As the competition among various Layer 1s cool off in the current market, we’ve seen drop off of Ethereum, Solana, Avalanche, and many others from their all time highs after valuations skyrocketed in 2021. Meanwhile, the two most prominent projects focused on building blockchain interoperability - Cosmos and Polkadot, have made major strides in the past year while continuing to expand their respective ecosystems.

Rather than building a single blockchain with inconveniences such as expensive fees and network congestion, both Cosmos and Polkadot have constructed an ecosystem of multiple blockchains, optimized for their respective purposes.

Introduction to Interoperability

Cosmos is a network of independent parallel blockchains. Described as the internet of blockchains, their scalable infrastructure allows blockchains in their ecosystem to seamlessly interact with one another while increasing their transaction capacities.

Similarly, Polkadot describes itself as a Meta-Internet that has created a way for blockchains to connect and communicate with each other on its network. This allows various blockchains to launch and operate on their global ecosystem.

As with independent and sovereign chains like Ethereum, applications built on them are unable to seamlessly communicate with protocols on other blockchains. Due to the isolated nature of their state machines, users would require a third party “bridge” to send their assets from one chain to the other, or build an Ethereum Virtual Machine (EVM) compatible protocol just to fit into the ecosystem.

Both Cosmos and Polkadot aim to solve the issue of seamless communication between decentralized applications, but differ in their approaches and overall structure - Cosmos uses the Hub-and-Zone model, while Polkadot utilizes the Relay Chain to Parachain model. Let’s take a look at how they each work.

Cosmos vs Polkadot Comparison


1. Structure

Cosmos Structure

Cosmos uses a hub-and-zone model, each powered by BFT consensus algorithms like Tendermint Core that connect their chains. Independent blockchains known as “zones” can send assets to other zones by routing them through the primary hub called “Cosmos Hub”. The protocol mechanism called Inter-Blockchain Communication (IBC) allows other blockchains in the ecosystem to send messages and execute transactions between one another.

Each blockchain is independent of the underlying layer and relies on itself for security. Essentially, blockchains like Osmosis, Juno, etc, run on their own consensus engine and validators of each blockchain are responsible for securing that blockchain alone.

Source: Cosmos

Since any developer can build a protocol on Cosmos, this can be quite challenging for lesser known blockchains, as zones have to incentivize validators to provide security for them. However, this means every message sent is based on trust - the recipient has to assume that the network of the sender is secured.

Interoperability

Source: Cosmos

Cosmos also has Peg Zones that will allow for external networks to connect to the ecosystem, such as the Ethereum Mainnet. These chains can connect to blockchains outside of the Cosmos network, allowing for cross-chain communication between blockchains. With IBC, Peg Zones can communicate with other chains and networks connected to Cosmos Hub by linking zones and hub networks together.

Any two chains attached to the Cosmos Hub can transfer tokens back and forth via IBC messages. This feature allows for full interoperability of assets between Cosmos and non-IBC chains.

Polkadot Structure

Polkadot, on the other hand, uses a sharding model with State Transition Function (STF). These shards (blockchains) within the Polkadot network known as parachains, have their own state machine, rules, and own local block producers, which can utilize any type of unique functionality, consensus algorithm, transaction cost structure, etc.

Polkadot has a Relay Chain acting as the main chain of the system. The Relay Chain has its own consensus algorithm, which finalizes blocks on the parachains in a few seconds. All validators in Polkadot remain on the Relay Chain, while parachains have collators that construct and send parachain blocks to validators.

As all parachains are linked to the Relay Chain, collators do not have any security responsibilities and can operate under a shared security model with the Polkadot ecosystem. This means hundreds of parachains can benefit from the security provided by the Relay Chain by simply connecting to them, allowing them to have sovereignty over their state machines and local rules.

However, this could also mean that the relay chain security may present a central point of failure if it is not sufficiently decentralized.

Source: Polkadot

Since validators in the Relay Chain get to decide over the final state changes made in any parachain, validators could indefinitely reject blocks from specific parachain collators and exclude the parachain from the global state. Polkadot tries to avoid this by shuffling validators so that they validate random parachains, lowering the possibility of a set of validators censoring a specific parachain. They also have another set of validators called “Fishermen” that constantly check on the other validators for malicious activity.

Unlike Cosmos, Polkadot requires protocols to bid for a slot in their network via parachain auctions. Since parachains must connect to the Relay Chain to reap the benefits of the network, these auctions are a way for protocols to compete against each to best allocate fixed Relay Chain resources. For protocols that cannot afford to lease a parachain or do not need continuous connectivity to Polkadot, parathreads are a pay-as-you-go alternative to parachains for protocols.

Interoperability

Polkadot has live parachains that support EVM projects called Moonriver and Moonbeam. These bridge parachains are specifically optimized for the best possible experience when coming from an Ethereum environment. Moonbeam provides a launchpad for Ethereum projects that want to easily expand to Polkadot without rewriting their codebase.

2. Communication

Cosmos

Cosmos focuses on asset transfers between chains, which is a simpler communication mechanism called Inter-Blockchain Communication (IBC). It takes an entirely different approach to interchain communication.

IBC is a trustless cross-chain communication protocol that allows different blockchains in the ecosystem to send tokens, arbitrary data and manage transactions across multiple sovereign blockchains. This end-to-end protocol ensures that communication between heterogeneous blockchains is stable and authenticated.

Source: Map of Zones

Polkadot

Polkadot is targeting arbitrary message passing between parachains called Cross-Consensus Message Passing Format (XCM). This means that Parachain A can call a smart contract inside Parachain B, can transfer a token between the chains, or any other type of communication.

Parachains develop connections with one another and communicate through their pre-established routes. These nodes that are essential to message passing are called Collators, and are full nodes of relay chains and parachains. However, instead of sending all messages, only proof of post and channel operations enter the Relay Chain.

This is very effective during a chain reorganization as messages can be rolled back to the point of the reorganization based on the proofs of post in the Relay Chain. The shared state amongst parachains means that messages do not require any trust since they operate in the same context.

Polkadot has an additional protocol called Shared Protected Runtime Execution Enclaves (SPREE) that provides shared logic for cross-chain messages. Messages sent with SPREE carry additional guarantees about provenance and interpretation by the receiving chain.

3. Consensus Algorithm

Cosmos Tendermint

The Cosmos Hub and its zones can run on any consensus algorithm following a certain specification called ABCI spec. However, this can currently only be done with the Tendermint consensus engine.

As a PBFT-based algorithm, it provides instant finality but affects block production and finalization as execution can only be done one block at a time. This means the algorithm works by having every validator talk to each other to approve or reject a single block.

The biggest downside of Tendermint is that it has a high communication overhead between validators. This means that while it could work relatively fast with 200 validators, it will be much slower when dealing with 2000 validators. This is important because once you see a finalized transaction, it will never be reversed even in the worst network conditions.

The Cosmos team provides a software development kit with the Tendermint algorithm being usable out-of-the-box. There have been other efforts to create consensus algorithms to fit the ABCI spec and we’re likely to see other consensus algorithms added in the future.

BPOS Staking Mechanism

The Cosmos Hub uses Bonded Proof of Stake (BPoS) to elect validators. The Cosmos Hub currently has 150 validators, with plans to support up to 300 validators. The validator set size can be changed through a governance proposal.

Funds must be staked before the delegation is submitted along with the amount for each validator they would like to delegate to. Since consensus voting and rewards are both stake-based, more than 2/3 of the stake must be committed during voting rather than 2/3 of validators. Likewise, a validator with 25% of the total stake will earn 25% of the rewards.

Polkadot Fast Forward

Polkadot uses a hybrid consensus algorithm called Blind Assignment for Blockchain Extension (BABE) and GHOST-based Recursive Ancestor Deriving Prefix Agreement (GRANDPA), better known together as “Fast Forward”.

This algorithm allows the Relay Chain to finalize multiple blocks from every parachains quickly while being able to accommodate a large number of validators. This is possible as not all the validators are required to vote on every block, instead they can decide and vote on the single highest valid block, allowing BABE to author candidate blocks and extend the finalized chain while GRANDPA can finalize up to millions of blocks in batches.

The parachains can use a variety of consensus algorithms to come to local consensus. Polkadot provides a software development kit (Substrate) that comes with 3 consensus algorithms out of the box: GRANDPA, Rhododendron, and Aurand. It is likely that more algorithms will be added to Substrate and will be usable within the Polkadot Network.

NPOS Staking Mechanism

Polkadot uses Nominated Proof of Stake (NPoS) to select validators. The current validator size is around 1000 and stakers who do not wish to run validator nodes can nominate up to 16 validators. Both validators and nominators lock their tokens as collateral and receive staking rewards.

In Polkadot, governance and staking are disjointed; nominating a validator does not assign any governance voting rights to the validator. Unlike Cosmos, the staking system pays out rewards equally to all validators regardless of stake.

Rewards are tied to their activity, block production and finality justifications, not their amount of stake. Thus having more stake on a validator does not influence the amount of rewards it receives. They are then distributed pro-rata to all stakers after the validator's commission is deducted.

The network incentivizes stakers to nominate validators with lower stakes, as they will earn higher returns on their staked tokens, encouraging them to create an equally-staked validator set.

4. Governance

Cosmos (ATOM)

ATOM is the governance token for the Cosmos network. Cosmos uses token-vote signaling for their governance system. Similar to other blockchains, the actual execution of proposals are carried out via a protocol fork. All bonded ATOM holders can vote, but if a staker decides to not vote on a proposal, the validators assume their voting power.

Proposals also require more than 2/3 of the total voting power to pass before the end of the voting period. Thus, many validators offer zero commission to attract stakers to delegate their tokens to them, giving them more control over the protocol. However, if the delegator votes after its validator, it will override its previous vote with its own.

Polkadot (DOT)

DOT is the governance token for the Polkadot network. Polkadot has a multicameral governance system that requires proposals to pass through several avenues before ultimately released as a public proposal, where the majority of tokens can control the outcome. Validators in Polkadot do not receive any voting power from their nominators.

Polkadot has two primary network representatives, the Council and the Technical Committee. The Council consists of 13 members approved by DOT holders. They “represent” the minority which allows for a lower passing threshold on public proposals that are unanimously approved by them. On the other hand, the Technical Committee is made up of teams that can be added or removed via a simple majority vote of the Council. Their job is to make recommendations such as protocol upgrades, emergency fixes, etc.

Value Accrual

ATOM accrues value from a few areas:

  1. Transaction Fee (Cosmos Hub)
  2. Interchain security (Optional)
  3. Potential ecosystem airdrops
  4. Governance

DOT accrues value from a few areas:

  1. Transaction Fee (Relay Chain)
  2. Parachain auctions
  3. Governance

The main differences between ATOM and DOT comes from their value accrual on interchain security, potential ecosystem airdrops, and parachain auctions.

As previously mentioned, small and emerging blockchains on Cosmos would struggle to attract validators to their zone. This could result in the network being more vulnerable to attackers. Cosmos has implemented interchain security that allows security to be shared with other zones in the ecosystem. Enabling an optional security lease from the Hub connects the value of the ATOM token from the Hub to its zones. This will further add value to staked ATOM as stakers will earn tokens from more than one chain.

If you staked or even held ATOM previously, you would have received a ton of airdrops from other protocols starting out in the ecosystem like JUNO, OSMO, etc. Occasionally, protocol will distribute tokens via airdrops to ATOM holders in order to promote their product within the ecosystem. However, this has not been done on Polkadot as we have yet to see any airdrops to DOT holders.

Lastly, as noted above, Polkadot supports up to 100 parachains, which have to be won through a candle-style parachain slot auction. Protocols can win the auction by bonding the most DOT, either through self-funding or crowd loans. If a protocol wins an auction, participants will get their DOT back after the leasing period of 96 weeks on Polkadot. If not, they will get their tokens back in a few days after auctions end.  This forces its parachains to hold a massive amount of DOT via auctions, creating a lot more buying and holding pressure on DOT as its ecosystem grows.

5. Development Framework

Both Cosmos and Polkadot offer a software development kit (SDK), known as the Cosmos SDK and Substrate respectively. They were created to make it easy for developers to start building their own chains, and include various modules out-of-the-box, such as governance modules (voting systems), staking modules, authentication modules, and so on.

The main difference between the two is that the Cosmos SDK supports Golang, whereas Substrate supports any language that compiles to WASM (Web Assembly), giving more flexibility to developers. They are both relatively new frameworks for building blockchains, and will have more features in the future.

Valuation

Conclusion

Looking ahead, Cosmos and Polkadot both have very interesting upcoming developments. Previously, zones on Cosmos were left to fend for their own security. With the introduction of interchain security, protocols can now pay the Hub to leverage on their security functions.

On the other side, Polkadot has 30 new slot auctions scheduled through February 2023. They will also be completing the rollout of their Cross-Consensus Message Format, which is paramount to fluent cross-parachain communication.

Currently, I find Cosmos to be more valuable as they allow anyone to spin off their own chain without having to go through the tedious process of parachain auctions. Looking at both ecosystems, Cosmos has more adoption with with 47 live zones as compared to 21 live parachains on Polkadot, alongside a higher percentage of staked tokens and almost double in terms of transactions volume in the last 24 hours. Their UX is also great with a variety of wallets available to use in the ecosystem.

Cosmos and Polkadot will continue to build their modular ecosystem and continue to compete for market share in the future. While it might be hard to tell which network will be more successful in the future, there is a possibility where they both exist and are interconnected with each other. Protocols like Astar have already managed to create bridges to both Cosmos and the Ethereum Mainnet, which could allow the networks to be fully interoperable.


About Switcheo Labs

Switcheo Labs is a creative and experimental think tank that guides and nurtures decentralized ecosystems in the DeFi space. Founded in 2018, Switcheo Labs was born out of a simple desire to make finance accessible and trust optional. Recognizing the financial challenges that currently exist, Switcheo Labs innovates on robust alternatives to put power back where it rightly belongs, in the hands of the people.

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