#37 Exploring the new Cosmos
We're trying to focus on the buidling side of crypto, while we experience the strongest wave of regulatory efforts.
On a very fundamental level, blockchains are in the business of selling blockspace. Blockspace can be used to store transaction information or to perform computation through smart contracts hosted on chain. However, as more applications emerge and become more complex, blockspace becomes scarce and insufficient. This struggle between the size, price, and speed of blocks and the increasing demands of blockchain applications summarizes the scalability dilemma in crypto. For example, the growing demand (and subsequent shortage) of cheap and fast blockspace in Ethereum is the sea of opportunity where alternative L1s (the so-called Ethereum killers) and competing L2s are trying to fish.
We recently launched a paper on the challenges of Ethereum scalability. After The Merge, Ethereum will focus on making their L1 more scalable by tackling sharding in the context of their next stage, The Surge. In the meantime, the different flavors of L2s, optimistic and zero-knowledge rollups, are being explored by competing projects competing to offer the cheapest, fastest blockspace. Read all about it HERE.
But besides L1s and L2s, there is a third approach in the ecosystem that offers exciting alternatives to scalability and new opportunities for developer creativity: blockchain networks.
Blockchain networks are interoperability protocols. Layers 1 and 2 are entire blockchains for people to run applications on; blockchain networks are a set of rules and tools for developers to build app-specific blockchains. Developers who choose to build on Ethereum, Solana, or Optimism have to comply with the specifications of the blockchains they launch on; those who work with Polkadot or Cosmos can easily build full-blown blockchains where they get to define all the technical and economic parameters.
Recently Cosmos held their international convention where they unveiled their roadmap for a new project iteration that will revamp the network. So it’s an excellent opportunity to dive a little bit into this other approach to blockchain infrastructure.
“The vision of the Cosmos Network has been realized,” reads the intro to the new roadmap. It refers to the original white paper from 2016 that set the foundations of the Cosmos ecosystem. Back then, the founders of the network created the three pillars of what Cosmos is today:
Tendermint, a Proof of Stake consensus engine
Cosmos SDK. A software development kit for blockchains
The Inter Blockchain Communication protocol. The mechanism that enables communication and crypto-asset transfers across Cosmos blockchains.
With a blueprint for a PoS consensus mechanism, a developing framework, and a secure comms channel, anyone could now cook a blockchain.
At the center of the Cosmos ecosystem was the Cosmos Hub: the primordial Cosmos blockchain, meant to be the port city of the network. The Cosmos Hub is a Layer 1, fueled by ATOM as the staking and fee token, and expected to become an epicenter of activity in the network of Cosmos blockchains (called zones). Nevertheless, the Cosmos Hub was never too appealing, with no particular value-added apart from being a nice example to get inspiration from when building another Cosmos blockchain. The same thing happened to the ATOM token, which failed to become much more than the ecosystem’s memecoin.
Things might change now. The latest whitepaper proposes a new role for the Cosmos Hub and a new set of tools that continue with the Cosmos way of doing things (build your own blockchain).
Here’s naly with all the details
But suppose you want something more like a bird’s eye view. In that case, you need to understand this: Cosmos 2.0 will offer a new layer of services to help the ecosystem’s blockchains bootstrap resources, from blockchain security to liquidity, creating a new economy for Cosmos that revolves around the ATOM token.
The new whitepaper is full of ambition and complexity, and there are quite a few gray areas concerning the execution. ATOM tokenomics and general governance seem to be two contentious issues that will probably bring debate. Whatever the case, we are witnessing a pivotal moment in the Cosmos ecosystem as an alternative way of building the infrastructure for the internet of value.
All these technical decisions and details (the L1s, L2s, networks of interconnected networks, etc.) are meant to fade into the background as the industry matures. Very few people know the specifications of the protocols that allow them to watch countless hours of cat footage on TikTok. But unlike the earliest internet protocols, the blockchain infrastructure routes offer different investment opportunities. We all wish we could predict where the mainstream version of DeFi will finally grow its roots, o where the fastest, safest, and cheapest NFT marketplaces will set up shop. So at the moment, technical specifications, tokenomics, and governance are at the core of investment analysis.
⬡ Six Angles
We select six topics to illustrate the very different angles crypto can be approached from. We could choose dozens, but six is the atomic number of carbon… and otherwise we’d be writing for ages.
1. USA | Regulation galore
Regulation is lately leading the narrative of the crypto ecosystem. Bull times attracted the attention of investors and the suspicion of regulators. And bear times brought up notorious blowups (Terra, Celsius, 3AC) that gave public administrations a sense of urgency.
Regulators have been, in most cases, absent, in some reactive to what happened in crypto. On March 2022, US president Joe Biden released an executive order (EO) urging administrations to produce reports and regulation drafts to start playing a more active role in the space, pursuing the double goal of protecting investors and protecting the innovative nature of the ecosystem at the same time.
Six months later, the White House has published its first comprehensive regulatory framework, composed of seven reports by several agencies, that includes reports, legislative proposals, future frameworks, and commitments for future reports.
You can read all about them in Chanalysis’ blog.
2. Stables | House bill could ban “endogenously collateralized stablecoins”
Some reports and drafts are being published, but a few more are in progress. For example, the US House of Representatives is reviewing a draft that could potentially ban some stablecoins for two years: the “endogenously collateralized stablecoins.” A narrow definition that would primarily only affect the next UST: a digital asset that maintained its value pegged to the dollar by automated mechanisms supported by another digital asset created by the same organization.
After the collapse of Terra, no relevant stablecoin project has dared to revive the self-collateralization model, though.
3. Europe | MiCA’s latest modifications change views on stablecoins and NFTs
While we’re on the topic of stablecoins, the general regulatory framework Europe is working on seems to have changed in the latest modifications added to MiCA (Markets in Crypto Assets). The current drafts include revised guidelines, especially concerning the algorithmic stablecoins (regardless of their collateral). The most noteworthy measures might look like limits on the amount issued or value transacted through stablecoins.
Also, quite notably, NFTs are back in. After being just mentioned as a future issue to attend, the current draft of MiCA now hints at a possible identification of some collections as securities: those minted in massive amounts of hardly distinguishable assets that traders use to reap profits. The framework considers that “the issuance of crypto-assets as non-fungible tokens in a large series or collection should be considered as an indicator of their fungibility.” So we could be looking at apes becoming securities according to the explanations given here.
4. DAOs | CFTC takes the enforcement route
It was usually considered that the CFTC (Commodity Futures Trading Commission) was a friendlier regulatory body than its cousin, the SEC. The former commission is in charge of regulating commodities, and the latter, securities. And as long as nobody sets nothing in stone, depending on who, what, when, and how you ask, cryptos are one thing or the other.
The SEC has had some infamous interventions recently, playing the “regulation by enforcement” game. But, unfortunately, last week, so did the CFTC, adding a little more discomfort to the crypto ecosystem. Mainly since CFTC’s complaint was directed at a DAO, opening up a legal debate yet to be inaugurated.
The CFTC had already unveiled a penalty and settlement agreement with decentralized lending platform bZeroX and its founders for illegally trading commodities. But the commission later filed a lawsuit against Ooki DAO, the decentralized autonomous organization that inherited responsibility over the bZeroX protocol after a rebranding and a transfer of control operation.
The complaint applied this to every individual who has voted on decisions with the DAO’s governance tokens — but also included any other person or entity associated with the DAO. The CFTC claimed jurisdiction since some DAO members have resided in the U.S. and voted on governance decisions from within the U.S. What's next for DAOs? Breaking down the CFTC's latest enforcement action
The CFTC refuses to take Ooki’s decentralization narrative as proof of valid delegation of responsibility, which makes sense. Basically, Ooki DAO seems to be going through the motions of decentral government, while decision power remains in the same hands it did when it was a company. The Commission claims decentralization was just a gimmick designed to obfuscate traditional business operations. But the scope of their complaint seems broad (all token holders can be held liable), which looks like a scary precedent.
5. Ether as a security | Gensler says post-Merge ETH could be a security
Gary Gensler, chairman of the SEC, hinted that post-merge Ethereum could now be considered a security.
While not naming Ethereum specifically, Gensler told the Senate Banking Committee that digital asset exchanges and other online providers who offer PoS blockchain “staking services” look very similar to lenders. Post-Merge, Gary Gensler again hints that ETH is a security.
Assets are traditionally identified as securities by the Howey Test. This adage defines a security as an "investment of money in a common enterprise with a reasonable expectation of profits to be derived from the efforts of others."
According to Gensler, the transition to Proof of Stake means that miners are closer to investors lending funds in expectation of profit, whereas in Proof of Work, there was actual effort involved. This changes the traditional narrative from administrations and regulators, including the SEC, that claimed that most cryptocurrencies were securities, except for Bitcoin and Ether.
As Coin Center Research Director Peter Van Valkenburgh asks, “does the newer vague guidance override the old bit of guidance?”
6. Lending | Lender Nexo receives cease and desist letter
Crypto lender Nexo has been hit with a cease and desist letter from 8 US states for failing to register as a securities and commodities trading platform and also misinforming investors about the risks involved. The platform claims they have already barred US citizens from engaging with some of their products and is playing the good-guy card:
“As the recent months have clearly underlined, Nexo is a very different provider of earn interest products, as showcased by the fact that it did not engage in uncollateralized loans, had no exposure to LUNA/UST, did not have to be bailed out, or needed to resort to any withdrawal restrictions.” Eight states file enforcement actions against crypto-lending platform Nexo
Nexo has avoided ending up in the same basket as bankrupt Celsius, Voyager, or 3AC. Still, regulators are not impressed and expect the company to register and provide all necessary reports and disclosures.