Why has the Cosmos ecosystem emerged as a standout, and how should Polkadot, another cross-chain giant, break the deadlock?

Written by: Polkadot Labs, Polkadot Ecological Research Institute

Background

When we talk about the cross-chain track again, time has given us a vague yet correct answer: cross-chain is not a false proposition, but rather a battleground that must be fought over. Therefore, in the past year, we have seen many cross-chain-related projects complete financing, with amounts generally in the tens of millions of dollars.

When it comes to cross-chain technology or interoperability, we naturally think of Polkadot and the Cosmos network, which was criticized a year or two ago, but the situation seems to have changed recently—Cosmos appears to be gaining momentum.

In particular, the application chain Terra based on Cosmos has seen its stablecoin UST's total market value surpass $10 billion, exceeding the long-established collateralized stablecoin DAI, which is over $9 billion, ranking fourth after USDT, USDC, and BUSD. At the same time, the Cosmos ecosystem seems to have undergone some subtle changes in the past six months, as evidenced by its market value fluctuations.

As a result, we have received many questions from the community recently, including what exactly has happened in the Cosmos ecosystem, how to understand the current development of both the Cosmos and Polkadot ecosystems, and what experiences Polkadot can gain from this.

With these questions in mind, we attempt to describe what has happened over the past period from an objective and fair perspective, as well as what hidden meanings lie behind these stories. Below, we begin our discussion.

Recent Developments in the Cosmos Ecosystem

First, we need to understand what has happened in the Cosmos ecosystem during this period.

Technical Updates

As one of the earliest projects to propose cross-chain solutions, Cosmos's Tendermint consensus protocol, Cosmos SDK development framework, and IBC cross-chain protocol are regarded as three major technological innovations in the blockchain field.

Recognizing the issues present in Bitcoin and Ethereum networks, Cosmos has proposed solutions for scalability, usability, and interoperability through the aforementioned technological innovations.

In March 2021, Cosmos's IBC officially opened for transfers, unlocking new opportunities for its ecosystem projects. After such a long time, Cosmos seems to have gained new momentum recently. Let's take a look at the technical iterations that have occurred in Cosmos over the past six months or so.

• On September 4, 2021, the cross-chain project Cosmos announced the establishment of a technical working group to develop interchain standards for NFTs and their metadata. This will contribute an interoperable open standard and reference software implementation for NFTs and metadata.
• On October 1, 2021, Cosmos's Ethermint was upgraded to Evmos due to trademark issues and expanded scope. Evmos will serve as Cosmos's EVM Hub, allowing smart contracts to be easily deployed and communicated within Cosmos. By the end of 2021, Evmos will deliver its mainnet and achieve full EVM compatibility within Cosmos.
• On November 10, 2021, Cosmos announced the Vega upgrade, requiring all validating nodes and node operators to join the testing process. The Vega upgrade includes various version updates to ensure the security of core components relied upon by the Cosmos Hub, such as Cosmos SDK, Tendermint Core, and IBC.
• On March 17, 2022, Cosmos Hub announced the execution of the Theta upgrade on the testnet at block height 9283650 (around 17:00 UTC on March 17, which is around 01:00 Beijing time on March 18).

From Cosmos's recent technological innovations, we can see that the application scope of the IBC cross-chain protocol has been expanded, further lowering the barriers for the Cosmos ecosystem.

For example, Evmos will interoperate with the Ethereum mainnet, EVM-compatible environments, and other BFT chains through IBC, allowing users and developers to easily transfer between blockchains.

The Vega upgrade plays a crucial role in the seamless upgrade of the Cosmos Hub in the future.

Thus, Cosmos has actively optimized and upgraded both within and outside its ecosystem. With a solid foundation, the building can rise high and stable, which is precisely what is needed before the future ecosystem explosion.

Ecosystem Development

The birth of cross-chain technology was to solve the problem of information silos in the early days of blockchain. Therefore, we all know that the future of blockchain will be a world of multiple chains coexisting. In this vast ecosystem, the development of ecosystem projects is an important influencing factor for the Cosmos ecosystem.

Osmosis is a DEX built on the Cosmos ecosystem with independent memory interoperability Layer 1 public chain. It is also the first application chain in the Cosmos ecosystem to achieve significant IBC trading volume and launch DEX activities.

In addition, with the widespread application of the fast-developing blockchain tool Cosmos SDK and the official launch of the IBC protocol, more and more ecosystem projects are being built and developed within the Cosmos network. So, what is the current state of development in the Cosmos ecosystem?

• On September 8, 2021, Nym was dedicated to bringing anonymous credentials to the Cosmos blockchain ecosystem. Nym's anonymous credentials will provide a decentralized solution for the Cosmos blockchain.
• On October 21, 2021, the blockchain Terra, developed based on the Cosmos SDK, officially activated the IBC standard (Inter-Blockchain Communication) through a governance proposal vote to "Enable IBC Transfer." Users in the Terra ecosystem can connect to other blockchain networks that support the IBC standard and send and receive assets across chains.
• On November 5, 2021, crypto infrastructure service provider Figment announced that it is working to integrate the blockchain data indexing project The Graph with Cosmos. This integration will allow The Graph to index and query data from the Cosmos ecosystem.
• On November 24, 2021, the Harmony community passed a Grant proposal to plan the launch of a cross-chain bridge connecting to blockchain networks like Cosmos.
• On January 30, 2022, it was announced that Injective Bridge V2 was released, supporting Ethereum ERC20 tokens as well as chains like Cosmos, Terra, and Osmosis that support Cosmos IBC.
• On March 11, 2022, the Cosmos ecosystem NFT application chain Stargaze announced that it would open the minting of its genesis NFT at 5:00 AM Beijing time on March 12.

As of January 5, 2022, there were 8 projects ranked in the top 300 by market capitalization in the Cosmos ecosystem, with over 260 projects built on the Cosmos ecosystem, second only to the Ethereum ecosystem.

As the broad prospects of the cross-chain ecosystem are gradually recognized by more people, the further adoption of IBC will bring greater benefits to Cosmos, and 2022 may witness an explosion of the cross-chain ecosystem.

Recent News

In the past two years, Cosmos has not received much attention, although Bloomberg once tweeted that Cosmos was the most anticipated project of 2019. However, recently, more and more people have begun to discuss Cosmos.

Since the launch of Cosmos 8 months ago, 25 public chains have connected to the IBC protocol. In February of this year, the company Cosmos was renamed Ignite.

In addition, many new projects have launched airdrop activities, and according to the latest data, the total market capitalization of the Cosmos ecosystem is $73.1 billion. So, what changes have occurred in Cosmos recently?

• On October 20, 2021, the Asian Digital Bank (ADB) reached a partnership with blockchain technology provider Bianjie to build the bank's new digital infrastructure, aiming to bridge the gap between centralized and decentralized finance. ADB's new system will be powered by Cosmos, allowing customers to manage centralized bank accounts as well as open distributed ledger accounts connected through the Cosmos network.
• On December 9, 2021, according to a blog released by Cosmos, since its launch 8 months ago, 25 public chains have connected to the IBC protocol, and the total market capitalization of its ecosystem tokens (ATOM, OSMO, LUNA, CRO, SCRT, etc.) has exceeded $60 billion, with a total of 5.8 million IBC transactions.
• On February 19, 2022, the liquid staking protocol PSTAKE announced a retrospective token airdrop to key stakeholders in the protocol ecosystem to ensure consistency in incentives and promote the long-term development of the protocol, with the airdrop amounting to 6% of the total supply, or 30 million tokens.
• On February 23, 2022, the Cosmos development team Tendermint announced its rebranding to "Ignite." The CEO of Ignite stated that the name change does not involve significant changes to the company's roadmap or leadership, but rather symbolizes a shift towards a "product-centric" approach, with "Ignite" evoking the idea of "the beginning of transformation and action."
• On February 28, 2022, the space trading game Cosmic Horizon, built on the Cosmos SDK, announced it would initiate an airdrop after the mainnet launch. The airdrop targets the Cosmos community, Layer 1 NFT market Stargaze, Regen Network, and Evmos community, with airdrop proportions set at 40% of the total token supply.
• On March 14, 2022, the Cosmos ecosystem DeFi project Crescent announced it would start an airdrop after March 14. The airdrop will allocate 100 million CRE to ATOM staking participants, divided into two parts: DEXdrop (50 million CRE) and Boostdrop (50 million CRE).
• On March 26, 2022, according to a tweet from the founder of kalpa, Cosmos has officially launched a governance proposal notification tool that can notify users when there are new governance proposals on IBC chains, allowing them to add their votes and actively participate in governance. Additionally, its V2 version will support Discord, displaying proposals that have already been made on-chain.
• On March 29, 2022, according to the latest data from CoinGecko, the total market capitalization of the Cosmos ecosystem is $73.1 billion. The top three projects by market capitalization are currently: Terra ($35,717,149,825), Cronos ($12,488,000,884), and Cosmos Hub ($9,063,119,633).

The Cosmos ecosystem public chain, represented by Terra, is gaining momentum, while other projects based on Cosmos are also providing airdrop opportunities for ATOM staking participants. From the recent news, it is not difficult to see that the Cosmos ecosystem is also showing signs of prosperity.

How to View the Rise of the Cosmos Ecosystem?

What Are the Reasons for the Rise of the Cosmos Ecosystem?

If we sort through the situation of Cosmos, we can find that there have been no significant events from either the technical development of Cosmos itself or its operations that could trigger rapid ecosystem growth.

Therefore, the reasons are likely to lie outside of Cosmos itself, particularly in its ecosystem projects.

The recent attention on the Cosmos ecosystem is partly due to the excellent performance of Terra, which has attracted many people to focus on the Cosmos ecosystem.

As an application blockchain built on the Tendermint consensus using the Cosmos SDK, Terra has achieved remarkable performance due to the unique design of its algorithmic stablecoin UST, quickly building a series of DeFi ecosystems around the stablecoin UST and successfully propelling its token LUNA into the Top 10.

Thus, Cosmos has gained a star ecosystem project, which inevitably draws attention to its ecosystem, prompting curiosity about whether there will be similar projects. On the other hand, other ecosystem projects in Cosmos are also taking actions to empower Cosmos.

Recently, several Cosmos ecosystem projects have conducted airdrops based on the staking situation of the Cosmos token ATOM.

This approach not only completes the initial token distribution but also increases demand for Cosmos, attracting many users. This is why Cosmos has been able to maintain stability recently. Of course, aside from these reasons, some may wonder whether this is related to Cosmos's economic model or its value capture capability. Let's briefly analyze this.

Differences in Value Capture Between Cosmos and Polkadot

As early as last October, we specifically wrote about Polkadot's utility and advantages in value capture (see "How Does Polkadot Achieve Value Capture from an Economic Model Perspective?"). Here, we extract some key points for your understanding.

Compared to Ethereum, Polkadot's value capture is not limited to using its native token as a medium for ecosystem liquidity. Any user within the Polkadot ecosystem can freely use the functionalities of these projects without paying any miner fees to the Polkadot network; the only expenditure required is the tokens needed by the ecosystem projects, which reduces the hassle of network gas fees (this is not significantly different from Cosmos).

However, the aforementioned points do not represent the greatest manifestation of value capture. The real difference lies in Polkadot's mechanism of locking DOT to participate in parachain slot auctions, which causes many circulating tokens to flow back and be locked in the network, providing a certain level of security for the network.

Moreover, projects wishing to join the Polkadot ecosystem must do so through parachains or parathreads, resulting in a relatively high barrier to entry, which corresponds to better security and reliability.

Polkadot operates on a model that does not charge C-end users but does charge B-end users. Users in the Polkadot ecosystem do not need to hold DOT to use parachain functionalities.

However, for parachain project teams, if they want to connect to the Polkadot ecosystem for broader applications, they must rent or spend DOT to win parachain slots. This not only allows users to enjoy seamless usage within the Polkadot ecosystem but also enables DOT to capture the benefits of network effects.

Charging B-end users may seem to set a barrier for parachain projects, but it also effectively filters out many poor projects, allowing projects within the Polkadot ecosystem to develop better under pressure, which naturally aligns with the law of natural selection.

In contrast, Cosmos lacks a similar design for capturing network effect value.

By sacrificing this aspect of value capture, Cosmos offers a more open mechanism, allowing any project that meets the Cosmos SDK and Tendermint consensus protocol to become part of the Cosmos ecosystem without needing permission. This is one reason why the Cosmos ecosystem has suddenly experienced an explosion.

Although both ecosystems possess cross-chain functionality, there are still some subtle differences: Polkadot's high consistency allows for deeper cross-chain interactions (supporting cross-chain contract calls and asset interactions); Cosmos's openness results in shallower cross-chain interactions (only supporting asset transfers across chains, but not cross-chain contract calls). However, the differences may not be significant at present, as cross-chain demand is not yet a pressing necessity.

Another interesting point regarding value bearing in the Cosmos ecosystem is that holders can stake ATOM to receive airdrops from various projects within the ecosystem, which seems to indirectly strengthen the holders and enrich the connections within the Cosmos ecosystem.

Thus, dialectically speaking, Cosmos's inclusiveness has facilitated the rapid explosion of its ecosystem, coupled with the clever collaboration of ecosystem projects, creating a certain "wealth creation effect."

On the other hand, Polkadot's ecosystem excels in security and cross-chain scenarios compared to Cosmos. This is why, in the past, people often compared Cosmos to the Android system and Polkadot to the Apple system, and this analogy still seems to hold true.

How to View This?

From the perspective of the economic model, it does not seem that the recent small surge in Cosmos is due to its value capture capability. So, how should we objectively view this situation?

First, the conclusion remains unchanged: Cosmos's recent small surge is not triggered by its inherent value capture capability or any particularly significant progress.

Instead, it is due to the attention drawn by star projects within the ecosystem and the willingness of other ecosystem projects to engage with ATOM, resulting in the current effects. These are market-driven factors leading to the small surge, not due to Cosmos's technology or official operations.

Therefore, fundamentally, this has nothing to do with whether Polkadot or Cosmos is more advanced technologically.

In fact, although we focus on the Polkadot ecosystem at the Polkadot Ecological Research Institute, we do not adhere to a "Polkadot-only" perspective. In our understanding, different blockchains have their suitable scenarios; Polkadot is one type of scenario, and Cosmos is another.

We will pay more attention to Polkadot while observing the changes occurring in other blockchains and consider how these changes may impact Polkadot and its ecosystem.

Secondly, we should think about whether the market behaviors occurring in Cosmos can only be realized within Cosmos.

First, Terra's innovative design has indeed created a new economic model or operational mode. Without discussing whether its economic model has long-term sustainability issues, it is worth noting that Terra itself does not have significant technical barriers, and its economic model is open and transparent.

Thus, replicating a Terra is indeed feasible, and some projects are already imitating Terra's economic model.

Second, the method of conducting airdrops based on the staking situation of the Cosmos token ATOM can also be replicated on Polkadot.

Since the on-chain data is available, for example, if I am a team working on DeFi or DApp on Acala, I can provide airdrops based on the staking situation of DOT for these accounts (it is not ruled out that this may actually happen in the future).

Third, there are also some psychological factors at play.

In fact, the subsidies provided to supporters through Polkadot's Crowdloan are much higher than the airdrops from Cosmos. However, due to the unfavorable overall environment, both DOT and Crowdloan have performed poorly, leading to a sense of imbalance among people.

In contrast, Cosmos's airdrops are seen as unexpected delights; even if their performance is not great, they are still considered pleasant surprises. One is a benefit that was expected but performed poorly, while the other is an unexpected delight, which, even if small, brings joy.

It's like a company originally intended to give you a bonus of several thousand dollars, but due to poor performance, the bonus is reduced by a thousand, leading to disappointment, compared to receiving a few hundred dollars as a surprise gift from the restaurant during a meal, which feels much more pleasant.

Of course, airdrops have the advantage of allowing one staking to receive multiple different project airdrops, but Polkadot can also fully achieve this.

Thus, the recent performance of Cosmos is merely influenced by market factors and does not involve the question of whether Cosmos or Polkadot is superior in technology. Moreover, these market factors do not have barriers or thresholds; instead, they may provide more inspiration for the Polkadot ecosystem.

What Ideas Can the Polkadot Ecosystem Explore?

As mentioned earlier, Polkadot parachain projects will also have their own ecosystems, and application projects within these ecosystems can learn from Cosmos's approach by conducting airdrops based on the staking situation of DOT.

This method can facilitate a cold start while leveraging DOT's influence to enhance the impact of their own projects, achieving a win-win situation.

Once this method becomes a common cold start approach adopted by many project teams, it will create momentum.

Imagine if there are 100 parachains on Polkadot, each with its own ecosystem, and every year, each parachain births 10 projects that adopt this airdrop method. This would result in an average of 80 airdrop events per month, leading to a vibrant scene.

Of course, this is just an ideal state, but it is certainly possible, and this could be a natural development scenario for the Polkadot ecosystem to grow stronger.

Secondly, if these application projects within parachains also use DOT as a backing asset.

Just as many DeFi projects on Ethereum use ETH as a backing asset, each parachain will require a significant amount of DOT to participate in ecosystem construction, and trading pairs like XXX/DOT are likely to become standard in various DeFi applications within the Polkadot ecosystem.

Therefore, simply discussing the demand and value capture brought by DOT due to Polkadot's economic model is not comprehensive. Many people analyze Polkadot statically and conclude that "Polkadot's value capture capability is weak."

However, ecosystems develop dynamically, and we should continuously observe their development. We should pay attention to how the Polkadot ecosystem may evolve into a mature form in the future, where projects within the Polkadot ecosystem may create new demand for DOT.

At that time, these new demands will endow DOT with new value, establishing a mutually beneficial relationship between Polkadot and its ecosystem. Only then can we better assess what Polkadot's value capture will look like.

Postscript

Throughout this article, we have spent considerable time discussing the recent developments in the Cosmos ecosystem and the implications that arise from them. It must be said that in this battle between the two cross-chain giants, Cosmos has achieved a relatively good initial explosion ahead of Polkadot due to its ecological advantages.

Of course, Cosmos was originally ahead of Polkadot on the timeline, as it launched its mainnet in early 2019, while Polkadot's mainnet did not officially launch until a year later, and the parachain slot auctions only gradually unfolded at the end of last year.

Therefore, from an objective perspective, Polkadot's slower pace was expected, and whether this "slowness" can lead to a turnaround in future developments is what we need to observe and consider. After all, the story of "The Tortoise and the Hare" may not happen for a while, as Cosmos has already run several kilometers, and Polkadot still needs to face challenges.

To this day, we still maintain our original view: Cosmos and Polkadot are not a question of who is stronger or weaker. In the near future, they will likely alternate in leading positions, or in the subsequent maturation phase, each will occupy its own territory and become leaders in different fields.

However, who can truly wait for the arrival of Web3 and maximize its utility remains uncertain. Maintaining a dynamic observation and outlook may be a good choice.