Where I see Cosmos at present

Formatted PDF at:

Feel free to criticize!

Hi my name is Jacob Gadikian and I am going to formally shill the cosmos ecosystem to you.

Cryptocurrencies are volatile and you could lose literally every penny. This is my opinion as to what will unfold, and while I have placed my bets according to this piece, please do your own research and know that I could potentially be wrong. This is an opinion piece and my only financial advice to you is to do your own research and come to your own conclusions.

As an engineer I have never written a message like this.At this time the financial dynamics of the Cosmos ecosystem are a result of engineering processes. Cosmos is not designed in, say, the style of safemoon, but instead engineered in the style of the Linux kernel. Personally I greatly prefer this style of engineering with a focus on protocols and the freedom to allow markets to take a natural conclusion. That is something that I also try to professionally uphold. I would also like to thank all the many ecosystem teams that I’ve gotten the opportunity to collaborate with over the past year. Here are a few of them that I’ve had the pleasure to work with:

Launched projects :

  • Gaia and her crew
    • Tendermint
    • B-Harvest
  • Akash
  • Sentinel
  • Osmosis

Coming soon:

  • Gno
  • Stargaze
  • Juno
  • Dig
  • Lotus
  • An1

…I’m certain that’s not a complete list so please forgive me if I’ve left anyone out. The fact is that Cosmos is composed of a great number of people all working on and toward blockchain interoperability.It is that Interoperability that is going to result in dramatic price increases. Recently, a decentralized exchange called Osmo launched in the Cosmos ecosystem. I had the good luck to be a Genesis validator for their network, and a few weeks before launch I got to have a phone call with the young Mr sunnya97. I’m relatively DeFinaive, and was mainly experienced with uniswap, and have been known to be fond of telling people that DeFi is an ‘explosion factory’.

Is there a usecase for DeFi outside of explosion factories?

What if defi is only an explosion factory when it’s dealing in rehypothecated shitcoins thay all issued against the same blockchain and are prone to constipation when that chain actually gets used?

Multichain defi is a value factory

A few years back, Gaia the Cosmos hub was instantiated without the world’s clearest vision or purpose. In fact, The topology of the network that IBC was designed to implement insured that the Cosmos hub could actually be circumvented: value did not need to flow through it. Instead, block chains would be able to route funds in any way that they desired, between any two chains. And with Osmosis, Multichain DeFi is finally here. Please watch this video to get in the mood:

I’m being a little bit facetious here but, the hell with it, I have seen the work done and I have been following this one for a very long time and I think that we’re now entering a stage of meaningful differentiation for free-standing blockchain applications. Osmosis has a TVL of over 50 million dollars now, but I think the most important thing isn’t really it’s total value locked but instead the dynamics that can be observed in the interchain network.

So osmosis came online and immediately the vast majority of IBC enabled chains connected to it and opened pools. This had the immediate result of creating a supply side liquidity crisis: because osmosis featured a well designed distribution mechanism that allocates tokens to liquidity providers in line with its mission of being owned by liquidity providers, there was a very strong incentive to fill the pools rapidly. And that’s exactly what happened-- here’s a pic from a seven day old chain:

I think that some of my audience has never traded using an automated market maker so I want to give the most basic example but at the same time let you know that osmosis is a little bit more advanced and adds some features to the Uniswap model I am about to describe.

Uniswap 1.0:

x * y = k

X is asset one

Y is asset two

K is invariant

As a liquidity provider, you put value into x and y in equal sized pairs. So if it’s a USDT / dog token pool and there are five dog tokens per dollar, to enter the pool I would need one USDT and five dog tokens. Subsequently, I as the liquidity provider, would earn a 0.3% fee when people trade, which is not accounted for in the math above just to keep things simple.

You as the trader, wish to acquire some y. You add x to the pool and take out a proportional amount of y. K does not change.

The original uniswap eventually became so popular that it’s quite fair to say that it drove the entire Ethereum ecosystem for a while. To this day, it’s trading around a billion dollars every single day on very very simple mathematics. At one point recently, trades on uniswap cost $50-$100 each in blockchain transaction fees. That is how strong the demand was to trade.

Osmosis:

Osmosis is a good deal more flexible than Uni swap 1.0, but the math really isn’t all that much more difficult.

(x*.1) * (y*.5) * (z*.4) = k

Additionally osmosis allows pool creators to set the swamp fee. Most pools on osmosis are using a 0.2% to .5% swap fee.

Additionally, Osmosis began to distribute its native token, which is used for the governance and infrastructure management of the osmosis blockchain to liquidity providers. This caused a sudden and drastic shift away from centralized exchanges in the trading of two tokens that I have been involved with with some time:

  • DVPN
  • AKT

Everybody wanted to get in the pools and earn a piece of the osmosis blockchain so that they could participate in its long-term care and feeding. Within a few days the prices of both assets had risen by over 50%.This is because the decentralized change context is profitable to asset holders, whereas centralized exchanges actually put holders at risk of losses and doxing. Both the teams and the communities of DVPN and AKT moved their liquidity toward pools on Osmosis.

Ecosystem outlook

Gaia + Dexes

In the near future (July 6th?), a decentralized exchange will be launched on Gaia, the Cosmos hub. And this thing, called the gravity dex, is positively incredible. Gaia will not have any sort of liquidity mining, but the team at be harvest has designed a totally new style of decentralized exchange that works with the heartbeat of the blockchain infrastructure that it runs on.

They call it ESPM.

Let’s break it down, shall we?

  • Gaia’s block time is approximately 7 seconds
  • Pools that do not have active orders in a given block, are not active and don’t really do anything during that block.
  • Pools with active orders, all of them, find a price once per block, and that price is used to execute trades in an AMM style, as well as an order book style.
    • Because there is only one price per block, additional trading mechanisms can be added in a modular fashion and front running is eliminated.

For every trading pair on the gravity dex, A price is determined once every 7 seconds, and various mechanisms can be used to execute trades at that price.

Furthermore, a mechanism called the gravity bridge will be added to Gaia and this will allow Gaia to access the liquidity of every single asset on Ethereum and then trade those assets with greater finality, lower cost, and higher speed than on the Ethereum mainnet.

Sommelier is already being used as an ethereum co-processor to reduce the risk of impermanent loss and enhance yield on uniswap.

Gaia’s gravity dex and bridge are in fact a much bigger deal. For the first time, barriers between blockchains are going to be effectively broken down. As it stands today, Ethereum is the hub for many many things, including high quality wrapped Bitcoin tokens. This means that Gaia will be able to trade WBTC from Ethereum in the next couple of weeks.

If we’re going to view finance and some kind of weird branch of physics, we can observe that capital flows toward the places with the greatest liquidity. Gaia and Osmosis ensure that any location or network in IBC is able to access vast liquidity. It’s reasonable to assume that we will see ethereum-based assets flow from Gaia onto Osmosis and enter pools. All of this creates demand For IBC compatible assets and any IBC compatible chain is able to act as a hub. Validator sets, especially mature ones, create additional value. For example, because some of the most skilled validators in the industry operate Gaia, Gaia is able to implement the rather technically advanced design for the gravity bridge, which calls for validators to run ethereum nodes as well as Gaia nodes.

I believe that there’s going to be a very serious shortage of IBC enabled tokens which will drive rather radical price increases. Furthermore, sovereign chains like DVPN and Akash are able to provide types of application value that have not been seen before.

New chains in Cosmos

While working at Tendermint, I got to learn a tool called Starport, which can be used for the rapid construction of new blockchains. These days, I am somewhat of a blockchain Sherpa. I am helping independent teams build new block chains using Starport and develop their validator community.

I also have created over the course of the past year a blockchain community called Blurt, which quite unfortunately is an island with regard to liquidity. We have an excellent relationship with our main exchange, ionomy, but they’re not the world’s highest volume or best promoted exchange. I love those guys and they’re amazing and I’m going to keep working with them on any project that I launch, but Blurt’s growth has been constrained due to a lack of liquidity. We have actively tried to get Blurt traded on major exchanges, but our strategies have failed us. Apparently the exchanges didn’t see much of an obligation to ensure that their users got the funds that we provided to them in our Genesis block or maybe we didn’t pursue them heavily enough. And for engineers like me, IBC fixes this.

And it does so in an entirely permissionless manner. Chains like dig, an1, lotus, or cblurt will be able to access vast liquidity on both osmosis and Gaia.This in turn means that their development team and their community will not waste time pursuing exchange listings but instead building product and creating community, the way that it was meant to be.

Here’s a real world scenario: suppose that you’re working with two independent groups, one of them is making hype fashion footwear that is traded using an NFT before delivery, and a second offers loans on NFTs.In the old world, You would probably try to work this all into solidity contracts and the two teams would compete for scarce network bandwidth.

In the Cosmos IBC world, You introduce the two teams independently and they are able to leverage the unique features of each other’s chain and share community, including the validators that operate the infrastructure for the chains.

Final note and thoughts on validation

A good deal of emphasis is being placed on the concept of shared security but I’m not so certain about it personally.Shared security is when the validator set of one chain validates activity on another blockchain, creating a hierarchical relationship between the two of them. Thus far, Cosmos has been flat. In the polkadot ecosystem, this shared security concept is pretty well developed and they deserve tons of praise for their work on it. In polkadot a clear hierarchy of chains can be observed. There are primary actors and then there are subordinates who leverage shared security.

I’m not actually anti-hierarchy, but I believe that hierarchies should exist on a per chain basis based on stake weight. Stake weighted governance operates much like a classical corporation, where The power of your vote is weighted by the number of shares that you hold.

Jae talks about this in his prophetic 2017 video: CESC2017 - Jae Kwon - Keynote - YouTube

(BTW 2017 was a long time ago, so it might be a good idea to watch gno.)

My concern is that chains operating using shared security are not fully sovereign, and that only fully sovereign chains can truly make decisions for themselves.That’s why I’m going to close with an exhortation of sorts; It’s my opinion that in order to build ecosystem value, it is necessary to reduce the cost and complexity of validation. Software should be improved and include rate limiting so that requests to RPC and API interfaces are unable to stop a node from making progress toward the tip of a chain, and It’s my opinion that the sentry node pattern should be considered a last resort, not the standard.

Most people are not able to orchestrate a set of machines in the century node style, and this limits the true peer-to-peer functionality of cosmos chains. To the greatest extent possible, end users should be validators and nodes should run at the edge of the network. This is why for the blockchain communities that I am working with – blurt, Lotus, Dig, an1 – I’ve taken the rather impractical step of working on software that allows chains to run on dedicated hardware in people’s homes and offices. I think that blockchain communities that run their own infrastructure will have more choices and therefore develop greater value.

Thank you for reading this rather long article. I am not only convinced of the financial potential of IBC enabled Cosmos blockchains, but also their potential to drive social good by solving coordination problems. Due to my own rational financial self-interest and an interest in seeing coordination problems robustly solved, I’ve gone pretty much all in on the Cosmos ecosystem at this time.

2 Likes