Cosmos blockchain project in ‘existential’ crisis.
Cosmos blockchain project in 'existential' crisis.
The Evolution and Challenges of the Blockchain Industry
The early days of the blockchain industry were marked by a “winner-takes-all” mentality, with each new blockchain project vying to become the dominant chain in the market. However, this mindset has gradually given way to a more collaborative approach, with the emergence of bridge infrastructure enabling communication between different blockchains. At the forefront of this shift is Cosmos, a blockchain ecosystem that pioneered the concept of “appchains” and shared security, as well as the proof-of-stake consensus mechanism that now powers Ethereum and many newer blockchains.
Cosmos set out to create a family of blockchains, each tailored for specific use cases but designed to seamlessly interact and exchange assets. The Cosmos SDK, a software development kit, was highly regarded as a tool for developers looking to build Cosmos-based blockchains. However, Cosmos has faced significant challenges in recent years.
One of the main setbacks for Cosmos was the collapse of Terra, one of the largest Cosmos-based blockchains. The crash of Terra’s decentralized finance ecosystem created a liquidity vacuum that the Cosmos DeFi ecosystem has struggled to recover from. Internal politics and infighting within the open-source development model of Cosmos have also impeded its progress. Additionally, the classification of ATOM, the native token of Cosmos, as a security by the U.S. Securities and Exchange Commission added further regulatory uncertainty.
According to Zaki Manian, a prominent figure in the Cosmos community, the next year will be critical for Cosmos. He believes that Cosmos needs to differentiate itself and establish a unique identity separate from other blockchains. The raw ingredients for success are there, but Cosmos must find a way to stand out and capture the attention of developers and users.
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Every blockchain has its limitations. Bitcoin, the pioneering blockchain, is primarily focused on transferring bitcoins and lacks the functionality of more advanced chains. Ethereum introduced smart contracts, enabling the development of decentralized applications and non-fungible tokens (NFTs). However, Ethereum’s high fees and scalability issues have created room for newer blockchains to cater to specific use cases, such as gaming.
As the tradeoffs of different blockchain designs became evident, the industry embraced the concept of a “multichain” ecosystem where different blockchains coexist to serve diverse purposes. However, the security of cross-chain bridges became a significant concern, with high-profile exploits exposing vulnerabilities in the ecosystem.
Cosmos was one of the first projects to address these security challenges. Its appchains were designed to interoperate from the outset, reducing the risk of bridge hacks. Cosmos introduced the Inter-Blockchain Communication Protocol (IBC) for seamless asset transfers between chains and Interchain Security (ICS) to enhance the security of newer blockchains. The Cosmos SDK gained popularity as a fast and efficient tool for building new blockchain networks.
The Terra Problem
Despite its early successes, Cosmos has faced setbacks in recent months. The collapse of Terra, a Cosmos-based blockchain, had a significant impact on the Cosmos ecosystem. Osmosis, the main decentralized exchange (DEX) on Cosmos, experienced a drastic drop in liquidity. This liquidity decline has had a negative impact on developers’ incentive to build on Cosmos.
The consequences of Terra’s collapse have been profound, and Cosmos has struggled to regain its previous stature. The memory of Terra’s impact on the ecosystem has faded, but the effects continue to be felt within the community. Less liquidity and fewer developers deploying apps to the ecosystem have hindered Cosmos’s growth.
In addition to the issues caused by Terra’s collapse, Cosmos now faces increased competition. The unique features that once set Cosmos apart, such as proof-of-stake consensus and shared security, have become more common in the blockchain industry. Ethereum, for example, transitioned to a proof-of-stake mechanism known as the “Merge” in 2022.
Newer competitors have emerged, including Ethereum’s rollup networks, which offer similar features like customizability, shared security, low fees, and interoperability. Optimism, with its OP Stack toolkit, has gained traction and powered a range of networks, including Coinbase’s Base and Bybit’s Mantle. Even Binance’s BNB chain, originally built on the Cosmos SDK, has begun exploring alternatives like the OP Stack.
Appchain vs. Interoperability
Despite the challenges, Cosmos still possesses technical capabilities that differentiate it from its competitors. One of its advocates, Zaki Manian, distinguishes between “interoperability” and “appchains.” While Ethereum’s layer 2 solutions focus on interoperability between chains, Cosmos offers appchains that provide greater control and flexibility for developers. Appchains allow builders to vertically integrate and design various aspects of their blockchains, including transaction settlement and security rules.
Manian argues that the rollup toolkits on Ethereum are still in the early stages of building true appchains. He cites dYdX’s decision to move to a Cosmos chain as evidence of the platform’s superiority in enabling builders to create innovative applications.
Cosmos faces not only technical and regulatory challenges but also internal community issues. The Cosmos community has been characterized by drama, including mass resignations, lawsuits, and allegations of decentralized voter fraud. The lack of a clear organizational structure and the involvement of multiple entities in development have caused delays and setbacks. The community’s reputation has also suffered, and it needs to address these issues to attract new developers.
However, the chaotic nature of Cosmos’s community has its own allure. If Cosmos succeeds, it will embody the true spirit of decentralization. Despite short-term setbacks, the core values of openness and experimentation, rooted in the hacker culture, will prevail and contribute to long-term success.
While Cosmos’s future remains uncertain, many of its contributions to the blockchain industry have already gained widespread acceptance. The early models it introduced for interoperability, proof-of-stake, and shared security have become industry standards. Despite the existential challenges, Cosmos has the potential to carve out a unique position in the market as long as it can maintain and further develop its vibrant builder ecosystem.
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