Tendermint

The Cosmos network uses Tendermint Core, a language-agnostic consensus algorithm that enables developers to replicate dapps in whatever programming language they wish. Tendermint Core is a Byzantine Fault Tolerant (BFT) consensus mechanism for distributed systems; this means that even if as much as one-third of the machines in the network arbitrarily fail, the network still reliably reaches the same version of events and executes the same state.

Tendermint Core achieves Byzantine Fault Tolerance via validators that stake ATOM and "vote" on blocks of transactions in rounds. Validators confirm transactions and broadcast cryptographic signatures to "vote" on the validity of state changes in the network. Validators cannot sign invalid or duplicate transactions or else they will have their staked ATOM "slashed" (i.e., taken from them).

consensus mechanism comparison table kraken — Source: Kraken

Tendermint BFT has three blockchain layers:

Application layer - Code that creates some type of functionality.
Networking layer - Broadcasts the transactions and consensus-related messages.
Consensus layer - Allows nodes (computers) to agree on the current state of the system.

Application Blockchain Interface (ABCI)

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Proof-of-Stake (with Something at Stake)

Tendermint was the first project to demonstrate a conceptual solution to the nothing-at-stake problem that plagued early PoS blockchains. Essentially, Tendermint’s consensus mechanism involves a security deposit element to the “stake,” which users stand to lose if they behave maliciously or ineffectively. This is in contrast with earlier permutations of PoS systems whereby users just had to have tokens in a wallet in order to participate in the network’s consensus. In Cosmos, it can be said that validators have “something at stake” instead of “nothing-at-stake,” as malicious activities are punished by having some of their staked ATOM slashed or burned. Prior to PoS systems that required validators to have capital at risk (in virtue of it being staked), it wasn’t clear how double-spend attacks could be prevented by those with even 1% of the network's tokens (as opposed to 51% of the computational capacity).

Validators required for 33% attack Aug 2022 — Source: Kraken

PoS is sometimes considered to have several benefits over PoW, such as... Upgrade to Premium for this section and to unlock the ENTIRE 60+ page report!

Inter-Blockchain Communication (IBC)

In addition to relying on a PoS mechanism that isn’t encumbered by the nothing-at-stake problem, Cosmos aims to become “the internet of blockchains” via its internal Inter-Blockchain Communication (IBC) protocol. IBC allows users to send information between two IBC-connected sovereign chains by running a light client on each chain (see Map of Zones). As a reminder, full nodes download and validate every transaction that has ever occurred on the chain since its genesis. Light nodes (typically) only check block headers. This means light clients are “light weight” nodes that require fewer computing resources than a full node. This makes them more egalitarian because they are cheaper and typically easier to run, helping to further decentralize the network. Once a zone creates an IBC connection with a Hub, it automatically has access to every other zone that’s connected to it.

The Inter-Blockchain Communication (IBC) protocol is what is known as... Upgrade to Premium for this section and to unlock the ENTIRE 60+ page report!

Hubs vs. Zones

The Cosmos Hub is a PoS chain that serves as the primary hub for routing transactions and data between Cosmos blockchains called zones. Hubs are the largest, most liquid zones in the ecosystem. Zones are application-specific chains built using Cosmos SDK. Using the hub and zone model, any zone can send information to a connected hub, and then that hub can send the information to any of the other connected zones. Because hubs act as routers or middlemen between zones, they are also responsible for maintaining the global state (token balances) across all Zones.

Cosmos hub and zone structure — Image credit: Cosmos website

Zones plug into hubs, which route and validate the transactions passed between different zones in exchange for fees. They connect to a Hub via a two-way peg, similar to Ethereum and side chains like Polygon. When a valid cross-chain transaction is submitted on the IBC, the token on the original chain is (essentially) frozen/burned while the receiving chain mints the equivalent amount on new tokens.

For example, if a user wants to transfer 50 ATOM from one chain to another, those 50 ATOM are bonded or locked on the native chain, then proof of the bonding is relayed to the other chain, and the proof is verified against the native chain’s header, and then vouchers for that 50 ATOM are created on the other chain. So, one could say the ATOM on the other chain is not “real,” but they do provide proof the ATOM they represent on the native chain is frozen.

Cosmos token transfer — Image credit: Cosmos website

Cosmos SDK

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Cosmos' 2022 Updated Whitepaper and ATOM 2.0

In September 2022, The Interchain Foundation released a revised concept for the Cosmos Hub, ATOM token, and the basis for the future roadmap. The biggest changes center around Interchain Security (ICS), new ATOM tokenomics and the inclusion of protocol-level liquid staking, and new protocol entities entitled the " Interchain Allocator" and "Interchain Scheduler."

Stepping back just a bit, the Theta upgrade was released in April 2022 and featured Interchain Accounts (ICA). ICAs allow any account on any Cosmos zone to open and control an account on another zone. This removes the previous limitations inherent to the IBC in which only certain transactions that conformed to certain standards could be executed.

Where the IBC on Cosmos enables network participants to easily share tokens between accounts on different chains, the Theta upgrade includes the ability to interact with other accounts (similarly to how Ethereum users interact with smart contracts) in other hubs. Interchain accounts are a key step towards interchain security, in addition to having other major impacts on the Cosmos network. IA enables developers to leverage existing functionality regardless of the hub on which it exists.
Technically speaking, ICAs permit an IBC-connected chain to open ICA channels with new, pre-defined messaging standards. This fact is important because ICA transactions do not adhere to the typical IBC standards. Instead, they are bundled transactions wrapped into an IBC-conforming transaction. The receiving zone gets the IBC wrapper, processes the transactions inside based on the newly established ICA messaging standards, and then updates its state.
The main benefits from Interchain Accounts are a more seamless user experience with less friction for moving between zones and increased composability. With Interchain Accounts enabled, users can yield farm in DeFi, stake in the Cosmos Hub, vote in governance, and participate in DAOs across all connected zones, all from one account on the Cosmos Hub. Current IBC-chains will become more composable with one another, enabling a transition from their native, single-chain business model to interchain native business models.

Interchain Security (ICS)

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Interchain Scheduler (IS)

Currently, Cosmos and the IBC enable frictionless token transfer across its zones, creating enormous cross-chain Maximum Extractable Value (MEV) opportunities. However, most of this MEV is extracted by a select few happening off-chain. The IS brings this activity back on-chain and plans to distribute the rewards across the users and Cosmos zones.

The Interchain Scheduler offers a secure market for... Upgrade to Premium for this section and to unlock the ENTIRE 60+ page report!

Interchain Allocator (IA)

Using a percentage of the money made from the Interchain Scheduler, the Interchain Allocator reinvests the revenue into Cosmos-based projects, serving as a formal long-term incentive program for Cosmos dapps. Specifically, the (IA) consists of two arms: the Covenant and a Rebalancer. The Covenant will create multi-lateral agreements with IBC-enabled zones, while the Rebalancer will automatically manage the portfolios/public liquidity. All of it together will create the new Cosmos stack (image below).

Osmosis

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Superfluid staking

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Cosmos Fork?

The recent passage of Proposal #848 in the Cosmos ecosystem has sparked a significant debate within the community. This proposal, aimed at reducing ATOM's maximum annual inflation rate from 14% to 10%, consequently reducing its staking Annual Percentage Rate (APR) from 19% to 13.4%, has led to a divide, with strong opinions on both sides.

The proponents of Proposal #848 advocate for a reduction in ATOM's inflation, positing that the current high rates are an overpayment for network security and that a lower inflation rate would enhance ATOM's value accrual. This perspective views ATOM in a similar light to cryptocurrencies like Bitcoin (BTC) and Ethereum (ETH), emphasizing its role as 'sound money' within the DeFi ecosystem.

Conversely, the resistance, led by figures such as Tendermint founder Jae Kwon, expresses concerns primarily rooted in financial implications, particularly the potential reduction in staking rewards. This group's resistance, however, extends beyond financial motivations.

Jae Kwon's opposition to Proposal #848 appears to stem from... Upgrade to Premium for this section and to unlock the ENTIRE 60+ page report!