Process power () : the Hub is one of the most successful on-chain institutions ever and is made up of many passionate stakeholders.
All things considered ⅘ is really good and it’s not out of the question that scale economies will exist in the future with any of the various improvements to the Hub’s security and money offerings.
I want to be clear that money does not mean paying for starbucks with your ATOM. It means being able to use it liquidly on every chain, for collateral on every stable coin, lending and perps protocols. It means allowing people to buy NFTs with ATOM in one click. It means being able to spend ATOM privately and efficiently if you want to. And it especially means having robust, predictable tokenomics and stable governance and risk management processes.
The “moneyness” of ATOM comes from the opportunities for its utilization and the sense of stability and security in doing so.
Another thing I want to debunk is that focusing on money and security is not minimalism. Almost every time I’ve spoken to people about my beliefs on this, the first response I get is - “you are advocating for Hub minimalism”. Everytime I hear this, the first thing I think is “huh?”. Money and security are two of (if not the two) largest markets in all of crypto. Bitcoin is a $500b app-chain for… money ! Ethereum is a $200b chain that is a few years deep into a transition into being a security provider for rollups and “ultrasound money”. How can the largest markets be minimal !
If it’s Not Minimalism then what’s the problem ?
Tldr : Focus - or lack thereof - was always the problem.
From the outside looking in, the problem has not been that the Hub has been minimalistic so it hasn’t captured value, it’s that it has been unfocused, and unsuccessful in the things it did allocate focus to. The Hub first attempted to create value for its community by being… a Hub for bridging! If I remember a conversation with Jehan correctly, a big reason this failed was because multihop IBC was not ready. It’s now 2023 and multihop IBC is just becoming prevalent within the interchain thanks to packet-forward-middleware and teams building applications that creatively leverage it. At some point, the Hub must’ve also tried to be a DEX. As I’ve learned from Duality being compared to Gravity DEX 2.0 numerous times, this did not go particularly well either. Osmosis, an app-chain hyper focused on building better on-chain exchange, beat them to the chase to a massive market opportunity. While I wasn’t around Cosmos at the time so I can’t comment with a lot of conviction on this, from what I know a lack of focus of resources was part of the picture.
If the Hub really wanted to make a best effort to develop ATOM into interchain money and become a security provider, it should actually try to do just that in a focused, well-defined manner before throwing the baby (money and security thesis) out with the bathwater (other failed attempts at protocol-market fit).
All of that said, if the Hub’s community decides this is not its goal, then so be it. As long as social consensus can get behind a focused and well-defined it’ll be a strict improvement over the current model.
Starting from an Objective Function
Tldr : An objective needs to precede focus. Without defining an objective, we can’t move towards it.
Maybe my favorite whitepaper ever has been the Aera whitepaper. Its thesis is simple and well articulated. As I interpret it’s problem statement is as follows : Liquidity in traditional finance largely comes from institutional demand. DAOs are effectively on-chain institutions with millions of dollars. However, DAOs often don’t effectively manage their treasuries and many don’t manage them at all.
The solution Aera presents is to start by defining a DAO’s objectives. Some examples might be :
- A lending protocol wanting to maintain an insurance fund whose value is sufficiently decorrelated with the price of the native token.
- A development DAO wanting to retain enough runway to fund development without selling tokens immediately.
- A memecoin DAO wanting to minimize the price impact and volatility of trades.
After the DAO defines objectives, treasury managers prescribe different portfolio allocations in competition with one another. The DAO will then split their treasury across the suggested portfolio allocations and track their success in meeting their objectives. After some time, treasury managers will have the opportunity to update their prescriptions and the DAO now has data points on their performance for meeting its objectives.
A broader lesson than DAO treasury management here is that institutional actions should come from the institution’s objectives ! You would think this is an obvious point, yet time and time again, DAO act not from their goals, but out of confusion or impatience just to make something happen. When resources are scarce, something is not necessarily better than nothing though, but doing something thoughtful is.
The ability to track progress on reaching objectives is much easier when a clear objective function is defined. An objective function is a measure for what to optimize. For portfolio managers, a common example might be to maximize the Sharpe ratio of their strategy (a sharpe ratio is a measure that measures risk adjusted returns). The idea of an objective function in optimization is similar to that of a key performance indicator (KPI) in business. They’re supposed to help us track success and tweak where necessary.
I am not going to sit here and tell you I know exactly what objective functions make sense for the Hub. But I do think that narrowing the scope is a helpful start to making one more clear. I suspect in that case there will be a few to track related to its utilization throughout the interchain. Some obvious ones are its on-chain trading volume, outstanding collateral for lending, stablecoins, synthetics, and perps, and its distribution across unique wallets, users and chains throughout the entire interchain.
Without clearly defined objectives, how can we know governance and funding bodies are working effectively ? While there seems to be a cry for accountability within the Hub, there is no method to actually track it.
An important thing to avoid though is making the sole objective token price. Token prices are based on many factors that are rarely in immediate control of contributors or predictable by spectators. If this wasn’t the case, then it’d be much easier to get rich off of trading! Making the objective function the token price risks creating a system that prioritizes short-term success over long-term success. The least costly interventions that temporarily increase token price are buybacks and marketing campaigns that do nothing to sustain value and only create exit liquidity.
I think discovering the right objective functions should be a collaborative process for the wisdom of crowds in Cosmos to answer. If ATOM is to be interchain money and the Hub interchain security, what are the KPIs we should be tracking for its success ?
Reaching the Objectives
Tldr : Systems for competitive resource allocation and accountability need to exist before productive, trustworthy action can take place.
The main levers I see at the Hub’s disposal are :
- Monetary policy
- Active governance
- Community spending
My current opinions on how to pull these levers are as follows :
Monetary Policy. Reduce inflation. While LSTs will continue to massively mitigate the negative impact of inflation on ATOM utilization, they are not a perfect supplement. LST supply caps, protocol and governance centralization risk are just some of the reasons why it doesn’t make sense to put every egg in their basket just yet. Lowering inflation should reduce the rate at which inflation naturally diminishes the purchasing power of ATOM and mitigate sell pressure from staking rewards. The goal of this policy switch is simply to reduce the risks in holding ATOM and using it to pay for goods and services throughout the interchain.
I also think EffortCapital’s idea for a dynamic liquid staking tax is a great idea to further reduce inflation in a productive way. If LSTs expand past X% of the network, it’s not that they should stop being issued in their entirety, but that the yield should be dampened by a tax that goes to the Hub. This would result in staking reward rates reaching an equilibrium based on how much “risk-free” yield can be earned by utilizing liquid staked ATOM elsewhere. The difference would end up going to the Hub and either be burned or used as POL.
Active governance. In my short time communicating with the ATOM community, one thing is clear - there are many intelligent, passionate stakeholders. This is a major differentiator of the Hub compared to other decentralized communities. Few forums are as active and thoughtful as the Hub’s.
Despite this it pains me to see that their energies are largely wasted. And I don’t believe this is anyone in particular fault, but rather a failure to coordinate. There is no framework for participating productively. Without a shared vision, the community is relegated to something close to chaos. The governance process ends up being thought leaders independently drawing conclusions and improvising on the introduction of those ideas. This tends to waste energy because the motivations for X proposal were never commonly established and so consensus will be difficult to reach. And if consensus is, it might not share a common thread with other interventions so it may be doomed to be less effective than it would’ve otherwise been or even fail.
The lack of established vision also imposes substantial risks and costs on teams considering building on the Hub.
My initial suggestion would be to initiate a discovery process for a framework, vision or “constitution” that can help guide proposers and governance to make value aligned decisions. Afterall I believe this is something the community would be really good at. Some points that I would support :
- Value creation over extraction : proposals should never impose unagreed rents on interchain entities. If the Hub wants to capture value for its community or ATOM, it should be through providing goods or services that others desire and opt-into. Rent seeking is a sure-fire way to push teams out of Hub alignment.
- Sustainability over charity : the bottom line for the Hub should be the sustainable growth itself. Nobody should be opposed to funding public goods for the interchain with ATOM, but it shouldn’t be at the expense of the Hub’s sustainability - there should just be a thoughtful, targeted reason for why it will accrue value back. I think the simplest way to think about sustainability is making it so :
- Revenue + \Delta Market Cap > Costs
This means that three basic types of interventions are worthwhile .
- Reducing costs : for example, reducing the cost to run additional ICS nodes.
- Increasing market capitalization : for example, growing utilization by partnering with lending protocols, stable coins and perpetuals to get ATOM and liquid staked ATOM whitelisted for trade and for collateral in other ecosystems or creating protocols for spending ATOM privately.
- Increasing revenue : for example, stimulating volume on ICS chains by strategically deploying liquidity to maximize revenue, while retaining full ownership over the underlying liquidity.
Community Spending. Among the community, I’ve seen two general ideologies (although most people fall in between) :
- Advocates for aggressive action : “The Hub is dying and needs resuscitation. Increase spending, run experiments and see what sticks, compete with Ethereum, Bitcoin and Celestia on everything.”
- Advocates for Hub Minimalism : “The Hub is Bitcoin for Cosmos. Minimize overhead and risk, push complexity to ICS and the interchain.”
To the Hub minimalists - Doing nothing will get the Hub nowhere. Bitcoin had a killer application in its early days driving adoption - the silk road. As of now there is no “silk road” for ATOM. ATOM won’t just magically end up in people’s wallets without a little effort.
To advocates for aggressive action - When spending is controlled by few players community trust is eroded. When spending decisions are made irrespective of market forces, information is lost to central planning. The solution starts with establishing systems for accountability to ensure proper incentives and restore community trust.
While these might not be the end state of committees, two concrete interventions that I believe are worth trying to this end are :
- Optimistic governance : To restore trust in community spending and impose proper incentives, a system of optimistic governance should be adopted. If an entity has or is going to be funded, it needs an oversight committee that can revoke its access to capital at any point. Optimistic governance is a good choice, because experts should be empowered to make decisions quickly while facing concrete repercussions if they abuse the trust. The oversight committee should be made up of knowledgeable volunteers knowing and willing to engage in good faith and without major conflicts of interest. Governance would play the role as the ultimate oversight over the committee. (Shoutout to Nicholas and Thyborg for insightful conversations on this idea.)
- Iterative, Tranched Allocation : Portfolio rebalancing and spending proposals should be tranched. Before a tranche is initiated, an objective committee establishes the objective function / KPIs for focus in this tranche. The spending and liquidity injection proposals are then made in the context of being good interventions to meet the objective functions / KPIs established by Hub governance. Over the course of a tranche, the performance of each intervention is tracked by the receiving party and presented before the objective committee sets the next objective function / KPIs for the following tranche. This will allow the objective committee to adjust its assumptions in light of new information. The goal of this is to create a system of accountability for underperforming proposals and a competitive market for emerging proposals. The combination of accountability and market based incentives should elevate the quality of proposals and in turn the effectiveness of Hub governance and Hub growth.
I also strongly support WillB’s recent post on getting the ICF more involved in funding and growing the Hub. While they’ve supported the efforts to bring ICS to market tremendously through funding, strategy and BD, now is a better time than ever to double down on growing the chain where it all started. The Hub needs all the resources it can get if it is to emerge as a successful protocol within crypto.
Open Questions
Tldr : Some open questions for the community to answer in the comments or their own posts.
- What do you think the Hub should focus on and what are some objective functions / KPIs that can measure them ?
- Who should be on the objective committee ? Why?
- Note : The objective committee refines objective functions / KPIs and the weights given to them.
- How long should tranches be ? Why?
- Note : there’s a balance to be struck between allowing time for long-term results to materialize and accountability.
- Who should be on the oversight committee ? Why?
- Note : The oversight committee can revoke privileges and customize parameters (e.g., rate limiting) on the smart wallet used to fund proposals.
If there are enough answers and interest from the community, I am happy to extend an open invite to collaborators on turning this into a proposal.
Parting Thoughts
Tldr : Be open to new ideas, disclosing biases again, shoutouts.
Nothing I say here is meant to be framed as the only solution for the Hub. If anything I was more interested in getting some ideas in my head on paper and sparking a discussion on the ways forward. Feel free to agree, disagree or question my points - I just ask that you please read as much as you can and respond thoughtfully.
I also want to address that I know some people felt a little betrayed when Neutron made the proposal to acquire Duality. While I will save my opinions on the proposal for the respective forum posts, I do want to say that I tried my best to present my real beliefs - even if they do come with some biases. I hope readers can take this with equal parts skepticism and faith instead of one or the other in absolute.
I also want to shout out to everyone who has engaged in thoughtful conversations on the topic with me or to the general public. While there are many others just to name a few stars : @effortcapital, nicholas, @Spaydh , @tom , @david_galileo , @WillB , @Thyborg , @jtremback , @LitBit , @hub.tusz.mod ( / @ala.tusz.am) and more.
