139 - The Cosmos Thesis with Sunny Aggarwal & Zaki Manian

Welcome to Bankless, where we explore the frontier of internet money and internet finance. This is how to get started, how to get better, how to front run the opportunity. This is Ryan Sean Adams. I'm here with David Hoffman, and we're here to help you become more bankless. Today, we are going to explore the Cosmos together. This is the Cosmos Thesis. We brought on Zaki and Sonny, who are developers, app developers, and longtime Cosmos community members, to talk about the Cosmos thesis. This, I think, will give you a zero to 60 on Cosmos in 90 minutes. I think it's a canonical episode for this community, for this ecosystem. In fact, the guests said as they were leaving, this is probably the best Cosmos episode they've ever recorded.

You be the judge after this episode. A few things to look out for. Number one, we talk about the Cosmos thesis itself, how it's similar versus how it's different to Ethereum. Number two, we talk about Ethereum as a tree versus Cosmos as a fungus. If that makes no sense to you now, listen to the episode and you'll see what we mean. The difference between the fat protocol thesis and the tall app thesis. That's another distinction we make. And Atom 2.0, a new white paper, was just released with new token economics and a whole new Cosmos Hub design. We talk about the new features and differences in that design. We also ask Zaki and Sonny if they think Atoms could one day flip ether in terms of total crypto market cap. David, there's so much we unpacked in this episode. Why are we talking about it? Cosmos, that is, and what should listeners look out for as they listen?

The Cosmos ecosystem, the Cosmos community, the Cosmos philosophy has always paired

nicely with Ethereum while also being different. I remember reading the Cosmos white paper in 2018 and really having like an aha moment. It's like, yo, this is something real that's new. And it was specifically about cross-chain interoperability. And even to when I was talking to Sonny at ETCC forever ago, he said, like the Cosmos and Ethereum communities have always been very philosophically aligned. And I think when we get into this episode, the listener should really pay attention to I think the accepted truth that Cosmos and Ethereum converge at their logical conclusion in their design philosophy at the same place.

They both believe in the same general outcome of how these ecosystems look like. Where they differ is how they get there.

And how they get there, the genesis stories for these chains, does impact what these things ultimately look like. Cosmos started its journey as a network of interconnected, sovereign application chains that weave themselves together, later adding a shared security model. Ethereum started its journey with the central security model of Ether, proof of work, a canonical single monolithic chain folding into now the beacon chain, and then many chains organize around it. We have the app chain model in Cosmos, we have the layer three model in Ethereum. We're each going after the same design structures. So the listener should really pay attention to what are the net consequences of a system that emphasized the security first, which is Ethereum, and Ether the asset first, which is Ethereum, versus an ecosystem that emphasized the sovereign app chain model first and then added security later. What are the net effects of that? We've used this metaphor in Banklets, and I used this in the podcast that if you re-roll the dice of the crypto industry over and over and over again, you will see something like Ethereum unfold out of that 100% of the time, 99.9% of the time. And I think that's also true for Cosmos. And that is why I think the Cosmos and Ethereum.

It's like two sides of the same coin. We will always see these two models. And I think these two models, the app chain model, the central security model of Ethereum, that is what crypto has to offer. These are the logical conclusions of crypto design philosophy, in my opinion. So I think with that context, I think the listeners should be pretty well equipped to go into this episode and get completely downloaded as to the whole Cosmos vision.

The other thing, of course, to think about as you're listening to this episode is where are the investment opportunities in Cosmos? And David, I think I want to talk to you a little bit about that, some of my thoughts on investment opportunities, but we'll save that for the debrief. And of course, the debrief is available for you who are premium members. It's our episode after the episode where we talk about the episode that was upgrade to premium membership if you want to catch that as well. Full disclosure going in. I own Adam Tokens. It does not represent more than 5% of my holdings. We take disclosures very seriously at Bankless. So we're starting to mention them at the top of every episode. There's always a link in the show notes if you want access to see all of our bags. Our full disclosures are located there. Guys, we're going to get right to the episode with Zaki and Sonny from Cosmos, Bankless Nation. We are talking Cosmos today with two of the best experts we could find in the space. Sonny Agarwal is a crypto OG. He's been in the Cosmos ecosystem since the very beginning. He's a man of many hats. He's been all around the space. He started the blockchain at Berkeley, a student club. This was the largest student organization for the crypto world at the time. And he's also the co host of the Epicenter Podcast. Sonny, how are you doing?

I'm doing great. You know, just got off of three days of Cosmoverse, which was the big Cosmos conference, and

so in decompression mode right now.

I understand that both of you guys are recovering from Cosmos verse. Hopefully, we'll get some of that energy back into this podcast as we go through. We also have Zachy Manion. He also wears many hats in the Cosmos and crypto space. He's been in the Cosmos ecosystem from the very beginning as well. He helped chip most recently Cosmos' IBC, which is an interchain blockchain protocol. He's also working on the validator ecosystem. He's been an advisor to Electric Coin Company. You remember Zuko and team from Zcash, and he is a co founder of a staking provider as well.

Absolutely.

Zaki, welcome to Bankless. How are you doing?

I'm doing great. Cosmoverse was the best, but like I'm glad that I I flew out of Columb. I was like, do I stay in Colombia for DevCon? And then I I was so tired. I was like, I'm gonna leave. I'll like recharge, come back.

So this was in Colombia then.

Yeah, we did it in Medellin, Colombia.

You know, Columbia is getting a lot of love this year from the crypto community with DEF CON being there and Cosmos First being there for sure. It's great.

There's actually a Bitcoin cafe, like a crypto cafe in Medellin that we got to do some events at. I think Bogota is gonna be very different, but from the experience of Medellin, it ended up being phenomenal.

How was the conference? For people that weren't able to attend, and also people that are wondering what the temperature is during the bear market, what was the energy like? What was the vitality like? How many people were there? Fill us in on what the Cosmos versus conference was like.

I don't think you could tell that it was a bear market. This is the second Cosmoverse. We had the first one was last year in Lisbon. It was like a sandwich in between like ETH Lisbon and the Solana Conference. And I think there were maybe like 500 or so people there. At Cosmoverse this year, I think there was about 1500 people. So it's like three times bigger while we're in a bear market. And like, you know, last time there was a lot of like overflow traffic coming from the other places. It's like here, it's like everyone who came here, like came for Cosmoverse, right? And like shows how much like there's a lot of excitement and like growth in the last one year, even.

And a little harder to get to than Lisbon.

You know,

You know, you weren't already there for other stuff, whereas like, yeah, I have to say a third or more people were just like, okay, like I'm in town for breakpoint and for Niercon, I might as well do Cosmoverse two. Again, the origin of this conference is like very typical of Cosmos, which is

Like a person uh named CryptoCedo. He's a YouTuber, uh, has a relatively popular YouTube channel about crypto. He got interested in Cosmos in early 2021. He started to build up a following in the community. Jack Zamplin, who is my co founder at another one of my projects called Simmelier Finance, has another validator business and I was also like a core dev in the ecosystem. So Jack and I had been kind of looking for people to help us bring the message of Cosmos to the world. And we found that you know CryptoCedo was doing a really good job.

We had taken up there was a marketing Dow that was set up called Prop 34 that took money from the Cosmos Hub Treasury. We ended up spending what was remaining in that to sponsor and like give CryptoCEDO the funds to do Lisbon. This time it was like multiple chains. So it was the same person now, you know, held this much larger conference in a much more difficult location. Uh, he had a staff, like 150 people working on it. It was sponsored directly from governance proposals from multiple Cosmos chains. And, you know, 1,600 people could throw up. There were after parties and events every night. It did not feel like a bear market at all. And then, like, the other thing that was really unique about this is there's literally never been a Cosmos conference where anything was announced. Like, really. The little chains would announce stuff, but like ecosystem level announcements had never happened before at a conference. And we actually were able to do both the Atom 2.0 white paper and the announcement of USDC coming natively to Cosmos at our conference.

David, I remember like we talked about ECC when we had our interview there. I said ECC is my favorite conference. Uh, and part of it is because, you know, I just always feel that ECC has a very community conference, just the fact that it's a community organized conference rather than foundation organized conference, it always had like a more interesting energy to it to me than even DEF CON. I like ECC better than DEF CON and like every other ecosystem, it's always like foundation thrown conferences, right? Cosmovas feels very much like Eat C C for the same reason. It's not a foundation thrown conference. It is like

Fan community member decided to do this.

Yeah, and it's very emblematic of what Cosmos actually is, which is a little bit more bottom-up than top-down orchestrated. Would you credit the success of this conference? While Cosmos Verse was harder to get to in a different part of the world, three times as many people showed up while crypto prices have gone in one third, right? And so, you know, one third the amount of capital in this space, yet three times the amount of people showed up. Where's all this energy in Cosmos coming from? What would you guys credit the vitality, uh the source of vitality here?

I mean, Cosmos as an ecosystem has just grown a lot. I think, especially, you know, in the last three, four months. I think, I think the DYDX sort of announcement of like switching over to Cosmos, you know, I know Zuzaki was pretty involved with that. What like that, I think, just got a lot of people's attention. And

People are like, wait, here's this like project that's like been building on Ethereum forever. And like, you know, why did they suddenly decide to like make this sort of switch? Right. And so people started looking at the reasons that why like DYDX did it and started learning more about, you know, the Cosmos thesis is very complex. And like, you know, when you're switching from Ethereum to, I don't know, Avalanche, like, oh, okay, cool, it's faster. Yay. It's like, no, but like, you know, when you're switching to Cosmos, there's like a whole set of like

Fundamentally different things that we're doing that, like

when the with the DOIDX announcement, people start to actually look into that. And I think a lot of people just got very interested in the

theses that we have at Cosmos and that we kind of just like snowballed like from there over the last few months.

Before we break down, I think the thesis and how this like really complicated idea of how we're different from Ethereum and how we're basically different from the blockchains that most people are probably familiar with. Also say it was just like we are also basically four or five months out from the Terra collapse. And Luna was built on top of the Cosmos technology stack. It was part of Cosmos. It was connected to IBC. The anchor carry trade passed through both the Cosmos Hub and Osmosis in a very large way. So we were very

Economically connected to it. Its collapse felt like it was a devastating blow to the ecosystem. Almost everybody lost money. It was a huge thing. And it's certainly, if we want to talk about, you know, how we all feel about the whole UST story, but it did feel like there was a moment at which there was a bottom there where we kind of felt like, you know, it was like unclear whether or not Cosmos was really going to uh how long it was going to take us to recover. And it the recovery happened like far more quickly than anyone anticipated. Basically, I got so much busier in like two weeks after the terror collapse. And it's just like not slowed down like uh at all since then.

Yeah, that's really interesting. You're right. This is not long after the Terra collapse. Would you guys believe that was just like less than five months ago when that whole thing imploded. And I can't believe it.

It's been a wild five months for us.

Yeah, I bet. And um there's definitely a lot of excitement. One thing uh, you know, I've been observing, of course, in the Cosmos ecosystem is the amount of building that's going on. There's also this kind of renewed interest, maybe through DYDX and others, but even in the Ethereum community around uh app chains, which I'm sure we'll talk about a little bit more. And really our I think our goal for this episode is David and I cover a lot in the kind of the Ethereum ecosystem on the podcast, right? So you guys have to teach two Ethereum idiots like what Cosmos is, what it's all about. I will say I was involved in the Cosmos ecosystem in the early days, and so it's always been a community that's been kind of um I've been observing and I've liked and I've appreciated kind of the efforts of, but you guys have come a long way as well. Cosmos, the idea, has come a long way, and we want to talk about uh that trajectory. I think we also want to talk a little bit about the Terra Luna collapse, but let's save that maybe until a little bit later. First, let's talk Cosmos, the idea. And David said this to me before we recorded that you told him, Sonny, Cosmos has been called an idea more than an actual thing. Those are your words, I think. Cosmos isn't a thing, it's more of an idea. What do you mean by that? What is the idea of Cosmos? What is the central thesis?

Yeah. The central thesis of Cosmos was that we are going to see a world of not a few blockchains, but many, many blockchains, most of them being application specific blockchains or app chains. And there's no such thing as a single

Final settlement layer. In the real world, there is no final settlement layer.

We're going to have many, many settlement layers, and every blockchain is going to be the settlement layer for its own native assets and its own native state. And that's what gives it fundamentally sovereignty, right? Rollups and other systems, they don't have true sovereignty from the main chain, right? The main chain is what finally dictates, it's the final arbiter of truth in this globalized system. While Cosmos is a very, we're all like localists, basically. We believe that, like, hey, we're not trying to build the world computer, as Ethan Buckman puts it, he we're trying to build community computers and let these community computers all talk to each other.

I know, Zaki, you wanna add anything?

Um all I will say is so there's another thing that Sunny and that like the Cosmos thesis really believes, which is one of the things we say is that like Cosmos is coming to kill your fat protocol thesis. So the fat protocol thesis is the way that blockchains will accrue value is that you'll build a blockchain. It'll typically a protocol with a token. That token will have a bunch of apps on top of it. But because the infrastructure layer and the network effects around it are represented by the token, that's where the most value will accrue.

And the Cosmos thesis has been from the get-go that where the value accrual layer is, is the app layer. It's the application layer that is the thing that is closest to the users. It's the application layer where intent and order flow and everything originates. And that's the layer of the system where the value will accrue. And we basically purpose built a blockchain stack for people to build the best possible app layers rather than thinking that, like, hey, I've built another VAT protocol.

What an analogy that I like to pull to is like if you're in the early web in the 1990s, a lot of people were thinking that the way to bet on the web was AOL and CompiServe. But now with like retrospect, we know it was Google and Amazon, right? The apps are what were sticky and actually had user relationships. And the infrastructure layers really actually what ended up actioning was that biggest apps actually ended up building their own infrared layers and became actually the biggest infrared providers as well through like AWS. But really, it is the app developers are the ones who move between infrastructure providers, but users are sticky to the applications.

So we wanna leave that out there. So one ideal you're presenting is uh rather than fat protocol, fat app thesis. Would that be a way to summarize what you just said? Cosmos is fat app.

I actually like this term called tall apps because one of the things, at least with Osmosis, what we really believe in is like vertical integration. So like we build our front end, we build our DEX modules, but we build the chain itself. And we just happen to build like the primary wallet for the Cosmos ecosystem as well. But we have this like what we actually take a lot of inspiration from is like Apple, which is like a very vertically integrated system, but that like gives them, I think, the best UX of any product line, right? And so I call these the tall apps, right? Vertical, highly vertically integrated.

So just to put a visual, a metaphor on this whole thing, Ethereum, it's got this one canonical layer one. And then we have a proliferation of layer twos. There's like five or six real big ones. Right now is like a big conversation going on in the Ethereum space with layer threes. And this kind of looks like a tree. There's like a big central tree trunk. There are like four or five smaller branches, but still pretty big, that come out of this tree trunk. And then they fracture off into like thousands and thousands of smaller branches and twigs that eventually turn into leaves. And maybe these leaves can be like the applications that, you know, capture the energy of the sun, for example. But it all collapses down to a central point, a central trunk. And that was really the Ethereum beacon chain and ETH staking at the very, very bottom of this whole thing. The Cosmos model is a little more of a mesh network. I kind of want to say a spider web, but even a spider web has kind of like a center point, but it still kind of looks like a more flat. There's not actually a point in the middle, and these things weave together as like just a net.

The actual metaphor is or like the correct analogy is like a fungus, the mycelial networks that like pervade the like forests and the earth

and do make it so that the trees can actually live, you know.

Right. Yes. You have definitely used this metaphor much better than I have, but that's definitely right. Uh it's Google searching mycelial network for those that don't have an image in their head as a result of that will definitely definitely help. And so the idea here is that like the cool thing about the mycelial networks is that they're just like automatically resilient because there is no central focal point. Can you guys kind of just like lean into this metaphor and help me unpack it a little bit more?

So I think one of the big things that we've really believed in cosmos is we do think that like if there was like a core difference of vision, let's say between like

Sonny and I and Vitalik,

which is okay, like Vitalik's view is like monetary premiums are really hard, but it's really hard to build like a secure, decentralized, censorship resistant system without securing it using a monetary premium. So you have this thing with where you have the root monetary premium chain, which is the beacon chain, and then everything descends from that monetary premium chain, is secured by and like reinforces with that monetary premium chain. You know, Sunny at Cosmoverse presented this idea of mesh security, where Cosmos chains actually opt into additional slashing conditions around each other.

We believe in like ad hoc economic networks forming. So, you know, you have these natural trade routes, of which the UST carry trade was one of them. But like you have trade routes between Adam and Osmosis. You have a number of large crypto exchanges run their own Cosmos change, including OKX and Crypto.com. So then you have trade routes between their user bases and other Cosmos chains. And you see this like what we are sort of expecting is this like network of value to form between these community computers and like some of the ideas that we're exploring now and are sort of in our vision of the future is to make sure that security can travel with economic interdependence, but you don't need this like root structure.

Yeah.

Like an example of this, it would be chains provide bilateral security agreements with each other. So in this app chain model, people have always asked like, oh, how are you going to get enough security on every individual app chain?

The analogy I like to give is I like geopolitical analogies. So for me, the example is NATO. NATO is a collective of sovereign countries. They all have their own governance systems. They don't meddle in each other's internal politics, but they have a mesh security system, right? If Article 5 says that if any one of the NATO countries gets attacked, they all rush to each other's defense. And I think the same thing will happen with Cosmos chains as well. And I think Wazaki's point was it'll be based a lot off of economic relationships. So I'll give an example of Osmosis and Axlar. So Axlar is, you know, currently the most popular bridge between Ethereum and the Cosmos ecosystem. Osmosis is a dex. Osmosis makes up about 70% of Axlar's TBL right now, while four of the top 10 assets on Osmosis are ETH, WBTC, DAI, and USDC, are coming via the Axlar bridge. So it's like, hey, we have such a high economic relationship with each other.

It would suck a lot for Osmosis if Axlar got like attacked. If it sucked for Axlar if Osmosis got attacked, we should be both providing shared security to each other, basically, right? Osmo holders should be putting up economic stake backing Axlar validators, while Axel stakers should be putting up economic stake backing Osmosis validators. So basically, by these two systems doing mess security with each other, they actually have the economic value of both of the market caps combined, securing each chain. And you can imagine that this scales with more and more chains. You know, we'll have a network of five chains, 10 chains, and all the sum value of all of the app chains, you know, it'll provide greater equal security that to like these L1 systems today.

Can we talk about the trade-off here, which is a trade-off I think Cosmos has made from the very early days, and Zaki just alluded to it, and Sonny, I think you also alluded to it in your answer, which is sacrificing monetary premium, essentially saying that the token at the bottom of a layer one chain does not need to, and perhaps should be designed not to accrue monetary premium. So coming from maybe kind of the Bitcoin space and also now the Ethereum space, obviously for Bitcoin, monetary premium is the thing. That is the app of Bitcoin, right? And Ethereum, I think the community has most recently and more recently adopted monetary premium as part of its security defense force. And when we've had Justin Drake and others on the podcast, it's kind of like maybe less the fat protocol thesis and more kind of the fat money thesis, which is the idea that if you can create monetary premium in your base layer asset, you essentially get like.