Background and Information
Blockchain is the Wild West. We know this from a trading/investing standpoint, but the same holds true from both technological and governance standpoints. Although blockchain started out with just one (Bitcoin), today there are many blockchains. Considering the amount of promise the technology holds for nearly every industry imaginable, you can bet that tomorrow, there will be countless blockchains all jostling for space.
The situation is quite like that of the birth of nations. They arise around common objectives. However, in the early days of civilization, tribes, nations, and eventually, empires had little to no cooperation with each other and certainly had no grounds for creating it. With blockchain, as of today, we nd the same thing going on.
Eventually, countries began forming alliances, global councils like NATO, and trade agreements which standardized certain measures across all nations signed onboard. What all of these agreements between societies have in common is that they standardize certain types of behavior so that there are things in common which can fit anywhere. So, to use an example from Cosmos’ Sunny Aggarwal, think of shipping containers. Shipping containers have been globally standardized so that a container leaving port in Los Angeles can easily be accepted and fit in a port in Hong Kong.
What Cosmos is doing is creating standards for blockchains that enable and encourage interoperability as in the above example with shipping containers. Right now, blockchains are like separate fiefdoms. But, with Cosmos’ interoperability protocol (called IBC for inter-blockchain communication), blockchains will be able to talk to one another and send assets between each other.
Cosmos (ATOM) Overview
Cosmos is a long-term project with deep roots in blockchain and has been under development since 2014. Essentially, Cosmos is creating a blockchain ecosystem wherein interoperability, scaling, and simple, modular blockchain constructions come together to bring about the decentralized blockchain web (sometimes referred to as Web 3.0).
The idea and necessity of interoperability may seem vague, but it’s incredibly important to blockchain’s future. The internet, for instance, would not be what it is today without standardization protocols like Hypertext Transfer Protocol Secure, which you may know as the https in a web address that you trust.
With Cosmos, you’ll be able to send BTC to the Ethereum blockchain, or an ERC-20 standard digital asset on Ethereum to the Bitcoin blockchain, or an asset on the Tezos Chain to Ethereum, and so on and so forth. The use here is that as the world, including its valuable assets, become tokenized across all of the competing blockchains, we’ll have a way for those chains to interact so that we can ‘unlock’ assets and allow value to move freely across the web of blockchains. What free trade agreements have done for the global economy, Cosmos hopes to do for blockchains.
Additionally, with Cosmos’ tools, a DApp (decentralized application) can take advantage of the features across different blockchains and localize them in a single DApp. In this way, a DApp can take the features it wants from Ethereum, NEO, Tezos, and Bitcoin, without having to be committed to any single one of those blockchains.
Finally, and perhaps most interestingly to those of you who aren’t software engineers, the Cosmos SDK makes creating and launching your own blockchain-based digital asset simple.
IBC (Inter-Blockchain Communication) and Asset Transfers
At the center of Cosmos’ approach to interoperability is IBC. In a nutshell, IBC allows blockchains to keep light versions of one another’s chain so that they stay current with the state of the other blockchain. As long as blockchains accept the IBC standard, then people can interoperably develop anything they want, taking advantage of different blockchains’ features to the maximum. Cosmos itself is beginning with asset transfers.
Digital asset transfers using IBC are remarkably simple. Let’s say you want to transfer an asset on the Ethereum blockchain to the Stellar blockchain (keep in mind, this is hypothetical — Stellar will need to adopt IBC to make this happen). First, you’ll issue the asset on the Ethereum blockchain and lock it in a smart contract. The Stellar blockchain will communicate with Ethereum and verify the contents of the smart contract, and when all is well, will issue a token on the Stellar chain that acts as a 1:1 claim of the underlying asset (the one originally issued and locked on Ethereum).
In this way, you can easily swap assets between participating chains so long as they’re all operating with Cosmos’ standards in place. Atomic swaps seem similar, but are nothing like what Cosmos is proposing. With an atomic swap, you aren’t actually moving X asset on the Ethereum chain to the Stellar chain. Instead, all you’re doing is swapping ownership of the assets on each chain, one on Ethereum and one on Stellar, at the same time. The swap in an atomic swap is just that swap of ownership, but not one of token provenance.
A lot of this discussion hinges on the what if regarding blockchains accepting the Cosmos standard. The interesting thing is that even if blockchains don’t modify themselves to accommodate IBC, Cosmos can still read their blockchains and interoperate with them using what are called peg zones. Essentially, a peg zone creates a mirror image of a blockchain with one modification — it’s using the IBC standard. A peg zone slots in between the blockchain wanting to communicate and the one that isn’t standardized to and allows them to inter-communicate anyway.
Cosmos isn’t only about asset transfers and decentralized application development. It can also help blockchains scale in seemingly limitless ways. A huge part of investor focus in recent years has been on the transaction-per-second speed of a blockchain. For understandable reasons, the allure of TPS speed has been the subject of blockchain showdowns and show-offs. While many scaling solutions are seemingly on the way (i.e., Lightning Network and sharding), they require huge technological leaps before being market-ready.
Cosmos can help blockchains scale with some of its default features and capabilities. As mentioned in the previous section, Cosmos can simply create mirrors of blockchains when making what they call peg zones. So, let’s say a blockchain has awful TPS speed (would rather not mention any names but…Bitcoin). Cosmos can create a mirror of that blockchain, and then another, and another, ad infinitum, multiplying that blockchain’s effective scalability. If a blockchain maxes out at 20 TPS, then using Cosmos, you can just mirror it over and over to bring that number up.
Doing so can help DApps scale to the needs of their users, whereas currently, most are quagmired owing to the inability of their native blockchains to scale.
Cosmos wants developers to have as much freedom to build blockchains and decentralized applications as possible. That’s why Cosmos is trying to interconnect blockchains — the more connected chains are, then, as we’ve seen with a global standard internet, the freer we are to collaborate, build, experience, and share useful things.
To push the process along, Cosmos has released the Cosmos SDK. The SDK release includes all of the same tools the team used to build out the Cosmos mainnet itself. By releasing those tools in a neat, organized, and modular package that is easy to understand, Cosmos is putting the means for building blockchains in the hands of anyone with the requisite technical prowess.
The big innovation that the Cosmos SDK brings to the table is the way it allows developers to select from a series of modules and pre-created options. When you fire up the SDK, you’ll first choose the foundation blockchain you’ll be building on, then you add modules on top of it like staking, governance preferences, and interoperability options. The beauty is that when you launch your own blockchain using the SDK, it’ll launch with as much interoperability as you choose.
In a sentence, the SDK has everything you need for creating a blockchain/token, all you need to do is decide on the parameters/functions of your blockchain/token, input them, and you’re good to go.
Token + Consensus
Model There’s more to Cosmos than just…Cosmos. Running underneath the hood is Tendermint, the software side of Cosmos which includes a BFT-based (short for Byzantine Fault Tolerant) proof of stake consensus algorithm. Whereas Cosmos is the hub of parallel chains working together, Tendermint is the operating system that makes it all possible. The Tendermint-run BFT consensus protocol is so well regarded that two other projects you might have heard of — Difinity, and Ethereum’s Casper upgrade (also known as Ethereum 2.0) are both BFT-based now as well.
Within Tendermint’s OS, ATOM plays a central protocol layer-level role ecosystem, giving you the ability to both stake and participate in blockchain governance. Bad actors are removed from the PoS network using slashing, a security innovation that is elegant in its simplicity and admirable in its robustness.
Parsing through all of the foundations behind Cosmos make uncovering the team nearly impossible. There are, however, several notable players. First and most well known is Jae Kwon of Tendermint. He pioneered BFT consensus and, in time, will likely be regarded as one of the figurehead blockchain pioneers of these early days. Kwon partnered with Ethan Buchman and Zarko Milosevic, a BFT researcher from Cornell, to found Cosmos. Along the way, Sunny Aggarwal, a proof of stake research scientist and crypto-media personality, has also become a protagonist at Cosmos.
Strength: Cosmos has a lot going for it. While many projects are doing the interoperability premise, very few have the deep crypto roots that the Cosmos team does. They’ve been working on the project in one form or another since 2014 and are embedded within the teams and communities of other massive blockchain projects — with Ethereum being the standout. The fact that Cosmos has an excellent working relationship with Ethereum and many of the Ethereum-based DApps out there today means that they should be pretty efficient when it comes to getting other projects to work with their standards.
The other strength they have going is timing. Everyone likes to compare Cosmos to Polkadot since they’re doing such similar things — but let’s face it, Cosmos is live today, and Polkadot is still a year away. Whatever merits Polkadot may have over Cosmos are, at this point, hypothetical, and we’ll have to wait for Polkadot to hit the market before finding out if it can out-compete Cosmos.
Additionally, Cosmos is an incredibly well funded project. They raised $17 million back in 2017, locked the ICO funds/tokens, and only made it to market in April of this year. Now, the project is valued at just under a billion dollars. As long as the team stays smart in handling their funds, they should have far more than enough runway to see the project through to completion.
Weakness: Interoperability, as a necessity, isn’t really a question. Blockchain needs it just like the internet needed it. The only question is surrounding Cosmos’ ability to deliver. They’ve already gone live with their mainnet, but just because you build it, will they come? That’s the question.
Secondly, Polkadot is a serious competitor with extreme pedigree concentrated within their team. A huge question mark surrounding the Cosmos project is whether or not they’ll take full advantage of their headstart or whether developers, DApps, and other blockchains are already in cahoots with Polkadot.
Opportunity: The Cosmos opportunity is interesting and possibly immense. Blockchain interoperability is a completely new field and Cosmos is the first to market. They have big competition down the road, but they’re live now and, if their premise plays out, then Cosmos will be an unavoidable presence in tomorrow’s blockchain-based internet.
Threat: The most apparent threat to the Cosmos project is that public blockchains and decentralized application building don’t take off. Imagine a world in which enterprise (private) blockchains rise and decide they don’t want to talk to each other. Cosmos won’t have much to offer them.
The other issue with Cosmos is that it may devalue cryptocurrency assets since it makes it possible for token/blockchain developers to mix and match the features of different chains. If you’re able to take advantage of Monero’s RingCT technology without actually owning/holding XMR, then what is the value of XMR? Owing to this, some project’s may not want to play nice with Cosmos.
And, of course, there is the threat of Polkadot getting a much better foothold in terms of standardization protocols than Cosmos. The blockchain internet of tomorrow is surely big enough for more than one player, but if we’re talking standards, then one project may rule the roost.
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