Cosmos/Polkadot V.S. Layer 2 Stacks: Series 2 — To Be Layer 1 or Layer 2?

23 min readSep 18, 2023

1. Introduction

In the first article of this series, after initially sorting out the technical solutions of CP (Cosmos & Polkadot) and Layer 2 Stack, we gained an understanding of the network architecture and core technologies of CP and Layer 2 Stack solutions. As it stands, CP’s technology far surpasses that of Layer 2 Stack. But what about the community and ecosystem?

In this piece, we dive into tokenomics and ecosystem growth. By mapping out token value capture scenarios, and comparing dimensions like decentralization and scalability, readers gain insight on likely token trajectories and the relative strengths and weaknesses of each solution.

The goal is to build an understanding not just of the technology, but of real-world adoption and community impact. This provides a more complete perspective on the advantages and disadvantages of CP versus Layer 2 stacks beyond just the technical specs. The analysis aims to equip readers to evaluate technological promise along with practical community and business factors.

2. Tokenomics

As CP and Layer 2 successively develop superchain networks, what roles will their native ecosystem tokens play? Or how will superchain growth unlock new possibilities for these tokens?

To discuss future token trends, this article first combed through various token models and analyzed similarities and differences. Next, it delved into potential impacts and unearthed investment value. Now, let us explore together how their token economics can fully realize their potential.

2.1 Cosmos

In reality, understanding the aforementioned Cosmos framework reveals that the need for the Cosmos Hub’s $ATOM token in practical application scenarios isn’t significant. This is because each chain has its native token, making $ATOM non-essential. However, during the Cosmos 2.0 conference, the team introduced the ATOM 2.0 plan, dedicated to bringing additional utility and value to the $ATOM token.

2.1.1 Token Distribution

There’s no supply limit for ATOM, with a current issuance of 290 million $ATOM on the market. The distribution is as follows:

Seed Sale: 11.8 million ATOM at $0.025 per token
Strategic Sale: 16.9 million ATOM at $0.079 per token
Public Sale: 160.3 million ATOM at $0.10 per token
Interchain Foundation: 23.6 million ATOM
Tendermint: 23.6 million ATOM

2.1.2 Token Utilities

(1) Validators Staking

Given that the entire Cosmos ecosystem consists of POS chains, the tokens staked by nodes represent their contribution to the network. Cosmos has also formulated measures related to its Staking mechanism, primarily coordinated through adjusting the network’s staking rate and token inflation rate.

For stakers, Cosmos provides two types of rewards: Emission (block rewards) and Fee (network fees). When the network’s staking rate exceeds 66%, the system decreases the inflation rate (down to a minimum of 7%). Conversely, when the network’s staking rate is below 66%, the system increases the inflation rate (up to a maximum of 20%). Essentially, the system uses algorithms to balance the network staking rate and the rewards for stakers. For those users who don’t stake, they will suffer losses due to inflation, indirectly encouraging them to participate in staking.

Why increase the staking rate? The economic security of the Cosmos Hub is determined by the number of $ATOMs staked. The more $ATOMs that are locked up as collateral, the higher the cost to attack the network. Thus, the more $ATOMs that are locked up, the greater the economic security of the network.

(2) Validators Rewards

Users holding $ATOM tokens have governance voting rights, allowing them to participate in the governance of the Cosmos Hub, initiate proposals, and decide on the future direction of the ecosystem. Furthermore, $ATOM can also be used in community management, provided as one-off grants to the community or setting up developer funds and other incentives, enabling the community to offer better suggestions for the Cosmos ecosystem.

(3) Transaction Fees

The interchain account connects the entire Cosmos ecosystem, enhancing the utility scenarios of $ATOM. As the native token of the Cosmos Hub, $ATOM can act as a relay chain to facilitate seamless conversions between different assets across chains. This setup allows assets on different chains within the ecosystem to be directly traded, providing convenience for interactions between different sovereign chains’ assets and $ATOM.

(4) Governance

Initiating governance proposals on the Cosmos Hub requires staking a certain amount of $ATOM. At the same time, $ATOM is the foundational token of the Cosmos ecosystem. Holding this token gives one a higher market profile and liquidity.

$ATOM’s tokenomics incentivize staking, which improves network security to some extent by preventing attacks. However, this also leads to low token liquidity, preventing circulation in the ecosystem, especially hindering DeFi products that are a major part of Cosmos’ features.

However, it’s worth noting that dydx chose to deploy on Cosmos, and Cosmos now natively supports CCTP’s USDC.

Additionally, a recent community proposal introduced a liquidity staking solution for $ATOM, giving staked and unstaked $ATOM equal liquidity. These upgrades undoubtedly create more use cases for the token, and I believe $ATOM’s future development will be even better than its current state.

2.2 Polkadot

2.2.1 Token Distribution

Polkadot’s token, $DOT, has not had its supply released yet. The token distribution is as follows:

3.42% for private investors
5.00% for SAFT (Simple Agreement for Future Tokens) investors
50.00% for auction participants
11.58% for future sales
30.00% for the Web 3 Foundation

2.2.2 Token Utilities

(1) Validators Staking

To become a validator on the Polkadot network, you must first stake a certain amount of $DOT tokens. This is because the Polkadot network uses the Nominated Proof of Stake (NPoS) consensus mechanism, similar to Cosmos. Validator staking helps maintain network security and decentralization.

In the Polkadot network, there are three types of validators: Parachain Validators, Relaychain Validators, and Other Validators. The roles of each type can be understood from their names:

a. Parachain Validators: These validators not only validate the state of their own parachain but also submit candidate receipts to the Polkadot relay chain to enable the addition of more blocks.

b. Relaychain Validators: These validators participate in the consensus of the relay chain and review the validity claims from other Polkadot validators. This process allows for the addition of blocks to the relay chain.

c. Other Validators: These validators collectively contribute to the validation of the distributed network, acting as a double-checking mechanism to ensure the correct allocation of validators for higher throughput and lower latency.

(2)Validators Rewards

In Polkadot, validators earn Era Points during an epoch through activities like block production or other actions, and they receive corresponding Era Points as rewards in the form of $DOT tokens.

These rewards are distributed at the end of each epoch. However, the specific quantity of rewards is not fixed and depends on factors like the scores earned by validators in the current epoch and the $DOT inflation model.

In addition to validators, there is another role called a “Nominator,” which can be understood as similar to a delegator in Cosmos. Nominators can nominate their $DOT tokens to validators to earn rewards, and they can share a portion of the rewards with the validators they nominate.

(3) Transaction Fees

Polkadot has introduced a “Weight-Based Fee Model” to address the limited block resources and has established a set of standards for the overall fee structure.

For example, each relay chain must efficiently process transactions to prevent block congestion. Each block should reserve some space for high-priority transactions or poorly constructed ones. Fee changes should occur gradually to prevent traders from accurately predicting fees, among other considerations.

(4) Governance

Polkadot introduced a new governance framework this year, and let’s first understand Gov1 and PolkadotOpenGov (the new framework), as well as the differences and improvements between them. In the traditional Gov1 governance model, the roles involved in governance include

Council: Responsible for executing governance tasks, managing parameters, proposals, etc.
Technical Committee: Manages the upgrade schedule and related technical aspects.
Holders: $DOT holders who participate in referendums.

In the newly introduced governance scheme, the roles involved in governance are

Holders: $DOT holders.
Technical Associations (Fellowship): These are the new participants. Compared to the original governance model, the new one is more decentralized, and Polkadot’s governance becomes more closely related to its holders.

a. Network Governance:

In the Gov1 version, any changes to the network require active token holders and the council to collectively manage network upgrade decisions. Whether a proposal is initiated by the public (token holders) or the council, it ultimately must go through a referendum, allowing all holders to make decisions weighted by their stake.

In terms of proposal voting, each proposal carries equal weight, and a Holder can vote for only one proposal at a time (except for emergency proposals). Voting periods can last for several weeks. Additionally, Gov1 supports alternating voting schedules, allowing voting every 28 days. However, in the new upgrade version, OpenGov, changes have been made to the voting mechanism to broaden and make it more flexible.

OpenGov shifts all responsibilities from the council to the public through a direct democratic voting system.

It dissolves the council.
Allows users to delegate their voting rights to community members in more ways.
Disbands the Technical Committee and establishes the Polkadot Technical Fellowship.
It eliminates the somewhat centralized council, achieving truly decentralized governance.

b. Treasury Mechanism:

The treasury, as the name suggests, is the public finance department of Polkadot network governance. When a proposal is passed, a portion of the funds is allocated to implement the proposal for the better development of the network.

The primary sources of revenue for the treasury include:

Transaction fees: 80% of transaction fee revenue goes to the treasury, and 20% goes to validators.
Staking rewards: The Polkadot network generates an ideal staking rate. When the actual staking rate falls below the ideal rate, stakers’ APY rewards decrease. To maintain inflation at 10%, the system doesn’t reduce the number of tokens but shifts a portion of total returns from investors to the treasury. (Polkadot regularly burns some funds from the treasury, so the actual inflation rate is less than 10%).
Validators: When the number of validators or proposers decreases, a portion of their tokens is transferred to the treasury.
Transfers: Anyone can donate to the treasury, although typically it is the recipient of funds returning them for some reason.

Treasury funds are held in an account that is inaccessible to anyone. When a proposal is accepted, it enters a waiting period for distribution. Because if funds were disbursed immediately upon proposal approval, they would need to withhold at least 5% of the proposal expenditure as collateral. If the proposal is rejected, this collateral is partially deducted, and if accepted, it is returned.

Proposals may include (but are not limited to): infrastructure deployment and ongoing operation, network security operations (monitoring services, continuous audits), ecosystem mandates (collaborations), marketing activities (advertising, feature payments, partnerships), community events and outreach (meetups, pizza parties, hackathons).

Currently, the OpenGov framework manages the treasury, and how funds are used depends on referendums.

c. Slot Auction & Core Time:

Parachains need to lock $DOT to obtain slots. These $DOT tokens remain locked for the duration of the lease, and they are automatically returned once the parachain exits. Holders of $DOT have the right to vote for governance of parachains and can even grant free operation of a particular parachain in the network.

The original slot mechanism was relatively inflexible because it was designed for long-term single chains. Although parallel threads mitigate liquidity issues, for technical teams, fundraising and acquiring $DOT to participate in the ecosystem network might be required.

However, Polkadot recently proposed version 2.0, which might eliminate the slot auction mechanism and use Core Time allocation instead.

The major difference between Core Time and the current slot auction is that slot auctions lock $DOT for a period of time, whereas Core Time involves purchasing time with $DOT, which doesn’t get unlocked. This changes the $DOT economic model and introduces new value capture mechanisms.

The current sale mechanism is divided into two types: bulk purchase and immediate purchase.

Bulk Purchase: Occurs once a month, selling 4 weeks of Core Time at a fixed price, as non-fungible assets.
Immediate Purchase: Similar to parallel threads’ pay-as-you-go model, where you buy when there’s a demand.

These changes reflect Polkadot’s ongoing efforts to enhance its governance and economic models to adapt to the evolving needs of its network and ecosystem.

Polkadot’s token governance mechanism is very comprehensive and has updated the auction mechanism for parachain slots. It abandoned the unbinding mechanism and adopted a purchase mechanism, bringing new value capture to $DOT. As more and more projects choose to deploy on Polkadot, I believe the importance of $DOT will become more pronounced.

2.3 Optimism

2.3.1 Token Distribution

The initial supply of $OP tokens is 4.3 billion, approximately distributed as follows:

25% allocated to the ecosystem fund
19% allocated to airdrop recipients
19% allocated to core contributors
17% allocated to investors
20% allocated to RPGF (Retrospective Public Goods Fund)

2.3.2 Token Utilities

Currently, there isn’t a specific use case defined for $OP in the superchain network. However, the governance of the OP Stack will be overseen by the OP Collective.

In simple terms, it adopts a Two-House System governance structure, consisting of the Token House and the Citizens’ House. These two houses balance power, preventing excessive centralization of governance.

The Token House is composed of OP holders and is responsible for making decisions related to business parameters. However, if token holders have full control over business decisions, it is likely that the system’s economy will lean in their favor, potentially to the detriment of other stakeholders.

The Citizens’ House, on the other hand, employs a one-person-one-vote mechanism and is responsible for making long-term value judgments. Different types of decisions are mutually supervised, and assessments are made from a broader perspective. Optimism aims to establish a governance system that can withstand the test of time through this new iteration, promoting collective prosperity and development.

Recently, Base and OP announced an economic cooperation agreement. Base will provide OP with the higher 2.5% sorter fees or 15% of profits. In return, OP will give Base 2.75% of $OP (details to be elaborated in Series 3).

OP has started its experimental revenue distribution model. Based on market cap calculations, OP actually profits from this cooperation. In past L2s, gas fees (L2gas + L1gas) were the main income source. OP pioneered a new rental model. For Base which uses OP’s stack to pay a share of revenue, this is undoubtedly a positive for OP.

However, how should this revenue model reward $OP token holders? Currently, governance rights are a certainty. Future use cases will be critical for OP, the top L2 stack now.

2.4 Arbitrum

2.4.1 Token Distribution

The initial issuance of $ARB took place on March 23, 2023, with a total supply of 10 billion tokens. The current circulating supply is 1.2 billion. Here is the distribution breakdown:

17.53% allocated to Investors
1.13% allocated to Arbitrum DAOs
11.62% allocated to Individual Wallets
42.78% allocated to DAO Treasury
26.94% allocated to Team and Advisors

Source: CoinGecko

2.4.2 Token Utilities

Currently, the official details about the specific use cases of $ARB in the superchain network have not been released. However, it is clear that regardless of whether the superchains have issued their own tokens and governance mechanisms, Arbitrum DAO will use $ARB to fully manage all aspects of the superchain network, including community and technical updates.

2.5 Polygon 2.0

Polygon issued a token economic whitepaper in July of this year for the Polygon 2.0 superchain network, aiming to use $POL for network governance.

In essence, $POL is an upgrade and rebranding of $MATIC, with a 1:1 conversion rate. They will not coexist, and $POL is intended to fully replace $MATIC in the future. Therefore, for now, we can use $MATIC’s token distribution model as a placeholder for $POL.

2.5.1 Token Distribution

The distribution of tokens for $POL (Polygon 2.0) is as follows:

12.00% allocated to Staking Rewards
23.33% allocated to the Ecosystem Community
21.86% allocated to the Foundation
4.00% allocated to Advisors
16.00% allocated to the Team
3.80% allocated to Private Investors
19.00% allocated to Binance Launchpad

2.5.2 Token Utilities

To incentivize Validators, the Polygon network rewards them in three main ways:

Protocol Rewards: The protocol continuously sends $POL to the Validator pool as a base reward, distributed based on the proportion of staked tokens held by Validators.
Transaction Fees: Validators can collect transaction fees from the chains they validate because they have the freedom to validate any number of chains. It’s worth noting that Polygon allows each chain to decide which tokens to use as Gas fees, and it doesn’t mandate the use of $POL. Therefore, the transaction fees collected by Validators can vary.
Additional Rewards: To attract more Validators, some Polygon chains may choose to introduce other rewards, which can be in various token types, as an incentive mechanism.

(3) Governance

Holding $POL tokens grants you governance rights in the network. However, the specific details of governance rules and procedures are not outlined in the whitepaper.

Polygon 2.0 allowing each superchain to use its own token for transaction fees is a very critical and unique move. It fully respects the native autonomy of each superchain, but to some extent also cuts off an important source of token capture.

Currently, all Layer 2 gas fees use ETH as the unit of account. If Polygon 2.0 gives up this source of revenue, how should it attract token holders? Even with governance rights, can those be passed on to holders to provide additional returns?

In my opinion, based on the currently revealed token utilities, holder incentives may not be as rich as CPs. However, future development strategy updates are possible.

3. Ecosystem Comparison

3.1 Cosmos & Polkadot

1) Data

From the chart, we can see that in terms of market capitalization, Polkadot is roughly three times that of Cosmos. However, Cosmos has a higher ecosystem stickiness with a daily active user count of 12.95K. Both have a similar number of core developers, but Polkadot’s network revenue is significantly higher than that of Cosmos.

2) Project

From the distribution of ecosystem projects in both Cosmos and Polkadot, we can see the following:

In Cosmos, besides the well-known Sei network, there is a significant presence of financial projects that cover a wide range of areas, including decentralized exchanges (DEXs), lending, and stablecoins. Examples include the derivatives exchange dydx, DEXs like Osmosis, and the lending platform Kava. Additionally, the stablecoin Terra is also part of the Cosmos ecosystem, although it hasn’t stood out prominently since the UST incident.

However, it is worth noting that CCTP USDC has already been deployed on Cosmos, greatly solving Cosmos’ liquidity problem and enabling faster ecosystem and community growth.

From the distribution of ecosystem projects in both Cosmos and Polkadot, we can see the following:

However, it is worth noting that CCTP USDC has already been deployed on Cosmos, greatly solving Cosmos’ liquidity problem and enabling faster ecosystem and community growth.

In contrast, Polkadot’s ecosystem projects are primarily concentrated on infrastructure-related projects, such as networks and blockchain development tools. Notable examples include Acala Network and Moonbeam, an EVM-compatible smart contract platform. Polkadot’s Substrate framework also makes it easier for developers to create their own independent consensus blockchains, attracting more infrastructure-related projects.

To summarize, when looking at the distribution of ecosystem projects, the Cosmos ecosystem mainly focuses on financial projects, while the Polkadot ecosystem has a more diverse range of infrastructure-related projects. The diversity of the ecosystem is slightly stronger in Polkadot. The different features of the development tools, Cosmos SDK, and Substrate framework have attracted different types of projects, contributing to the current landscape.

3) 2.0 Version Updates

Both CP (Cosmos and Polkadot) have released their 2.0 versions, which offer more comprehensive improvements and optimizations regarding ecosystem governance and token empowerment.

In Cosmos 2.0, new mechanisms mainly revolve around the reallocation of $ATOM. This includes interchain schedulers, interchain allocators, interchain security, and liquidity pledging, deeply integrating $ATOM across these functionalities. Specifically:

Liquidity-pledged chains join the Hub consumption chain, where staking $ATOM yields $stATOM and $qATOM, used for trading and other interchain activities. They’ve adjusted the $ATOM issuance policy, reducing issuance over a 36-month timeframe. After 36 months, a portion of transaction fees generated by the Hub consumption chain will be redistributed to stakers, nodes, and community pools. Meanwhile, $ATOM issuance, interchain schedulers, and interchain allocators will distribute profits to the treasury to support ecosystem growth and the development of $ATOM public assets.
In addition, the latest Cosmos Hub community proposal will optimize the liquidity staking model (LSM) of $ATOM on September 13th. This will allow staked $ATOM to enjoy the same liquidity as unstaked $ATOM. This measure will release the 68% staked $ATOM into DeFi scenarios, accelerating overall ecosystem growth. Other management measures include increasing the liquidity staking upper limit, validator security deposits, instant liquidity staking, etc.

In Polkadot 2.0, the auction mechanism for parachain slots has been modified to “core time”, thus reducing the entry barrier and optimizing flexibility. This can be circulated in primary and secondary markets through bulk purchasing and instant buying, no longer offering the previous slot auction unlocking $DOT method, which enhances $DOT liquidity.

Moreover, in 2.0, Polkadot aims to shift from a relay-chain-centric paradigm. If a user uses an application on Chain A and wants to use the same app on Chain B, this involves seamless cross-chain app deployment. Addressing this, Polkadot developed the XCM cross-chain communication protocol, a descriptive language framework. It helps describe intentions, but it’s hard to ensure the receiver translates the message faithfully. Thus, the Accord agreement was created to ensure honest behavior. Polkadot is also developing other mechanisms, such as Hermit Relay and Project CAPI, to help relay chains free up space and move functionality to the application layer on parachains.

Overall, Cosmos 2.0 focuses on interchain scheduling and allocation to reallocate the $ATOM token value, while Polkadot 2.0 primarily modifies $DOT use cases, introduces new empowerment methods, and aims to build cross-chain applications, realizing a fully decentralized cross-chain network.

3.2 L2s Comparison

1) Current Development Status

From the charts, it can be observed that Polygon has the highest market capitalization, daily active users, and core developers. zkSync has the highest TPS (Transactions Per Second). Excluding Starknet and zkSync, which do not have their own native tokens, $OP currently has the highest token price.

2) Ecosystem Resources

Recalling the public chain wars of 2021, Solana gained recognition from SBF due to its innovative PoH (Proof of History) technology. FTX stood behind its creation of its own DEX, and the major backing from Multichain greatly assisted Solana in expanding its ecosystem, causing the price of $SOL to skyrocket. BSC, endorsed by top-tier exchange Binance, repeatedly organized hackathons and launched top-notch DEXs, rapidly channeling Binance traffic. Avalanche, having developed the Avalanche consensus to enhance blockchain performance, received massive investments from prominent funds like A16Z, Polychain, and Three Arrows Capital, seeing a tenfold increase in TVL within half a month.

For L2s aiming to strengthen their network, the focus undeniably revolves around developers, projects, and users. Ecosystem resources are paramount in this context. With the backing of powerful top-tier exchanges or VCs, more developers and projects can be attracted, leading to more users and creating a positive feedback loop. So, do these L2s with their Stack solutions have a robust ecosystem resource barrier?

Polygon ($450 million)

The founding team hails from Matic Network, with core members who have worked with prestigious firms like PayPal, Google, 0x, and Coinbase.
They’ve secured multiple rounds of funding, with investors including Coinbase Ventures, Binance Labs, and Mark Cuban, among other renowned institutions and angel investors. Also received support in the form of ETH and Financial Grants from the Ethereum Foundation and backing from the Polkadot Ecosystem Foundation.
Proactive in collaboration with traditional web3 industry leaders. For instance, they joined Disney’s accelerator program, partnered with Meta to develop NFTs for Instagram, released NFTs on the Polygon chain in collaboration with major brands like Adidas and Prada, and possess numerous membership NFTs from web2 companies, positioning themselves as pioneers in the web3 sector.

Optimism ($179 million):

Initially developed by the Plasma Group, core member Karl Floersch is also one of the founding members of Uniswap and has a strong connection with Ethereum.
They’ve completed seed and Series A funding rounds, backed by investors such as Coinbase Ventures, Binance Labs, and Paradigm, and have the support of the Ethereum Foundation.
Synthetix, a prominent synthetic asset defi platform, was one of the earliest supporters of Optimistic Rollup.

zkSync & Matter Labs ($258 million):

zkSync was founded by the team at Matter Labs, and its core members come from top global institutions like Stanford, MIT, and the Technion–Israel Institute of Technology, showcasing their technical prowess.
Gone through multiple funding rounds, backed by prominent crypto VCs and organizations like Coinbase Ventures, Paradigm, Framework Ventures, and Three Arrows Capital. Also received several developmental and research grants from the Ethereum Foundation.

Arbitrum ($140 million)

Developed by Offchain Labs, a team led by technical experts like Professor Ed Felten from Princeton University.
Completed multiple rounds of funding, with investments from renowned institutions such as Pantera Capital, Coinbase Ventures, Ribbit Capital, and Naspers Ventures, among others.
Gained significant adoption from top projects like Reddit, dydx, and Chainlink, and its most crucial addition is the perpetual trading platform GMX, which has contributed significantly to its ecosystem’s growth.

Starknet (No funding yet, Starkware $261 million):

Starkware, the main R&D team behind Starknet, consists of numerous cryptography and blockchain experts.
The Starkware team has secured multiple research and development grants from the Ethereum Foundation.
Collaborated with companies like NVIDIA to leverage GPUs for enhanced computational speeds. They also partner with other renowned firms to explore applications in supply chain finance and more.

It can be observed that among these Layer 2 solutions, Polygon has the strongest financial backing. Optimism has a close relationship with the Ethereum team and enjoys higher community recognition. zkSync, as the first team to use zk technology, pioneered the ZK Rollup approach. Despite having the lowest funding, Arbitrum holds about half of the TVL in the L2 space and has several notable projects. Starknet, on the other hand, takes a unique approach, utilizing the native StarkEx mechanism to achieve parallel computation within the Rollup framework.

4. To Be Layer 1 or Layer 2?

In recent years, Cosmos and Polkadot have continuously improved and grown their ecosystems, releasing 2.0 versions. Facing the rise of L2s, can their 2.0 versions maintain advantages by offering unique features?

Cosmos and Polkadot have respectively launched 2.0 versions, optimizing aspects like consensus mechanisms, interoperability, and token economics. It can be said CPs have more mature experience in building interchain networks compared to L2s. Currently, CPs have a nearly $10 billion market cap, so L2s need to put in more effort to surpass them. However, since L2s rely on Ethereum, Ethereum’s strong consensus and large community can also aid L2 development.

Here we summarize the unique features of CPs and L2s that may attract projects:

Sovereign: Cosmos and Polkadot (CP) grant application chains the complete autonomy to choose validators, issue tokens, govern themselves, and more. While L2s Stack allows developers to modify stack modules and customize their own chains, it doesn’t provide them with the right to self-governance. The consensus for transactions ultimately relies on Layer 1 (L1) blockchains like Ethereum, and governance is entirely controlled by L2. Therefore, for those who require highly customized public chains or application chains and want control over parameters and governance, CP may be the preferred choice. For example, the founder of dydx recently chose to deploy the V4 version on Cosmos. They believed that Ethereum-based L2 solutions had several issues: insufficient performance and the fact that Ethereum L2 currently operates through centralized sequencers that have the ability to censor and block transactions. While it’s possible to bypass sequencers and directly access L1 to avoid censorship, Ethereum L1 is too slow and expensive to support dydx’s core product requirements. So, even though Ethereum may appear more decentralized overall, its least decentralized components, such as sequencers, may not meet the needs of certain applications. Therefore, dydx opted for Cosmos.
Cross-chain Interoperability: Cosmos and Polkadot (CP) support communication and asset transfers between heterogeneous chains, not limited to their own ecosystems but also compatible with the Ethereum ecosystem. For instance, the Cosmos ecosystem currently relies on Axelar Network and Gravity Bridge to bridge assets from the Ethereum ecosystem. Security depends on third-party bridges, resulting in a relatively lower Total Value Locked (TVL). While cross-EVM bridge compatibility is not ideal at the moment, it still offers broader possibilities for cross-chain interactions. Projects can implement communication with Ethereum and other public chains, or even L2 Layer-2 superchains, on CP. In contrast, the interoperability protocols of L2s are somewhat limited, as they can only achieve communication within their internal ecosystems through shared cross-chain bridges and cannot interact with other non-EVM public chains. Therefore, for platforms aiming for full-chain interaction, CP may be preferable.
User Experience: As an independent blockchain, CP is not limited by Ethereum and achieves higher throughput and transaction speed through communication protocols. On the other hand, while L2s use Rollup technology to offload most transaction processing work onto their own chains, the Stack also employs Rollup to significantly reduce costs through recursive compression. However, the ultimate security and consensus are still constrained by Ethereum. Projects seeking transaction speed and user experience can choose to deploy on CP. Meanwhile, for projects that require a significant amount of off-chain storage space and prefer to process transactions off-chain, choosing L2s would be more convenient, as CP chains have limited on-chain space.
Deployment Difficulty: Currently, both CP and L2s are compatible with the Ethereum EVM. However, in comparison, L2s may have a more mature compatibility level than CP. L2s have already hosted a wealth of Ethereum DApps, making it easier for these projects to migrate and deploy. The deployment difficulty and willingness for these projects to move may be higher on L2s than on CP.
Legitimacy: Building upon deployment difficulty, in terms of willingness to deploy and community consensus, users have a higher level of trust and recognition for Ethereum. Therefore, for projects that are already established within the Ethereum ecosystem, it can be challenging for CP to attract them to join its ecosystem. Consequently, for projects that need to quickly leverage various tools and protocols available on Ethereum, deploying on L2 can provide access to the richest ecosystem resources while ensuring security.
Threshold: To deploy on CP, nodes need to stake $ATOM or participate in $DOT auction slots, which sets a relatively high entry barrier. In comparison, L2 solutions like Optimism only require a certain amount of ETH to be staked, and zkSync has no specific requirements, allowing anyone with the necessary technical capabilities to become a node. Therefore, Ethereum L2 solutions have lower entry barriers compared to CP, making node deployment more convenient.

Overall, Cosmos and Polkadot have advantages in interoperability, performance, scalability, and governance. However, Ethereum Layer 2 solutions offer higher security and a more mature ecosystem.

5. Conclusion

This article has further deepened the discussion on CP (Cosmos & Polkadot) and Layer 2 Stack solutions from the perspectives of tokenomics and ecosystem development. We analyzed the roles that ecosystem tokens play in the networks of CP and Layer 2 as they develop, as well as how the growth of superchain networks could create more possibilities for these tokens. These analyses provide strong evidence for understanding the long-term impact and value of these technological solutions.

Although these Layer 2 solutions each have their respective resources, how to effectively utilize these resources to build their ecosystems raises a new question: how should L2s develop their own superchain networks? This will be detailed in Series 3.

References

https://medium.com/@eternal1997L

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https://polkadot.network/

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https://medium.com/offchainlabs

Declaration

The present report is an original work of @sldhdhs3, @GryphsisAcademy trainee, under the mentorship of @Zou_Block and @artoriatech. The author(s) alone bear the responsibility for all content, which does not essentially mirror Gryphsis Academy’s views or that of the organization commissioning the report. The editorial content and decisions remain uninfluenced by the readers. Be informed that the author(s) may own the cryptocurrencies mentioned in this report.

This document is exclusively informational and should not be used as a basis for investment decisions. It is highly recommended that you undertake your own research and consult a neutral financial, tax, or legal advisor before making investment decisions. Keep in mind, the past performance of any asset does not guarantee future returns.