Deep Dive: How Will IBC Create Value for the Cosmos Hub?
By: Christina Cosmos
Tags: Cosmos Network, Ibc, Tendermint, Cosmos Sdk, Cosmos

Whether you’re familiar with Cosmos or looking to find out more, one of the first terms you’ll run into is IBC (Inter Blockchain Communication). Of the industry-leading developer tools that make up the Cosmos tech stack and enable its expanding ecosystem, IBC is the biggest game-changer of all.

So, what exactly is IBC and why is it such a big deal? Perhaps more importantly, how will it create value for the Cosmos Hub and its native ATOM token?

What Is IBC?

In a nutshell, IBC is a protocol that allows blockchains to talk to each other. There are several important technical requirements involved and conditions that need to be met, but we won’t dive into those here. Just know that being able to transfer tokens and other data frictionlessly and trustlessly between previously unconnected blockchains is a big deal.

Why?

Since the advent of Bitcoin in 2009, we’ve seen an explosion of blockchains with different value propositions, consensus methods, ideologies, advocates, and raisons d’etre. In a pre-IBC world, they all (for the most part) existed in closed-ended silos, unable to communicate with each other. But that model simply isn’t sustainable.

Just picture blockchains as countries with growing populations and commercial activity. One blockchain is particularly proficient at producing wheat while another excels in the breeding of cattle. They would naturally want to engage in trade and benefit from each other’s expertise. It’s a basic human instinct that dates back as far as our existence — and it’s equally applicable to blockchains and their communities.

Peng Zhong, CEO of Tendermint, a core contributor to the Cosmos ecosystem, offers a further useful analogy. He says, “Imagine every blockchain right now as a small tribe living on an island in a vast archipelago. So what IBC enables is the discovery of shipbuilding, which allows these tribes to travel between each other. So it’s really big, it’s huge for community building… the moment a blockchain flips IBC on, people can start traveling back and forth and participate in cross-island trade of various goods that each island is specialized in creating.”

Pretty cool, right? IBC opens up a literal world of possibilities allowing blockchains to interoperate and transfer value, interchange assets and services, and connect — without running into the scaling issues inherent in some of the largest blockchains today.

And the best thing about IBC? It’s already here.

IBC Has Officially Shipped

“IBC is the internet of blockchains,” states Jack Zampolin, an early contributor to the Cosmos network and engineering lead behind the Cosmos Hub, “and Cosmos is the only one building it and actually shipping the technology.”

In fact, the first IBC connection between the Cosmos Hub and IRISnet took place at the start of this month, and Akash Network soon followed on April 24. “Those are the first blockchains with IBC enabled,” Peng enthuses, “but over the coming weeks and months, more and more chains will enable IBC.”

A comprehensive list of other Cosmos blockchains planning to enable IBC — and when — can be found on the Wen Mainnet? page this page maintained by Josh Lee, aka Dogemos, a long-term Cosmos contributor and CEO of Chainapsis (the team behind IBC-enabled wallet, Keplr).

Now, remember those “important technical requirements” we glossed over earlier on? The launch of IBC alone can’t magically make all blockchains connect. They must first meet certain specifications surrounding their module system, consensus state introspection, etc. (you can read more about that here).

Many blockchains are already working on this and Peng is confident that the growth of the interchain (Cosmos’ extended network of interconnected blockchains) “won’t take any time at all… the community is already here, they’re just not connected right now.”

And for Proof of Work blockchains like Bitcoin and Ethereum that don’t meet the requirements of IBC, bridges to the Cosmos Hub are already being built.

The Gravity Bridge to Ethereum, in particular, could have huge implications for the growth of DeFi, a burgeoning sector with more than $62 billion of value locked in its multiple predominantly Ethereum-based protocols.

The Bridge will enable the free flow of ERC20 tokens between Ethereum (and other EVM-enabled chains) to the Cosmos Hub, allowing DeFi dApps to scale — and expanding the ATOM’s scope well beyond the Cosmos. The Bridge will also allow IBC tokens from Cosmos to be sent to Ethereum.

Unprecedented Scalability

Apart from being socially distanced, many popular blockchains are plagued by scaling issues, sky-high fees, and lengthy transaction times. The Ethereum network, for example, has already hit 99.15% capacity. “Everything is congested and transaction fees are pricing most people out of participating in DeFi and NFTs on Ethereum,” Peng explains.

That’s because all applications use a mainframe approach, running on a shared state machine. Jack compares this model to computing in the 70s, saying, “people thought that bigger and bigger supercomputers were going to be how computing was used and consumed. They were building complex time-sharing systems where people would have a terminal on one big supercomputer. That’s what Ethereum is like. There is one blockchain where everyone runs their programs. That’s not scalable.”

Indeed, as prominent VC firm Paradigm Research reinforces, there’s a limit to the number of applications that can be supported on ETH 1.0:

“Today, congestion on the Ethereum mainchain drives applications to resettle on alternative L1’s and L2’s because they can’t afford to pay Ethereum’s metropolitan premium. Each new L{1,2} needs awkward middleware — “bridges” — to communicate with the others.

Cosmos offers a different vision for an interchain future: one built around interoperability as a first principle. Cosmos believes that giving sovereign chains a shared communication standard is a natural step in the evolution of protocol design. This vision is inclusive, not competitive. Ethereum and other platforms will be able to integrate this interoperability model, too.”

Jack adds, “Cosmos saw this problem [lack of interoperability] years ago. We’ve been building the technology to connect all the blockchains for years and we’ve built what is going to become the core of the internet of blockchains. There is this huge global network of different distributed systems that can trustlessly interact with each other and trustlessly transfer value. That’s what’s powerful about Cosmos and that’s what really differentiates us.”

Let’s Talk About Sovereignty for a Moment

We haven’t touched on this point so far but it’s actually one of the biggest advantages of building a blockchain with Cosmos rather than a dApp on Ethereum. Beyond avoiding congestion and prohibitively high fees, being your own blockchain lets you make your own rules and retain your sovereignty.

Former lead researcher at Tendermint, Sunny Aggarwal, stated that IBC allowed for “economic integration without political integration.”

Sunny likened IBC to the standardization of shipping containers that today enables global economic trade — without the need for political alignment between nation-states.

Sam Hart, Cosmos contributor and Grants Engineer at Interchain Foundation, elaborates, “IBC allows you to form a message channel — a shipping channel — that is established between two parties. The shipping containers are standard but you can send whatever you want inside the container. The blockchains are sovereign blockchains, with their own voting populace, disjoined from one another.”

Josh further helped hammer this point home, saying:

“Being sovereign and having your own blockchain means you get to set your own system and your own boundaries over how you interact with others. If you exist as a smart contract, you are just a tenant living in a rented house… You don’t have a lot of rights and when the landlord kicks you out, there’s not a lot you can do.”

Of course, being sovereign comes with implications as well. If you custody your own crypto assets (you do, right?), you’ll have some idea of what this may involve. Yet, unlike Ethereum’s ‘one-size-fits-all’ security model that Paradigm calls “Ethereum’s metropolitan premium,” Cosmos provides what Josh describes as:

“A good middle ground, where you can choose how sovereign you would like to be but you don’t have it thrust on you like on Ethereum.”

IBC: Driving Value for the ATOM

By now, you can probably grasp the magnitude of IBC and its implications for the future growth of blockchains. But, you may also be wondering — if IBC is such a big deal, why are so few people talking about it? Why isn’t Cosmos commanding more attention?

If you are asking that, you’re not alone. A simple search for ‘Cosmos’ or ‘ATOM’ through any social channel will unearth fiery debates on this very topic — or baffled observations pondering the exact same thing.

After all, Cosmos is home to more than $120 billion worth of digital assets across 31 apps and services that include Binance Smart Chain, Terra, Crypto.org, and THORChain. It’s also one of the fastest-growing layer 1 ecosystems today.

“Not sure why people are not talking enough about Cosmos,” tweeted Qiao Wang, a former entrepreneur at Messari and trader at Tower Research. His sentiments are widely echoed throughout the web.

But let’s remember. IBC is up and running. It’s not an icon on a roadmap. It’s not a section in a whitepaper. It’s not a promise in an elevator pitch. It’s actually here connecting blockchains and beginning to fulfill the Cosmos vision… But, it’s also only just arrived.

The Cosmos Hub is designed to be a service provider to the chains that connect to it. So, in parallel with more chains enabling IBC, the ATOM community plans on creating a slew of value-add services that create powerful incentives for sovereign chains to connect to the Cosmos Hub and transfer assets to it — thus driving value for the ATOM token.

Peng reinforces, “Just like a port city is valued by the amount of trade that flows through it, the Cosmos Hub’s value is measured by the value of blockchain economies that conduct business on the Hub through IBC.”

Early ecosystem contributor and Grants Manager at Interchain, Billy Rennekamp, reflects, “There are a hundred different ways you can build a business around this and a very real and valuable proposition attached to the ATOM that’s developed even more so over the years.”

Josh adds, “We can’t even imagine all the use cases that will come from this [IBC] because Cosmos is a first-of-its-kind multichain environment enabling a lot of new business models… And there isn’t a better place to capture that value than the Cosmos Hub and the ATOM.”

Bringing DeFi to Cosmos — Gravity DEX

Beyond delivering bleeding edge technology that’s paving the way for the sustainable growth of blockchains, one major way IBC allows the ATOM to capture value is through the exponential growth of DeFi — and the transaction fees generated from the influx of assets into the Cosmos Hub that will go directly to ATOM validators and stakers.

Cosmos Hub’s upcoming Gravity DEX (testnet opens May 4 and registrations opened April 21) will exponentially increase the transaction activity and rewards. The Gravity DEX allows token holders on any IBC-enabled blockchain to send their tokens to the Gravity DEX in order to swap for other IBC tokens or earn yield by providing liquidity for swappers. In addition, work is also underway to connect other heterogeneous chains such as Polkadot and Celo through IBC, and Ethereum through the Gravity Bridge.

This will turn the Gravity DEX into what Peng describes as a “vast marketplace” that grows in value as more assets are moved on to it. “The more things being sold, the more transactions that happen, the larger the cut the people who run the marketplace get. That cut is what ATOM holders get.” He adds:

“It’s one of the strongest ways ATOM will gain in value; with a DEX that’s powered and secured by the ATOM. It’s going to encourage all these new chains to start trading and creating liquidity, for traders to start arbitraging, and for developers to see that they have a new path to start listing their tokens permissionlessly and getting people to invest… That’s really huge.”

Hyung Lee is CEO of B-Harvest, which was recently acquired by Tendermint to complete the Gravity DEX. He emphasizes, “Our key advantage as an interchain DEX is to have as many kinds of tokens as possible.”

Hyung will soon be stepping into his new role as Head of DeFi at Tendermint. And he’s got plenty of plans to generate value for the ATOM besides a highly liquid decentralized exchange. He explains:

“Our plan is to build much more than only a DEX. We have much longer plans to put more on the Cosmos Hub and each one is as important as the DEX… Another very important next step will be lending and derivatives, and staking derivatives that you can trade on the Gravity DEX. The goal is to provide many more complex DeFi utilities in the Cosmos Hub to enrich the ecosystem and increase the value for ATOM.”

Shared Security / Interchain Staking

Shared security (or Interchain Staking) is coming soon to Cosmos and will allow staked ATOM to secure more than just the Cosmos Hub. This will increase the amount of transaction fees and chain inflation that are rewarded to ATOM stakers, as validators can choose to secure separate “child” chains as well.

It will also enable new projects to hit the ground running as quickly as possible without having to invest in the necessary infrastructure to procure validators. This lowers the barrier to entry to the Cosmos ecosystem as developers can opt for the validation services of the Cosmos Hub to secure their chains and springboard their projects.

Sam explains, “Let’s say I want to launch a new chain, with Starport, I can do it in about 15 minutes. When I opt for shared security, I know that it is secure and I have the best validators and I can get my project up and running quickly. And for ATOM validators and stakers, they get a cut of the transaction fees and inflation from the other chain, as ATOM is no longer relegated to the Cosmos Hub.”

The Best Developer Experience — Starport

With some of the largest and most popular blockchains on the market today built on top of Cosmos SDK, Cosmos has quickly earned recognition as the industry standard for building blockchains. Through the launch of Starport in August 2020, Cosmos provides the best possible developer experience, and all the tools needed to launch a chain in a matter of minutes.

Developers building a new chain today can use Starport, the developer toolkit for Cosmos, to fast-forward through complex technical specifications and quickly scaffold and launch their own IBC-enabled blockchain. Developers who have built their Cosmos chain without Starport will have to make some compatibility adjustments.

Unlike running on a shared state machine with one compulsory model of security or receiving shared security by default, Cosmos lets developers choose the level of sovereignty they desire. Young chains can avail of shared security from the Cosmos Hub, and more established projects can launch independently, or make use of the Starport Network to access and grow a validator community of their own.

Denis Fadeev, Director of Development Experience at Tendermint, explains, “Cosmos gives blockchain developers freedom to choose how to build and launch their chain. They can build their protocol logic in Go, or use smart contracts, or even experiment with EVM running on top of Tendermint. We’re focused on delivering the best experience of launching sovereign chains as well as providing alternatives, such as shared security.”

ATOM holders can also invest in new chains that are aligned with the Cosmos Hub, creating an aligned incentive with chain developers and the ATOM from the beginning that is beneficial for all involved. As Peng points out, “it will encourage more cross-promotion from the start.”

Final Thoughts

The Cosmos ecosystem is composed of impassioned visionaries and insanely talented contributors who share a mutual vision of an interconnected internet of blockchains with scalability, usability, and (most importantly) interoperability, at its core.

They are unapologetically obsessed with the tech and how it will change the world. And it’s wildly refreshing for anyone whose typical experience of the cryptocurrency space revolves around the speculative chorus of “number go up,” and “wen moon.”

Yet Cosmos is on the cusp of explosive growth. The team is discovering and delivering solutions to problems that most industry participants never even anticipated. As Billy rather aptly put it, “Cosmos is sort of playing 4D chess. This building on a future version of a future version of a problem that is only now becoming apparent to the rest of the world.”

“You can do practically anything you want with IBC,” says Tendermint’s Director of Product, Gautier Marin. “Token transfers, NFTs, cross-chain smart contracts, interchain accounts… IBC lets you build any kind of cross-chain application you want.”

“It’s a great time to make something and get involved in the Cosmos ecosystem,” enthuses Sam, “we’re building all the pieces that you need.”