Many blockchains today grapple with a myriad of issues and limitations, ranging from energy inefficiency to subpar performance and immature governance mechanisms. However, this realm of early innovation provides the opportunity for continual refinement and advancement at a pace driven by excitement and passion for change. This paper delves into one such innovation: Cosmos.
Cosmos stands out as a distinctive layer 0 blockchain ecosystem, comprised of an array of independent, parallel blockchains, each fortified by classic Byzantine Fault Tolerance (BFT) consensus algorithms. These interconnected blockchains, termed “zones” or “shards,” form the foundation of Cosmos. At its core lies the Cosmos Hub, the first and primary zone housing ATOM, its native multi-asset Proof-of-Stake (PoS) cryptocurrency. Furthermore, through an inter-blockchain communication (IBC) protocol, the Cosmos Hub extends its reach by fostering seamless integration with other zones, including those employing different consensus models such as Proof-of-Work (PoW).
The unique hub and zone architecture, akin to traditional hub-and-spoke models, stands as one of its defining features. In the landscape preceding this model, blockchain ecosystems boasted promising use cases and applications. However, with the saturation of layer 0 and layer 1 blockchains leading to the advent of layer 2 solutions, compatibility issues and convolution began to emerge. Inter-blockchain communication, essential for seamless interaction, remains challenging and lacks standardization. While blockchain bridges have since emerged as a common solution, they inherently harbor vulnerabilities. These vulnerabilities encompass forged proofs, enabling attackers to circumvent validation and mint new tokens illicitly, route misdirected tokens from the bridge, and deploy malicious contracts to manipulate deposits, among many other concerns.[5] The Cosmos Hub addresses these challenges and improves upon them by facilitating effortless communication between zones, eliminating the complexities associated with inter-chain transfers. Serving as the central nexus, the Hub streamlines token transfers across diverse chains and maintains transparent records of token distribution within each zone – including an ongoing record of how many tokens are maintained in each zone. This streamlined approach not only enhances interoperability, but also helps to mitigate risks associated with the traditional blockchain bridges.
Central to the functionality of Cosmos is the Tendermint consensus protocol. The main goal of Tendermint is “to provide the networking and consensus layers…as a generic engine on which arbitrary applications can be built.”[1] In a decentralized and trustless state, achieving consensus is paramount yet formidable. BFT, with its ability to foster consensus amidst distrust, malicious activity, and inevitable faults, serves as a linchpin. However, unlike conventional BFT algorithms where each node is given equal weight, Tendermint assigns each node with a specific amount of voting power. Nodes with positive voting power are designated as validators. Using cryptographic signatures, validators collectively determine the acceptance of successive blocks. Consensus is achieved through iterative rounds of voting, wherein a designated leader proposes a block and a set number of validators sequentially cast their votes. Upon proposal by the designated validator, the block is verified and authenticated by the other validators, then put to vote for acceptance. Only upon achieving 2/3 majority consensus across multiple stages is the block officially accepted – cementing the robustness and reliability of this consensus mechanism. This process continues in stages, rotating the responsibility of the proposal among validators in round-robin fashion.[2] In the event of a node failure, the responsibility seamlessly transfers to the next validator, ensuring fault tolerance within the network.
On top of Tendermint, this ecosystem uses the Cosmos Software Development Kit (SDK): an “open-source framework for building multi-asset PoS…[and] permissioned Proof-of-Authority (PoA) blockchains.”[4] In short, this technology allows developers to easily create their own custom blockchains from scratch that can natively interoperate with other blockchains. These blockchains are built out of composable modules, most of which are open-source and readily available for developers to use immediately. The blockchains are generally referred to as application-specific blockchains, that offer a different development paradigm than virtual-machine blockchains (such as EVM). Rather than building decentralized apps as sets of smart contracts as is the case with virtual-machine blockchains, blockchains built with SDK are customized to operate a single application, and developers have the freedom to make design decisions required for optimal performance and operability. This also provides better sovereignty, security, and performance.[9]
The IBC protocol further enriches the Cosmos usability by facilitating seamless communication among disparate blockchains. Unlike traditional bridging, Cosmos’ approach eliminates the need for token liquidation, underscoring its user-centric design. This works due to the following process: once the tokens are validated as existing and locked on one chain, a representation of these tokens are created on a separate chain that the user(s) are trying to communicate between. A similar mechanism is then used to unlock the original tokens on their origin chain once the transaction(s) is complete. This is extremely important as it allows for the full interoperability of heterogeneous chains, giving maximum flexibility to each individual blockchain.[1]
Governance within the Cosmos ecosystem distinguishes itself from other blockchains, notably Ethereum and Bitcoin. With Ethereum, community proposals are submitted via an Ethereum Improvement Proposal (EIP), typically requiring widespread consensus – otherwise resulting in a hard fork if the proposal is breaking, and therefore polarizing. Also, if users on the network decide not to use certain tokens, it can potentially lead to severe interoperability issues. Conversely, Cosmos introduces a dynamic governance structure where validators (described above) and delegators within the Cosmos Hub wield the authority to vote on proposals, ranging from alterations in preset parameters to coordinated system upgrades and amendments.[3] Delegators differ from validators as they hold less power, but can still participate in the staking process based on their own individual stake as opposed to their total stake. Yet what sets Cosmos apart is its decentralized governance model extending beyond the hub. Each zone possesses the autonomy to govern themselves, establishing unique constitutions and governance mechanisms tailored to their respective communities. This decentralized approach ensures zone-specific proposals undergo a localized voting process, mitigating disruptions across the broader ecosystem. Moreover, this streamlined governance framework expedites decision-making, as fewer stakeholders overall are involved in the decision-making process, leading to quick protocol acceptance and protocol formation or alteration. Such nimble governance mechanisms foster agility and adaptability within individual zones, thereby benefiting projects operating within the Cosmos ecosystem.
Cosmos offers a compelling solution compared to other existing blockchains, particularly in facilitating interoperability among parallel chains – each with their own standards, languages, tokens, projects, etc. The architecture not only enables independence for each chain, but also addresses congestion and scalability issues through the creation of a multitude of layers. Even Ethereum, grappling with these scalability issues which in turn create soaring transaction fees, would find reprieve in Cosmos’ design. Polkadot, a similar PoS blockchain, offers comparable features and is a strong competitor in this space. Their architecture serves as a network of interoperable blockchains formed from a single relay chain that provides inherent security to the subsequent “parachains.” [7] The enhanced security of Polkadot is due to the staking system: validators and delegators stake crypto not only to participate in an auction for block validation but also stake to assist in securing the network. While this shared security model may edge out Cosmos in terms of technical security though, Cosmos excels in interoperability and scalability since each blockchain uses its own set of validators. This ensures that adding new blockchains (zones) does not impact throughput of the IBC or the Hub. Although Polkadot may be more popular and therefore have more validators currently, its scalability is limited by the number of validators securing the network. This differs greatly from Cosmos, where the addition of new zones does not significantly impact the ecosystem and likely provides additional validators to the Hub.
However, this flexibility also presents challenges, such as decreased value of the ATOM cryptocurrency. While transfers of currency and assets are simple on Cosmos, its decentralized nature means there is little need to operate on the Hub regularly. ATOM’s utility is limited to securing the network and serving as the central currency for the IBC protocol, which may warrant further incorporation into Cosmos’ security model to increase its importance and lead to attracting more users. Nevertheless, Cosmos’ user-friendliness, interoperability, and scalability are likely to continue drawing large numbers of users, eventually leading to more validators and delegators.
There are several use cases for Cosmos that make this an exciting possibility and important blockchain. Because of the Cosmos SDK user-friendly and open-source availability, it is the perfect innovative platform for developers to build new technology and decentralized applications (dApps). For example: because the base code already (likely) exists to build apps from the open-source framework and can accept virtually any existing token - while maintaining full transparency - a developer could build an initial coin offering (ICO) fundraising Zone for early-stage projects that is able to handle PoS, keep track of each user’s coins, manage upgrade and contentious issues quickly, and using IBC can send and receive tokens from anywhere.[1]
Another example of where this could be useful is with a truly decentralized exchange. Current exchanges, in particular Stablecoins, are heavily regulated and cannot be used on public blockchains. So, with Cosmos, one could create a 2-chain infrastructure. One chain is used as the PoA chain that handles Stablecoin, and the other a public PoS chain for crypto-to-crypto trading with both running on top of the Tendermint Core. These chains would be connected and could exchange through the Cosmos Hub via IBC connections.[1] This same idea could even be applied to states or regions that want to create their own local currency, using private blockchains and a local hub to transfer between one another.
By empowering developers to create independent blockchains, Cosmos fosters a vibrant ecosystem. While it still faces the blockchain trilemma of high scalability and decentralization with limited security [Exhibit 1], it offers a more secure alternative to the bridging systems used by many blockchains today.
Recommended by LinkedIn
Exhibit 1: Cosmos Blockchain Trilemma
Works Cited Page
