50 Shades of Staking: Part II — Away from General Purpose Blockchains. The case of Cosmos Network
This is Part II of a series of posts dedicated to exploring the topic of staking and validation (Part I here). In this series I will argue why I see validators of a certain blockchain protocol type as future financial hubs, able to combine and capture value from several business models simultaneously, evolving into new Bitmains, Binances, USVs and Goldmans. I will be exploring various validator, masternode and block producer concepts of various projects.
Table of Contents (to be updated as newer sections are added):
Part I. Winning the Crypto Monopoly
Part II. Away from General Purpose Blockchains. The case of Cosmos Network
Part III. Validator — a Mining Pool, a VC, a Bank or an Exchange?
Part IV. Which other opportunities are out there?
1) Away from General Purpose Blockchains
So now we know about the winning strategy for an investor, be it an individual or a fund. As mentioned in previous post, before coming to the juicy topic of the validation itself, we need to figure out for which projects and protocols it really makes sense to invest in masternode and even more for the validator setup. This is by no means an easy question, however let’s try to think together as to which projects are likely to succeed in mid- to long-term. Mid- to long-term view needs to be adopted when discussing such topics as validation due to a large upfront investment required in most cases to set-up one in addition to all kinds of lock-ups required for the staked tokens.
In order to figure out the right projects we need to see how the challenges existing today are approached by the projects in the space. Changpeng Zhao or CZ, CEO of Binance in his recent interview with Fortune made a quite interesting statement regarding the future of blockchains and smart contract platforms in particular. While currently most are competing on the basis of who has the highest TPS, CZ thinks none of the current contenders are poised for long-term success because they are all too slow (any general purpose smart contract platform like Ethereum, Tezos, EOS, Dfinity and alike). Instead, the future is behind the newer blockchains like Tendermint allowing to “write” blockchains for specific purposes and as it is in case with Cosmos Hubs, connect those. CZ’s comment implies that:
Blockchains will evolve in the way of chips, where customized ASIC (“application specific integrated circuit”) chips have come to dominate computing over general purpose ones.
I would base my further arguments using Cosmos Network as an example, however in the last part I would also mention some alternative models for running super-masternodes and validators from the projects I closely follow like Waltonchain and Elastos to name a few.
All of these projects provide a toolkit for creation of new custom chains powered by their own consensus algorithm and interconnecting those (Cosmos/Tendermint), or offering a very flexible and scalable parent- and childchain infrastructures, where the Supermasternodes and Arbitrators bridge those (Waltonchain, Elastos respectively). Here is also a great article on the Cosmos team’s views on application-specific blockchians.
2) The Case of Cosmos Network
As was mentioned earlier, one of the best examples to illustrate the concept of Mining 2.0 such as validation, baking and alike are referred to by some is Cosmos Network and its Validators. The argument also applies to Tezos bakers and EOS block producers to a varying degree, since they are the general purpose blockchains and offer little to no interoperability with projects outside of their ecosystem. However, most of the reasoning why validator business is extremely interesting to look into do hold for those protocols as well given they manage to acquire enough users for their dApps.
Here is a short intro to Cosmos Network to provide some context to the points I will be making down the line (feel free to skip it in case you are a bit familiar with the concept or feel free to dig deeper into Cosmos and Tendermint here and here). Also feel free to watch a short intro video about Cosmos:
Cosmos is a decentralized network of independent parallel blockchains, each powered by classical BFT consensus algorithms like Tendermint. The first blockchain in the Cosmos Network is the Cosmos Hub, whose native token is the Atom. Cosmos is a permissionless network, meaning that anybody can build a blockchain on it.
Cosmos along with Polkadot are considered to be the leading cross-chain and interoperability protocols, bridging various blockchains. As of this writing, Cosmos is in testnet (Gaia-8000). The list of projects having expressed their plans to build on top of Cosmos is very impressive: OmiseGO, 0x, FOAM (their argumentation here), BigchainDB to name a few with even more expected to utilize Tendermint engine (here is the full list).
There is a lot to talk about with Cosmos Network and Tendermint and why I believe in the long term prospects of this project. Here, however, we forego going into detail into general theory of Cosmos Hub and Zone beyond the video and chart above. This is done to reduce the clutter of the article and to deep-dive into these concepts in Part III, already with some examples.
In Part III: Validator — a Mining Pool, a VC, a Bank or an Exchange I will finally come to the juiciest section of actually dissecting the value creation and the business model of a validator. Based on Cosmos validators example, I will show how a business model of a validator unites under one roof such business models as a mining pool, a crypto exchange, a bank and a VC. I also strongly believe that the entities running validators, bakers, arbitrators, masternodes and/or being deeply involved in a given protocol, having a say regarding its development, are turned into multiplicators, attracting opportunities both locally and globally before the general market.
About the author
As a blockchain analyst at ASTRATUM, I am involved in a wide spectrum of activities, analyzing blockchain ventures and ICOs, applying cryptoeconomics and mechanism design to engineer tokens, conducting due diligence, developing blockchain strategies as well trading and investing into crypto-assets.
I am passionate about:
- Novel business models like masternodes, staking, validating/delegating
- Crypto-asset analytics and valuation
- Crypto-asset management
- Token engineering and mechanism design (game theory view)
- Smart contract platform research and analysis
- ICO/STO consulting
- Blockchain “deeptech” research
ASTRATUM is a Berlin-based blockchain venture studio, developing blockchain strategies, solutions and ventures. Besides corporate innovation in mobility, fintech 2.0 and real estate, we develop together with partners our own ventures. We are a founding member of German Blockchain Association.