Second Stop: Replicated Security
With the first implementation of Inter-Chain Security (ICS), Replicated Security, rolling out soon on the CosmosHub, a new chapter will be written in the anthology of the Cosmos ecosystem and it will kick off a new era, one of provider and consumer chains.
While this new model revolves around sharing security, we will also see the emergence of revenue sharing and an entirely new economic zone, with ATOM at the center.
Becoming a consumer chain will come with many benefits; however, the benefits for validators and delgators of the CosmosHub are also substantial. Above all, a successful implementation of Interchain Security will put on full display the powerful features of Interchain Accounts and IBC.
Let’s dive into what Replicated Security is, which teams are expected to launch a consumer chain, and what the benefits are of this gigantic endeavor. I will wrap up this discussion with the importance of liquid staking derivatives (LSDs) in this model and what we can expect from them.
What is Replicated Security?
The provider chain, the Cosmos Hub, will share its security with other chains, leasing it to consumer chains. In this initial implementation of Interchain Security, the complete validator set will also validate the consumer chain. In other words, the entire validator set, which is securing the CosmosHub with its delegations of the ATOM coin, is replicated onto each consumer chain.
This is accomplished through the Inter Blockchain Communications protocol (IBC) as depicted in my drawing below.
As payment for these services, each consumer chain shares its revenues with the provider chain; specifically, a share of its revenues in the form of tokens are paid to the ATOM stakeholders (see my drawing below).
Consumer chains that have their own tokens can pay a share of fees collected or a share of inflation in their token to ATOM validators and delegators, who can claim these as normal staking rewards. In case the consumer chain chooses to launch without its own token, the revenue sharing can be paid from application fees (from usage fees or swap fees, for example).
This is a permissioned design and the new economic zone will expand through governance. In other words, teams wanting to onboard a consumer chain will submit a proposal to the CosmosHub, which will be voted on by the ATOM validators and delegators.
New Consumer Chains
The following consumer chains are being readied for deployment, as confirmed on their respective blogs, in interviews with founders, or in their Discord channels:
- Neutron - a new, permissionless smart contract general blockchain
- Stride - a permissioned liquid staking provider, currently live as sovereign blockchain in the Cosmos.
There are several new and existing teams that have either expressed interest in a migration to becoming a consumer chain or have commented on evaluating this move, in interviews or public discussions. Some are also conducting development with grants from the CosmosHub and have publicly stated moving towards using Interchain Security. While not confirmed as consumer chains, these are nevertheless super interesting projects to keep a close watch on:
- Duality - a new, hybrid AMM with order book functionality
- SimplyStaking - developing on-chain ETFs
- Informal Systems - building collaborative financial applications
- PolymerDAO - building interoperability solutions with ZK tech and IBC for non-Cosmos SDK chains
- Fair Block - building infrastructure solutions to prevent front-running and bad MEV
- Comdex - a permissioned, suite of interconnected trading dApps
- Gnoland - a new smart contract platform, using the gnolang programming language.
Benefits for the Consumer Chains
Once a blockchain will launch or transition to a consumer chain with the CosmosHub as its provider chain, it will gain some tremendous benefits. These include:
The consumer chain will lease security from the Hub, taking advantage of the vast cache of staked ATOM securing the network.
The time to market will be relatively quicker, since there is no need to bootstrap an entire validator set. Teams can focus resources on product development, marketing, and customer acquisition.
Launching a blockchain will be less expensive, because the upfront costs of building the infrastructure to set-up a validator set will be avoided. Instead, an on-going share of future revenues will pay for leasing the infrastructure from the CosmosHub, amortizing these costs out into the future.
There will be no need to have an overriding focus on making the chain’s staking token as valuable as possible, since security is provided from one of the most valuable coins in the ecosystem. I also expect that natural liquidity opportunities will develop as consumer chain tokens will be paired with ATOM.
The consumer chain will become an integral part of the ATOM Economic Zone. I will venture to guess that there are few Cosmonauts in the ecosystem that do not own ATOM. And, we all root for the success of our flagship coin. I also expect many more new Cosmonauts will join the ecosystem.
The activities on the consumer chain will be directly linked to one of the premier blockchains in the ecosystem, giving it a high level of trust and brand recognition.
Once the economic zone builds out, participants can leverage the transactional and operational efficiencies and grow their respective product offerings together. I have heard public discussion of IBC relayer subsidies and even more highly efficient IBC transaction channels to optimize IBC connectivity across the consumer chain network.
Working closely with some of the most experienced developer teams in the Cosmos will pay dividends in terms of technological innovation and support.
Benefits for the Validators and Delegators
The benefits for validators and delegators are significant and include:
Expanding the current earnings potential for previously made investments in securing the CosmosHub. While there will be additional costs to securing consumer chains, it is expected to be less than doing so for other new, sovereign blockchains.
Growing the future earnings potential from receiving a share of the revenues from consumer chains, in the form of transaction fees, token inflation, and application fees. Essentially, this will take the form of a basket of token rewards, received in addition to the normal staking rewards from ATOM. I see this as a model for a revenue sharing marketplace.
Increased voting rights will be integrated with Interchain Security as the entire system is based on a permissioned governance model.
Engagement with new projects launching in the ATOM Economic Zone will be built-in from the start. ATOM stakeholders will have first-hand opportunities to participate in new start-ups.
It is expected that some of the new consumer chains and dApps will use airdrops to the ATOM stakeholders to engage community involvement and raise excitement for their products and services.
The Importance of LSDs
As a result of the initial roll-out of ICS with Replicated Security, I see a new wave of innovations on the horizon, correlated with the alignment of consumer chains in the ATOM Economic Zone.
I believe that the growth of liquid staking products will accelerate. More importantly, I expect that new innovations for LSD products will quickly emerge. With all these talented teams closely aligned, the amount of possible technological advancement is staggering.
The first publicly announced innovation in liquid staking is the development and introduction of the Liquid Staking Module. Existing staked ATOMs will be able to remain staked on the CosmosHub while participating in liquid staking products offered by providers such as Stride, Quicksilver, and pSTAKE.
The success of liquid staking derivatives is already playing itself out in the marketplace. Risks do exist and if you are interested in a discussion of what these are, I left a link to another one of my articles in the Sources section below. For ATOM, ensuring that the coins are staked on the CosmosHub is also critically important for its future security interests. If liquid staking providers accumulate large amounts of staked ATOMs on their own sovereign blockchains, instead of on the CosmosHub, the security interests could be threatened. This is exacerbated when these providers use only a small number of validators to secure them.
Having liquid staking providers like Stride operate their blockchain as a consumer chain on the CosmosHub will ensure that the security interests are aligned. The upcoming Liquid Staking Module will further ensure that existing staked ATOM can reap the benefits of liquid staking, avoiding un-staking from the CosmosHub, just to bring them to external liquid staking chains.
Attracting additional liquid staking providers to the ATOM Economic Zone will also be tremendously beneficial.
Elevating ATOM
Since developing and subsequently launching the CosmosHub, the focus has always been on building the foundations for the Internet of Blockchains: the infrastructure components and the communication mechanisms. This has been an extremely successful endeavor as over fifty sovereign blockchains have already populated the ecosystem and dozens more are launching in the coming months. Innovative dApps have been introduced across many popular Web3 sectors, including: DeFi, NFTs, Socials, DAOs, and eCommerce. Most importantly, all participants across all those blockchains can safely, quickly, and inexpensively communicate and transact with each other through IBC. As a result, the ecosystem is an interconnected net of vibrant communities, engaging with each other in trade, social affairs, and creative endeavors.
With the introduction of Replicated Security, the CosmosHub is amplifying its role in the ecosystem and establishing the ATOM Economic Zone. Together with this expanded purpose originates an entirely new revenue model for the economic stakeholders of the CosmosHub by elevating ATOM, the coin all Cosmonauts hold and love.
Het avontuur gaat door – Opa.
Sources, References, and Further Reading
CosmosHub - https://cosmos.network/
Neutron - https://neutron.org/
Stride - https://stride.zone/
Duality - https://duality.xyz/
SimplyStaking - https://simply-vc.com.mt/
Informal Systems - https://informal.systems/
Polymer DAO - https://www.polymerlabs.org/
Fair Block - @Fair_Block
Comdex - https://comdex.one/
Gnoland - https://gno.land/
Benefits and Risks of LSDs - https://leofinance.io/@kaaskop/the-benefits-and-the-risks-of-liquid-staking
Several of the graphics were AI generated using starryai and DALL-E 2.
You can find me here:
Twitter - @KaasKop_Opa
Medium - https://medium.com/@KaasKop_Opa
Loop - https://www.loop.markets/user/52879
Leo Finance - https://leofinance.io/@kaaskop
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