This was a sad week for the crypto community. So we’ll keep this piece short and share more of our thoughts on what happened and what might change.
Chin up. Keep moving forward.
We still have each other.
$UST depeg incident and the revival plan
Saving the burning house, or the people?
The crisis wiped out 40 billion USD market capitalization, for the LUNA token alone.
Long story short, UST lost peg, and LUNA tanked. LFG trying to save UST over LUNA at the first attempt. This is no different from a man choosing to save his house, instead of his people. Of course, the community was angry so there is a second plan – a hard fork to pre-depeg, reverting the first attempt. Both received criticism from CZ.
Personal opinion. NFA.
This won't work. – forking does not give the new fork any value. That's wishful thinking. – one cannot void all transactions after an old snapshot, both on-chain and off-chain (exchanges).
The money is gone. How we treat each other is potent.
Contrary to how Terra handled the crisis, Axie Infinity showed us a more effective way to deal with this type of situation. Sky Mavis immediately suspended the Ronin blockchain, preventing everyone from depositing or withdrawing funds, and pledged to reimburse player losses when the hack was discovered. In the eight day aftermath, Axie Infinity had secured $150 million to pay users, accepting a down round. It is worth mentioning that the team admitted their fault and came up with urgent action to prioritize users’ benefit.
Although, some of you may argue that Axie’s size is not size.
Impact of UST collapse
98% of the total locked assets on the Terra ecosystem have evaporated in 9 days, namely the top DeFi protocols on Terra, such as Anchor and Mirror.
The collapse of the UST has had a domino effect on the crypto market. USDX, USDN, USDC, and USDT have also experienced peg loss as holders panicked after this disaster. Several DeFi projects integrated with LUNA or UST were affected by the price errors from Oracle, causing multi-million dollars losses.
This disaster has revealed the downside of the current infrastructure. Vulnerabilities in algorithmic stablecoins need to be addressed as soon as possible to grow the market. Collateral assets and stable mechanisms need to be carefully calculated to minimize the impact of market factors as much as possible but still guarantee a better capital efficiency than over collateral stablecoins.
Many open questions are still being asked will users continue to trust Do Kwon and a new folk of Terra?
Following the resumption of the Terra blockchain for the second time on May 11, Lido announced that users could bridge bETH — a representation of stETH on Terra’s Anchor protocol — back to Ethereum. As holders flee Anchor and retrieve stETH when cashing out to fiat currency, they must first sell stETH for ETH. Thus, much of the stETH was swapped in Curve on that day.
If the stETH/ETH price peg fails for a time, then liquidations could trigger more volatility in the markets. Curve and Balancer pool for stETH:ETH has been again unbalanced, putting the stETH peg at 0.987 ETH per stETH on May 12.
The leverage situation results from yield farmers folding: deposit stETH as collateral, borrow ETH against it, then stake that ETH to get more stETH, and repeat to maximize the yield.
Leverage is most significant at Aave. ETH is the most borrowed asset from stETH for about $800m. Even if stETH depegs 10%, $100M would get liquidated on Aave, and users who are close to the liquidation threshold of 75% could deleverage or exit altogether. The most significant risk is if these liquidations result in bad debt for Aave, but this is extremely unlikely.
Since potential liquidations are an outcome of using leverage, this has always been a known risk. As mentioned by Lido, stETH does not need to be pegged to ETH to work correctly, and stETH will always reflect a 1:1 claim for ETH on the beacon chain after the ETH 2.0 merge. As a result, a decrease in the price of stETH could potentially be a great chance for long-term holders to buy ETH at a discounted price, as long as they are not facing potential liquidation. On the other hand, leveraged users need to maintain their positions at a safe level to avoid short-term liquidation due to market fluctuations.
AZUKI IS UNDER FIRE. GUESS WHO LIT IT
A small part of the Azuki universe – Beanz revealed on May 06, receiving much traction from the community. Also on that day, Azuki announced to welcome Rehito Hatoyama (Ray), a man behind famous brands such as Hello Kitty and Human Made, as an advisor.
However, fresh Beanz turned stale when Zagabond, founder of Chiru Labs, posted “A builder’s Journey” article sharing his path from zero to hero in NFT. In this post, Zagabond revealed that he had been behind the NFT projects CryptoPhunks, Tendies, and CryptoZunks. Those projects have been criticized for rug pulls.
These allegations put Azuki in hot water and shocked the community. Shortly after the collection witnessed a big sell-off, the floor price dropped 50% to the 7 ETH range. On May 11, Zagabond admitted his faults and promised to communicate clearly with everyone and solve the issues.
In our opinion, Zagabond has been involved in the development of 3 NFTs projects only proving his know-how in operating NFT projects and communities. Thus, Zagabond acknowledged his impact on the NFT market while Azuki took the lead. After Zagabond’s confession, we have seen an increase in the price and volume of the CryptoPhunk, and CryptoZunks collections.
The incident is maybe intentional. Data from Nansen indicated that there was plenty of sell-off due to the news, while smart buyers were accumulating, at a discounted price.
– 16 🤓 Smart buys vs. 11 🤓 Smart Sells – Increase in overall listings + sales in the last 24h – Plenty of sell-off due to the news, while *some* smart buyers are accumulating – Azuki's floor price is currently sitting at around 14-15 ETH pic.twitter.com/lo8KY9KYoT
As we all see, more and more traditional companies are realizing the potential of NFT’s and are already pioneering this innovation. The question that we need to address here is how this adaptation of traditional enterprises affects the current market?
Web2 companies has a very high take rate for creators. In the world of web2, power will be concentrated in the hands of a few industry leaders, thereby influencing the source of income for creators. In a recent report from a16z, web3 creators earn nearly 2 million times higher than what they earn with Meta, or nearly 300 times more than Spotify, etc. Web3 creates an open marketplace for small-scale creators to be able to bring their work to the masses more easily and without the burden of revenue from a handful of web2 publishers.
Web2 companies are highly dependent on taking control of the market, and from there providing domination and then optimizing profits. Even when there are positives with web2 companies entering the market, allowing the market to expand, from another perspective, this participation of web2 companies only helps to extend their pie and will probably increase their dominance to the masses.
CRYPTO TAX AND REGULATION
Since Luna’s event, global financial regulators are paying more attention to the cryptocurrency sector after this incident. Do more regulations mean good things?
SEC: The Securities and Exchange Commission has asked for additional comments on issuer WisdomTree’s proposal to list a spot bitcoin exchange-traded fund (ETF).
El Salvador: El Salvador’s president, Nayib Bukele was in a meeting of 44 countries in El Salvador on Monday to discuss bitcoin and other topics.
Central Africa: Just weeks after the Central African Republic (CAR) made bitcoin legal tender, they also reminded member states of its ban on cryptocurrencies on Friday.
Australia: For the first time, Bitcoin and Ethereum ETFs are offered for Australian investors. Securities and derivatives exchange Cboe Australia introduced the ETFS 21Shares Bitcoin ETF and the ETFS 21Shares Ethereum ETF on May 12.
Portugal: During a working session on Friday, Finance Minister Fernando Medina affirmed that crypto assets will be taxed in the near future.
Brazil: In the last few days, the CEOs of Binance and Coinbase were slated to meet with Brazil’s Central Bank president Roberto Campos Neto, signalling that talks between the industry and the government are continuing.
European: Grayscale Investments announced on May 16 that it is set to make a play for Europe, with its first exchange-traded fund (ETF) in the region.
Nigeria: Last week, Nigeria’s markets regulator published 54 pages of regulations for digital assets, as the country may be stepping back from an earlier ban on cryptocurrencies.
We hope to bring a more #BUIDL vibe (and less drama) to you soon. Until then, see you next week.
Elon Musk & Twitter buyout: how’s the story going?
Twitter, Inc announced on April 25 that it has entered into a definitive agreement to be acquired by Elon Musk – CEO of Tesla (TSLA) and SpaceX, for about $43B in cash. Upon completion of the transaction, Twitter will become a privately held company.
With $500M committed by Binance, CZ expected to bring crypto and blockchain technology to mass adoption through social media and web3. Without a doubt, the acquisition of Twitter – top social media sites for crypto enthusiasts, from Elon Musk – crypto’s top influencer, and the participation of Binance, a16z, Sequoia, etc., will create a significant influence on the adoption of crypto.
Dogecoin is the most apparent evidence of the impact of this acquisition by causing Dogecoin (DOGE) price to surge. There are two main reasons behind:
As we’ve all witnessed clearly in the past, Musk has taken advantage of his influence to create value for DOGE. Because the number of individuals Musk-fan is huge, leading to the more significant number of people who believe and hold Doge. Thus, brands (Tesla, Gucci, etc.) that accept payment in Doge partially based on the credibility of Elon Musk.
Furthermore, Elon Musk changed his profile picture recently on Twitter to a collage of Bored Ape Yacht Club images, then discredited NFT by tweeting a common comment from NFT (non-fungible token) critics, writing, “I dunno … seems kinda fungible.”
After realizing the recent vital growth of NFT, Musk, with his current influence on the crypto market, does not seem to ignore this very potential niche. But why BAYC? Well, this NFT collection has become a legend in the NFT market, as it now ranks first in terms of floor price, surpassing CryptoPunks, the 2017 OG from Larva Labs with more than $1.2B traded in the first quarter of 2022. Adding another good reason for Elon Musk’s choice of this collection, Bored Ape Yacht Club has been making headlines over the week by launching its Otherside metaverse.
Given the influence of Elon Musk and Twitter on the decentralize world, will this acquisition benefit the entire industry? Will Twitter different from Facebook, YouTube, and other social media sites that prioritize profits over the benefits of all users when its revenue currently depends heavily on advertising? Twitter has reported losses for 8 years from 2012, except 2018 & 2019. Therefore, it is very likely that Twitter and its board team will have to prioritize strategies to bring profits to the business. The approach that Twitter will use to meet this goal while also ensuring the decentralization property for this social media platform is still uncertain.
The only obvious thing we see here in this acquisition of Twitter is that it strengthens the influence of Musk and his followers even more, thus making the market more susceptible to manipulation.
Another question for Twitter is how it can improve the ownership of NFTs under Elon’s watch. Even if Twitter allows users to set NFTs as PFPs, it may not completely solve the ownership problem. Over 80% of NFTs Minted for Free on OpenSea Were Fake or Stolen. Besides, on-chain and off-chain transmissions are not frictionless, and the artists are still not getting the real value of what the NFT is committed to. In short, this movement may further exacerbate the NFT thefts, which have been a major pain point in this market.
Otherdeed & BAYC: The Apes that cost us $157M
The drama around BAYC does not just stop with Elon Musk. Let’s rewind back to a week ago.
Some investors reported they had to pay more than twice of the mint price of 305 $APE (~ $5,800) and some had their transactions fail but were still charged for the gas fees.
Roughly $157M worth of ETH was burnt just for this land sale. About a week after the sale, Yuga Labs has announced to repay gas fees for the failed transactions:
We have refunded gas fees to everyone who made a transaction that failed due to network conditions caused by the mint. The fees have been sent back to the wallets used for the initial transaction. Here’s how to find your refund… 🧵
Nevertheless, the community has been irritated by the fact that Yuga Labs did not optimize their smart contracts so as to mitigate the gas war and deemed that this was just an excuse for them to launch a new chain for the sake of new funding:
Vitalik thinks that such gas optimization tricks would not help, since gas price would still be rising until it reached the equilibrium of supply and demand.
Don't think optimizing the contract would help. Regardless of contract details, tx fee goes up until list price + tx fee = market price. If gas usage per purchase decreased 2x, the equilibrium gas price would have just been >12000 gwei instead of 6000.
But that was not the point of the community. The point is, they could have done better, but they did not.
From our perspective, given the congestion on Ethereum, it is reasonable for a huge metaverse project such as BAYC’s Otherdeed to run their project on another chain for a more seamless user experience, specifically by deploying it on an L2 to first estimate the demand and then decide how to build their own chain if necessary. Even if they build their own side chain and (perhaps) establish their own token, it will look like the ApeChain is a parasite of Ethereum, and this may further trigger the anger in one of the largest crypto communities in the world.
Currently, only time can decide whether this is a good decision made by Yuga Labs but surely, Yuga Labs themselves must do a lot more to reclaim the trust of their community.
Solana Gas War: To bribe or not to bribe, that is the question
Superficially, NFTs may just seem like jpegs, but their popularity have proved to be burdensome in many cases. The booming demand have the underlying ability to shut down an entire blockchain for many hours.
This time, that blockchain is Solana.
Unlike Ethereum, there is no bidding blockspace market on Solana; instead, the network accepts transactions “indiscriminately” on an orderly basis. This has helped reduce the transaction fees on Solana substantially compared to Ethereum but in exchange, they suffer from transaction spamming which puts a burden on validators.
Evidently, on May 1, Solana blockchain was shut down for more than 8 hours, mostly due to the rising NFT transactions on this chain, primarily because of the Candy Machine, a tool for users to mint NFTs fairly.
Solana Mainnet Beta lost consensus after an enormous amount of inbound transactions (4m per second) flooded the network, surpassing 100gbps. Engineers are still investigating why the network was unable to recover, and validator operators prepare for a restart.
Specifically, bots have been used to exploit this mechanism as they are able to spam a huge amount of transactions to the network to get a chance of successfully minting an NFT. While this incident negatively affects SOL price, it seems to leave no impacts on NFT investors on Solana as the NFT transaction count has quickly recovered after the outage. After the network shutdown, the Solana team has offered three solutions to mitigate such outage in the future:
Implementation of QUIC, a Google-developed protocol to enable faster network communication while simultaneously identifying the IP address of each transaction sent, thereby limiting the bot spamming
Deployment of state-weighting which allows validators to process more transactions given that their stake is higher
Application of fees to prioritize transactions; however, to alleviate the probability of gas war, there is a limit for an account to have their transactions to be prioritized in each block
Besides, other solutions being suggested include Dutch auctions or dynamic mint which can reduce the incentive for NFT buyers/bots to spam the network at the start (as prices can go lower)
On May 8, when the price of $BTC started declining and pulling the entire market down, including $LUNA, $UST lost its peg and dropped to $0.9857.
There was a panic sell of $UST on Curve, leading to the disproportion of this stablecoin in the Curve 4pool. Shortly after that, there was a buying force that brought back the balance by purchasing $UST with $USDT.
Until May 9, Luna Foundation Guard announced that they would “loan” $750M worth of $BTC to an OTC trading firm and 750M $UST to the market to stabilize the peg, i.e.the 750M $UST will be borrowed to buy $BTC. However, this seemed to exacerbate the problem by triggering a further oversupply shock for $UST, diverging the ratio of $UST on the 4Pool of Curve.
On May 10, $UST declined substantially to $0.6. The total reserve balance of LFG plunged to $188,066,798, down by more than 90% since its all-time high at roughly $3.9B.
Also, the $BTC reserve balance of LFG was down to zero from nearly $1.4B within 24 hours. Thus, LFG has spent more than $3B in the effort to bring back $UST to the peg, but this stablecoin was still hovering around $0.75.
Meanwhile, LUNA saw a massive drop to $26.54, losing nearly 60% value. The amount of $UST deposited to Anchor also “vaporizes” 48% because of massive withdrawals that send the APY of Anchor back to 20%. This event also affects the Terra ecosystem; the TVL has quickly diminished down to $13B, losing 45% within one day.
This event of Luna has been predicted by many investors before because UST’s model of providing APY up to 20% is unsustainable. It looks like a Ponzi scheme. Now it will be interesting to see what Do Kwon and the Luna team will do next to save the project. If $UST can repeg back to $1, will the trust of users in $UST remain? Time will tell.
Decentralization, scalability, and security have ever since challenged the idea of an open, decentralized network due to the problems of the first-generation blockchain Layer 1 Bitcoin, Ethereum, and their variants. While we’ve yet to see the upgrade of Ethereum 2.0, a new-gen Smart Contract Platform like Cosmos, Polkadot, Avalanche and LayerZero with promising proposes for the Internet of Blockchain. The term Internet of Blockchain refers to application-specific blockchains that co-exist and interoperate with one another. With several multiple-chain networks under development, it’s no certainty to forecast the winner of the scalability race between Smart Contract Platform. However, it is possible to dig deeper and explore the fundamental ideas underlying each one.
Cosmos, Polkadot, Avalanche and LayerZero have critical distinctions at the protocol level (e.g., consensus method, economic security topology) that affect platform capabilities (e.g., inter-chain communications, token economics, types of viable applications) and how they grow their networks (e.g., validator participation, staking attributions). This article aims to differences between these architectures and their trade-offs.
To help our readers understand this topic of The Internet of Blockchain comprehensively, before diving into this topic of The Internet of Blockchain, we will walk you through a few jargons which will be used frequently in this article.
Trilemma of blockchain
A blockchain cannot possess all three attributes of scalability, decentralisation, and security.
Scalability refers to the ability of a blockchain to expand in the increased number of transactions and nodes
Decentralisation ensures that the decisions made in the network are not concentrated on one central entity
Security in blockchain involves two dimensions: liveness and safety. While liveness indicates that consensus among validators in a blockchain must finally be reached, safety guarantees that validators do not misbehave. In light of safety, there is accountable safety: when more than ⅔ of the network behaves honestly, the chain cannot be forked but if it does (and ⅓ of stake is burnt for such misbehaviours), the network can point out the identities of those ill-behaved entities
Consensus is the agreement of the network on the validity of a transaction before adding it to the block.
Deterministic consensus is applied when there are voluminous flows of messages between validators to finalise the transactions. Once transactions are added, they cannot be reverted but forking the chain, thereby improving the network security. Also, since there is no waiting time for nodes to confirm that a transaction is valid, deterministic consensus helps lower the latency in transaction processing
Probabilistic consensus indicates that the probability that a transaction added to the chain will not be reverted increases when the chain gets longer. Thus, transactions are not really “finalised” but are becoming more valid when more blocks are added to the chain. Moreover, probabilistic consensus does not require complex flows of messages between network entities, thereby enhancing the scalability of a blockchain
First mentioned by Ryan Zarick, co-founder and CTO of LayerZero Labs, in order to build a blockchain bridge, a developer will face the trade-offs between these three properties:
Instant Guaranteed Finality, meaning that funds must be successfully transferred from the source chain to the destination chain
Unified Liquidity, indicating that multiple chains must be able to get access to a single liquidity pool for the sake of higher capital efficiency
Originality of Assets, specifying that the funds being moved to the destination chain must be the native (or the most liquid synthetic) ones being sent from the source chain, otherwise, users will receive synthetic assets that do not have much liquidity which then signifies the risk they have to incur
A light client is a software or application that helps users interact with the blockchain without storing the entire data on it.
Unlike other blockchains, Avalanche has 3 separate networks to handle different tasks on the network: X-Chain for asset trading, C-Chain for smart contract creation, and P-Chain for overview platform coordination.
What problems does Avalanche solve?
Its consensus mechanism is leaderless directed acyclic graph where a node keeps querying other nodes for the validity of a transaction for a randomly determined number of rounds. There will also be a confidence counter that represents the number of times that a majority of the network accepts the validity of a transaction.
For example, the network must together agree on one of the two colours, gray and yellow. One node (denoted as node A) currently has gray as its choice. In the next round, if a majority of nodes being asked vote for yellow, and the confidence of A in yellow exceeds the confidence of A in gray, A will switch to choose gray. This process is repeated among all nodes until consensus is reached.
Because this mechanism is leaderless and the number of validators being able to join the network is boundless, it satisfies the need of decentralisation for a blockchain.
With the help of EVM subnets, it ensures the scalability of the network and allows customization on blockchain in an effortless manner which is suitable for enterprise adoption or instantiation of a new project but with different jurisdictions.
To set up a subnet, one needs to be a member of the Primary Network and stake at least 2,000 AVAX. In the long term, this brings a viable scaling solution for projects being built on Avalanche Primary Network, but on the other hand, there will be a tradeoff of liquidity drain from the mainnet when a subnet can grow bigger and attract more capital flow into it.
Since a node can always change its decision based on the accrued confidence level after each round, the equilibrium of the network remains unstable, thereby discouraging ill-behaved nodes from attacking the entire network.
A problem of Avalanche is that it does not have slashing. This may reduce the barrier of entry to become a validator, but also put the safety of its system at risk. Because decisions of a validator for a transaction on Avalanche can always be changed given enough confidence, it is hard to detect malicious actors in the network. In short, accountable safety is not satisfied.
At the time of writing, Avalanche has 19 subnets with 1,609 validators and more than 520,000 active addresses on all chains.
The first subnet deployed on Avalanche is of DeFi Kingdoms, the famous game title that originated from Harmony. The number of unique contracts deployed on DeFi Kingdoms mainnet has reached 218, up by roughly 8 times since launch in March 2022.
Apricot, the upgrade of Avalanche blockchain, has released Phase 5 in November 2021 with including major improvements especially for gas fees reduction. Most recently, transaction allowlist precompile was introduced on Avalanche, assisting in building a KYC/private subnet for enterprise or government adoption.
Officially launched in 2020, Polkadot aims to solve the interoperability issue of blockchain. It achieves this by (i) relay-chain, where Polkadot’s consensus, communication & information are coordinated, (ii) a network of para-chains, including blockchains to process transactions parallelly, and (iii) para-threads, functioning the same as para-chain but only used temporarily.
What problems does Polkadot solve?
Security & Scalability
Para-chains on Polkadot inherit shared security of the relay-chain. Furthermore, the consensus of Polkadot has two separate mechanisms for block production and transaction finalisation. When producing blocks, there will be slots (to product blocks) that are assigned randomly to validators. On the other hand, validators will vote on the chain that they deem to be the most valid, and a chain that has more than ⅔ of validators voting for will have its latest block being finalised. This will help enable the scalability of the chain in a probabilistic manner but also ensure the security and the speed when processing transactions as of deterministic consensus.
Currently, to be in the active set of validators of Polkadot, a newcomer must hold at least 1.75 million DOT, which is equivalent to $30M. Additionally, each chain only requires 5 validators, a tradeoff between scalability and security (as well as decentralisation). Polkadot also has a higher finality time (12-60 seconds), much longer than the speed of a few seconds compared to Avalanche or Cosmos. Also, parachain slots are limited, therefore also preventing other projects from building on Polkadot’s chains.
At the time of writing, Polkadot has 14 para-chains, 15 para-threads with 297 validators, and more than 520,000 active addresses on all chains.
Each para-chain can be classified into 3 categories: DeFi, Smart contract platform, and Infrastructure. All of them exist to deliver a variety of products and enrich the diversity of the Polkadot’s ecosystem.
XCMv2 (the core messaging format between para-chains of Polkadot) Second Audit has been finished and XCMv3 is in the final stage of development.
Cosmos is a network consisting of multiple independent parallel blockchains, called Zones, powered by the Tendermint Core consensus algorithms. These Zones link to Hubs – which function as the interoperation bridge between Zones. Hubs and Zones communicate with others through an inter-blockchain communication (IBC) protocol, similar to a virtual UDP (User Datagram Protocol) or TCP (Transmission Control Protocol) for blockchain. The vision behind Cosmos is to be the Internet of Blockchains, a network of blockchains able to interoperate with one another in a decentralised way while retaining its sovereignty.
A set of open-source tools such as Tendermint, the Cosmos SDK, and IBC allow developers to build custom, secure, scalable, and interoperable blockchain applications quickly. These tools have highlighted their ability to solve the obstacles of Scalability, Usability, and Sovereignty.
Tendermint BFT manages the blockchain’s networking and consensus layers, giving the application layer to developers. The Tendermint BFT engine is connected to the application by a socket protocol (i.e., a data transporter) called the Application Blockchain Interface (ABCI). ABCI enables blockchain applications to be written in any language, thus making it easier to onboard potential developers to build on top of the Tendermint BFT engine while also freely adjusting their blockchains.
The three benefits of Tendermint for developers include simplicity, great performance, and fork-accountability.
Tendermint consensus allows the hub/zone to process thousands of transactions per second, with commit latencies of 6 to 7 seconds. Notably, there is no limit to the number of Zones and Hubs that can be created on Cosmos.
Additionally, another benefit of Tendermint’s consensus algorithm is simplified light client security, thus solving the scaling problems for Cosmos.
Cosmos SDK streamlines the progress of blockchain applications. This toolkit contains a series of pre-built modules (building blocks) from which developers can choose as desired for building a new chain.
The Cosmos SDK has already been used to build many application-specific blockchains that are already in production. Among others, we can cite Cosmos Hub, IRIS Hub, Binance Chain, Terra or Kava and many more are building on the Cosmos SDK.
Every Zone and Hub in Cosmos has their own validator set and different trust assumptions, which allows it to inherit the security and interoperability of the public Cosmos network without sacrificing control over its underlying service. The Cosmos architecture achieves this by using a global hub with regional autonomous zones, where voting power for each zone is distributed based on a common geographic region. For instance, a common paradigm may be for individual cities, or regions, to operate their own zones while sharing a common hub (e.g. the Cosmos Hub), enabling municipal activity to persist in the event that the hub halts due to a temporary network partition.
The connection between blockchains is achieved through Inter-Blockchain Communication protocol (IBC). Once integrated, IBC allows zones and hubs to open communication portals between one another, serving as the information rails, meaning that blockchains with different applications and validator sets are interoperable. IBC is the cornerstone of this otherwise sprawling network of sovereign chains.
Cosmos Hub is one of many hubs in the network, and there is no central hub or limit on the number of zones/hubs that can be created. Whilst Tendermint consensus is limited to around 200 validators before the performance starts to degrade, thus, reducing the decentralisation of the network. Limiting validators on the system leads to a high barrier to becoming a validator. Currently, a person needs a minimum of 47,231 $ATOM (~ $1M) to be in the active validator set of the Cosmos Hub
The Cosmos ecosystems have a fragmented network structure in which distinct blockchains with diverse priorities can have their own validator set and connect with one another via bridges when necessary. This topology is criticised for being as secure as the weakest chain (when the most secured chain accepts assets from the least secured chain, it becomes less secure). However, the new IBC versions will use shared security mechanisms (see Billy Rennekamps’ speech).
Cosmos Hub’s utility
While IBC is a significant milestone forward for the utility of the Cosmos Hub, it will not be the only hub competing for the market of cross-chain transfers. Cosmos’ hyper-modular architecture allows other hubs to compete for a share in the market. This hub rivalry may affect (though somewhat) the outlook for the Cosmos Hub and ATOMs.
The idea for Cosmos ecosystem hubs is to become the one with the highest reputation, garnering the most transaction submissions and related fees for network stakers. However, decentralised protocols should strive towards being lean and efficient economic activity routers, which would limit the share of validator revenue earned by fees. Fee revenue might be further eroded by fierce competition among hubs. Despite its essential role in Cosmos’ genesis, the Cosmos Hub and its ATOM tokens are not privileged within the ecosystem.
Allowing other blockchains with Interchain Accounts to create and control accounts on the Cosmos Hub
Allowing the Cosmos Hub to perform transactions natively on other chains
Cosmos development teams plan to add shared security to the Cosmos Hub. This feature will enable Cosmos SDK networks to obtain security from the validator set of the Cosmos Hub. The design for Cosmos’ shared security feature is less-defined relative to Polkadot.
LayerZero is an omnichain interoperability protocol, competent for exchanging messages to any contract on any chain. It also permits user applications to have complete control over its architecture and interpretation. LayerZero is a messaging transport layer that allows smart contracts to interact with one another across chains.
LayerZero is a User Application (UA) configurable on-chain endpoint that runs an Ultra Light Node (ULN). To transfer messages between on-chain endpoints, LayerZero relies on two parties: the Oracle and the Relayer, to transmit messages between on-chain endpoints.
By providing direct transactions across all chains without having to rely on a trusted custodian or intermediate transactions, LayerZero satisfies the rule of native assets.
Regarding the unified liquidity property, allowing transactions to flow freely between chains provides opportunities for users to consolidate fragmented pockets of liquidity while also making full use of applications on separate chains thanks to the combination of two independent entities: an Oracle and a Relayer,
LayerZero is generalizable enough to run on any chain, across the full spectrum of security and scalability assumptions, thus meeting the need for instant guaranteed finality.
Relayer & Oracle
A cross-chain transaction consists of a transaction tA on A, a communication protocol between A and B, and a message m. As per valid delivery states, m is delivered if and only if tA is committed and valid. The key notion behind LayerZero is that if 2 distinct entities confirm the validity of a transaction (in this case, tA), then chain B may be certain that tA is valid.
LayerZero accomplishes this by integrating two separate entities: an Oracle, which gives the block header, and a Relayer, which offers the proofs associated with the aforementioned transaction.
LayerZero utilises the security attributes of the established oracles (Chainlink and Band) with an extra layer of security via the open relayer system by splitting duties between the Oracle and Relayer. While this may appear to be a minor distinction at first look, its ramifications are far-reaching. For starters, it means that the worst-case security of this new network is still equal to that of the Oracle. If you select Chainlink as your oracle, every malicious action in the system is still reliant on first defeating the Chainlink DON. Even if the Oracle’s consensus is corrupted, it also requires the Relayer’s active collusion.
The implementation of LayerZero Endpoint – the interface to LayerZero is a lightweight on-chain client, on multiple chains allowing cross-chain transactions. A LayerZero Endpoint is currently implemented as a series of smart contracts on each chain included in the LayerZero network. The core functionality of a LayerZero Endpoint is encapsulated in three modules: Communication, Validation, and Network.
One key point of LayerZero Endpoint is that rather than replicating and storing block headers within the client, it delegates the task of fetching the necessary cross-chain headers and transaction proofs to off-chain entities: the Oracle and Relayer. This results in LayerZero Endpoints being incredibly lightweight, making them cost-effective even on expensive chains like Ethereum.
In addition to the core modules, LayerZero Endpoint can be extended via Libraries, which are auxiliary smart contracts that define how communication for a specific chain should be handled. Each chain in the LayerZero network has an associated Library, and each Endpoint includes a copy of every Library.
LayerZero is now in beta and has launched across EVM-compatible networks like Ethereum, Avalanche, Polygon, BNB Chain, Fantom, Arbitrum, and Optimism, with integrations on Solana and Cosmos coming soon.
While the first application to integrate with LayerZero was Stargate – a liquidity transport protocol, it’s worth emphasizing that cross-chain lending, yield aggregation, and trading are only the beginning.
Implementing The Dome, a system that (at the relayer level) deflects all attacks from malicious external contracts rendering them useless..
Blockchain networks that are diverse Cosmos, Polkadot, Avalanche and LayerZero provide remarkable infrastructures to support the internet of blockchains, demonstrating that the asynchronous heterogeneous network paradigm works effectively and is an enhancement over Bitcoin and Ethereum as they now function. They will eventually be able to support millions of daily active users and realize the user-owned and managed Web 3 vision.
Co-existence of these major architectures is healthy for a true decentralized internet, as they have their own design choices and tradeoffs in their own right. Based on the data across development activity and the total active addresses, Avalanche is currently take the lead. It is noteworthy that each platform has different priorities and limitations tailored to the specific circumstances they’ve outlined.
Kyros Research Team
Subscribe to receive our insightful reports & articles