Creating Lisk Internet: Avalanche Subnet vs Cosmos 2.0

Introduction

Before the Internet, computers had no way of transmitting data to other computers. Once computers could communicate data through a common language or protocol, the Internet expanded rapidly. The Internet Protocol (TCP/IP) establishes a network of computer networks that is more useful, powerful, and valuable than any individual computer network. This network of networks is the Internet, the backbone of modern life.

In general, cryptocurrency networks are shared, open, distributed computers. However, most cryptocurrency networks do not have a shared protocol and therefore cannot effectively communicate with other networks. They are isolated, as they were in the early days of the Internet.

Avalanche and Cosmos 2.0 are two cryptocurrency projects at the forefront of connecting cryptocurrency networks, laying the foundation for a new kind of internet. These projects enable developers to customize blockchain networks and applications — something that cannot be done with a single, monolithic network such as Ethereum or Solana.

This article describes the upcoming changes in Cosmos 2.0, provides a brief overview of Avalanche, and compares their unique value proposition, token value accumulation, and associated risks.

Main points of this article:

• Cosmos 2.0 introduces the vision of an interconnected, financially coordinated network with built-in economic drivers.
• Cosmos’ Software Development Kit (SDK) reduces the time it takes to start a new project, making Cosmos an attractive ecosystem for developers.
• Avalanche provides a faster finality, more decentralized smart contract platform that avoids the risks associated with DAO governance and liquidity centralization.

What's new in Cosmos 2.0

The first Cosmos white paper outlines the backbone of the Cosmos ecosystem, including the hub-and-spoke architecture, the Cosmos SDK, the Inter-Blockchain Communication (IBC) protocol, and the Application-Blockchain Interface (ABCI).

hub-and-spoke view

The Cosmos Hub is a centralized communication blockchain that facilitates transactions between its spokes (or chains of consumers) via the IBC protocol.

The Cosmos 2.0 white paper , released in late September 2022, outlines several fundamental changes and developments on the current mainline. Interchain Security and Liquid Staking are two mechanisms designed to improve network security, while Interchain Scheduler and Interchain Allocator are new economic engines. Additionally, the white paper outlines the necessary tokenomics changes to fund these engines.

security changes

Interchain security is a mechanism for sharing verification infrastructure between the Cosmos Hub and emerging application-specific blockchains (appchains). Prior to interchain security, application chains in the Cosmos ecosystem were responsible for launching on their own verification infrastructure. For new application chains, interchain security greatly reduces the cost of launching and bootstrapping security for new projects. Cosmos Hub stakers also benefit as they gain access to fees generated by interchain security projects and the ATOM block reward program.

In Cosmos 2.0, staked ATOMs are the interchain reserve currency. With liquid staking, the incentives of network participants are more aligned. As the number of staked ATOMs in circulation increases, network security increases and capital remains liquid to be deployed in the ecosystem.

economic engine

interchain scheduler

The Interchain Scheduler is a new feature of the Cosmos Hub that establishes a secure marketplace for block space. The new ABCI++ allows for separate transaction inclusion and ordering. Ordering rights for future blocks can then be tokenized and traded between blockchains. The interchain scheduler creates transferable, blockchain-agnostic reservations of block space, establishing an on-chain MEV market. After the block is successfully executed, a portion of the scheduler's auction proceeds is sent back to the application chain.

In other words, the interchain scheduler matches buyers and sellers. Buyers are users who wish to lock in arbitrage opportunities or arrange cross-chain settlement transactions with strong execution guarantees. Sellers are blockchain projects that sell reserved block space.

Inter-chain allocator

The Interchain Allocator is a system that exists on the Cosmos Hub to distribute capital and incentivize alliances. There are two tools that support the interchain allocator, one is the contract (Covenant) and the other is the rebalancer (Rebalancer).

Contracts are a system for establishing multilateral agreements with designated chains and IBC-backed entities. Functionally, it is a Cosmos Hub smart contract that contains a liquidity pool that reduces the friction of inter-protocol transactions. Two or more parties (usually on a blockchain governed by a DAO) enter into a contract by depositing funds into the contract. Once the funds are in place, the terms of the deal will go into effect and a relationship of interest between the two parties will be established.

Rebalancing is a tool used to perform third-party swaps and use a set of swap policies to rebalance the pool of funds in the contract towards a target portfolio.

Together, these tools create the foundation for decentralized staking protocols that manage capital, coordinate stake, and build trust between chains. Examples of how protocols use allocators include protocol-to-protocol collaboration, expanding the market for liquid staked ATOMs, or providing guarantees against auction prices down the line.

The interchain scheduler and interchain allocator create a self-reinforcing economic feedback loop. The interchain scheduler facilitates the development of the IBC market and generates revenue for the interchain allocator. The inter-chain allocator deploys funds according to the policy formulated by (DAO), increasing inter-chain liquidity. The increase in inter-chain liquidity brings more arbitrage opportunities, thus increasing the value of the MEV market on the chain.

Economically Strengthened Flywheel

In order for the Cosmos Hub to enter into an agreement with a consumer chain using an interchain allocator, the Cosmos Hub must establish a treasury. To accommodate this need, the white paper outlines changes to the Cosmos token economics.

Cosmos 2.0 Token Economics

The Cosmos Hub treasury is filled by issuing new ATOMs (inflation) and income generated by allocators and schedulers. The following figure is a schematic diagram of capital flow:

Capital Flow View

The new monetary policy is divided into two stages: the transition period and the stabilization period.

The purpose of the transition phase is to give consumer chains time to join interchain security and give the community a chance to develop the social infrastructure necessary to efficiently manage a sizable treasury.

At the beginning of the transition period, 10 million ATOMs will be issued every month. The issuance rate is calculated according to the following formula:

New ATOM release progress

The transition period ends 36 months after the switch to the new monetary policy. After the transition phase, the network will remain in a permanent stabilization phase, during which time the network will issue 300,000 ATOMs per month.

Despite the initial high inflation, in less than 10 months the ATOM inflation rate in the new model should be lower than in the old model.

Avalanche overview

Here are some highlights of Avalanche's structure:

• At its base layer, Avalanche has the fastest transaction finality and lowest fees in the industry
• Avalanche's consensus protocol supports unlimited decentralization with minimal impact on transaction finality
• Avalanche has an Ethereum Virtual Machine (EVM) blockchain called C-Chain
• Avalanche scales horizontally through application chains deployed using subnets
• Avalanche subnets can use any state machine

Similarity

Avalanche and Cosmos 2.0 share many similarities in terms of overall vision, customizability, scalable approach, and optional shared security.

Both platforms abstract away the complexity of the networking and consensus layers, so application builders can focus on building applications.

Both platforms allow for flexibility in the virtual machines that run Lisk. This means that each Lisk is free to make its own design choices, including state machines and monetary policy. The flexibility of the virtual machine enables protocols to design revenue distribution policies, deploy different licensing schemes (public or private blockchains), and comply with different regulatory requirements.

Both projects are horizontally scalable. Scaling vertically or horizontally depends largely on how the platform designer decides to manage the state of the blockchain. Vertically scaling blockchains are monolithic blockchains like Solana that manage a single shared state for the entire network. Managing a single large shared state while maintaining performance presents technical challenges. Horizontally scalable blockchains decompose the management state into smaller, independent blockchains that are relatively simple to maintain and can be customized for different use cases. The price of horizontal scaling is increased difficulty in composability, or chaining protocol calls together across blockchains.

Both projects offer new projects the option to attach to their ecosystems by using a shared validator set. For Avalanche, new projects are usually deployed on the C chain. This means that C-chain validators provide security to C-chain projects, and these projects do not need to bear the additional cost of bootstrapping the validator set. Cosmos 2.0 shares its validator set through interchain security.

similarities and differences

The framework includes value proposition, native token value accumulation, and risk.

Cosmos 2.0

unique value proposition

Cosmos 2.0 interchain includes any blockchain that implements integration with the IBC protocol. This is in contrast to Avalanche application chains which must be deployed using subnets.

The new economic engine of Cosmos 2.0 takes advantage of market inefficiencies by bringing MEV on-chain. This market provides a sustainable source of liquidity for the ecosystem, incentivizing new projects to be deployed across chains.

Cosmos 2.0 provides an SDK to build application chains. In contrast, Avalanche has limited developer tools.

The Cosmos 2.0 blockchain can perform atomic cross-chain transactions (AXC transactions). Through AXC transactions, users of two different blockchains can conduct transfer transactions submitted together on the two ledgers. For example, transactions between the Bitcoin and Ethereum blockchains are possible, although AXC requires both parties to the transaction to be online for the transaction to occur. In contrast, Avalanche currently only switches between subnets via bridging.

Native Token Value Accumulation

The pledged ATOM accumulates value through IBC activities, settles through the inter-chain scheduler, and provides reserves for the cross-chain alliance through the inter-chain allocator.

risk

Cosmos 2.0 relies on DAOs for fund distribution and governance. Without widespread acceptance of a reliable decentralized identity solution for governance, DAOs risk centralization because governance tokens, like other forms of capital, tend to be centralized. This can result in a group of powerful individuals having unfair influence in governance, capital allocation, and interchain evolution.

While there can be many Cosmos Hubs across chains, the hub-and-spoke architecture centralizes liquidity in the Cosmos Hub treasury. As Cosmos Hub treasuries grow with inflationary progress and economic activity, they become a more attractive attack vector.

A single SDK can be a great tool for rapid ecosystem growth, but bugs in the SDK create propagation holes.

Finally, the risks posed by new economic engines can lead to uncertainty, perverse incentives, and unintended consequences. Prior to Cosmos 2.0, the on-chain MEV market was not the primary economic driver of the ecosystem. How will the engine evolve when MEV becomes less profitable through solutions like Flashbots ?

Avalanche

unique value proposition

Avalanche is one of the most decentralized and fastest smart contract platforms in the industry. Cosmos achieves finality in 6 seconds, while Avalanche achieves finality in 2 seconds.

While understanding Avalanche's architecture is complex, Avalanche's protocol deployment architecture remains relatively simple because it does not require L2, although L2 is possible. This is in contrast to the many technical, economic, and game-theoretic considerations proposed by the Cosmos 2.0 economic engine.

Avalanche is led by former Cornell University computer scientists Gün Emir Sirer and Kevin Sekniqi. This is in contrast to the development of Cosmos, which is largely performed by open source contributions.

Native Token Value Accumulation

Avalanche’s native token, AVAX, gains value by locking AVAX among validators, burned C-chain gas fees, and burned subnet gas fees (optional).

risk

Before distribution, the token distribution between the Ava Labs team and the foundation represented 34.3% of the AVAX tokens in circulation.

In the current bridging environment, there is a smart contract risk of asset transfer between subnets. Additionally, a Bitcoin bridge requires a high level of trust, as it only takes 6 out of 8 known custodians to compromise the bridge.

Avalanche faces competition from zero-knowledge technologies and other scaling solutions. Vertically scaling blockchains will challenge horizontally scaling blockchains if the compositional challenges are not adequately addressed.

consistent vision

The visions of Cosmos 2.0 and Avalanche are not mutually exclusive. The Landslide Network is an Avalanche subnetwork that implements IBC integration, creating an ingress and egress between the two ecosystems. The goal of Landslide Network is to reduce the finality of the Tendermint consensus and port the Cosmos and Terra ecosystems to Avalanche.

in conclusion

After understanding the value proposition, value accumulation and risks of the Cosmos 2.0 and Avalanche projects, it is necessary for us to take a step back and reflect on what the long-term value proposition of the application chain Internet can do. Web2 users don't need any basic understanding of Internet protocols to surf the web, a level of abstraction that doesn't yet exist in the crypto space.

As it currently stands, any time you interact with a cryptocurrency network, you must know which network you are interacting with. An open, interoperable AppChain internet connection fluidity that facilitates communication between networks helps to achieve this missing abstraction layer. This can remove technical overhead and friction for new cryptocurrency users, bringing cryptocurrency one step closer to mass adoption.