Research Report: The Governance of Cosmos Interchain Security
Authors: Darcy Allen, Chris Berg, Sinclair Davidson (RMIT Blockchain Innovation Hub)
We are excited to share the findings and recommendations of our research report, supported by the ATOM Accelerator DAO.
- The research report, The Governance of Cosmos Interchain Security, is available for download at the Social Science Research Network here.
- Our proposed onboarding template is available for download here.
Our research analyses the governance of interchain security and provides a series of findings and recommendations. This report builds on our previous governance forum posts (here and here) and on many conversations we’ve had with community members over the previous few months, including recently at Cosmoverse. We welcome any further community discussion on these topics as we continue to research and engage in the Cosmos ecosystem.
Summary of research report
- Interchain Security (ICS) is the specific Cosmos implementation of a broader family of shared security models across blockchains boundaries. The first iteration of ICS, replicated security, enables the validator set of the Cosmos Hub (the producer chain) to provide security services to smaller sovereign chains (consumer chains) in return for compensation.
- Shared security through ICS is best understood as a mutually beneficial arrangement where consumer chains are buying security (rather than making that security in-house) from the Cosmos Hub. Benefits to the Cosmos Hub include receiving new revenue streams and benefits to the consumer chain include access to high quality economic security.
- For ICS to be successful and sustainable, the economic relationship between a producer and consumer chain must be carefully governed. Governance processes must be robust to effectively onboarding consumer chains (including the terms of those agreements) and to the inevitable need to adapt the agreements (e.g. repricing of compensation).
- The aim of this research report is to provide recommendations to improve the governance of ICS agreements. We use institutional economics to help identify potential hazards in ICS agreements, including:
- the risk of vertical integration (i.e. producer chain buys consumer chain) that emerges when one organisation provides security to another
- the challenges of adapting in the face of incomplete contracts and a rapidly evolving environment (e.g. radical success or failure of a consumer chain)
- the risk of opportunism (e.g. producer chain uses advantageous position to renegotiate) where there are asset specific investments in the ICS relationship
- We make recommendations and findings that facilitate more robust and sustainable relationships between all parties to ICS agreements, including:
- The establishment of a governance body for each individual ICS agreement, with a focus on regular review processes and adaptation. These agreement-level bodies are needed to both facilitate adaptation (e.g. repricing of agreement) to prevent the collapse of a given agreement.
- Identifying foreign exchange risk (namely payment terms in native currencies of consumer chains) as a major contractual decision in ICS agreements. Decisions about who bears this foreign exchange risk turns on the desirability for the Cosmos Hub to treat the relationships as either venture relationships or infrastructure relationships.
- A decision tree for the Cosmos Hub to navigate onboarding of new consumer chains.
- A draft template for onboarding of consumer chains (download here). This template recommends the information prospective consumer chains should provide to the Cosmos Hub in their proposals, including governance, payment terms, and exit clauses.
