The answers of the questions above lead to different outcomes and possibilities, but amongst all of them, there's always a topic in mind, and that's the price of sovereignty. In this article, we will expand on this idea, the options available nowadays, and how Ethos is targeting that problem.

Introduction

Once a project decides to launch its own sovereign chain, a dilemma occurs: how do you maintain the security of your ecosystem without diluting tokens, if your model is not yet sustainable?

That has been one of the pain points of many Cosmos blockchains. As explained in this article, maintaining a node by a validator can take around $500 per month and validator. If your chain has around 150 validators, that's $1M per year only on infrastructure, and then those validators need to pay for salaries and run a profitable business.

The model so far for many new chains has involved a foundation with a high amount of token supply to slowly deploy and subsidize part of those infrastructure costs until the project finds product market fit and it can be sustainable, but the price action of the token and its distribution can be severely impacted by that time, and with it come also security issues.

That's why many options are available now:

• Partial Set Security by the Cosmos Hub (as we explored in a previous article )

• Dymension with their rollApps (as we explored in this previous article )

• Restaking through Eigenlayer (as explored here)

Amongst many others. Each of them comes with the potential drawback of giving away sovereignty for security, and that's why many chains have decided to go through the hustle of building a standalone L1 instead. And it is in this last point where Ethos comes into play.

Ethos

Precisely trying to solve the issues mentioned above, Ethos allows any L1 to become a sovereign chain, bootstrapping an initial network and allowing them to adjust their security premises via restaked ETH on Eigenlayer.

Ethereum stakers can restake their ETH on EigenLayer by delegating their tokens to operators who support Ethos. These operators allocate the delegated stake to an elected set of Guardians, who validate the Ethos Layer 1 chain (called “Guardian chain”). Through the mechanism they call Opt-In Shared Security, these Guardians can co-validate or delegate to secure any combination of L1 chains, extending the security of restaked ETH beyond the Ethereum ecosystem. Guardians are allowed to choose which chains to validate on.

Ethos architecture

On one hand, a validator will need to run an Ethos node ("Guardian chain", the layer 1). Additionally, they will need to run a node for each new chain they opt into, and finally they need to connect to an Ethereum node, though not necessarily run it.

If this sounds familiar, it is because the approach is very similar to that of PSS (partial set security). In this case, however, the main difference is the fact that the chains secured by Ethos would have the security of Ethereum rather than Atom, making it less "Cosmos aligned" but with a more stable and recognized asset.

Ethos AVS contract

The AVS contract deployed on Eigenlayer is the element that allows interactions between ethereum stakers, ethos operators and Guardians. As defined in [this article](https://medium.com/cosmostation/ethos-powering-sovereign-chains-with-eth-security-41907ea0938d), it defines the slashing rules and rewards.

Guardian chain

The Guardian chain can be understood as a L1 blockchain for which the "Guardians" will need to run a node, and chains which want to leverage Ethos will be able to connect via those Guardians and the restaked ETH allocated by the Ethos operators.

Ethos will initially launch with a Proof-of-Authority (PoA) consensus mechanism, with plans to transition to Proof-of-Stake in the future. Through PoA, Ethos elects network validators based on their identity or reputation rather than their staked amount, in a similar manner as Noble. Their identity is formally vetted by the network, with the ability to cross-check the information in the public domain. These validators, called Guardians, are responsible for validating the Guardian chain and securing the network.

Ethos operators on EigenLayer delegate their stake to Guardians based on their performance and reputation (note that in some cases the operator and the guardian might be the same entity). Through Ethos's Opt-In Shared Security mechanism, these Guardians opt into taking additional responsibility, securing (co-validating) multiple L1 chains. This process extends the security of restaked ETH beyond the Ethereum ecosystem.

Vote extensions

Through Cosmos SDK, Ethos leverages the power of ABCI++ and Vote Extensions. Vote Extensions force validators to come to a consensus on some arbitrary data before every block is produced. Each validator can vote if the data is accurate, and if a quorum is reached it is published at the beginning of the block. In Ethos, this is used by guardians Guardians to come to consensus on stake updates that happen on the Ethos AVS, thereby bridging data from Ethereum to the Guardian Chain. When Ethereum stakers delegate more ETH to Ethos operators on EigenLayer, or when operators reallocate their delegated stake, these changes are reflected on the Guardian chain through vote extensions.

Once the stake updates are recorded on the Guardian chain, they can then be propagated across all sovereign chains that are co-validated by the Ethos Guardians. This ensures that the security provided by the restaked ETH is accurately represented and updated across the entire network of Ethos-powered L1 chains.

Execution Layer Tokens

Execution Layer Tokens are the native tokens of Ethos Integrated Chains. These tokens aren’t used as the staking token for the integrated blockchain. Instead, they are used for their intended purpose, which can be viewed as increasing their utility rather than losing it.

By isolating the consensus layer, the execution layer token value is no longer tied to inflation schedules, Total Value Staked, and other security factors. It will likely follow the performance of the execution layer and the applications built on top, allowing for a fairer and more accurate pricing mechanism.

Since there is no need to stake the execution layer token, it will have a different distribution and user behavior compared to traditional PoS coins. This can result in more DeFi adoption for the token and better access to liquidity for users of other networks.

Ethos as a roadway for new chains

Once we've understood how Ethos works, we can see how it links with the topic we introduced. Building a standalone chain and the incentives and security upfront is certainly a very complex topic which has not aged well for many projects.

If a new project with enough complexity to need its own dedicated blockspace and chain decides to go and become its own chain, as we've discussed previously, can take many different roads, but if it doesn't want to subsidize many validators until it becomes sustainable, or doesn't want to inflate a new token and rush it, it makes sense to become a secured chain.

Why Ethos?

A question that comes to mind when thinking about Ethos is why would we go through the trouble of creating a new L1 (guardian chain) when we could use Eigenlayer directly. An answer to that, and also to the question of this topic, is that the process of onboarding new AVSs or operators is not easy, and Ethos makes it easy and secure.

To fully grasp what that means, let's see a situation in which two potential new chains want to launch, and are considering becoming an AVS via Eigenlayer or joining Ethos (which has its own AVS contract deployed and secured with more than $2bn). If they were to launch each as an AVS, they must search for Eigenlayer operators to collaborate with them, and it is not an straightforward process. Meanwhile, if they were to launch as an Ethos chain, they can do it without that struggle and with $2bn or more as security.

On top of that, it leverages a pristine asset such as staked ETH instead of Atom (in the case of PSS), which some projects might view as an additional positive advantage, and PSS chains give part of their sovereignty to Atom.

ETH stakers looking for additional yields can delegate stake to consumer chains in Cosmos and Consumer chains looking for supplemental security get access to the massive stake pool of Ethereum.

Conclusion

Ethos is a validator coordination layer providing crypto-economic security to integrated chains. By reducing the price of sovereignty, chains can lower provider revenue and/or redirect a portion of it to grow and incentivize a healthy ecosystem. Ethos benefits all stakeholders in the network: security consumers pay less, and providers take on less cost, creating a more sustainable and secure blockchain environment.

Glossary

Provider Chain: The primary blockchain providing security and validator sets for consumer chains in an interchain network.

Consumer Chain: A blockchain within an interchain network that utilizes the security and validator sets provided by the provider chain.

Cross Chain Validation (CCV): The process by which validator sets from provider chains are used to secure consumer chains.

Replicated Security: A system allowing the launch of "consumer" blockchains using the same validator set as the "provider" blockchain. Consumer chains inherit security and decentralization from the provider.

Partial Set Security: An evolution of Interchain Security aimed at addressing issues from version 1.0, allowing each consumer chain to be secured by only a subset of the provider validator set.

CometBFT: A consensus algorithm (previously Tendermint) used in Cosmos blockchains.

ABCI/ABCI++ (Application Blockchain Interface): The interface between consensus and the application layer in a Cosmos blockchain.

IBC (Inter-Blockchain Communication): A protocol enabling communication and transfer of assets between interconnected Cosmos blockchains.

Consensus and CometBFT

First off, we need to understand the basics of how consensus is reached in the provider chain. Recall for there to be consensus, we must have agreement and finality:

• Consistency: keeping the nodes in sync so local histories add up

• Liveness: even in the event of outages or attacks, transactions are eventually processed

There are trade-offs to be made, and CometBFT based chains (previously Tendermint) favor consistency if needed. So in a regular situation, a user sends a transaction, where it sits in the mempool waiting for it to be processed. The block proposer (validator) is chosen in round-robin fashion such that validators are chosen with frequency in proportion to their voting power. It will then take that transaction and a bunch more from the mempool, bundle them together in a block and sign them. For more specifics on block commitment, see our previous post on block commitment here: https://www.imperator.co/resources/blog/tendermint-and-block-commitment. 

All we need to know is that CometBFT is in charge of consensus, and is not concerned with the interpretation of transactions, that occurs on an application layer. There are at least two broad approaches to application-level concerns using blockchains:

1. Create an application-specific blockchain where everything that can be done is defined in the protocol.

2. Create a programmable state machine and push application concerns to a higher level, such as bytecode created by compilers interpreting higher-level languages.

Ethereum-like blockchains are part of the second category: only the state machine is defined in the on-chain protocol, which defines the rules of contract creation, interaction, execution, and little else.

A purpose-built or application-specific blockchain is different. There is no need to present a general-purpose, programmable state machine because application concerns are addressed by the protocol the developers create.

Finally, ABCI/ABCI++ is the Application Blockchain Interface, and is the interface between consensus (CometBFT) and the application itself. ABCI provides a socket for applications written in other languages. If the application is written in the same language as the CometBFT implementation, the socket is not used.

Cross Chain Validation

Consumer chain transactions are not executed on the provider chain. Validators are obligated to run a separate validator node for the consumer chain, once this chain has been approved through an on-chain governance process.

Using IBC protocol, packets are relayed to make sure the consumer chain knows which validators are securing the Cosmos Hub and how much voting power they have. At the same time, the consumer chains need to tell the provider chain when there is evidence of misbehavior so that validators can get slashed on their ATOM tokens on the Cosmos Hub.

In the context of Cross Chain Validation (CCV), the validator sets of the consumer chains are chosen based on the tokens validators bonded on the provider chain, i.e., are chosen from the validator set of the provider chain. When validators misbehave on the consumer chains, their tokens bonded on the provider chain are slashed. As a result, the security gained from the value of the tokens bonded on the provider chain is shared with the consumer chains.

Each chain that is part of the interchain secured network contains either a provider or consumer CCV module which is in charge of the following steps:

• After proposal passes, the provider chain creates a light client on the consumer chain which relayers use to initialize the connection

• Relayers then create the channel which is used for CCV

• If a validator on the provider chain changes its voting power, this changes need to be communicated to all consumer chains

• If a validator misbehaves on the consumer chain, the provider chain needs to be informed so that it can slash a portion of the staked atom

• Consumer chains can have a native token that gets paid out as a block reward. At each block, a fraction of the block rewards is transferred to the consumer’s CCV module, which are then transferred to the distribution module on the hub through IBC token transfer, which then distributes the tokens to validators and delegators

For cross chain validated chains where we have a provider and a consumer chain, the transaction point of view for the consumer chain is depicted below. Users send signed transactions on the consumer chain, transactions go to mempool via ABCI, dedicated nodes (those additional nodes per validator that had to be initiated after the approval) take a bunch of them, communicate with CometBFT via ABCI, Comet performs all consensus logic, a block is executed in 7 seconds and it is finalized. Then, the new state of machine is communicated via ABCI and it moves on. Block rewards are accrued in distribution module, and are sent periodically to provider chain via IBC. 

Additional steps only occur for:

• IBC package sent form provider to consumer if a validator VP changes

  • This takes place at a block level; if I stake to 100 validators in 1 block and a second user stakes to 100 same validators, only 100 updates will go through to the consumer chain. 

• If a validator misbehaves on consumer chain -> IBC package to provider chain

• Additional extraordinary changes (consumer chain wants to leave and become a standalone chain)

Partial set security

Doing a quick recap, we’ve refreshed how consensus is met, how application and consensus talk to each other, how Cosmos chains talk to each other, how cross chain validation works and how replicated security works. Thus, we have all the ingredients needed to learn how partial set security works.

Despite the great amount of advantages the Interchain Security v1 brings (value accrual for the Hub, easily launch a new chain, inherit hub security), it also has a major drawback: an extra cost for validators which might not want to validate a specific consumer chain. And in the current version of replicated security, all validators must run an additional node (with the exception of those validators allowed to opt out through the soft opt-out feature).

Partial set security tries to solve this problem, as it allows for every consumer chain to be secured by only a subset of the provider validator set. What is explained below is a first iteration of PSS, and future versions might vary. 

A new parameter N is introduced for each consumer chain to specify, and this means that the top N% of the providers voting power has to secure the consumer chain. Those outside of that N% can opt in if they want. In particular, we can define two types of consumer chains:

• "Top N" consumer chain if it has joined with N != 0. More specifically, it has to take values between 50 and 100.

• "Opt-in" consumer chain otherwise (only secured by validators that have opted in), with N = 0.

  • In this specific case, the consumer chain can whitelist/blacklist specific validators, and set a power cap as well.

  • In the current version it is set to be permissioned to avoid spam.

Additionally, there’s a discussion on how to enable a permissionless deployment of new consumer chains, where a main issue is “chain squatting”, where someone “starts” a bunch of consumer chains just to reserve the chain IDs.

Conclusions

After doing an overview of Interchain Security 1.0 and 2.0, we see that onboarding of new consumer chains might be easier, since proposals are more likely to pass if not everyone is forced to validate. Additionally, smaller validators are not forced to validate chains anymore if they do not want to.

On the other hand, a consumer chain does will not receive the same economic security as with Replicated Security, unless it is a Top N chain with N > 95%. But different use cases can have different requirements, and with the specific parameters such as whitelisting for opt-in consumer chains, a set of locally close nodes can be chosen for instance, or the other way around.

Currently, each new consumer chain costs ~$513k yearly (avg cost per node = $250 per month) so $250*12 months * 171 validators = $513k yearly. We're taking into account 171 validators because of the feature "soft opt out". Up until today, according to data from Numia, we’ve seen:

• $31.5k monthly revenue from Stride. Extrapolating to 12 months: $378k yearly revenue to the Hub.

• $5.7k monthly revenue from Neutron. Extrapolating to 12 months: $69k yearly revenue to the Hub.

That means that the validators are running at a cost of -$579k yearly overall. However, that value can be reduced with partial set security via top N validators. We present a small simulation of the validator cost per year in each feature with different values.

With those numbers, and new potential chains being added as consumer chains, we might be able to see a more sustainable revenue for the Hub. A possible candidate would be Noble, which is running under Proof of Authority with a total of 20 validators. It could easily become an opt-in consumer chain with 20 validators, and additional nodes could join if they wish to.

It sure is a step on the good direction, and we’re excited to see new consumer chains joining the space!

RollApps are built with Dymint and an application framework, just like a Cosmos SDK app-chain but without Tendermint, and they point to the Dymension Hub for settlement/consensus. In this blog post, we will explore the value proposition of Dymension, and why RollApps matter.

Glossary

AMM (Automated Market Maker): A decentralized exchange mechanism facilitating liquidity provision and price discovery.

eIBC (Escrow IBC): An IBC-based protocol facilitating trust-minimized and instantaneous token transfers across optimistic RollApps, addressing issues like the Verifier's Dilemma and enabling instant withdrawals.

Optimistic Rollups: A type of rollup that assumes transaction validity unless proven otherwise, utilizing a system of fault proofs to settle disputes, offering scalability and EVM compatibility.

RollApps: Application-specific blockchains within Dymension's ecosystem, allowing for scalable execution environments without consensus overhead, with the Dymension Hub serving as the settlement/consensus layer.

Rollups: Scaling solutions for blockchains like Ethereum, moving transaction computation off-chain while retaining data on-chain, typically implemented through optimistic or zk rollup designs.

RDK (RollApp Development Kit): A set of generic modules enabling compatible Cosmos SDK functionality for deploying RollApps on Dymension's settlement layer, simplifying development and deployment processes.

Sequencer: Node operators bonded on the Dymension Hub responsible for producing blocks on a RollApp, akin to validators in PoS blockchains.

ZK Rollups: A type of rollup relying on cryptographic proofs for transaction validity, though more complex and less EVM compatible than optimistic rollups.

The problem to solve

To understand the core ethos of Dymension and why they’ve built an ecosystem around RollApps (which we will define later on), we need to first address what rollups are, and then we will be able to introduce why RollApps might solve a crucial dilemma.

Why would we need a rollup on the first place? In the case of Ethereum, committing to the actual layer one has its upsides and cons. You get access to a lot of liquidity, but users will incur into a high transaction cost. However, it has been known for a while that Ethereum’s roadmap includes scaling through a set of layer 2 blockchains built on top of it.

Each block on Ethereum can only house a certain amount of data, limited at around 50 tps. Rollups are considered one of the safest solutions for scaling Ethereum, leveraging its security, and keeping some data per transaction onchain, while keeping the computation off chain, to layer 2 protocols. Rollups use smart contract to take transaction computation outside the Ethereum network, shape them into batches, and publish them back into the network. That’s the work of a Sequencer.

This does not come without issues however. Choosing a type of rollup (optimistic, zk rollup) is the first topic that arises. Optimistic ones are easier and fast, and allow for EVM compatibility, but as their name implies, they're optimistic in the sense that they assume that state changes are valid unless proven wrong, and there's a whole system of fault proofs to settle any disputes. ZK rollups rely on a completely new and cryptographic proof, but are more complex and less EVM compatible.

Another added layer of complexity comes with liquidity fragmentation between rollups, Ethereum layer 1, and the fact that optimistic rollups can take up to two weeks to complete withdrawals to the layer 1, due to its fault proof system.

Furthermore, an additional complexity not often expressed in optimistic rollup designs is the Verifier’s dilemma, which is defined as the observation that there’s no point in checking somebody’s work if you know they’re not going to cheat; but if you’re not going to check then they have an incentive to cheat (there is a follow-up article here). We want to take into account:

• Checkers might be cheating (bribed)

• Checkers might not be incentivized to check.

  • Surprisingly, this worsens if more checkers are added, as the chance of it being profitable diminishes with more checkers if the asserter (sequencer) is honest.

And this is where RollApps come into play with Dymension.

RollApps

When you withdraw from a rollup, who is validating the state of the rollup? That’s the settlement layer, in the case of Optimism/Arbitrum that would be Ethereum mainnet. In the Dymension ecosystem, the Dymension Hub is the settlement layer for all RollApps. In short, they execute transactions off-chain and post data and state updates on-chain. With the data posted, anyone can submit a fraud proof and earn slashing rewards in case of a fraudulent state update.

Dymension compatible rollups (from this point on, RollApps) write the transaction data to a data availability layer, while publishing the new state on the settlement layer. This reduces the efforts of each validating node participating in the network. Now each computer doesn’t need to process every transaction. As such, by moving the computational efforts off-chain, nodes with less computational power can keep up with high amounts of information re-processing and participate in the consensus of the network.

The Dymension team has developed the RollApp Development Kit (RDK)is a set of generic modules which enable compatible Cosmos SDK functionality, such as creating accounts and token management, and simplifies the process of deploying rollups on top of dymension’s settlement layer.

RollApps are Dymension’s solution to scaling. They are application-specific blockchains minus the consensus overhead, leaving just a highly scalable execution environment. The IBC-enabled hub allows for a connection to all other IBC-enabled chains, as well as communication between deployed Dymension RollApps, creating greater network effects as more applications are deployed.

RollApps operate under fraud proof design allowing for greater scale and relying on just one honest participant for a well functioning system. One honest participant means that only one actor needs to prove that a malicious action was committed by the RollApp sequencer and if so the sequencer gets slashed. Dymension’s validators are responsible for maintaining the current state and handling any fraud disputes or malicious RollApp sequencers.

eIBC

First presented in the video below, there’s still little documentation which can be found here. Since Dymension’s RollApps are optimistic, the key takeaways are:

• eIBC (short for escrow IBC) is an IBC based protocol to facilitate trust minimized and instantaneous token transfers across optimistic RollApps.

• Introduces a workaround to try to solve the Verifier’s dilemma as well as instant withdrawals.

With a certain set of assumptions outlined in the documentation, the eIBC protocol is explained as follows:

With two involved actors (Alice, a user on a RollApp; Bob, a relayer in the IBC), eIBC wraps a standard pending finalization IBC message from RollApp to settlement layer (which will confirm post-dispute window) in order to achieve instant trust minimized transferring. As a wrapper, the protocol introduces a similar flow to the IBC protocol in which Alice submits an eIBC transaction on the source RollApp, and Bob relays the message from the RollApp to the settlement layer where it's verified. If Bob decides to fulfill the request, he sends the required tokens to the eIBC middleware module on the settlement layer, which in turn instantly delivers the said tokens to Alice on the settlement layer and re-routes Alice's original pending IBC message to Bob's address.

An interesting dynamic is also introduced in the document, in which a third user Carrol is introduced, which is an investor looking for a return on her capital:

• Bob decides to create a “verifier liquidity pool”, that utilizes those tokens on the settlement layer to provide instant liquidity for eIBC users for a specific source RollApp. Since Bob runs a full node of the RollApp, he will actively submit a fraud-proof in case of any fraud.

• Carrol decides to pool her funds with Bob’s pool for the RollApp.

• Alice submits an eIBC transaction from the RollApp requesting to withdraw tokens (e.g. 10 DYM) and is willing to pay 1 DYM to do so.

• Bob relays the eIBC message from the RollApp to the settlement layer where it’s verified, and the liquidity pool can provide liquidity to Alice delivering the tokens to the eIBC module.

• The eIBC module distributes the escrowed tokens to Alice and re-routes her original pending finalization tokens to Bob’s LP (10+1).

• Carrol is able to withdraw profit from Bob’s LP.

This way, Alice can receive her requested tokens instantly. Verifier pools however also entail risk for liquidity providers who must trust in the verifier’s ability and integrity.

The eIBC protocol addresses both the verifier dilemma and the fraud proof window. We will have to wait, however, until RollApps are live and more documentation is available, since resources so far are limited in this regard, and a few questions arise. If a user wants to withdraw DYM from a RollApp to the hub, in order for him/her not to wait for the fraud proof period, a user on the settlement layer can "clear" it for a fee. If for any reasons no user wants to perform that action, how does the fraud proof period work? How long does it take?

Dymension RollApp Standards

As a settlement layer, Dymension needs the ability to verify RollApps with ZK proofs or fraud proofs. They recently announced a standard to abstract away blockchains:

- DRS (Dymension RollApp Standards) with fraud proofs, enabling verification of RollApp state and standard chains. It is the equivalent of ERC tokens.

They are RollApp execution environments which are registered via governance on Dymension, and they can either be a chain template with a popular VM, or custom built using the RDK. Once they're approved by governance, anyone can permissionlessly use a that standard to deploy a RollApp, removing the need for multi-sig smart contracts.

Liquidity fragmentation and the role of $DYM

Dymension uses an embedded Automated Market Maker (AMM) designed to expose RollApps to efficient asset routing, price discovery, and most importantly shared liquidity for the entire ecosystem. Dymension protocol incentivizes these pools along with RollApp deployers.

Node operators bond assets on the Dymension Hub for the right to produce blocks on a RollApp (i.e. to become a sequencer). Sequencers receive block production rights similar to validators in Proof-of-Stake (PoS) blockchains.

As defined in this blog post, the following assets are eligible for sequencer bonding:

1. Native DYM: Sequencers are able to bond Dymension Hub’s native token (DYM) for the right to produce blocks on the RollApp.

2. RollApp token: Enabled by Dymension Hub’s AMM, sequencers will be able to stake the native token of a RollApp once approved by the Dymension Hub’s governance.

3. LP DYM / ROLLAPP token: Dymension Hub’s native protocol token DYM is required to be established as the base asset of liquidity pools to be eligible. The other side of the liquidity pool may be the RollApp’s own native token.

RollApp governance

The RDK enables application developers to utilize NFTs, SBTs (Soul-bound tokens), delegation to addresses, and other creative means of separating governance obligations from block producers.

Governors have full control of on-chain governance and value accrual mechanisms such as fee collection, token minting, and NFT royalties.

RollApps can have a single deployer or different approaches depending on their criteria. As in DPoS, governors can receive delegations from holders, and in return delegators receive shares. Therefore, transaction fees and block rewards are shared amongst governors, delegators, and sequencers.

Finally, RollApps are required to publish transaction data and state updates on-chain. Costs of publication are incurred by the sequencer. Expenses for sequencers may be broken down into the following categories:

• State updates

• Data publication

• RollApp bonding

Sequencers publish state updates to the Dymension Hub. Sequencers may utilize either DYM or the RollApp’s native token to pay for transaction fees on the hub.

Closing thoughts and challenges

In some ways, RollApps are similar to App-chains. They become connected and independent chains creating a network, they are also application-specific, and they too have their own token which can be used to pay for network fees. The SDK for rollups is the RDK. But, as much as they are alike, there are still a few major differences which constitutes the reason for their creation.

They allow a higher throughput, lower latency and substantially easier bootstrapping than any monolithic blockchain. However, there is a tweet by Jon Charbonneau which shows a rather interesting cycle, where an app on a general purpose chain might want more sovereignty, so they might launch an app chain, which over wants more value capture, becoming a general purpose chain, and successful apps built on top of it might want more sovereignty.. you see the point.

A network of interconnected fast RollApps with high liquidity might be able to break that cycle. On top of that, an additional challenge is both adoption and competition. Rollups on Ethereum seem to be doing fine and thanks to recent developments, they might become cheaper and scalable, and settling on Ethereum is a well established procedure for L2s. Building awareness and fostering adoption of the Dymension ecosystem, including RollApps and the Dymension Hub, among developers and users will be crucial.

Reflecting on Last Year

2023 was a rollercoaster ride for the crypto markets. The aftermath of the FTX and Terra collapses, coupled with the broader macroeconomic situation, triggered a significant market crash. Sentiment hit rock bottom, and the absence of retail investors added to the challenges. However, amidst the chaos, numerous projects persevered, building despite the adversities. Bitcoin's price sentiment turned positive mid-year, and some altcoins experienced a late-year rally, indicating resilience in the face of adversity.

Let us dig in on the main events, narratives and lessons we can learn from this last year.

1. Bitcoin Ordinals

During the last year, the Bitcoin community has found itself entangled in a heated debate over the emergence of Bitcoin Ordinals, which essentially function as non-fungible tokens (NFTs) on the Bitcoin blockchain. The controversy has given rise to conflicting viewpoints within the community, with discussions intensifying on the potential impact of Ordinals on Bitcoin's fundamental principles and functionality.

The Call for a Hard Fork

One perspective in the debate advocates for a hard fork of Bitcoin to address the Ordinals issue. This faction suggests that a fork, similar to the instances of Bitcoin Cash and Bitcoin SV, could allow Ordinal supporters to maintain their vision without interference from core developers seeking to eliminate Ordinals. The same group highlights the potential rift in the Bitcoin community and the challenges Ordinals face in the face of upcoming protocol changes.

Ordinals as Innovation

On the other side of the debate, some argue that Ordinals represent innovation and a natural evolution of the Bitcoin blockchain. They credit Segregated Witness (SegWit) and Taproot upgrades for enabling Ordinals, emphasizing that the technology adheres to existing consensus rules. Proponents believe that Ordinals meet market demand and push the boundaries of Bitcoin, providing a valuable stress test for the network.

(Un)expected effect

Some data sheds light on the current state of the Bitcoin network, reporting a massive surge in Ordinals-related network activity. With daily inscriptions reaching 400,000 and trading volumes hitting $40,000, debates around the impact on gas fees and questions the decentralized nature of Bitcoin emerge. Nonetheless, this fact is also increases the fear of censorship debate sparked due to the surge in gas fees caused by Ordinals.

A Call for Understanding and Competing

Some other people offer a unique perspective on how to approach the Ordinals debate. They advise critics to gain a deeper understanding of the technology by actively using Ordinals, engaging with developers from the Ordinals ecosystem, and exploring competition to drive innovation. They challenge the traditional approach of criticism and suggest that proactive engagement and market competition may be more effective.

Conclusion

The Bitcoin Ordinals debate is multifaceted, encompassing discussions on technology, market dynamics, and the future of Bitcoin. As the community grapples with these conflicting viewpoints, it remains to be seen how the ongoing debate will shape the trajectory of Bitcoin and its ability to adapt to emerging technologies and user demands.

2. USDC Depeg

Circle’s USD pegged coin(USDC), one of the prominent stablecoins in the cryptocurrency market, experienced a significant deviation from its $1 peg earlier in 2023, triggering concerns and a subsequent sell-off. The sudden depegging occurred shortly after Circle, the issuer of USDC, disclosed difficulties in withdrawing $3.3 billion of its $40 billion reserves from Silicon Valley Bank (SVB). This revelation led to a rapid decline in the stablecoin's value, shedding light on the intricacies of its underlying financial infrastructure.

On March 9, Circle initiated a wire transfer to extract its funds from SVB as the FDIC-insured bank was on the verge of shutting down its operations. However, by March 11, Circle confirmed that the wire transfers were not fully processed, leaving $3.3 billion of USDC reserves still held by SVB. The delay in withdrawing a significant portion of its reserves contributed to a loss of confidence in USDC's stability.

Following the revelation, data from Cointelegraph Markets Pro and TradingView illustrated an immediate and substantial decline in USDC prices. The stablecoin, which had been pegged at $1, plummeted to $0.8774, representing a loss of over 10% of its value. The market response reflected concerns over the liquidity and backing of USDC, as users sought to divest from the stablecoin amid the withdrawal challenges faced by Circle.

The USDC depegging incident serves as a reminder of the vulnerability of stablecoins. In this case, the attack vector came from the traditional market, and in previous cases (UST PTSD) came from design failures, which reminds us to stay cautious and diversify. As the crypto community navigates the aftermath of this event, attention will likely be drawn to increased scrutiny and transparency regarding stablecoin reserves and the mechanisms in place to address unexpected challenges.

Diversifying portfolio and exposures to different stablecoins might also be a good option to mitigate possible issues. A good example of that is Sommelier Finance USD vault, which contains a basket of USD pegged stablecoins, managed to rebalance and even profit during those times, as shown in this retrospective article. In the image below, taken from said article, we see that during the volatilty period, the portfolio allocated 25% to USDC, 25% to DAI, and 50% to USDT. Once it became clear that SVB depositors would be made whole, Real Yield USD began converting both DAI and USDT to USDC to capture the available arbitrage opportunity

3. Evaluating Narratives: Appchains, Monolithic Chains, and Modular Chains

One noteworthy development from 2023 was the evolution of blockchain narratives. Three prominent trends were still fighting for supremacy:

• Appchains: A focus on specialized blockchains catering to specific applications or industries gained traction. Projects sought to optimize efficiency and scalability by tailoring their blockchains to the unique needs of decentralized applications.

• Monolithic Chains: In contrast, some projects continued the trend of comprehensive, all-encompassing blockchains. The idea was to provide a one-size-fits-all solution, addressing a wide array of use cases within a singular blockchain architecture.

• Modular Chains: A middle ground between the two extremes, modular chains gained attention. These blockchains aimed to strike a balance, offering a core infrastructure while allowing for modular components that could be customized based on specific requirements.

Understanding these narratives is vital for investors and enthusiasts alike, as they shape the trajectory of the industry and influence project strategies.

The launch of Celestia gave a big boost to the modular thesis, while DeFi growth in Solana made a great impact in the ecosystem, and new appchains on Cosmos thriving also impacted the appchain thesis. Only time will tell.

4. New narratives: Intents

As defined in this article, which will be almost fully quoted thanks to the usefulness and great explanation, an intent is a message signed by a user to express a desired outcome. It contains information about certain parameters, and a solution is only valid if the conditions relating to those parameters are met. Unlike a transaction, an intent describes an ideal end state, rather than a set of instructions to be executed.

A transaction specifies the journey, while an intent specifies the destination.

Intents are journey-agnostic. As long as the desired outcome is reached according to the rules set by the user, the path to that destination is inconsequential to the user.

Understanding Intents: An Analogy

A simple yet intuitive analogy for understanding intents is getting a taxi to the airport for an early flight. Let’s say a user has the following conditions as part of their set of preferences:

• Origin: Hotel

• Destination: Airport

• Arrival time: 6:30am

• Capacity: 6 people + suitcases

With these preferences in mind, we can examine the difference between intent-based and transaction-based systems:

An intent-based system is like a rideshare app. The user specifies the above conditions, and the app takes care of finding a suitable driver, determining the best route to avoid traffic, etc. Because the app has access to a wealth of information about factors like driver availability and traffic conditions, it can provide the user with the best possible solution. If the user pre-orders through the app the night before, sure enough, they can expect a 6-person van to show up at 6am to get them to the airport on time - or, if there are no large vehicles available, two regular cars instead.

A transaction-based system is like hailing a taxi in an era before smartphones existed. Instead of ordering through a specialized service, the user has to calculate what time they need to leave in order to arrive on time, and then walk out onto the street early, say at 5:45am, to find a taxi that is available and large enough for their group. Once they manage to hail a taxi, the driver must then figure out the best route to get to the airport by 6:30am - all without access to GPS or live traffic data. If either the user or the driver planned imperfectly, the user can get a poor outcome (arriving late and having to rush through the airport), or completely fail (missing their flight).

In both cases, the user specifies the same set of preferences (get 6 people from the hotel to the airport by 6:30am). However, in one situation, the user can express their conditions in one place with the peace of mind that it will be taken care of by a specialized service provider, whereas in the other situation, the user must exert additional effort to plan ahead and find someone to fulfill their conditions while still facing a higher chance of getting a worse outcome.

(Image credits here)

Risks

While intent-centric services offer a wide array of user experience benefits, one need only look to the taxi analogy to see where the systems can go wrong.

Providing detailed directions for all of our taxi rides, akin to the traditional model of specifying every step in a blockchain transaction, would be prone to errors.

But there's also a problem with the "trust the driver" approach that more closely resembles intent-centric systems: We've all had the experience of hopping into a taxi in an unfamiliar city for what we expect to be a quick ride, only to sit awkwardly as our driver takes a suspiciously long route, running up the meter.

The taxi driver in this analogy is like the solver in an intent-centric system: trusting the solver to take care of a task means trusting them to execute it honestly.

Although intents has been a buzzword in blockchain throughout 2023, the impact is yet to come, but it has paved the way for innovation.

5. Cosmos: Noble and ICS

In 2023, significant strides were made within the Cosmos ecosystem, marked by notable achievements. These include the introduction of new appchains like dYdX, the emergence of Noble as a dedicated asset issuance chain, and the pioneering launch of the first chain secured by the Cosmos Hub, leveraging Interchain security/replicated security (ICS). Interchain security represents Cosmos' innovative approach to shared security, empowering a provider chain such as the Cosmos Hub to generate blocks for a consumer chain. Validators participating in this ecosystem run dual nodes—one for the Cosmos Hub and another for the consumer chain—earning fees and rewards across both networks.

Over the course of the year, two key milestones were reached in the implementation of ICS:

• Neutron debuted as the inaugural ICS-secured chain.

• Stride, initially conceived as an independent app chain, seamlessly transitioned into an ICS-secured chain.

These achievements underscore the ongoing narrative of value creation for the Cosmos Hub. However, challenges are still present, particularly concerning scalability, sovereignty, and compensation for validators requiring additional hardware for each ICS chain. Notably, not all chains are well-suited for integration, needing a focus on ecosystem value creation.

A pivotal moment for Cosmos in 2023 was the launch of Noble as an app chain tailored for native asset issuance. Addressing liquidity concerns within the Cosmos ecosystem, Noble introduced native USD-pegged stablecoins, notably in partnership with Circle, the entity responsible for USDC issuance.

Initially anticipated as one of the first chains secured by the Hub through ICS, Noble opted for a PoA (Proof of Authority) model, secured by select validators from the ecosystem. As the maturity of ICS progresses, there is speculation that Noble may seek integration into the ICS network, transitioning into a consumer chain linked to the Cosmos Hub.

Furthermore, the launch of Noble facilitated the standalone deployment of the dYdX chain, leveraging the Cosmos SDK and native USDC collateral, a feat that may have been unattainable without Noble's contribution. In summary, the advancements within the Cosmos ecosystem in 2023 signify a significant step forward in its evolution, with ICS integration and Noble's emergence as pivotal milestones driving ecosystem growth and innovation.

6. Game Theory: Strategic Thinking in a Complex Ecosystem

2023 reinforced the importance of game theory in navigating the crypto landscape. Projects and investors had to adapt to a dynamic environment, considering not only their individual moves but also anticipating the actions of others. The interplay of incentives, competition, and collaboration became increasingly intricate, emphasizing the need for strategic thinking and adaptability.

The application of game theory principles in navigating the complexities of the Web3 space, particularly focusing on the dynamics of Ponzi schemes within the Cryptoverse, is and will always be a usefull skill. We saw it two years ago with Olympus DAO and the (3, 3) meme. In the same manner, we can illustrate (-4, +2) in game theory notation, where one participant's gain comes at the expense of others' losses.

1. Payoff Function in Game Theory:

   • The notation (X,Y) is defined as a payoff function in game theory, emphasizing that in most interactions within web3, someone winning often means someone else losing.

   • The simple truth is that many interactions are not just Zero-Sum but Negative-Sum when considering participation costs.

2. Ponzinomics Laws to take into account (thanks to Jordi Alexander):

   • First Law: Money in an isolated system can be redistributed among participants, but it cannot grow beyond what is put in, leading to winners at the expense of losers.

   • Second Law: Entropy loss in a closed system increases over time, with various sources of entropy in the crypto space, including gas costs, fees, smart contract hackers, and more.

   • Third Law: As the amount of money decreases in the system, the activity spirals down to zero. Closed Ponzi Systems depend on new revenue to offset entropy loss, and once momentum wanes, a death spiral ensues.

3. Beware of DeFi Forks:

   • Aggressive rewards and liquidity mining attract users, increasing Total Value Locked (TVL). However, without sustained inflows, the death spiral takes over, resulting in lower yields, TVL reduction, and a decline in community engagement.

Having always present those points will help us navigate through the noise. Thankfully, those of us present through the year 2023 can catch fast enough projects with dubious credibility, since most of them emerge during bull runs, so they catch retail and inexperienced people.

As we embark on a fresh journey into the new year, the lessons gleaned from the ride of 2023 in the cryptocurrency industry offer valuable insights for the road ahead. While the challenges faced during the past year were formidable, they also spurred resilience, innovation, and a deeper understanding of the dynamic crypto landscape. The web3 community remains steadfast, with developers actively shaping the future of technology. There's always room for learning, improvement, and achievement as we work towards realizing the potential benefits of blockchain technology. Embracing both challenges and opportunities, let's continue to build and contribute to the ever-evolving crypto ecosystem.

Author Bio

You can call me either Kurama or Jordi, and I am a data analyst and web3 research analyst. I’m interested in social models, web3 and decentralization, regenerative and decentralized finance, amongst many other.

1. Basics of dYdX and perpetual protocols

dYdX stands out as a decentralized perpetual contract exchange that emerged in 2017. Operating within the decentralized finance (DeFi) space, it seamlessly combines lending, leverage trading, and perpetual contracts. A pivotal move for dYdX occurred in 2021 when it transitioned to the StarkWare Layer 2 solution, effectively overcoming issues related to transaction speed (TPS) and gas fees, leading to a remarkable surge in trading volume.

The platform adopts a unique tiered trading fee system, providing advantageous rates for Makers and high-volume traders to stimulate liquidity. The impending v4 version of dYdX signifies a migration to a Layer 1 chain based on Cosmos SDK, introducing off-chain matching and on-chain consensus for trading processes. Additionally, v4 embraces fully decentralized governance and introduces the $DYDX token rewards, serving as an incentive for early adopters.

In the realm of perpetual protocols, dYdX's offerings are essentially financial contracts lacking an expiration date, enabling users to speculate on asset price movements without direct ownership. The platform's perpetual contracts encompass features such as leveraged trading and lending, creating a robust ecosystem for traders. The strategic move to Cosmos is anticipated to enhance scalability, composability, and regulatory resilience for dYdX, solidifying its position as a leading decentralized exchange in the perpetual contract market.

2. Metrics: daily users, volume and top pairs.

Disclaimer: historical data is not currently available. In v4, it will first be available through Numia, and prior to that the only one availabe (and displayed in this post) is available on metabase.

Daily Takers have been oscillating between 2300 and 3500 since August. The chart below does not include those only posting Maker offers.

Weekly volume peaked at $33 billion during October 2021, $31 billion again during February 2022 and has been oscillating between $3.6 billion and $14 billion weekly ever since.

During first half of 2022, the most traded pairs were BTC-USD and ETH-USD competing for the first place, AVAX-USD and SOL-USD competing for the third and fourth place, and AAVE, UNI, LINK, ATOM and other sporadic pairs having peaks of volume.

There are more metrics in the source above, such as TVL, number of liquidations and funding rates, but they are not as relevant as volume to illustrate the current state of the protocol, as we will see in this post.

And what about other derivatives products? As of today, dYdX still accounts for half of all derivatives volume along all DeFi, but its dominance has been decreasing over time, starting at 78% dominance at the start of 2023 to 48% on November. One can check the details in DefiLlama to see the breakdown of the pictures below, where red accounts for dYdX.

The total volume however has decreased overall in average, but it looks like this fall in dominance is due to the emergence of new derivative protocols rather than a decrease in dYdX volume, which varies from month to month, as we can see below from the same source.

3. Why cosmos

dYdX has been one of the few protocols which seems to have gained massive usage and a target user base and adoption. Volume has been high for a long time and it is the main alternative to CEXs in terms of leverage trading.

However, building this whole infrastructure had its highs and lows. They have build on top of ethereum, but using proprietary software such as is Starkware, therefore not fully owning the whole infrastructure and software from start to end. Being a well funded team thanks to high revenue (which will be discussed below) meant that they were able to look at alternative approaches to solve this gap, and that’s what they did.

Building a dYdX chain as a standalone chain meant that they did not rely on ethereum consensus, and being an open source free software leveraging the Cosmos stack, they could design the protocol and chain at their choice, eliminating dependencies on third parties. On top of that, the new native USDC on Cosmos will help dYdX, reducing cross-chain bridges and risks.

Finally, one last step from the dYdX team meant that they could now leave the chain and protocol open 100% to community. Starting at the launch of the new chain, all the revenue would be distributed to stakers as we will see, and it will be up to community to decide what to do next with the chain.

4. Business model

Maker and taker fees are calculated based on 30D volume. There are two type of orders on dYdX:

- Maker orders: orders that do not immediately fill and rest on the order book — these orders add depth and liquidity to the order book.

- Taker orders: orders that immediately cross existing Maker orders. They remove liquidity from the order book.

The current v3 fees as described here are as follows:

Currently on v4, the official numbers are not on their website, but some changes were discussed in forum posts such as this one, displayed in the following table.

Those fees up until dYdX v4 were distributed to the team and to cover transaction costs. Now, with the new v4 chain, it will be distributed to stakers.

Current annualized revenue, according to TokenTerminal sits at $93M, meaning $7.6M in the last 30 days prior to writing this post.

At the current date, there are 60 active validators, with a total 7M tokens staked (0.7%). Concerns are being raised regarding the fact that the top validators hold too much voting power. There are many users which have not bridged their dYdX to the dYdX chain, meaning that those numbers are very volatile.

There is a dune dashboard tracking the bridged dYdX from Ethereum to the dYdX chain, where we currently see that a total of 1000 addresses have bridged a total of 350M dYdX tokens.

In previous versions of dYdX, staking the token did not hold much value other than a few rewards since those staked tokens went to the Safety Staking Module, in case of a shortage of assets. Since v4 requires staking the token to provide security, the dYdX team needed a sustainable incentive formula so that users were incentivized to stake their assets. The solution? Rewarding stakers with the taker and maker fees.

5. Tokenomics

There are 1 billion dYdX tokens minted, but not all of them are in circulation. Many of them are vesting and will become available over time. Inflation can be increased through governance, but it is limited to a maximum of 2% per year.

The following data from DefiLlama displays how the total tokens are or will be allocated.

Interestingly enough, following the launch of dYdX v4, a huge unlock of tokens will take place throughout late 2023 and early 2024, mainly to employees, future employees, consultants and investors.

Those unlocks will be interesting to see together with the renewed v4 business model, which returns the revenue to stakers rather than to dYdX the company.

6. Governance

As stated here, there are several entities involved in dYdX:

- Exchange: v3 hosting, dYdX Trading Inc. company, and core devs

- Foundation: in change of governance

- Trade: dYdX Ops Subdao, hosting infrastructure and frontends for the dYdX chain.

As of dydx v3, the foundation is/was in charge of governance proposals. As a sovereign Cosmos chain, anyone can post a governance proposal which can be voted by all users.

For anyone not familiar on how Cosmos governance works, it is a delegated proof of stake system, where validators and delegators can vote, and a delegator vote can overwrite their validator vote. As a summary, we find:

1. Validators: Cosmos relies on a set of validators, typically a limited number, who are responsible for proposing and validating blocks. These validators are selected based on the number of tokens they hold or that have been delegated to them.

2. Delegators: Token holders in the Cosmos network can delegate their tokens to validators of their choice. By doing so, they effectively vote for those validators and provide them with a higher chance of being selected to create new blocks.

3. Voting Power: The voting power of a validator is directly proportional to the number of tokens delegated to them. Validators with more tokens delegated to them have a higher chance of being chosen to create new blocks.

The specific details on the dYdX chain are as follows, but can be modified:

- Minimum deposit (in order to place a proposal): 10k dYdX

- Voting period: 4 days

- Quorum: 33.4% (at least 33.4% of all staked dYdX must have voted)

- Threshold: 50%. Simple majority of 'Yes' votes: Greater than 50% of the participating voting power must back the 'Yes' vote by the end of the voting period

- Veto: 33.4%. At least 33.4% of participating voting power must have backed 'NoWithVeto' by the end of the voting period

Voting power, whether backing a vote of 'Yes', 'Abstain', 'No', or 'NoWithVeto', counts toward quorum. Quorum is required for the outcome of a governance proposal vote to be considered valid and for deposit contributors to recover their deposit amounts.

Conclusion

The platform's journey from its inception in 2017 to the 2021 transition to the StarkWare Layer 2 solution reflects a commitment to addressing scalability and gas fee challenges, resulting in a notable surge in trading volume.

Examining key metrics, including daily users and volume, dYdX has maintained a substantial presence in the perpetual contract market. Despite facing increased competition from other derivative protocols, its volume dominance has decreased due to the emergence of new players rather than a decline in dYdX's own activity.

The strategic move to Cosmos is justified by the desire for independence from Ethereum's consensus and the ability to build an open-source protocol on the Cosmos stack. The transition to a fully community-owned chain further underscores the commitment to decentralization.

In terms of the business model, the shift to v4 brings changes in fee distribution, with stakers now receiving a portion of the fees. The current annualized revenue and active validator count provide insights into the platform's financial health, though concerns about top validators' voting power linger.

Exploring tokenomics, the unlocking of a significant number of tokens post-v4 launch adds an interesting dynamic, especially as the revenue-sharing model shifts towards stakers rather than the company.

Finally, the governance structure, based on Cosmos's delegated proof-of-stake system, empowers token holders to participate in decision-making.

As dYdX continues to evolve and navigate the dynamic landscape of decentralized finance, its v4 upgrade on the Cosmos chain positions it as a trailblazer, setting the stage for a community-driven and decentralized future.

Author Bio

You can call me either Kurama or Jordi, and I am a data analyst and web3 data analyst. I’m interested in social models, web3 and decentralization, regenerative and decentralized finance, and solarpunk ideals, amongst many other.

Liquid staking within the Cosmos blockchain ecosystem introduces a groundbreaking paradigm shift in the realm of decentralized finance (DeFi). While traditional staking mechanisms offer users attractive yields, they often present a trade-off by locking tokens, limiting their utility in other decentralized financial applications. Liquid staking emerges as a solution to this challenge, fostering enhanced capital efficiency and empowering users to participate more actively in DeFi opportunities.

The Core Challenge: Capital Lockup in Traditional Staking

When users stake tokens in a traditional staking model, they commit their assets to a chosen validator or even opt to run their own validator node. In return, they receive staking rewards as an incentive for contributing to the security and consensus of the underlying blockchain protocol. However, this engagement comes at the cost of token lockup, restricting users from fully utilizing their assets in dynamic and evolving DeFi ecosystems.

Liquid Staking: Unleashing Capital and DeFi Potential

Liquid staking disrupts this conventional approach by allowing third-party entities to pool and delegate substantial amounts of tokens to validators of their preference. In exchange, users receive liquid staked tokens (LST), specially issued by these entities. What sets liquid staking apart is the dynamic nature of LST, which accumulates value over time through the reinvestment of staking rewards.

The key differentiators of liquid staking can be listed as:

1. Liquidity and Accessibility: Liquid staking liberates tokens from the confinement of traditional staking, providing users with a fungible and tradable asset (LST). This newfound liquidity empowers users to seamlessly engage in various DeFi protocols without compromising their staking rewards.

2. Optimized Yield Generation: Liquid staking platforms strategically reinvest staking rewards into the issued tokens, compounding their value over time. This dynamic yield optimization contrasts with traditional staking, where rewards are often received in the native token, subject to market fluctuations.

3. DeFi Integration: The liquid staked tokens become versatile assets that users can seamlessly deploy in decentralized finance applications. This integration allows users to explore lending, borrowing, yield farming, and other DeFi opportunities while still benefiting from the underlying staking rewards.

4. Risk Diversification: Liquid staking introduces a layer of abstraction from the complexities of direct staking engagement. Users can leverage third-party services to manage the staking process, potentially reducing the technical barriers associated with running individual validators.

In essence, liquid staking emerges as a catalyst for broader DeFi adoption within the Cosmos ecosystem. By mitigating the trade-off between staking and liquidity, it facilitates a more dynamic and interconnected financial landscape where users can maximize the utility of their assets while actively participating in the security and growth of the underlying blockchain protocol.

The new avenue for Stride in Cosmos

The staking yield in most Cosmos chains right now is enough for many users to settle with that yield staked instead of risking loosing money on market makers. Therefore, it’s difficult to incentivize users to provide liquidity. 

Right now, Stride (the main liquid staking provider in Cosmos) has $35M worth of liquid staked assets with them. But the potential for stride is much larger. In Ethereum, the main liquid staking provider is Lido Finance, which has become a huge player accounting for more than 30% of all staked ETH. This market usually is a winner-takes-all market, and the first players have a huge advantage, and we believe that Stride will be a huge player and one of the most important Cosmos chains because of that.  

Cosmos Liquid Staking Module (LSM)

Cosmos hub currently holds around 247M $ATOM staked. The LSM does have a cap: 25% max of all staked assets can be Liquid Staked, but they can do so without waiting for the unbonding period to end. This means that now that the LSM is live, around 62M ATOM can be liquid staked, a total amount of around $419M.

Taking into account that there are three main liquid staking providers in cosmos (Stride, Persistence, Quicksilver), I find it easy for Stride to hold almost half of the said assets. That would mean around $210M, which is 6 times more than it currently holds with all chains combined.

The scope of this report is to measure the possible revenue of stride based on different scenarios, using only the Cosmos Hub side. As a last-minute addition to this article, it is definitely worth mentioning the last-minute news: the Stride team has posted a forum on the Hub to pave the way towards an eventual merge between Stride and the Cosmos Hub. Therefore, we will separate the following sections in two.

Current Stride revenue generation

As of the writing of this article, staking STRD allows users to receive staking rewards, which consist of STRD as well as staking rewards collected from liquid staked tokens. It also allows for users to vote. 

Stride has a hard cap of 100M tokens. In prop 8, STRD stakers voted to include all staking rewards collected in the STRD staking reward. Stride protocol collects 10% of the staking rewards of all liquid staked tokens. With a TVL of $36M and a blended staking reward rate of 21% APR, the Stride protocol is currently collecting $756,000 yearly. This means:

• If there were $100M in Atom liquid staked in Stride, and staking APR for Atom is 18.85%, Stride collects and distributes within STRD stakers 10% of that APR, which means Stride would collect annually around $1.9M just from Atom.

  • Out of those $1.9M, 15% goes to the Hub and the rest (around $1.6M) goes to stride stakers, in the form of stATOM. 

• On top of that, stakers also receive STRD due to STRD emissions.

As stated above, this is a winning situation also for the hub, since 15% of stride revenue is shared with the hub.

The image above shows the daily revenue of stride, taken from DefiLlama API. Annualized, this is around $600k in revenue.

Current Stride revenue projection

There are of course many things that can influence the revenue side, but we can do some projections, based on the price of Atom, the staking yield, and the amount staked in Stride.

We’ve limited the total amount in each scenario to max 46M staked Atom currently, which would account for 75% of what’s allowed through the LSM. Of course, this can vary and it could eventually reach 100% of all staked Atom, so our approach could even be considered “conservative” in that regard.

In a scenario where Atom reaches its previous ATH at around $44, with 75% of all the Atom allowed by the LSM, this would mean a yearly revenue of $26M for Stride and $4.6M for the Hub. We can do the maths for all 240M staked Atom, and the revenue would be astronomical.

And this is where Stride and Lido differ. As far as I’ve been able to understand, Lido revenue goes to the protocol, but it’s not delivered through its token. LDO stakers do not receive any revenue from the protocol. Lido Finance charges a fee of 10% of each investor's profits, of which 50% is used to improve the platform and provide coverage and privacy for consumers.

Current revenue distribution

As we’ve already stated, the huge attraction for the $STRD token comes from the revenue generated by the protocol.

The total staked STRD tokens is currently 20.33M STRD. If one would hold 50.8K STRD at the current price ($0.8, $40.6k), that would be 0.25% of all staked STRD. If that proportion maintains over time (tricky to calculate due to unstaked STRD and inflation):

• For a yearly protocol revenue of $446k, this user would receive $446k*0.25/100 = $1.1k yearly in protocol revenue.

• For a yearly protocol revenue of $1M, this user would receive $1M*0.25/100 = $2.5k yearly in protocol revenue.

• For a yearly protocol revenue of $40M, this user would receive $446k*0.25/100 = $100k yearly in protocol revenue.

This is a huge driver for the price of Stride long term, but short term only the market knows. It’s been a week since the LSM has gone live, and the total liquid staked amount has not increased that much, as one can see here.

We have also built the following tool which takes as input:

• Atom price

• Staking yield

• Total staked Atom

• Percentage of ALL staked Atom liquid staked in stride

The tool is available here, and it returns two charts such as this ones:

Those values are calculated based on the default numbers ($10 Atom, 15% yield, 247M Atom liquid staked through stride).

Stride proposal to merge with the Hub

The proposal is still in the making, and so far the Stride team wanted to pitch the idea to the whole community, which personally is a great example; an open conversation with no “closed deals” behind it.

As seen in the comments in the forum, the idea is to convert all STRD to ATOM and Stride would become a satellite chain, with 100% of the revenue going back to the hub. From the Stride core developers and the whole Cosmos ecosystem (and specifically the Hub) point of view, this would make sense, since:

1. With the launch of dYdX and Celestia, the Hub might lose its main strength: being the largest Cosmos chain by market cap, and therefore Stride security too since they’re entangled.

2. Fully aligning incentives between both the Hub and Stride, the Hub would “buy” a dedicated team.

3. With Stride becoming fully decentralized (Atom is way better decentralized than Lido governance for instance), other appchains (Celestia, dYdX, etc.) might be more comfortable using Stride.

However, the procedure by which the conversion from Stride to Atom would be done is still unclear, and as seen by the price action since the announcement and the previous section of this article (revenue distribution to STRD stakers), the Stride token holders don’t seem to be convinced.

It seems that the proposal will not be pushed forward, at least not for a while. Following the the latest explanation from four Stride core contributors, their vision for the Hub has become clearer:

• The Hub needs to gain relevance, and Stride depends on the hub for security; therefore, if the Hub fails, Stride falls with it.

• There was a discussion envisioned in 2021 where the Cosmos Hub would be like a port city, which didn't garner enough consensus. Stride contributors still believe the city idea would make sense, along with interchain security. Converting STRD to ATOM would mean the Hub controls the core utility of liquid staking, serving as the city's first service.

• Moreover, they envision a world where all STRD, OSMO, and STARS would be converted to ATOM. In this scenario, this "city" would have three core utilities: liquid staking, exchange, and culture—without compromising the Hub's minimalism and avoiding a monolithic structure (liked by IBC, featuring interchain security).

As they state, BTC and ETH are perceived as the "monies" of the Web3 economy, serving as a store of value and medium of exchange. In the case of ATOM, the compelling story that would appeal to the Web 3 space is this:

• ATOM is the oldest and most decentralized governance token, controlling a suite of interchain services.

Whether all of this makes sense at a legal, business, and economic level, it certainly appears to be a promising idea for the Hub. Most importantly, it has been open and transparent from the start, whether it reaches consensus or not throughout the interchain.

Conclusions

In conclusion, liquid staking in the Cosmos blockchain ecosystem represents a transformative leap forward for decentralized finance (DeFi), addressing the longstanding challenge of capital lockup associated with traditional staking. By offering users the ability to trade in liquid staked tokens (LST) that accrue value over time, liquid staking enhances capital efficiency and facilitates active participation in diverse DeFi opportunities.

As the Cosmos ecosystem navigates the challenges of incentivizing liquidity provision amid substantial staking yields, Stride emerges as a key player in the liquid staking landscape. With $35 million in liquid staked assets, Stride has the potential to follow the footsteps of major players like Lido Finance in Ethereum, capturing a significant share of the market. As the first-mover advantage often prevails in this space, Stride is poised to become a pivotal force in the Cosmos blockchain ecosystem.

The Cosmos Liquid Staking Module (LSM) introduces a new dimension to staking dynamics. In this evolving landscape, Stride, along with other providers like Persistence and Quicksilver, is positioned to play a crucial role in managing and distributing a substantial portion of these liquid staking assets.

Stride's current revenue model, driven by staking STRD tokens, sets the stage for a lucrative proposition for users and the Cosmos Hub alike. With a 10% collection from staking rewards of all liquid staked tokens, Stride demonstrates a sustainable path to revenue generation. As Stride's total value locked (TVL) stands at $36 million, projections indicate a potential annual revenue of $756,000. The symbiotic relationship between Stride and the Cosmos Hub, where 15% of Stride's revenue is shared, aligns incentives for both entities.

Looking ahead, revenue projections for Stride are contingent on various factors such as the price of Atom, staking yield, and the percentage of staked Atom within Stride, as well as other assets liquid staked through Stride. Conservative estimates indicate substantial revenue potential, with scenarios projecting annual revenues ranging from millions to tens of millions, depending on Atom's market performance. Stride's current unique feature of distributing revenue to STRD token holders further solidifies its long-term attractiveness in the ecosystem.

Even if the current proposal of Stride merging with the Hub takes place, all the revenue stated in this research analysis would flow directly to the Hub, which is in turn very positive for the Hub istelf.

While the short-term market response remains uncertain, the long-term potential for Stride is underscored by its innovative revenue-sharing mechanism and the promising prospects of liquid staking in the Cosmos ecosystem. As the Liquid Staking Module gains traction and the market dynamics evolve, Stride's strategic position and revenue-sharing model position it as a frontrunner in the transformative journey of liquid staking within Cosmos.

A bit of context to understand the mission of EigenLayer:

EigenLayer believes that application-specific blockchains (appchain) offer the best path for innovation in the crypto space. In the context of Ethereum, smart contracts are forced to align with its infrastructure. This infrastructure has a limited and shared block space, resulting in high and unpredictable fees, non-instant transactions, lack of privacy, and a consensus that neither knows nor wants to know about the applications it validates.

The challenge lies in creating appchains, as this would require a complete rebuild of the decentralized trust infrastructure that Ethereum has already established. (We will then define the three elements of decentralization and how EigenLayer integrates them into appchains.)

EigenLayer offers a restaking solution to bring the appchain vision of the cosmos back to the security of Ethereum.

This vision was not created by Eigen Layer; they simply advanced it.

Looking back several years, the Ethereum community, particularly Vitalik Buterin in his article "End Game", unveiled a new roadmap that would change Ethereum's fate. He talks about abandoning the execution of applications at the "Layer 2" level to focus on security, "the anti-fraud and anti-censorship armor necessary to guarantee the security of high-capacity domains". Thus, Ethereum specialized in decentralization and benefited from the second-largest economic security during its transition to proof of stake.

(https://vitalik.ca/general/2021/12/06/endgame.html)

Ethereum, in turn, becomes a specific blockchain dedicated to securing other chains, initially Layer 2, but Eigen Layer enhances this vision by allowing the security of other blockchains adopting the Proof of Stake consensus.

"Eigen" comes from German, meaning "your own".

Eigen Layer translates to "your own layer", allowing anyone to build on top of a decentralized trust network. EigenLayer can be summarized as a marketplace for decentralized trust, offering three elements of decentralized trust that restaking can provide:

1. Economic Security:

typical of PoS validation. You can reinvest your crypto to secure another blockchain (for example, stETH restaked with Axelar). No matter the crypto, it's the dollar amount that counts. In the event of misbehavior by restakers, economic sanctions (slashing) will be applied. It doesn't matter if one person staked $1 billion or a million people staked $1,000 each.

2. Decentralized Operators:

You're looking to have many distributed nodes to make collusion difficult (diversity of validators and stakes).

Security by All, for All:

Note that "economic security" and "decentralization" are not exclusive to Ethereum's restakers. They can be found elsewhere, such as in cosmos blockchains, layer 2, or even in LP tokens, as seen in Osmosis.

Indeed, Osmosis is actually the first blockchain to use a token other than its native token as a source of security. They have implemented what they call "superfluid staking", which stakes LP tokens taking into account only the portion corresponding to the amount of osmosis in the pool. A portion of the LP tokens is therefore subject to slashing conditions.

Similarly, with Eigen Layer, blockchains will have the choice to determine which source of security they accept and the slashing conditions. For instance, we might see Chainlink being secured by the tokens of the applications using it, or Ethereum's security being boosted by its application tokens like Uniswap, Aave, and Curve. Or, of course, ETH could be restaked to secure cosmos blockchains. EigenLayer aims to be the most neutral possible marketplace for decentralized trust, letting the free market decide what best suits everyone.

For Eigen Layer, this specific relationship mainly stems from the fact that Ethereum holds the largest number of liquid stake assets, making it easier to use. If I have stETH pending, you probably won't have to convince me to restake them. A delegate can take my money, use it to validate an Actively Validated Service (AVS = protocol secured by EigenLayer's restakers), and thus increase my earnings. If you're considering raising capital to secure your AVS, this can be achieved quite easily.

Pooling security is often seen as beneficial. The argument is that it's much harder to attack a committee with $100 billion at stake than one with $50 billion.

Liquid Staked ETH Restaking: A Victim of its Success?

Although restaking can contribute to activating staked assets, its impact on facilitating decentralized operators is less clear. As a delegate with a certain amount of stETH, my concerns are mainly capital costs. If I already own stETH, my additional capital cost is $0. However, the operator's overhead remains unchanged.

Regarding restaking with a 32 ETH validator, integrating new AVS requires as much work as if the application was launched as a self-secured application chain. Responsibilities include team upgrades, software management, continuous monitoring, etc. The actual overhead and the constant work that ensues are the same, whether it's a reimplementation or self-security. In the end, it doesn't significantly affect their operational load.

The simple act of restaking with stETH will be by far the most common due to its ease of integration and lack of fees. This could almost encourage the use of liquid staking, although it compromises Ethereum's decentralization, part of which security relies on players like Lido, who are market leaders in liquid staking.

Ethereum: The Programmed Programmer.

The third element of decentralized trust is under development at EigenLayer, called Protocol-enforced proposer commitments (PEPC).

This third point is now unique to Ethereum. Restaking is clearly useful when looking for a credible commitment from a chain's proposer. For instance, you could buy N% of Ethereum's next block to trigger liquidations in a lending protocol on the Ethereum blockchain.

Instead of letting Ethereum validators opt for off-protocol commitments (via EigenLayer), the idea is to create a mechanism allowing proposers to do so natively. Proposers could force the Ethereum blockchain to run a specific protocol.

The key difference between PEPC and restaking is in the first part of this acronym: proposer commitments, which would be enforced by the protocol. Validators would reject a block as invalid if a proposer fails to adhere to a commitment they agreed to. This offers a much more robust approach compared to an off-protocol solution where the only option is to dismiss the proposer. The validity of an Ethereum block wouldn't solely depend on the proposer's commitment with the PEPC solution.

ELI5 Eigen Layer:

Is Eigen Layer a slashing machine?
Programmable security = Programmable slashing

Eigen Layer is a massive destruction machine! But be careful; it only serves to defend.

If we were to explain Eigen Layer to a 5-year-old, we'd say it's a slashing machine. It's simply a contract that adds slashing capacity for capital. It adds obstacles to your obstacle course and rewards you for your bravery.

If the best of fighters stumble?

If he doesn't respect the timer because it's a rainy day and mud slows him down... It's up to the commander who was watching him to judge if his mistake was malicious and if he indeed deserves to be slashed. This commander today is a group of individuals who founded the EigenLayer project and will be the EigenLayer DAO tomorrow.

Recently, we experienced a similar situation in the Cosmos Hub and its version 1 of restaking called replicated security (ICSv1). It's different from EigenLayer since the consumer chain already inherits the three types of security that EigenLayer is trying to bring, by replicating the validator set of the Gaia chain. But the validator slashing voting issue remains the same. A validator who had added slashing conditions for the Neutron chain did his job poorly and had his "restaked" ATOMs slashed. An on-chain proposal (818) was launched to refund this validator who was apparently not malicious. Let us tell you that even for a chain with one of the most active and involved DAOs in all of crypto, the discomfort and everyone's political interests were felt. With EigenLayer, it's better not to imagine how it will go if it's a DAO or a multisig, outside the involved chains, that will vote. This is a loss of sovereignty that many serious projects will have a hard time accepting.

The power of restaking:

Restaking is implemented for several strategic reasons. First, it establishes an effective mutualized security system. Staked ETH, which secures Ethereum, is reused to guarantee the security of other protocols. This process occurs via acceptance on EigenLayer. Once registered, users agree to new pledge conditions in exchange for rewards. EigenLayer obtains withdrawal rights from the staked ETH. Similarly, validators allow the imposition of new slashing conditions on their pledge. Thus, stakers who opt for EigenLayer generate additional income through "Actively Validated Services".

Validators can choose their risk and reward parameters before serving a protocol. This leads them to select the most promising protocols, thus stimulating competition and avoiding less interesting projects. This system creates an open market where protocols can buy mutualized security from ETH validators. It strengthens crypto-economic security by consolidating resources in one place over time, making the model more resistant to financial attacks. Value accumulates through restaking, as ETH stakers who choose EigenLayer enhance security for revenues, thereby increasing the value of ETH and strengthening the ecosystem as a whole.

The weak point of restaking:

As observed earlier, ETH restaking does not sufficiently take into account the sovereignty of consumer chains (AVS). This lack of consideration for what's around Ethereum is culturally unfavorable and will encourage "mercenary" behavior. Some projects use Ethereum's security to attract users and capital, thus benefiting from the Ethereum ecosystem as a powerful marketing tool. For restakers, it will be like bringing mercenaries to war: useful in many scenarios, but in the end, they are only there to survive and profit. If a protocol relies solely on restaked ETH for its security and doesn't achieve a sufficient restaked value, it becomes vulnerable to attacks by whales or coalitions. It's easy to advocate the use of Ethereum's security commitments, but the reality is that most applications won't achieve a critical mass of revenue or users to attract restakers in a competitive economy. Restakers are paid to provide a decentralized trust service, and EigenLayer acts as a marketplace for this. As in other markets, such as DEX with tokens or Opensea with NFTs, competition and supply and demand will regulate the selection of projects to restake.

Who are EigenLayer's competitors?

• ICS is similar to restaking but with closed governance. The hub's governance currently acts as a risk manager by monitoring the load and quality of the "leverage" (# of ICS chains). In doing so, some consumer chains, such as Duality and Neutron, have seen their blockchains merge to avoid overheads for validators and unnecessary "leverage".

• Mesh Security is very similar to EigenLayer, but with a different compromise for greater blockchain sovereignty. Mesh Security is also a smart contract, but it has to be implemented in all mesh chains, each having its restaking market. While EigenLayer is a marketplace for everyone. Additionally, Mesh Security allows a free market for bilateral chain securing.

• Also, there's Babylon. It's said to allow Bitcoin restaking, but it's more than that. It unlocks Bitcoin staking entirely because, on its proof of work blockchain, the Bitcoin token has no securing capability; the miners have it. It would be up to the miners to be able to mine other PoW cryptos in addition to BTC. If we were to talk about an equivalent to restaking, we would call it "remining". Babylon will use economic security to add a slashing power, in addition to the decentralization power with Bitcoin's timestamping protocol. Imagine bounty hunters shooting laser-eyed Bitcoin maximalist.

In terms of marketing, don't you think being a blockchain secured by BTC is cooler than being secured by ETH? The choice will certainly depend on the product of the appchain. For degenerative DeFi, it will probably be more appealing to the Ethereum community than a monetary market respecting a certain financial balance for a stable and lasting return on its BTC.

Conclusion:

EigenLayer opens up possibilities and innovates in the direction of decentralization for all. However, in our opinion, its actual use will be limited to rare but impactful use cases. Most existing applications are smart contracts that only have to scale on their rollup (rollapp). That said, EigenLayer will play a major role in all applications that innovate at their infrastructure level. Like Sei (Twin-turbo), Osmosis (superfluid staking / Encrypted mempools), DYDX (decentralized order book), and Chainlink for example, all of which require consensus different from Ethereum. 

EigenLayer is also necessary to unify the security of parts that Ethereum users need. Bridges or the Chainlink oracle have so far independent security from Ethereum. If the security of one part is compromised, it's the security of all parts, including Ethereum, that is understood, so restaking is necessary for the Ethereum ecosystem.

Real use cases for restaking, for Ethereum:

Economic Security - As you can probably imagine based on my previous arguments, we believe this economic security point gets too much attention. Not many AVSs really care about this aspect. You can also pledge any asset, not just ETH.

Decentralized Operators - This is clearly valuable, but as described above, it has nothing to do with Ethereum. You can enlist any set of decentralized operators without them committing to also be Ethereum players. Ethereum is again a natural place to find a group of operators.

Proposer Commitments - This is clearly a valuable concept, as evidenced by the exploration of the PEPC. Without a mechanism in the protocol, it makes a lot of sense for restaking.

So, the real use cases for ETH restaking actually boil down to two elements:

Technical Element (proposer commitments) - If you want a credible commitment to ordering an Ethereum block, it must come from Ethereum validators. "MEV-Boost++" is a hypothetical application example that could come from this element.

Social Element - I see aligning with Ethereum as a primary use case for most replay applications, not pooling economic security.

It's basically saying, "Look, we are an Ethereum project!" It's about the same reason why chains continue to be called Ethereum L2, regardless of the architecture: validium, rollup, sovereign rollup (ETH DA), bridge… All L2! All Ethereum!

Written by https://twitter.com/2_cosmonautes

Introduction

UMEE is a lending algorithm built as a blockchain. As a base layer blockchain secured by a decentralized validator set, anyone with an internet connection is able to access Umee's services. Umee is permissionless, meaning anyone can access debt markets on Umee regardless of things like their location or financial history.

All Umee users must be properly over-collateralized at all times in order to borrow funds. Users who fail to remain properly over-collateralized will have their collateral liquidated in order to minimize risks of insolvency and provide a high degree of security to lenders.

Once the foundational interest rates are built, the crypto format for debt primitives such as notes, bills, bonds, CDS, structured products, and other assets can be built on top of Umee.

Although this report is not focused on UMEE token, it’s essential to know the basic economic use of it, which will come towards the end of the report.

Transactions

Let’s go straight to the juice. The number of transactions on UMEE are always very high; if one takes a look at mapofzones, it has around 500k transactions per day.

For instance, if we take the first day of 2023, it had a total of 719063 transactions. However, 550k of those are aggregate exchange rate vote and rate prevote, and that seems to be the reason behind the high number of transactions. Those actions come from the oracle module, as prices per exchange rate are submitted on-chain via pre-vote and vote messages using a time-weighted average price (TWAP).

With regards to transaction fees, throughout the whole of 2022 and 2023 so far there have been 243k UMEE spent for transaction fees, and that’s around $1.1k with the current price.

IBC Transfers

IBC transfers happen between two IBC connected chains, and is a way of measure the transfer between them and how much they are connected.

The number of IBC transfers per day has decreased since inception, reaching a peak of around 30k transfers in a single day on September 2022, to around 2k IBC transfers daily currently.

Depositing and Borrowing

The number of available assets for depositing and borrowing has been increasing steadily in UMEE, to reach around 20 assets.

In that regard, numbers are pretty clear; there has been a huge demand for supplying and borrowing in UMEE despite market conditions; numbers are around an ATH on both sides, reaching $13.2M USD supplied and $4.2M borrowed.

Figure taken from UMEE website

The number of users depositing is also reaching a steady amount, reaching up to 140 users depositing daily and currently sitting at around 40-60, and with stATOM, USDC and ATOM being the most used assets.

Revenue

The sources of revenue are:

• Transaction fees

As seen in the first section, transaction fees are very small, reaching only 243k UMEE in almost two years.

• Validator commission

Validator rewards will depend on their commission. For instance, top 1 validator with a 20% commission is receiving around 18M yearly UMEE (roughly $74k atm). A top 20 validator with 5% commission is earning around 500k yearly UMEE (around $2k), and so on.

• Oracle rewards

After researching a few more and reaching out to devs on UMEE, this part is not yet clear on instructions regarding the way of querying it, so I will not speculate with them for the moment.

UMEE as a consumer chain

Within the AEZ, there's a key primitive missing: a money market, and according to Thyborg from Informal Systems, UMEE could be a potential consumer chain candidate for the following reasons:

- UMEE is a great partner for Neutron and Timewave, so the Cosmos Hub could lend part of the liquidity in the community pool.

- UMEE is a great partner for Stride and Duality, making use of hybrid stable pools and therefore processing Stride's liquidations with lower slipage.

- Atomic IBC would enable flash loans for the first time in Cosmos

Roadmap

There are three upcoming phases, with full detail here:

Marina

• Ojo price feeds to expand the range of DeFi products, incorporating safety parameters via the IBC rate limiting module.

• Establish a robust smart contract framework to facilitate the seamless onboarding of dApps onto the Umee blockchain.

• Optimize Umee's infrastructure to minimize validator operational costs and overhead, thereby enhancing overall efficiency.

• Provide community incentives to foster the growth and expansion of the Umee ecosystem.

Hali

• Expansion of leverage offerings to accommodate diverse use cases and markets.

• Introduction of an improved Liquidation Protocol to ensure the stability of the loan stack, implementing incremental position liquidation (approximately 5%) for effective loan rebalancing.

• Enhancement of governance features to address emergency scenarios and establish robust response mechanisms.

• Development of a cross-chain interface prototype with the Ethereum ecosystem, enabling seamless interoperability and broader accessibility for Umee.

Yara

• Implementation of new tokenomics.

• Introduction of Outpost and Virtual Liquidity mechanisms.

• Integration of superior interest rate algorithms to enhance the lending experience, accompanied by innovative fixed duration lending tools for the development of a native cryptocurrency yield curve.

• Expansion of product development to onboard the global bond markets into the realm of DeFi.

All of them are highly important, but looks like Marina with validators operational costs minimization, expanding DeFi applications, and Hali with leverage and improved liquidations are a good points in which to focus.

Author Bio

You can call me either Kurama or Jordi, and I am a data analyst and web3 data analyst. I’m interested in social models, web3 and decentralization, regenerative and decentralized finance, and solarpunk ideals, amongst many other.

1. Introduction

The aim of this report is to show a deep dive of Sommelier performance, display its current growth and potential, both for users, delegators and validators, and how it accrues value for all of them in an organic way.

The best way I’ve found to describe what Sommelier does in the simplest way for users who already have basic understanding of Blockchains is as follows. It’s a smart contract platform which optimizes platforms (currently) on Ethereum, using both off-chain calculations for portfolio optimization (via ML algorithms and trading expertise) and the Cosmos SDK so that a set of validators manages the security of those smart contracts instead of a multisig. The use cases of those portfolio optimizations go from stablecoin yield optimization, to exposure of different assets, and potentially even more use cases as the platform matures.

As one can already see, there’s a high complexity and different set of users who can benefit here. From users gaining exposures to the different strategies, strategy providers by applying a management fee, to stakers and validators by earning yield and fees.

Although the tokenomics and fees percentage might change, the scope of this report is to look at overall numbers and performance, in order to better determine the potential for the space.

2. Cellars and strategies

First and foremost, a Cellar is a concept used a lot in Sommelier jargon and it’s used for referencing a smart contract representing an on-chain investment strategy, that can take in arbitrary inputs / commands from off-chain. There are currently two types of cellars/strategies live: yield strategies and automated portfolio management.

Yield strategies, as expected, generate yield through active management leveraging lending and borrowing platforms on Ethereum using stablecoins. There are currently two yield strategies, real yield USD and aave2.

Automated portfolio management allow users to gain exposure to different assets with less risk. For instance, if you want to gain exposure to ETH with less risk, you can join one of those strategies and if ETH rallies, it’s supposed to increase with less value, but if it crashes the strategy will go towards stablecoins and it will drop less in value.

3. Yield strategies

There are currently two possible yield strategies available at Sommelier: Real Yield USD and Aave stablecoin strategy. Those are the ones which have attracted more liquidity so far, although we’ll look at stats and performance in the following section.

As defined in Sommelier app, Real Yield USD leverages lending platforms like Aave and Compound, and decentralized exchanges like Uniswap, so it focuses on these three protocols and simultaneously allocates capital to Aave and Compound lending pools and Uniswap V3 LP pools in order to maximize yield.

On the other hand, the Aave stablecoin strategy aims to select the optimal stablecoin lending position available to lend across Aave markets on a continuous basis. The goal is to outperform a static strategy of lending any single stablecoin. Returns are amplified for Sommelier users as they will not suffer opportunity costs from passively sitting in less profitable lending positions at any given moment.

If we look at numbers, it’s clear that the new Real Yield USD strategy has outperformed the rest of strategies in terms of total value locked, jumping from 1M USD a month ago, to more than 14M USD currently.

The yield return so far has also maintained around 7% return on stablecoins, which is higher than any other protocol can offer through real yield.

However, in terms of unique depositors, it’s worth noting that although the number of unique depositors in Sommelier yield strategies has increased, the number of unique depositors during the last 30 days at the time of this report has not increased as much as the amount deposited, meaning that users with a high amount are also leveraging the Real Yield strategy.

4. Automated portfolio management

The two first automated portfolio strategies which launched were ETH-BTC Trend and ETH-BTC Momentum, and are the ones which had more traction at their launch.

• ETH-BTC Trend

The Cellar aims to outperform simply holding BTC and ETH, while also giving investors lower volatility and risk than holding BTC or ETH individually or an equally weighted portfolio of BTC and ETH.

The strategy is long only but cuts risk exposure when the price trends are negative. The Cellar is expected to outperform at times when price increases are moderate, while outperforming significantly and reducing risks in a bear market. The strategy is likely to underperform in sideways markets or when prices are rising extremely quickly.

The Cellar is expected to capture the majority of any positive price trends, but it will always enter the market only after the trend has started to be positive. The strategy will limit losses if price movements are negative with the expectation of improving the risk-reward ratio. The benefits of the strategy are expected to emerge within a 3-6 month holding period in case of diverse market conditions and are very likely to emerge for holding periods over 1 year.

• ETH-BTC Momentum

The momentum Cellar strategy aims to outperform and have lower volatility and risk than holding BTC or ETH individually or in an equally weighted portfolio of BTC and ETH.

The strategy is long only, but it reduces risk exposure if price momentum is negative. The cellar is expected to outperform at times when prices are rising moderately or one of the portfolio assets is appreciating faster than the other. The strategy is likely to underperform when there are extreme price appreciations but is expected to capture the majority of any positive price movements. The strategy is expected to outperform in a bear market since it can cut risk exposure, but it is exposed to negative price movements because it is long only and always holds at least a small proportion of risky assets. The benefits of the strategy should emerge within 3-6 month holding period in case of diverse market conditions and are highly likely to emerge for holding periods over 1 year.

Performance and users

Now that we’ve already analyzed the theory of the two main automated portfolio management strategies, we can dig into how they’ve behaved so far. The first figure below shows precisely the price action of both strategies since inception.

The trend strategy has outperformed currently the momentum one, when comparing both of them in terms of ROI since they went live, with a net increase of 21% for the trend strategy (started at 1 USD) and a negative -2.53% for the momentum one (it started at around 2 USD).

On the other hand, we if we look at ETH and BTC price separately and their value increase in percentage, we get the values displayed below, where ETH price has surged a 12% in price and BTC a total of 36%, thus having an average return of around 24%, pretty close to the trend strategy.

Finally, we can look at both the total amount currently staked for both strategy tokens, as well as the number of weekly unique users swapping in the Uniswap v3 pools for both strategies.

There are currently around 14k trend tokens, and 3.5k momentum tokens, and the number of users swapping through the Uniswap v3 pools has been declining over time.

There are more strategies (steady ETH, steady BTC, steady MATIC and steady UNI), but I’ve decided for the scope of this report to stick with the main ones.

5. Conclusions on fees and long term security

Right now each strategy has its own fee schedule and split with the protocol. Real Yield USD is basically all of the protocol TVL and the protocol is earning 0.1% annually on the funds in that strategy. That 0.1% is split with the validators, stakers and protocol treasury.

Once new and successful strategies go live, this fees will be redefined for each one of them so it’s all currently an assumption waiting for the protocol to mature. As explained very well by jack (@OriginalJakeW) in this substack article:

[Those fees] will be auctioned off to swap for SOMM coins which will then be given back to stakers as rewards for securing the network. The beauty of the system is the auction will act as price support when the protocol is accruing enough fees. You can see how valuable this can be to the protocol and how it starts to turn into a flywheel. The more success the protocol has, the more fees generated, the more value swapped through auction, the more rewards to stakers, the more number go up.

The most important point to keep an eye on is how long will it take for the protocol to be sustainable for validators to keep validating, but it is clear that the protocol is committed to achieving use cases and results through a long term vision, rather than diluting the token for short term gains.

Author Bio

You can call me either Kurama or Jordi, and I am a data analyst and web3 data analyst. I’m interested in social models, web3 and decentralization, regenerative and decentralized finance, and solarpunk ideals, amongst many other.

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Cosmos has become a playground for developers and teams to experiment with the technology, build new features, and see the potential end result. Based on what I have seen in the space, here are five predictions for Cosmos in 2023.

1. Interchain Security won’t have the expected success

Interchain Security and its upcoming first version, called Replicated Security, will be the very first shared security solution on Cosmos. The concept is simple: one chain, referred to as a Provider chain, provides its economic security to other chains, referred to as the Consumer chains.

There are numerous advantages to this, the first one being that the Consumer chain inherits the security of the Provider chain, making it equally secure. As a result, a Consumer chain using Replicated Security with the Cosmos Hub, benefits from an economic security of over $2 billion right from the start. Another benefit of that model is that the Consumer chain does not have to bootstrap its own set of validators set, as the validator set of the Provider Chain will directly produce blocks for the Consumer chain.

In return for this, it is expected that Consumer Chains will compensate ATOM stakers and validators. This model may appear attractive at first, but there are several points that could prevent it from being as successful as it appears to be. Let’s analyze this further.

• Scalability issues 

In its current form, Interchain Security is not scalable due to the necessity for validators to run a new node for each new consumer chain. This results in an expensive and resource-intensive infrastructure to maintain for validators.

It is unthinkable to imagine 1,000 Consumer Chains using Replicated Security due to the heavy infrastructure it would require for validators. If there is an ambition to reach this goal, a lighter solution for validators must be found.

• Compensations 

As a validator, the hardware setup to run an ICS chain with Replicated Security is exactly the same as for the Cosmos Hub. Therefore, the cost is linearly related to the number of chains added; this means that adding just one ICS chain will double the infrastructure cost for the validator. Does it double the income though? The answer is no.

Each project that wants to use Replicated Security must go through governance and be accepted as a Consumer Chain by the validators and stakers. Therefore, they will closely monitor the compensation the project is offering, as it is reasonable to expect remuneration for the benefits Replicated Security provides. If the project is not providing adequate compensation to validators and stakers, or none at all, it is unlikely that they will be accepted by governance, unless they offer something highly strategic to the Cosmos Hub.

• Sovereignty

Under replicated security, the Consumer chain is not sovereign in block production as it is completely dependent on the validator set of the Provider Chain. Therefore, Consumer chains are basically transferring value to another blockchain.

Not having control over its block space will become an issue for the most successful Consumer chains, especially those that will generate a great amount of MEV activities. Therefore, it is likely that the most successful consumer chains will not remain as Consumer chains to have full control over their blockspace. Because why would you bring value to the stakers and validators of another chain, when you can bring this value to stakers and validators of your own chain if you become a sovereign Appchain?

I view Interchain Security as an Incubator, providing projects with security and without the need to worry about a validator set, allowing them to grow and become a sovereign Appchain for the most successful ones. If this were to happen, we may wonder what the future of Interchain Security would be if all successful Consumer chains were to leave.

Of course, that does not apply to projects that that prioritize security over everything else. For example, the upcoming generic purpose issuance chain is expected to issue native USDC, so using Interchain Security makes sense as native stablecoins are crucial for the ecosystem. Similarly, a liquid staking chain should prioritize security and Interchain security is a good long-term option, given that the Cosmos Hub has the largest economic security within the Cosmos.

There are still points to be addressed to make Interchain Security successful, and scalability should be the primary focus. Alternative versions to Replicated Security exist; the opt-in version has an issue with the subset problem, and ICS v3 appears to be less attractive than Mesh Security.

2. IBC is set to become the most dominant bridge in crypto

IBC (Inter-blockchain Communication protocol) plays a crucial role in the Cosmos ecosystem. The success of the Appchain vision relies on the ability of different blockchains to communicate with one another. This is why IBC is one of the most popular bridging solutions available.

IBC is more than just a bridge: it is a general-purpose message passing protocol that facilitates various forms of data communication across IBC-connected chains.

My take here is that IBC is likely to become the dominant bridging solution in the crypto space by 2023 for several reasons:

• The launch new IBC-enabled blockchains (dYdX Chain, Sei Network, Nibiru, Quasar …) will increase the number of IBC transactions.

• Wormhole's upcoming Wormchain will be IBC-enabled, and connect Cosmos with +20 other ecosystems, thereby increasing IBC volume.

• Teams such as Composable or Electron Labs are working on extending IBC to other ecosystems, such as connecting the Polkadot and Ethereum to Cosmos using IBC.

• With the upcoming new modular blockchains coming to Cosmos and the emergence of rollups, there will be a necessity for rollups to communicate, and using a protocol such as IBC could be a way to ease communication between them.

• Lastly, the development of more complex features, such as cross-chain swaps, cross-chain lending markets, and cross-chain arbitrage opportunities, is also expected to lead to an increase in IBC volume.

IBC offers several advantages that make it more secure than other solutions. First of all, it is permissionless, allowing anyone to act as a relayer between blockchains A and B. Additionally, there is no need to trust a third party in IBC, as it’s secured by validator sets. Furthermore, IBC is general, it’s not only for Cosmos and can be applied to other ecosystems.

In a sector as important as bridges, which is also one of the most hacked sectors in crypto, security is a critical concern and the ability to rely on bridges that can be trusted is highly important.

IBC is currently one of the most battle-tested and secure bridges available, with a proven track record of reliability. While there are still risks associated with its use, a bridge that relies on entire validator sets is more secure than one relying on a simple multisig.

3. Celestia will be a new paradigm in the crypto world

Celestia is the missing piece in the Cosmos ecosystem.

Celestia is a modular blockchain, which is a blockchain that outsources at least one of these four components: data availability, consensus, settlement, and execution, to an external chain in order to improve performance, efficiency, and scalability. This is in contrast to traditional monolithic blockchains such as Ethereum, which handle all four components in the blockchain stack.

Modular blockchains like Celestia are more scalable because there is a separation of resources, meaning that each node is more specialized to a specific function, resulting to more efficiency.

Celestia is responsible for Data Availability, which guarantees that data is organized and accessible to users and applications. This is critical, as without it, users and applications would be not be aware of the current state of the chain. Celestia utilizes an efficient technique known as Data Availability Sampling, which uses light nodes to verify %n by many. For a comprehensive article about the Modular World, I suggest the one from Rain & Coffee.

Any project can use Celestia as a data availability layer and focus on the other parts of the blockchain stack. We may come to a world in which Ethereum could use Celestia as a data availability layer.

I anticipate that many projects will adopt Celestia as a data availability layer and construct their own sovereign rollups on top of the chain. To facilitate scaling, it is crucial to simplify the deployment process for developers, and a one-click rollup kit already appears to be in development:

The utility of the Celestia token will increase as more rollups are implemented on top of the chain, as rollups will have to pay for the block space to post data on the Celestia chain. This interaction can be abstracted away from the end user and people using the rollup won't need to hold Celestia tokens to pay for fees; that is entirely up to the sovereign rollup to decide what the fee tokens should be. But, in order for the rollup to pay in Celestia for block space, we could imagine some solutions such as the use of an AMM that swaps the rollup native token into Celestia tokens automatically to pay the Celestia chain for instance.

Additionally, Celestia is a great scaling and security sharing system.
Rollups inherit the security of Celestia from the beginning. The infrastructure cost is also much lower compared to other solutions such as Interchain Security; and it will be interesting to observe the competition between the two, as Celestia offers almost the same advantages as Interchain Security without the same trade-offs.

One area that will be highly important for Celestia is interoperability between different sovereign rollups. As of now, it is up to each rollup to decide which bridging solution to use, and if each of them selects a different solution, it could lead to a poor user experience.

Celestia is one of the most exciting projects of 2023.

4. Appchains are NOT suitable for everyone.

If there is one lesson we should take away from the last two years, it is that the Appchain thesis is not the best solution for brand new teams. An Appchain is not easy to manage, as the core team must not only focus on its core product, but also on the infrastructure and security of the chain. This is a difficult task.

The greatest challenge for the teams was how to make the blockchain economically sustainable in order to cover the infrastructure costs of validators and incentivize people to stake to secure the chain. The bear market has demonstrated that many small-cap projects have been unsuccessful in that regard. In 2023, if the bear market persists, we will see many validators leaving chains that were once promising Appchains but have since become zombie-chains.

Alternatively, the new teams will be more attracted to the new features and solutions such as Celestia, Interchain Security, or SAGA than building their own Appchain, allowing them to focus on their product first, attract users and liquidity, and, once successful, building an Appchain if there is a need to it.

DYdX is a great example. It initially began on Ethereum, then moved to Layer 2 (StarkWare), and now they have a great working product that is attracting liquidity and users, they decided to launch the dYdX Chain due to the specific features they desired, such as flexibility, sovereignty, and decentralization.

It makes more sense for a successful Decentralized Application to build its own Appchain than for a new project to start a chain from scratch. I would not be surprised to see another important DeFi protocol decide to build a Cosmos Chain, the pieces we are still missing are an oracle such as Chainlink on the ecosystem, as well as IBC connected to Ethereum.

The Appchain thesis still holds, but for new teams in the space, I would recommend starting with an easier solution than building a chain, so they can focus on the product first. If successful, they can then build their own chain.

5. The lack of composability on Cosmos is slowing down adoption

It is difficult for teams to build on Cosmos compared to ecosystems such as Ethereum, where deploying smart contracts is relatively straightforward.

The sovereign nature of Appchains on Cosmos impedes composability, which in turn slows global adoption. For example, here are some tasks that are simple to implement on Ethereum and difficult to do on Cosmos:

• Developing a DEX Aggregator

• Developing a Yield Aggregator

• Developing a Borrowing / Lending product

• Doing Flash Loans

All of this is hard to do on Cosmos because it needs to deal with different chains, and this requires having IBC transactions between all the different steps. We just have to see how hard it was for Mars Protocol to build its Hub and spoke model.

Therefore, in 2023 I anticipate more teams working on those issues to build tools and products to solve those points, but at the expense of a slower adoption of the Cosmos Ecosystem.

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Kam is the Strategy Lead at Imperator.co. He previously worked in investment banking and the hedge fund industry before transitioning to the cryptocurrency industry full-time. He has a strong interest in all aspects of blockchain technology and enjoys analyzing different projects and their current developments.

As we reflect on the lessons of the past year, it is important to consider how we can avoid similar pitfalls in the future. In this article, I wanted to share some thoughts on the major lessons learned in 2022 and how they can help us navigate the market moving forward.

1. A lesson on Trust

Trust refers to the belief in the reliability and integrity of an individual or system. This year, we have learned that it is important to not blindly trust anyone, particularly those who cultivate a cult-like following. There are several indicators that should raise suspicion:

• Claims that their product is superior to all others 

• An unwillingness to acknowledge potential flaws, and become aggressive when you ask questions on the fallibility of their project

• A community that displays similar aggressive behavior

It is advisable to seek out ecosystems where key contributors and community members are open to criticism and willing to discuss the flaws of their ecosystem. For example, the Ethereum and Cosmos ecosystems are known for their openness.

Likewise, Founders who present themselves as altruistic and committed to improving the world should also be approached with caution. Even those who have been praised for their generosity can end up engaging in fraudulent behavior, such as stealing billions from customers and investors. It is essential to thoroughly evaluate the trustworthiness of any individual or system before placing confidence in them.

2. A lesson on Investment

The lesson we learned this year regarding investment is the importance of being cautious and not getting caught up in the hype. Many people made significant profits in 2021, only to lose almost everything in 2022. If you find yourself in this situation, unfortunately you can't change the past, but you can take steps to prevent making the same mistake in the future. If you are constantly worrying about your crypto investments and losing sleep over the possibility of a crash or hack, it may be a good idea to cash out some of your investments until you feel comfortable that the remaining funds will not significantly impact your financial well-being if lost.

During bull markets, hype and speculation can dominate over fundamentals, but it is important to remember that the industry is still relatively young and anything can happen. Protocols, wallets, and exchanges can be hacked, and your favorite tokens can lose significant value overnight. According to the Global Wealth report, in 2022, an individual needed a net worth of at least $138,346 to be in the top 10% of global wealth holders, and a net worth of $1,146,685 to be in the top 1%. Keep that in mind. 

Therefore, avoid greed. If you have significantly more money invested in crypto than in your bank account or other traditional investments, don't be greedy and consider cashing out some of your profits to improve your quality of life.

3. A lesson on Research

This is related to lesson number 1, to avoid falling victim to scams or risky investments, take the time to do your own research and evaluate the risks associated with any token, protocol, or technology before investing in it. Ask questions and try to understand where the different yields are coming from. If you still don't understand, it might be best to not invest in it, or at least not a significant amount.

Decentralized finance (DeFi) offers the opportunity for anyone to have full control over their funds, which is a significant advancement. However, this also comes with the responsibility of managing your own funds. Understand that generational wealth is created during bear markets, and it is difficult to predict how low prices may go. Therefore, the most straightforward and effective strategy may be to dollar-cost average (DCA) the coins with strong fundamentals that you are most confident in. Remember that although prices may fluctuate, the fundamentals remain relatively consistent.

Take the time to understand the risks before investing your money, prioritize strong fundamentals over hype, and don't buy words. 

4. A lesson on Job Opportunities 

During bull markets, everyone is busy and it can be difficult to get in touch with the right people. In contrast, bear markets provide the perfect opportunity to build a strong network and get to know more people. If you are passionate about this industry, use this time in bear markets to contribute to the projects that you care about most. It is during this time, when many people have left, that you can establish a place for yourself and potentially even get a full-time job in your favorite project.

Take advantage of this opportunity to speak with core team members, assess their needs, and identify how your skills can bring value to the project. This is how you will position yourself for future opportunities.

If you have survived this year and want to make a contribution, it is the right time to do so. Don't let the bear market hold you back from pursuing your passions and making a difference in the space.

5. A lesson on Security

As an investor, it is crucial for you to prioritize safety and employ diversification as a key strategy. There are various risks that can threaten your investments, such as the bankruptcy of an exchange where you hold funds, the loss of the private key to your cold wallet, the collapse of a protocol or blockchain, or a poor risk management. While it is not possible to completely eliminate these risks, diversification can help mitigate their impact and allow you to continue participating in the market, because "You can't win if you're not betting, but you can't bet if you lose all your money." - Cobie. 

One effective approach to diversification is the "Horcrux" strategy, which is named after the objects in the Harry Potter series in which Voldemort hid fragments of his soul to achieve near immortality. In this context, your money serves as your soul, and you can protect it by dividing it across different locations such as an exchange that you trust, a secure cold wallet, and a protocol you believe in. This way, even if something happens in one location, you will still have a chance to survive.

The key is to take necessary precautions and diversify your investments and locations to ensure that you are not overexposed to any single risk.

6. A lesson on User Acquisition 

One of the key lessons learned this year is that acquiring users inorganically does not add value to protocols and ecosystems because those users are not likely to remain engaged. Instead of seeking ways to incentivize people to join, teams should focus on understanding the market and identifying problems that exist within the industry. By building something that addresses these issues and offers something fundamentally different from what is already available, they can create real value and establish a sustainable foundation for their project, which will attract organic users.

This requires a long-term perspective and a focus on improving user experience, developing new revenue streams, or offering unique features and functionalities. As the saying goes, it's a marathon, not a sprint - and this is especially true in our industry. 

7. A lesson on Fundraising 

Private market funding saw a 77% decline during the second half of 2022, making it increasingly challenging for projects seeking funding. As a founder, it is important to ensure that your project addresses a genuine problem and offers something innovative in order to stand out in the current market. This includes carefully considering the valuation and ensuring that the requested funds provide you a sufficient runway for development without causing undue stress on cash flow. To protect these funds, you should keep them in a bank account and avoid exchanges, as well as the temptation to trade with them in an effort to generate additional returns, because we already know how this may end.

If you have successfully managed your funds and survived until the next bull market, you may consider seeking additional funding. During bull markets, investors are often more willing to take risks because of the money they have already earned, making it a favorable environment for raising funds. However, it is important to align your funding needs with your project goals and ensure that the amount being requested is justified.

8. A lesson on Communities

When considering an investment in a cryptocurrency project, it is important to pay attention to the community behind it. The community can be a strong indicator of the project's potential for success, as it is often the driving force behind the project's growth and development. A project with a highly active and engaged community is likely to be more resilient and thrive in both good and bad market conditions. On the other hand, a project with a less active or less engaged community may be more vulnerable to setbacks or failures. Therefore, prioritize projects with strong and active communities, as these are likely to be the ones that will stand the test of time and deliver the best returns on investment. As it is right now, Ethereum and Cosmos are, in my opnion, the most active communities in crypto. 

As we begin a new year, I hope that the lessons I learned will also be helpful to you and that you can apply them moving forward. It is hard to believe that 2023 could be worse than 2022, but it is likely that this year will also bring its fair share of surprises and challenges. Despite the uncertainties, major developers are still here and actively working to improve and innovate within the space. There is always more to learn, more to improve, and more to achieve as we strive to bring the benefits of this technology to the world. So, let's embrace the challenges and opportunities that come our way, and let's keep building.

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Author Bio

Kam Benbrik is the Strategy Lead at Imperator.co. He previously worked in investment banking and the hedge fund industry before transitioning to the cryptocurrency industry full-time. He has a strong interest in all aspects of blockchain technology and enjoys analyzing different projects and current developments.

On Tendermint, validators use a consensus algorithm known as "Byzantine Fault Tolerance" (BFT) to commit new blocks to the blockchain.

A block is committed when a 2/3 majority of voting power signs and broadcasts commits for that block.

The 2/3 majority in consensus algorithms is derived from the Byzantine General's Problem.

Malicious validators could try to prevent consensus by spreading false information or not sending information at all; these validators are known as "Byzantine Faults" or "Byzantine Nodes".

In a BFT (Byzantine Fault Tolerance) system, even if up to 1/3 of the voting power on the network is malicious or offline, the system can still reach consensus.

The 1/3 of Byzantine nodes cannot influence the outcome of the consensus process.

On most Tendermint-based chains, the voting power of each validator on the network is equal to the amount of staked coins.

This provides an incentive for validators to act in the best interest of the network and helps to ensure its security.

Before a consensus is reached, several steps are typically involved. These steps are as follows:

• Propose

• Prevote

• Precommit

• Commit

1. Propose

At each new block height, a validator is selected in a round-robin fashion, based on the proportion of bonded tokens it possesses.

The goal of the selected validator is to propose a new block of transactions to be added to the blockchain.

2. Prevote

Once a block is proposed, other validators vote on whether they believe the block is valid. If they don't think so or don't have time to vote, they cast a "nil" vote.

For the block to be prevoted, at least 2/3 of the total voting power must agree that it is valid

3. Precommit

If at least 2/3 of the total voting power has prevoted in favor of the block, validators now have to precommit to it, indicating that they are willing to include the block in the blockchain.

At least 2/3 must precommit the block.

4. Commit

If a sufficient number of validators have precommitted to the block, then it is added to the blockchain and the consensus process is complete.

This whole process is what validators call "reaching consensus".

They ensure that the block is valid and can be trusted by the rest of the network.

Once a block is committed, it cannot be altered or removed, the transactions contained in the block are final.

If validators do not reach consensus, then the block cannot be added to the blockchain and the transactions just stay in the mempool until the issue that prevented consensus is resolved.

Then, transactions will just be included in a later block.