Original Title: “What Makes Cosmos Application Chains Attractive?”

Author: Kyle Liu, Investment Manager at Bing Ventures

Key Points:

• The rise of hybrid application chains is an inevitable trend in the development of public chains, which can not only enhance the scalability and security of public chains but also provide more flexible and efficient solutions for different scenarios. In this process, security will be a key factor in the development of public chains, and new technologies and solutions such as Interchain Security (ICS) will lay a solid foundation for public chains.
• Blockchains built on Cosmos often find it difficult to launch their own validator sets. ICS aims to address this issue, enabling projects to leverage the economic security of the Cosmos Hub. Looking ahead, building a blockchain on Cosmos will become increasingly cheaper and as easy as building a website on WordPress.
• These chains can serve as liquidity bridges between the vast ecosystems of Cosmos and symbolically connect different public chain communities, bringing them closer together. As these teams gradually break down barriers, future developers will be able to easily choose how they want to build their networks without making significant compromises.

The world of public chains is growing rapidly, with users and liquidity driving transaction volume and usage, making block space scarce and expensive. This makes the narrative of Super Appchains attractive. Blockchains like Ethereum are transforming into larger settlement layers, while most economic activities will occur on the many different L2/L3 chains built on top of them. A similar situation is unfolding in Cosmos, where the Cosmos Hub is striving to become the standard security layer for other application chains.

This issue of the Bing Ventures research article will outline the advantages and ecological opportunities of Cosmos application chains based on the logic of public chain development. We believe that security will be a key factor in the further development of the Cosmos ecosystem. Whether as a standard security layer or as application chains, the security of public chains is non-negotiable, and the introduction of Interchain Security (ICS) provides a new solution for security, while the architecture of hybrid public chains also offers more guarantees for the security of application chains on Cosmos. This makes the future of Cosmos application chains promising.

Logic of Public Chain Development

With the continuous development of major public chains, several large ecosystems have emerged in the market, such as Ethereum and its various L2 and sidechains, Appchains on Cosmos, Avalanche and its subnets, and the parachains of Polkadot and Kusama. Each of these ecosystems contains a large number of chains; for instance, the Cosmos ecosystem has over 50 Appchains. These chains are interconnected through Inter-Blockchain Communication (IBC), forming a vast network. Against this backdrop, new opportunities for the development of public chains have also emerged.

Emergence of New Opportunities

Cosmos is a hybrid public chain with a wide range of opportunities and advantages for application chains. The Cosmos infrastructure is ready to attract new applications by horizontally adding new chains through the IBC ecosystem. This means that developers can more easily create new application chains, forming a more complex ecosystem through interoperability with other chains. Additionally, by issuing assets (such as USDC) and connecting to other ecosystems via IBC, Cosmos can attract significant capital inflows, promoting the development of the ecosystem. Furthermore, in the coming year, as other ecosystems continue to suffer from bridging vulnerabilities, Cosmos will have a higher chance of increasing its market share.

Analogous to how people in the past chose settlements, tending to gather at crossroads of trade routes for value exchange, we can foresee similar opportunities in the realm of application chains on Cosmos, where liquidity aggregation can be achieved by building intersections between major ecosystems. Consequently, a series of new products will emerge, such as stablecoin exchanges, arbitrage, MEV capture, and DeFi protocols that aggregate yields from two or more ecosystems.

ICS as the Cornerstone

Interchain Security, or ICS, is now also referred to by teams as Replicated Security. It is an important evolution in Cosmos that allows application chains to benefit from the validator ecosystem of the Hub. It enables other blockchains to forgo their own validators and use the security and validator set of the Cosmos Hub. This way, other blockchains can save costs and time while gaining reliable and stable network protection provided by the Cosmos Hub.

ICS can also establish closer cooperative relationships between the Cosmos Hub and other blockchains, forming an ATOM Economic Zone. For instance, blockchains using Replicated Security (consumer chains) can pay a certain proportion of tokens or fees to the Cosmos Hub (provider chain) as a security service fee. These revenues can be distributed to validators and delegators staking ATOM on the Cosmos Hub, increasing their earnings. At the same time, consumer chains can also gain more attention and support from validators and delegators staking ATOM on the Cosmos Hub.

The introduction of ICS brings new opportunities for Cosmos. ICS allows application chains to obtain the security provided by the Cosmos Hub from the outset, without undergoing months of validator testing, thus facilitating the development and construction of application chains. ICS can bring larger-scale development to Cosmos, enabling the Cosmos Hub to reach agreements with consumer chains to create revenue. This revenue can be used for ecosystem development or distributed to ATOM holders.

The launch of ICS also brings tremendous value to application chains. Application chains can benefit from the security provided by the Cosmos Hub while still retaining a high degree of sovereignty in terms of consensus and data availability. Furthermore, ICS can bring more business opportunities to application chains, such as transaction fees, MEV capture, block space auctions, and revenue sharing. In summary, we believe that the opportunities and advantages of Cosmos application chains mainly lie in the following three points:

1. Application chains based on ICS can be launched quickly, making it easier to start new chains;
2. ICS allows new chains to rent the security of Cosmos Hub validators and stakers, so appchains do not need to establish or rent their own validator sets, thus reducing the security costs and risks of launching new chains;
3. Cross-chain interoperability: Cosmos can leverage ICS to enable frictionless asset transfers, logical calls, and event notifications between appchains. ICS allows appchains to use different consensus algorithms and smart contract languages without affecting communication and collaboration between them. This way, appchains can focus on their core functionalities while enjoying the services and value provided by other appchains.

Advantages of Cosmos Application Chains

Appchains are an important component of the Cosmos public chain, with the core being restricted access to state. Unlike general chains that allow anyone to launch new applications without permission, Appchains coordinate to decide which applications they will run. Similarly, cross-chain communication also requires connections established through IBC.

There is an inherent trade-off here. Appchains sacrifice the agility of permissionless innovation in exchange for sovereignty over their applications. Additionally, they can optimize their chains to address specific use cases, thereby providing a more reliable user experience. Another significant advantage of application chains is incentives. On general chains, revenue often leaks into the underlying gas tokens. Even the most popular dApps struggle to capture most of the revenue they generate. In the hybrid public chain arena, Cosmos application chains have tremendous opportunities and advantages. One of the biggest driving factors is that Cosmos is one of the few infrastructures that can easily launch new chains.

Hybrid Public Chain Ecosystem

In this trend, some other Layer 1 public chains are also emerging with new projects entering Cosmos. For example, the L1 network on Kusama—Picasso Network, built by Composable Finance, aims to become a cross-chain hub that attracts liquidity from the larger DeFi space. Picasso achieves this through its new cross-chain infrastructure layer called XCVM. It is the first chain in the Polkadot ecosystem to connect to Cosmos via IBC and will serve as a bridge between the two ecosystems.

Another project is the Avalanche subnet Landslide, which aims to migrate the Cosmos ecosystem to Avalanche with the help of IBC and shorten the finality time of Tendermint consensus. This chain will run on open-source code based on COSM/WASM SDK, allowing any Tendermint-based DApp to run natively within the AVAX ecosystem. This will combine the high throughput of AVAX consensus with the powerful VM built in Rust, making it more suitable in aspects related to interoperability compared to EVM.

The Sei Network team has also recognized this, and they are developing the Nitro project, which is the first Solana virtual machine chain built on Cosmos. Nitro allows developers to use existing Solana smart contracts without modification, while users can easily access these applications using Solana wallets. Nitro essentially serves as a gateway between Solana and Cosmos, enabling cross-chain interactions between the two public chains.

Cross-chain collaboration is fundamentally based on the current trends and demands of public chain development. Solana, as a high-performance public chain, has a wide range of application scenarios but may face some bottlenecks in other areas, while Cosmos, as a cross-chain collaborative public chain, can provide more possibilities. The establishment of Nitro offers a new avenue for collaboration between these two public chains, while also providing new ideas for cross-chain interactions among other public chains.

Compared to other public chains, Nitro's advantage lies in its foundation on Cosmos, which means it can directly benefit from the advantages and applications of the Cosmos ecosystem while retaining the performance and advantages of Solana. The establishment of Nitro can help Solana better expand its ecosystem, attract more developers and users, while also diversifying Cosmos and further enhancing its market competitiveness.

Ecological Opportunities for Application Chains

When we think of application chains, we think of Cosmos because the Cosmos SDK is the most mature toolkit that allows building new chains from scratch without permission. Appchain today is represented by Cosmos, as the Cosmos SDK is currently the most mature toolkit for building a new chain from scratch without permission. In the long term, we expect that as technology matures, Appchains as Rollups (or Rollapps) will see broader applications. Some noteworthy existing and upcoming application chains include:

1. Neutron: PoS Smart Contract Chain

Neutron provides a smart contract platform for Cosmos Hub to experiment with all new/experimental things they want to use and develop. This includes CosmWasm contracts, ICA for cross-chain operations, and ICQ for reading data from other chains, as well as combining them to create innovative products like Interchain DEX while maintaining the isolation of the Hub.

In short, this is a completely permissionless general smart contract chain secured by the Hub. Anything that can be developed on the CosmWasm smart contract chain can be deployed on Neutron, which also serves as an incubator for smart contract dApp innovation within the Hub Economic Zone. One of the earliest projects launched is Lido, which will issue their ATOM liquid staking derivatives on Neutron.

2. Osmosis: The Liquidity Backbone of Cosmos

Osmosis is the most active chain in Cosmos and the most liquid chain in IBC, with monthly trading volumes exceeding $1 billion. At the same time, it serves as the liquidity backbone for tokens on Cosmos chains. The first major innovation of Osmosis is Superfluid Staking, a module that allows the underlying OSMO tokens in liquidity pools to provide liquidity and stake simultaneously to secure Osmosis. The latest Fluorine upgrade adds more features, such as stablecoin trading automated market makers (stableswap AMM), IBC rate limiting, and multi-hop routing. IBC rate limiting is a response measure to cross-chain bridge hacks, limiting the maximum supply of tokens that can enter or exit Osmosis within a defined time window.

Osmosis has more plans for 2023, including centralized AMM, reducing MEV through threshold decryption, "internalizing" MEV in collaboration with Skip (i.e., allowing the protocol to perform arbitrage trades), launching Mars Protocol for lending liquidity provision tokens, Interfluid staking similar to Superfluid Staking (but for staking underlying LP tokens of non-OSMO tokens), mesh security, and more. The growth of Osmosis is largely attributed to its high token issuance/inflation rate, but the upcoming features and integration plans for 2023 provide it with more opportunities, positioning it to become the liquidity backbone of the entire IBC network and drive more robust growth.

3. Sei: A True Hybrid Public Chain

As an application chain based on Cosmos, Sei has certain opportunities in the hybrid public chain arena. Sei will launch two highly optimized Rollup solutions, Nitro SVM and Paddle. The former runs SolanaVM, while the latter runs MoveVM. MoveVM is a relatively new smart contract platform that has been adopted by fast single-instance chains like Sui and Aptos and is considered one of the fastest and safest VMs. Notably, Paddle will be the first Rollup solution to run MoveVM. The adoption of optimized Rollup solutions helps improve the performance and security of blockchain systems, thereby increasing the attractiveness of the ecosystem. Therefore, Sei has broad prospects for development in the DeFi space and is expected to become a leader among hybrid public chains in the future.

At the same time, as more ecosystems adopt modular architectures, Cosmos and other public chain platforms will also face new opportunities and challenges. In Sei's architecture, it allows developers to build different blockchain applications while also enabling these applications to communicate across chains. Sei's design aims to address the isolation issue among existing public chains while achieving higher performance and lower transaction costs without sacrificing security and scalability. In this process, Sei adopts the framework of Cosmos SDK and builds a highly flexible chain architecture on top of it. This allows developers to easily build various types of applications, such as asset-based applications, staking-based applications, and more.

4. dYdX: A Pure DEX Appchain

The launch of dYdX will coincide with the "Noble" consumer chain of Cosmos Hub. Circle will issue USDC on this chain, with dYdX being the largest first client. This will greatly accelerate the circulation of native USDC on the Interchain, which has long been lacking in Cosmos and IBC. Essentially, the growth of dYdX benefits the growth of native USDC on Cosmos. The growth of native USDC on Cosmos benefits the economic activity growth of the Hub as an Interchain security provider. The growth of the Hub as an ICS provider also benefits the adoption of other consumer chains, while native USDC can accelerate their launch. The growth of native USDC and the economic growth of the Hub positively promote the overall liquidity growth of other Appchains.

5. Injective: Decentralized Derivatives Trading Protocol

Injective aims to create a global trading market. Unlike traditional financial derivatives trading platforms, Injective allows anyone to freely trade various derivatives on its platform. Additionally, Injective adopts a new trading model called "trustless intermediaries," which ensures the security and fairness of transactions. Unlike dYdX, which is a pure application chain focused on derivatives, Sei and Injective serve as foundational layers for applications like perpetual contracts, options, and stablecoins.

6. Duality: A Hybrid Between AMM and CLOB

The core function of Duality is to create AMM pools that allow for exchanges at constant prices. This differs from typical centralized AMMs, which determine price ranges through price scales. Duality allows liquidity to be placed at specific prices, similar to limit orders on a CLOB. Any curve can be built on Duality pools, and traders can access all pools' shared liquidity using market or limit orders. Like its main competitor Osmosis, Duality aims to internalize arbitrage profits from MEV and redistribute them to LPs.

7. Stride: Liquidity Staking

Although Stride is an independent chain, once ICS is launched, it will become a consumer chain to obtain economic protection from the centralized Hub. When considering Cosmos liquidity staking tokens, it is essential to ensure that the security of underlying assets is not compromised by chains with low market caps and untested validator sets. Stride has issued liquidity staking tokens stATOM, stOSMO, and stSTARS, all of which have incentive pools on Osmosis. Stride's main competitors will be Lido and another Cosmos-native liquidity staking solution, Quicksilver.

8. Polymer: ZK-based IBC Protocol

Polymer will be the first zk-IBC application chain on Cosmos Hub. It allows for cross-chain asset transfers without disclosing any information. With zk technology providing high levels of privacy and security, Polymer has great potential in the field of cross-chain asset transfers.

9. FairBlock: A Solution to Prevent "Bad" MEV Through Identity Encryption (IDE).

Conclusion

Currently, the bottleneck in the hybrid public chain arena lies in the lack of a unified standard, with many projects establishing their own interoperability solutions, leading to further market fragmentation. Therefore, the missing link is a unified standard for communication between all chains, similar to TCP/IP for the internet. However, many Layer 1 public chains outside of Cosmos are leveraging IBC technology to enter Cosmos, indicating that this blockchain network is gaining adoption.

In this context, the development trend of hybrid public chains is inevitable. These public chains can select high-quality features from various chains and combine them into a more scalable and secure whole. In this hybrid public chain, their L1 layer can serve as a settlement layer, while their L2/L3 layers can carry more practical business. This hybrid public chain can not only address the bottlenecks and issues of existing chains but also provide more flexible and efficient solutions in different scenarios.

Network effects are the engine driving economic activity. Every time a new blockchain (node) joins the Cosmos network, it increases the value of that network. Most importantly, the value of the network grows exponentially. In summary, the future of cryptocurrency will be modular, and the combination of different technology stacks will enhance their advancement.