How does the upgraded Cosmos achieve inter-chain security and cross-chain MEV?

Author: @MohamedFFouda

Compiled by: Guo Qianwen, Chain Catcher

This article is translated from @MohamedFFouda's Twitter Thread.

Not long ago, @CosmoverseHQ released the Cosmos V2 white paper—depicting both a new plan and reviewing past chapters. The white paper looks forward to its new system, aiming to create a treasury for business builders and establish a strong value support system for ATOM.

The Cosmos ecosystem is developing rapidly, covering over 45 zones and having more than 700 IBC relayers. However, it still faces a very core question: If each zone uses its own native token for staking and payments, how can ATOM capture value from these activities?

Cosmos Hub helps projects within its ecosystem to launch quickly, providing infrastructure including Tendermint, Cosmos SDK, and IBC, but it has not had a (positive) impact on the actual operation of these 45 zones, nor has it captured revenue from them—this major design flaw will be addressed in version 2.0.

First, Cosmos has upgraded its previously released "Interchain Security," transitioning from an initially decentralized and isolated security model to a more tightly connected model. Currently, zones/application chains can hold ATOM and summon validators from Cosmos Hub. The new interchain scheduler complements interchain security by creating a shared block space market, allowing coordination between block builders of different zones. The interchain scheduler will enable Cosmos Hub and other zones to capture significant MEV revenue.

The scheduler has two important functions that allow it to capture MEV: first, it separates transaction ordering from validation using the Tendermint engine. Then, the scheduler auctions the transaction ordering rights within a specific zone, which is a Cosmos Flashbots Auction Product, thereby generating revenue.

The more innovative aspect is that it allows for cross-chain MEV. For example, in cross-chain arbitrage, if the price of the ATOM-USDC pool on Osmosis differs from that of the same pool on EVMOS, then MEV searchers can execute two separate trades for price arbitrage.

Sounds simple? But the main issue is that there is currently no guarantee that both trades will be executed or will fail. If only one of them is executed, the situation can become quite dire. However, the interchain scheduler can provide this guarantee by auctioning transaction ordering rights to future blocks on different zones to attract MEV searchers. If searchers win these rights, they gain strong assurance that their transaction bundles will be executed in their preferred order on the block.

The captured cross-chain MEV revenue can be shared among searchers, validators, and application chains. Application chains can ultimately benefit from the wasted MEV, gaining "real" revenue from the economic activities they support.

As Cosmos Hub validators earn more revenue, it is possible to reduce ATOM inflation, i.e., block subsidies, making ATOM more economically viable and easier to appreciate. It is evident that Cosmos has learned a lot from Ethereum's POS upgrade.

But why will the issuance of ATOM be higher in the nine months following the activation of version 2.0? This is another great initiative—the newly issued tokens will enter a brand new treasury to fund development, public goods, and the systemic growth of the Cosmos ecosystem.

The development of the Cosmos ecosystem will be coordinated by the interchain allocator. The allocator will help application chains acquire customers and liquidity to support the success of new Cosmos application chains.

The allocator's job is to select application chains and support them, a subjective task that requires human judgment. Therefore, the allocator will operate through DAOs funded by Cosmos Hub.

These DAOs will exist within Cosmos Hub. The voting rights of DAO members depend on their ATOM bonds and the duration of those bonds. The allocator DAO creates more usability for ATOM, which can help its price appreciate. The economic interaction between the scheduler and the allocator brings a flywheel effect, stimulating significant growth. Cosmos draws experience from Solana, Polygon, Near, and other ecosystems that focus on business development to drive overall ecosystem growth.

The V2 white paper also showcases other changes, such as built-in liquid staking, which can make the Cosmos universe more cohesive and incentivize building within the Cosmos ecosystem.

To enter Cosmos Hub, there is likely to be competition among other major Cosmos zones (like Osmosis zone) to capture some of the aforementioned value. Osmosis has already provided features like ultra-liquid staking to offer similar guarantees for interchain security.

Collaboration and competition coexist, which will spark more interesting business opportunities and lead to the emergence of more quality entrepreneurial projects.