What’s Missing in Cosmos DeFi?

Key Takeaways:

• The Cosmos ecosystem is heavily dependent on its native asset, ATOM, for liquidity, showing a higher degree of concentration compared to other ecosystems like Polkadot. While this concentration has been beneficial for the initial development and health of the ecosystem, it may pose threats in the long run, especially when under certain external market risks.

• Osmosis has demonstrated good traction in cross-chain transactions, in contrast to Injective and Kava. This suggests that Osmosis is both more strategically focused and technologically advanced.

• Although having a native asset brings stability to the Cosmos ecosystem, the low liquidity of BTC and ETH indicates that there’s room for improvement in integrating cross-chain assets.

• As lending platforms, Unmee and Kava Lend have great limitations compared to peers like Aave and Compound in other ecosystems, for example, shallow liquidity for major assets.

Against the backdrop that multiple blockchain projects were vying for dominance, each aspiring to be the “next Ethereum” or “Blockchain 3.0”, Cosmos chose a different path.

It all started with a simple idea: how to create a decentralized, interoperable blockchain network instead of a single, isolated ecosystem. Cosmos was designed in a way to solve this challenge. Its vision is not to create another blockchain but to build an “internet” that connects all blockchains, a network that allows various blockchains to communicate and interact freely. While many projects and layer-1 blockchains have made attempts to connect different blockchains, Cosmos emerged to be the most successful one that offers better interoperability and developer freedom.

From Concept to Practice

Design Philosophy

Based on the Tendermint consensus, Cosmos was different from most blockchain projects of its time. Cosmos provided developers with a consensus mechanism and an application development kit (SDK) for building customized chains instead of execution engines or virtual machines offered by the other Layer-1 blockchains. This innovative model gives developers higher flexibility in tailoring the operational environment and transaction types for their application scenarios.

Interestingly, in the early stages, Cosmos was often considered a competitor of Polkadot in terms of interoperability. However, as both developed, they’ve taken entirely different technical paths. Polkadot, with its cross-chain messaging format, XCM, aimed to build infrastructure for seamless interchain communication. It uses a built-in shared security model that allows parachains to get robust security automatically when connecting to the Relay Chain. In contrast, Cosmos’ ecosystem and its chains do not solely rely on the Cosmos Hub for interchain communication and security. It adopts a mesh network system where application chains are responsible for their own security. This design means that DeFi projects within the Cosmos ecosystem can have greater flexibility and autonomy.

The core components of Cosmos include the Cosmos SDK, IBC protocol, and Tendermint Core consensus engine. The Cosmos SDK, an open-source framework and set of tools and template libraries for building public blockchains and blockchain applications, has significantly reduced the difficulty of blockchain development. The IBC protocol facilitates information exchange and interoperability between blockchains, allowing Cosmos chains to form a united network. Lastly, Tendermint Core provides an efficient and reliable consensus mechanism with fast transaction finality.

• Leveraging Cosmos SDK’s robust toolkit, DeFi developers can launch and operate their applications with ease. The benefits of the Cosmos SDK for DeFi developers include the following.

• Modular Design: A hallmark feature of the Cosmos SDK is its modularity. It offers a range of preset modules, such as authentication, banking, and governance, which developers can use to build applications quickly. For DeFi projects, this means they can focus on optimizing user experience without reinventing the wheel.

• Flexibility: The Cosmos SDK allows developers to write their modules in Go. This offers great flexibility to DeFi projects, enabling them to innovate freely by building new financial tools, introducing new transaction types, or bringing in other new functionalities to their applications.

• Cross-Chain Interoperability: The Cosmos SDK supports the IBC (Inter-Blockchain Communication) protocol, which enables different chains within the Cosmos network to interact and transmit data with each other. This means that DeFi projects can access a broader range of assets, increasing their application’s appeal.

• Security: While Cosmos chains have to handle security independently, the Cosmos SDK offers built-in security measures such as staking and slashing. These measures help reduce the difficulty faced by DeFi projects in ensuring network security.

In summary, with the Cosmos SDK, DeFi developers can develop high-performing, innovative, and secure application-specific blockchains in a short time. Furthermore, they can harness the cross-chain interoperability of the Cosmos network to amplify the influence of their chain.

Market Overview

The DeFi sector on Cosmos can be broadly divided into the following five categories:

• Given that each project within the Cosmos ecosystem essentially operates as an independent public chain, this classification is based on their primary application scenario. And projects with a large and diversified ecosystem of their own are classified in the Infrastructure category.

1. Infrastructure

Cosmos is designed to be modular. It affords a lot of flexibility to developers looking to build public chains tailored to a specific application. Through the Inter-Blockchain Communication (IBC) protocol, Cosmos enables applications and protocols within its ecosystem to interconnect, facilitating a trustless exchange of data and value across chains. The widespread adoption of the Cosmos SDK allows public blockchains built on the Cosmos SDK to grow their ecosystems and boast a strong sub-ecosystem of DeFi applications.

2. Liquidity Staking

The liquidity staking sector within Cosmos is currently dominated by Stride and pStake, both of which offer PoS staking derivatives. Stride allows users to enjoy the benefits of staking while retaining the liquidity of their assets. Similarly, pStake enables users to stake assets to receive staking rewards and then utilize the pegged staked representative tokens in DeFi or send them to other IBC-supported blockchains. At present, there are few use cases for these staked representative tokens across DeFi in contrast to the situation in the Ethereum ecosystem. This means the staking sector within Cosmos still has a long way to go.

1. Vaults

Cosmos’ vault sector is evolving towards more complex and adaptable strategies, moving beyond basic fund management strategies. Sommelier’s “smart vaults” epitomize this shift. Traditional approaches, like investing in indexes or specific pools and reinvesting gains over time, are becoming outdated. Instead, smart vaults that can adjust their compositions based on the current market conditions or predetermined indicators are trending. This transition to smart vaults marks significant progress for DeFi vaults in Cosmos. These next-generation smart vaults can adapt to market fluctuations, offering DeFi users more flexible, agile, and potentially more profitable solutions.

1. Lending & Borrowing

The lending and borrowing sector in Cosmos is still in the developing stage, with Umee being a primary lending protocol. Referencing the traditional debt market, Umee provides universal cross-chain lending functionalities.

1. DEXes

Cosmos’ decentralized exchange (DEX) sector is rapidly expanding. Crescent and Osmosis are two representative platforms aiming to provide efficient capital utilization and liquidity. Cosmos DEXes enjoyed a high degree of interoperability thanks to the IBC protocol, which enables them to support different blockchains to expand their ecosystems and communities. Traders can efficiently use their funds on DEX platforms like Osmosis by participating in liquidity provision and yield farming, which not only helps to ensure that there is always sufficient liquidity for trading but also minimizes slippage.

Cronos and Kava are the two most mature DeFi-focused blockchains within the Cosmos ecosystem, both integrating over 100 protocols.

However, when compared to other Layer 2 projects, such as Arbitrum, their Total Value Locked (TVL) seems rather insignificant. Arbitrum’s TVL is about 5–10 times greater than theirs. Furthermore, they lack the backing of any standout projects. As evident from the chart above, both have seen stagnant TVL since the start of the year.

The above pie chart shows the composition of the Cosmos DeFi market. The breakdown only considers protocols built directly with the Cosmos SDK without considering the projects built on top of Layer1s within Cosmos like Kava.

The chart shows that infrastructure projects hold the most significant portion of the locked-in value in the Cosmos DeFi ecosystem, mainly because many public chain projects that boast DeFi ecosystems of their own are classified into this category. For instance, 108 DeFi projects launched on Cronos, and a comprehensive suite of fundamental DeFi services including Kava Mint, Kava Lend, and Kava Swap have been built out on Kava. Kava Mint, Kava Lend, and Kava Swap collectively reached $200 million in TVL. With them complementing each other, Kava can cater to various DeFi use cases.

DEXes hold the second-largest portion of the locked value with Osmosis and Thorchain being the top two contributors. Osmosis’ superfluid staking feature effectively secures its position in the DEX sector. It allows liquidity providers on Osmosis to simultaneously participate in liquidity pools and also stake their LP tokens to validators on the blockchain, maximizing their returns.

Diversity is a huge selling point of the Cosmos DeFi ecosystem. The number of protocols built directly with the Cosmos SDK only exceeds 400. Combined with its easy-to-use tech stack, Cosmos is attracting many DeFi builders. While sectors like “Lending and Borrowing” and “Vaults” appear to have a smaller footprint, it’s because many projects are built on top of chains within Cosmos. We’ll delve deeper into these sectors in the following sections.

Mapping the Landscape

Infrastructure — Major Projects Suffering from Stagnant TVL, Future Unclear

Kava

Overview:

• Kava is built on the Cosmos SDK, a popular framework for building blockchain applications in Go. This provides Kava with modularity and interoperability.

• It adopts a PoS consensus mechanism based on Tendermint. Tendermint is renowned for its Byzantine fault tolerance, ensuring network security and reducing the risk of double-spending attacks.

Major Applications:

• Kava Mint: This application allows users to collateralize their assets to obtain USDX loans. It is reminiscent of the MakerDAO system but with its unique features, especially regarding supported collaterals.

• Kava Lend: This is a money market where users can supply and borrow assets for rewards. Its renaming to Kava Lend from Hard Protocol signifies its integration and alignment with the broader Kava ecosystem.

• Kava Swap: This is a protocol designed to provide an efficient and safe way to swap natively between the world’s largest assets. It employs the automated market maker model, facilitating the buying and selling of tokens on the Kava chain and ensuring liquidity and competitive pricing for traders.

Token System:

• KAVA: The native token of the Kava blockchain. It plays a crucial role in the platform’s security, governance, and various mechanical functions. Its PoS mechanism also means that KAVA token holders can stake their tokens to validate transactions and earn rewards.

• USDX: Kava’s stablecoin, which users can mint by collateralizing their crypto assets. It provides a stable medium of exchange within the Kava ecosystem.

• HARD: The governance token of Kava Lend. It is used to incentivize early participants and in voting to guide the product’s ongoing development and governance.

Major milestones of Kava are marked in the above TVL chart. The launches of Kava Mint, Kava Lend, and Kava Swap injected activity into the ecosystem in its initial stage of development. Later on, as the Kava Network matures, it realized a so-called co-chain architecture that allows developers to build and deploy projects using either the EVM or Cosmos SDK execution environments with seamless interoperability between the two. Unfortunately, a series of events happened in 2022, including Terra’s collapse and Celsius’s inability to repay users, left Kava hit as well, resulting in a significant decrease in TVL, which has not been recovered till today.

Persistence

Persistence is a protocol that aims to power institutional open finance with a level of interoperability that will allow for seamless transfers of value across borders. Within the Persistence ecosystem lies a suite of innovative financial products, such as PStake and Dexter.

pStake:

Background:

• pSTAKE was the first liquid staking solution for $ATOM when stkATOM launched in 2021 on Ethereum.

• In 2023, stkATOM migrated to the Persistence chain as an IBC-native token.

Core Functions:

• Liquidity Staking: pSTAKE addresses the staking dilemma faced by PoS asset holders, allowing them to stake tokens for rewards while using them in DeFi.

• How it Works: With pSTAKE, users can securely stake their PoS assets (like $ATOM) to earn staking rewards and receive staked underlying representative tokens (like $stkATOM), which can be used to explore additional yield opportunities in DeFi.

• Supported Chains: Currently, pSTAKE supports liquidity staking on Binance Chain, Cosmos, Persistence, and Ethereum.

Features:

• How stkATOM Operates: It follows an exchange rate model, where the value of stkATOM increases against ATOM in the background as it accumulates staking rewards.

• Fees: pSTAKE sets fees low for good user experience, for instance, a 0% deposit/withdrawal fee, a 5% protocol fee, and a 0.5% instant redemption fee.

• Security: pSTAKE has been fully audited by Holborn Security and Oak Security. pSTAKE has also been running a $100,000 bug bounty on Immunefi since April 2023.

• Unique Features: pSTAKE offers a unique “Redeem Instantly” feature, allowing users to avoid the 21–25 days unbinding period.

• Wallet Support: At launch, pSTAKE supported Keplr and Ledger, with support for more software and hardware wallets coming soon.

Liquid staking plays a crucial role in encouraging people to stake their tokens on a network and enhancing the economic incentives for network participants. pSTAKE does just this to Cosmos. However, due to the low DeFi activity in the Cosmos ecosystem, funds flowing into liquid staking protocols are often moved to Ethereum in the end. As a result, $ATOM has been underperforming and the TVL of pSTAKE has been lukewarm.

Cronos

Cronos, launched in March 2021, is a public blockchain developed by Crypto.com, aimed at facilitating fast and secure transactions at low costs. Cronos is an EVM chain side-chain. It plans to scale the DeFi Ecosystem by hosting new projects or porting existing projects from EVM-compatible chains.

VVS Finance

VVS Finance is the first Automated Market Maker (AMM) Decentralized Exchange natively built on top of the Cronos blockchain. The project leverages proven and audited protocols. Unlike other protocols, VVS Finance stands out with a comprehensive and rewarding incentive program, powered by its governance token with the ticker of VVS.

• For liquidity providers (LPs), two-thirds of the swap fees collected are distributed to the LPs of the respective pools. LP tokens can also be staked to receive VVS rewards.

• VVS stakers will receive VVS / partner token rewards.

• Trading incentives: Those who swap tokens on VVS Finance will receive rewards.

• Referral program: Those who refer users to trade on VVS Finance will receive rewards.

Tectonic

Tectonic is a DeFi protocol for lending and borrowing on Cronos. It’s as representative as VVS Finance. It is a fork of the Compound protocol.

Tectonic enables users to supply their cryptocurrencies onto the platform as a liquidity provider to earn interest and TONIC rewards.

Each asset carries a Collateral Factor (i.e., Loan-to-Collateral ratio), which signifies the amount available to be borrowed for each collateralized asset. A Collateral Factor of 75% means that the users can only borrow up to 75% of the value of their collateralized assets. Should the value of collateralized assets drop, or the value of the borrowed assets increase, a portion of the outstanding borrowing will be liquidated at the current market price minus some liquidation discount.

Both Tectonic and VVS Finance are significant projects in the Cronos DeFi ecosystem. As observed from the above chart, VVS Finance’s TVL was much higher than that of Tectonic initially. However, after a series of catastrophic incidents in DeFi and CeFi in 2022, both of their TVLs fell dramatically and the gap between them narrowed from about 7 times to about 2 times. Their situations are a microcosm of the Cronos DeFi ecosystem. They are waiting for a catalyst to break out of the current stagnant TVL, for example, prominent developments in projects.

Liquidity Staking — Innovative Mechanisms Unlocking Great Potential

The staking ratio of Cosmos Hub is about 70%, as compared to Ethereum which has about 20% of the total supply staked. However, of this 70% of staked ATOM, merely 1.5% is liquid staked, compared to 9.3% for ETH. Needless to say, liquidity staking in the Ethereum ecosystem is more advanced, underscoring Ethereum’s lead in the DeFi space over Cosmos. Yet, this also highlights a vast opportunity for Cosmos DeFi given its overall 70% staking rate. With proper developments in relevant protocols, Cosmos can tap deeper into this massive market, offering substantial gains for its DeFi ecosystem. Within the existing liquidity-staking market of Cosmos, Stride’s TVL leads by a wide margin, at 75%, with pSTAKE, once the frontrunner, now in second place at around 20%.

Stride

Driven by the adoption of Stride’s liquid staking token stATOM, Cosmos DeFi is thriving. By rewarding stakers directly with protocol revenue in the form of $STRD, Stride created a special value proposition for stakers. Also, Stride will be receiving Interchain Security from the Cosmos Hub to enhance its security further. As the ecosystem grows, the demand for $STRD is expected to increase, pushing for more adoption of stATOM.

stATOM Liquidity and Adoption:

• stATOM addressed the dilemma between liquidity and staking rewards. It is the primary ATOM LST with a market share of over 70% and a TVL nearing $30 million. Stride’s upcoming features, such as liquid governance and instant redemption, will further increase its allure.

• Difference to stETH adoption: stETH adoption was heavily driven by users wishing to loop lever ETH via platforms like Uniswap or Aave for leveraged trading strategies. Note from the below charts that the clear driver for stETH adoption was heavily correlated with the launch of the Aave V2 market. stATOM looks to convert the 70% already staked capital to liquid staked tokens, whereas the majority of stETH was changing unstaked capital to liquid staked capital.

$STRD Tokenomics and Comparison with $LDO:

Stride payout protocol revenue directly to $STRD stakers, while Lido takes a 10% fee on staking rewards and directs it toward the protocol treasury. Therefore, $STRD stakers have more benefits. For the latest governance votes Lido had on Snapshot, the voter turnout ratio was about 1.5% of all the wallets that hold $LDO. This means that the majority of $LDO’s trading volume was not driven by people’s motivation to participate in Lido’s governance.

Interchain Security (ICS):

• ICS enables the replication of the security of the ATOM validator set across different application chains. Stride’s alliance with ATOM ensures income and value accrual for ATOM stakers, bolstering the overall crypto-economic security of Cosmos Hub.

• Liquid Staking Module (LSM): The LSM mitigates liquid staking risks by limiting the total amount of ATOM that can be liquid staked to 25% of all staked ATOM. At the same time, the LSM introduces the ability for staked ATOM to be instantly liquid-staked, without having to wait for the 21-day unbonding period. This framework regulates the adoption of liquid staking by preventing providers from controlling over one-third of the total stake and safeguarding against the risk of validator corruption. it also minimizes the maximum size of a potential liquidation cascade.

As the entire Cosmos ecosystem embraces liquidity staking, the integration of liquidity staking with LSM will propel stATOM’s use within the Cosmos DeFi ecosystem, subsequently enhancing TVL on lending markets and DEX. As liquid staking is adopted across the entire Cosmos ecosystem, liquid staking in tandem with the LSM will allow for stATOM to be used all across DeFi in the ecosystem. As Stride’s market penetration intensifies, demand for the STRD token grows as more fees are paid to stakers.

Dexes — The Dominance of Osmosis and Injective, and the Future of Liquidity

Among Cosmos DEXes, Osmosis is the undoubted premier protocol. All the aforementioned representative tokens of staked ATOM can be added to the liquidity pools there. As such, Osmosis is an important pillar of Cosmos DeFi. Note from the above chart that Osmosis accounts for a large majority of the total TVL and the TVL on other DEXes is all below $25 million.

Though Osmosis has a dominant position within Cosmos, its liquidity and user base are dwarfed by other DEXes if we look at the broader DeFi sector. The above graph compares the TVL of Balancer v2 and Osmosis. Before the series of DeFi/CeFi crises starting in the summer of 2022, Osmosis TVL was still able to keep up with Balancer v2, although barely. In the bear market following the crises, Osmosis TVL lingered at low levels as liquidity was drained because $ATOM was not regarded as a worth-holding asset during such a time.

Osmosis

Osmosis is an automated market maker (AMM) based DEX designed for the Cosmos ecosystem. It enables cross-chain transactions by incorporating the IBC protocol and offers greater flexibility and composability.

1. Fundamentals:

• Osmosis combines the benefits of staking with liquidity provision, allowing investors to maximize their returns. Unlike traditional DEXes, where users must choose between staking and liquidity provision, Osmosis integrates both.

• Osmosis supports the use of staked ATOM in LPs, which laid the foundation for LSDFi in Cosmos and solidified its position as a leading DEX in the ecosystem.

2. Advantages of Osmosis as a DEX:

• Superfluid Staking: Osmosis introduces an innovative mechanism where investors can benefit from both liquidity provision and staking. This dual-benefit system allows users to capitalize on both earning methods without choosing between the two.

• Liquidity Pool Customization: Osmosis allows market participants to adjust the various parameters of their liquidity pools including swap fees. This allows for a truly decentralized AMM framework and lets market participants determine the optimal equilibrium between fees and liquidity, rather than being relegated to rigid protocol parameters that attempt to determine it for them.

3. Major Concerns:

• Competition: The DEX market is fiercely competitive. Osmosis needs to innovate continuously to maintain its unique value propositions and attract users.

• Security: As with all DEXes, security is paramount. Ensuring funds are safe and smart contracts are free from vulnerabilities is crucial.

• Adoption: The success of Osmosis will also hinge on broader adoption within the Cosmos ecosystem. If Cosmos gains more attention, Osmosis is likely to be benefited.

Injective Protocol

Injective Protocol (INJ) is a DEX that offers cross-chain margin trading, derivatives, and forex futures trading. Built on Cosmos as a Layer-2 sidechain, Injective achieves zero gas fees, high-speed transactions, and full decentralization.

1. Core Constructs:

• Injective Chain: A fully decentralized sidechain based on Cosmos Tendermint, serving as a layer-2 derivatives platform, trade execution coordinator, and decentralized order book.

• Layer-2 High-Speed Protocol: Via a bi-directional bridge with Ethereum, the Injective Chain offers robust cross-chain compatibility and liquidity.

• Decentralized Order Book: Injective provides a decentralized order book, facilitating on-chain trade matching and settlement.

• Free Market Trades: Injective allows users to create their derivative markets, offering a fully decentralized peer-to-peer derivatives trading environment.

2. Components:

• Injective Exchange Client — The user frontend interface.

• Injective API — The relayers connecting the Injective Exchange client and the Cosmos layer.

• The Cosmos Layer — A blockchain based on Tendermint, supporting instant finality.

• The Ethereum Layer — It comprises the Injective’s bridge smart contracts, ensuring bi-directional bridging with Ethereum.

3. Smart Contracts:

• Injective Coordinator Contracts: They make it easier to employ Injective’s derivative transactions on Ethereum as well as the Injective Chain.

• Staking Contracts: They are used to handle the essential functioning of the Injective Protocol for stakeholders via rewards, slashing, delegation, and governance mechanisms.

• Injective Derivatives Contracts: These are smart contracts that enable traders to construct, execute, and use decentralized perpetual swaps on any market of their choice.

• Injective Bridge Contracts: They are smart contracts that govern the Ethereum-Injective Chain two-way peg.

• Injective Token Contracts: They are ERC-20 contracts that are built for the various uses of the INJ token.

Outlook for DEXes

1. Dependence on the Development of Staked Assets on Cosmos

The growth of DEXes largely hinges on the adoption of LST assets. LSDFi is set to become a new revenue frontier. Taking Ethereum’s LSDFi as an example, its market cap has already reached $1.9 billion. If Cosmos successfully cultivates its LSDFi ecosystem, DEXes would be the primary beneficiaries. Furthermore, LSDFi can funnel more users towards DEXes because they will not only be able to profit from trading but also from providing liquidity. And the increased user base will propel the evolution of DEXes

2. Ecosystem Constraints

Cosmos’ strength lies in its establishment of an ecosystem of various protocols, interconnected through Inter-Blockchain Communication (IBC) protocol. However, this is a double-edged sword since many DEXes in the Cosmos ecosystem are predominantly designed around Cosmos assets.

In these DEXes, the major tokens transacted are platform tokens of projects built on the Cosmos SDK, such as those built on the Osmosis and Shade protocol. Many liquidity providers’ (LP) assets, like stATOM, SHD, AKT, INJ, etc., are also tokens within the Cosmos ecosystem. This results in these DEXes lacking LPs of popular assets outside of Cosmos, to some extent, limiting their liquidity growth and volume. For these DEXes to flourish, a possible strategy might be to increase the popularity of these Cosmos tokens so that they are more widely traded. However, this approach is circumscribed, as it relies on the growth and development of the Cosmos ecosystem.

Alternatively, Cosmos and its DEXes might contemplate introducing popular assets outside of Cosmos. This can be actualized by establishing cross-chain bridges or collaborating with other blockchain platforms. Incorporating a broader array of external assets can not only boost the liquidity for DEXes but also attract more users to engage with them, hence fostering the growth of DEXes.

Lending: Waiting for a Turning Point in Cross-Chain Borrowing

Umee

Umee is primarily a lending platform. It aims to bridge various blockchains, allowing users to collateralize assets on one chain and borrow on another. This interoperability is a pivotal feature, especially in the blockchain space where assets and liquidity often remain confined within specific ecosystems.

1. Unique Value Propositions

• Whitepaper Cross-Chain Interoperability: Umee facilitates seamless interaction between different blockchains, such as Ethereum and Cosmos. This interoperability means users are not confined to a single blockchain ecosystem but can harness assets and opportunities across multiple chains.

• Collateralizing Staked Assets: A distinctive feature of Umee is the ability to use the Proof-of-Stake (PoS) blockchains’ staked assets as collateral. This means users can collateralize their staked assets without forgoing potential staking rewards. It offers dual benefits — earning from the stake and gaining liquidity.

• Algorithmic Interest Rates: Umee employs algorithmically determined interest rates. These rates adjust based on market conditions, ensuring users receive fair and dynamic borrowing rates.

• Security and Efficiency: By leveraging bridging solutions like Gravity Bridge, Umee ensures the safety and efficiency of cross-chain interactions, crucial for trust in the DeFi space.

2. Contributions to the Cosmos Lending Market:

• Influx of Liquidity: By allowing assets from other chains, especially popular ones like Ethereum, to be used in the Cosmos ecosystem, there could be a substantial influx of liquidity. More liquidity typically means a more robust lending market. The above image shows assets from other chains supported by Umee.

• Enhancing the Utility of Staked Assets: Nearly 70% of assets in Cosmos are staked. Umee’s model of using these staked assets as collateral can unlock significant value, driving more activity and growth in the Cosmos lending market.

• Attracting New Users: Cross-chain capabilities can draw users from other ecosystems to Cosmos. If they can easily move and utilize their assets between chains, the friction to enter the Cosmos DeFi space will be reduced.

• Innovative Lending Mechanisms: Umee established a universal infrastructure for cross-chain lending facilitation. It can be further used to introduce new financial products and services, enriching the Cosmos lending ecosystem.

Outlook for the Lending Segment

The lending segment essentially faces a similar situation as DEXs. Its development is dependent on the adoption of staked assets and is subject to ecosystem constraints. Simply put, staked assets will continue to be a determining factor for unlocking value in the lending market. Meanwhile, this market is also restricted by a focus on Cosmos-native assets. Even though protocols like Umee and Tectonic offer borrowing services that incorporate assets from other chains, they are not the major borrowed assets for users.

From the above, it’s evident that the major lending and borrowing assets on these two major protocols are still stablecoins and Cosmos-native assets (stATOM, OSMO). There is not a presence of assets from other chains among popular borrowed or supplied assets. This limitation might hinder further market development.

Vaults: Intelligent Vaults and Cross-chain Technology Driving the Growth of Liquidity and Diversity

Sommelier

Sommelier is a decentralized asset management protocol that introduces the concept of “intelligent vaults”. Unlike traditional static strategies that might become obsolete due to changed market conditions, Sommelier vaults aim to predict, react, optimize, and evolve based on real-time DeFi market conditions. Built on the Cosmos SDK, it can be bridged to high-value EVM networks, allowing seamless integration across different blockchain ecosystems. The project’s TVL has been steadily increasing since the launch of the Real Yield ETH Cellar, making it an essential bridge for connecting the Cosmos ecosystem to external interest generation protocols.

1. Value Propositions:

• Intelligent Vaults: Sommelier vaults are characterized by their adaptability to changes.
  Predict: Use time-series forecasting methods to estimate future base yields.
  React: Rebalance positions as information about major market moves (like a de-peg) becomes available. If market conditions change, vaults can rapidly adjust leverage ratios to help avoid liquidation.
  Optimize: Use a sophisticated solution to accumulate leverage that is highly capital efficient and significantly reduces gas/flash loan fees that are otherwise typically incurred. Additionally, it can optimize Uni V3 tick ranges while accounting for impermanent loss.
  Evolve: Update its algorithm and integrated protocols to continually capture new yield opportunities.

• Off-chain Computations: Sommelier’s architecture permits off-chain rebalancing computations, not only ensuring strategy confidentiality but also enabling the use of intricate data modeling techniques similar to those employed in traditional finance.

• Bridgeless Assets: Sommelier provides multi-chain access without the need to bridge assets, reducing the complexity and potential risks associated with asset bridging.

• Decentralized Governance: Transactions and operations on Sommelier are overseen by a consortium of validators, ensuring the security of user funds and responsiveness to user preferences. This decentralized approach ensures that the platform remains censorship-resistant.

2. Contributions to the Cosmos Lending Market:

• Enhanced Liquidity: By bridging to high-value EVM networks and introducing intelligent vaults, Sommelier could potentially bring more liquidity to the Cosmos ecosystem, vital for a thriving lending market.

• Innovative Lending Mechanisms: The adjustability of Sommelier vaults means that they can adapt to market conditions, potentially introducing novel lending strategies, thus enriching the Cosmos lending ecosystem.

• Reduced Costs: Sommelier’s aggregation and batching of transactions can lead to a reduction in gas fees, making lending on Cosmos more economically efficient.

Outlook for the Vault Segment

Sommelier’s intelligent vaults and cross-chain capabilities not only offer users advanced asset management tools but also bring broader liquidity and diversity to the Cosmos ecosystem. Sommelier’s unique architecture, especially its off-chain computations and bridgeless asset functionalities, provides a more efficient, secure, and economical solution for DeFi. This model may attract more developers and projects to the Cosmos platform as it presents a more flexible and scalable environment to build and optimize DeFi applications. Moreover,

Sommelier’s decentralized governance and consortium of validators ensure the transparency and security of its protocol, further enhancing user trust in the Cosmos DeFi ecosystem. In conclusion, as Sommelier continues to evolve and refine, it is believed to make significant contributions to the prosperity and growth of Cosmos DeFi, opening new opportunities and possibilities for the entire cryptocurrency realm.

In-depth Observations

Liquidity Concentration: High reliance on ATOM puts pressure on elevating its narrative

What Does Liquidity Concentration Mean to Protocol Value?

In the blockchain and DeFi space, liquidity serves as a pivotal metric, reflecting the health and appeal of a protocol or platform. Higher liquidity reduces transaction costs and accelerates the speed of trades on the platform. Cosmos’ native asset, ATOM, has widespread use across numerous DeFi protocols. If a protocol has a high proportion of ATOM in its liquidity, it indicates that the protocol is heavily dependent on assets from the Cosmos main chain. In other words, if a significant volume of the Cosmos main chain’s assets (like ATOM) were to be removed from the protocol, its value could take a severe hit.

Why is ATOM Important?

If a protocol’s value is predominantly concentrated on ATOM, then it’s safe to say the protocol’s value heavily relies on Atom. This implies that any factors affecting the value of ATOM, be it market dynamics, technical updates, or governance decisions, might indirectly impact the protocol’s value.

The liquidity concentration within the Cosmos ecosystem reveals its heavy reliance on its native asset, ATOM. Data indicates that LP pools consisting of ATOM assets (including stATOM, qATOM, and other staked assets) account for around 40% of all LP pools on a protocol on average. This means that the protocols in the Cosmos ecosystem are highly concentrated on ATOM assets for liquidity, differentiating them from mainstream liquidity providers like Uniswap and Balancer which focus on providing liquidity for diverse assets.

Significance of Liquidity

In the DeFi sector, liquidity remains a key indicator. Higher liquidity ensures that users can trade more easily and swiftly, all while bearing lower transaction costs. For any DeFi protocol, maintaining high liquidity is crucial as it can attract more users and funds. ATOM’s substantial LP pool ratio creates a moat for itself, enabling it to have a stable source of funding.

Characteristics of Cosmos

Cosmos, leveraging its Cosmos SDK and Inter-Blockchain Communication (IBC) features, allows various blockchains to freely communicate and interact. This enables protocols in the Cosmos ecosystem to better provide liquidity for ATOM. Additionally, Cosmos’s cross-chain capabilities allow it to interact with assets from other chains, further enhancing its liquidity.

By contrast, the liquidity concentration in the Polkadot ecosystem is relatively lower. This suggests that protocols in the Polkadot ecosystem have less reliance on DOT for liquidity, or that other assets within the Polkadot ecosystem contribute more substantially to liquidity. This differentiates Polkadot from Cosmos, highlighting the moat built by the native assets of Cosmos (ATOM).

Cross-Chain Trading Activity: Despite the extensive ecosystem, cross-chain activity is low, suggesting a certain level of insularity.

To gauge the activity of cross-chain asset trading, we examined the three highest-valued public chains in the IBC network. Overall, on-chain assets on all these three chains are primarily native assets within their ecosystems. Notably, almost 100% of Injective’s assets are from its ecosystem, indicating that public chains in the IBC network are currently inclined towards developing their internal ecosystems.

Osmosis has the highest cross-chain trading volume, nearly double that of Injective and almost three times that of KAVA. This signifies Osmosis’s lead in cross-chain trading activity and appeal.

Cross-Chain Trading Activity

The high cross-chain trading volume of Osmosis underscores its core advantage as a DEX, along with its capability to attract cross-chain liquidity and trades. This also suggests that users and projects on Osmosis are more inclined towards cross-chain trades. While Injective’s cross-chain asset value is lower than Osmosis’s, it’s still significantly high, indicating its activity in certain specific assets or trading pairs. KAVA’s cross-chain asset value is the lowest. This aligns with the fact that Kava’s core business is its lending platform and the platform focuses more on intra-chain lending activities rather than cross-chain trades.

Reliance on Native Assets

The reliance on native assets exhibited by Osmosis, Injective, and KAVA reflects the current developmental focus of the Cosmos ecosystem. A high proportion of native assets in their liquidity might suggest that these chains place more emphasis on the development of their internal ecosystems and applications.

Absence of BTC and ETH

Although BTC and ETH are the two major assets in the cryptocurrency market, their liquidity on Osmosis, Injective, and KAVA is relatively scarce, especially on Injective and KAVA. This indicates that the Cosmos ecosystem is still in the early stages of incorporating cross-chain assets.

Insularity of the Cosmos Ecosystem

This insularity in the Cosmos ecosystem might be intentional to shield its internal ecosystem from external market fluctuations. On the other hand, it also reflects the technical and strategic choices of the Cosmos ecosystem, ie. placing more emphasis on interactions between chains within the IBC network.

The Health of the Lending Market: Lacking appeal for mainstream assets, in need of more aggressive innovation

In the current cryptocurrency ecosystem, lending protocols have become indispensable, offering users a decentralized way to lend or borrow assets. To delve deeper into the performance of lending protocols in the Cosmos ecosystem, we compared Umee, Kava Lend, Aave, and Compound. Through this comparison, we can better understand Cosmos’s position and potential in the lending domain, and how it differentiates from other mainstream lending protocols.

The loan-to-value (LTV) ratio on Cosmos is around 75%, which does not differ much from the major platforms.

As a primary lending protocol on Cosmos, Umee offers higher BTC interest rates than the major platforms but is surpassed by Aave in terms of interest rates for ETH and USDT. KAVA Lend doesn’t have data for ETH and USDT. Apparently, lending protocols on Cosmos focus more on lending their native ecosystem assets, and their relatively lower interest rates fail to attract investors. To succeed in the fiercely competitive DeFi market, these protocols might need to reconsider their strategies, possibly increasing interest rates or introducing other incentives to draw in users.

From a liquidity perspective, lending protocols within the Cosmos ecosystem have certain limitations. The liquidity of Umee and Kava Lend is primarily centered around tokens within the Cosmos ecosystem, striking an obvious difference from the major platforms where mainstream assets like BTC, ETH, and USDT take center stage.

Advantage of Native Token Reliance

Native tokens of the Cosmos ecosystem possess noticeably superior liquidity on Umee and Kava Lend compared to other assets. This heightened liquidity offers a stable marketplace for Cosmos’ tokens, assisting in upholding their value and demand. Moreover, such concentrated liquidity also lends a degree of price stability to these tokens, mitigating the effects of market fluctuations.

Liquidity Limitations

Although Cosmos ecosystem’s tokens enjoy high liquidity on these platforms, this restricts the inflow of other major assets and stablecoins. BTC and ETH, as the leading assets in the cryptocurrency market, are critical for the liquidity of any DeFi protocol. While the strategy of Umee and Kava Lend may have short-term benefits, in the long run, it might curtail their ability to attract a broader user base and capital.

Market Competition and Strategic Adjustments

The current DeFi marketplace is fiercely competitive. Various blockchains and protocols are relentlessly working towards offering a wider array of asset pairs and services to attract users and capital. In such an environment, an over-reliance on an ecosystem’s native assets could place Cosmos lending protocols at a competitive disadvantage. To counteract this competition, Cosmos lending protocols need to pivot their strategies to introduce a more diverse range of mainstream assets and stablecoins and offer more competitive interest rates and services.

Conclusion and Outlook

In essence, the DeFi ecosystem of Cosmos isn’t just a stack of individual DeFi projects. What Cosmos has built is a vast infrastructure ecosystem. DeFi project can either be a public blockchain or a project on a public blockchain. This makes Cosmos’s DeFi ecosystem a bit complex. A project can be a chain itself and aims to grow its ecosystem, or it can be a project that bridges itself to other chains to magnify its presence in a specific niche like DEX, Lending, etc.

Unlocking ATOM’s Value

The Cosmos DeFi market is at a pivotal stage. The introduction of liquid staking assets by the likes of Stride and Osmosis has breathed new life and opportunities into the ecosystem. While Stride offers opportunities with ATOM as an LST asset, Osmosis offers an LSTFi platform. Both strengthened Cosmos’s foundation for better interoperability with other blockchain ecosystems. However, when compared to Ethereum, Cosmos’s staking ecosystem lags and is highly dependent on its mainnet. Thus, the future of Cosmos’s staking largely hinges on the development of the Cosmos ecosystem itself.

For innovative liquid staking derivative projects, the focus shouldn’t only be on offering opportunities for ATOM holders to stake with validators but also on sourcing liquidity through cross-chain derivatives markets. This will not only boost ATOM’s liquidity but also bring additional gains to users outside the ecosystem. In short, what Cosmos currently lacks is a ‘black hole’ similar to Terra.

Innovations in Cross-chain Asset Management

Sommelier, with its smart vaults and cross-chain capabilities, provides users with advanced asset management tools, bringing more liquidity and diversity to the Cosmos ecosystem. Its unique off-chain computations and bridge-less asset capabilities offer a more efficient, safe, and economical solution for DeFi, attracting more developers and projects to the Cosmos platform.

Furthermore, the introduction of native USDC addresses the long-standing issue of Cosmos lacking a stablecoin, providing better on-chain trading strategies and risk management tools for market participants.

Segments We’re Keeping an Eye On

• Trading Aggregators and Cross-chain Bridges: In a multi-chain world, trading aggregators and cross-chain bridges deliver a seamless experience for users, facilitating easy asset transfers between chains. Cosmos’s IBC stands out as a prime example, yet there’s ample room for further expansion in this domain.

• Stablecoins and Money Markets: ATOM, as the native token of Cosmos, holds irreplaceable value within its ecosystem. But for greater stability, a stablecoin system is crucial. Opportunities lie in developing a stablecoin system that not only closely integrates with ATOM but also works with various types of money markets like RWAs.

From a broader market perspective, the crypto market is currently bearish due to limited liquidity. The TVL of Cosmos’s DeFi projects is generally not high as a result of the prevailing market conditions. Yet, the unique and changing nature of Cosmos, especially with its distinct heterogeneous architecture and the debated utility of its ATOM token, attracts numerous developers. As the crypto ecosystem grows, many established projects are pivoting from singular ventures to developing their own public blockchains, and the developer-friendly environment and SDK components of Cosmos make it a top choice.

Simultaneously, Ethereum’s DeFi innovations are shifting towards Layer 2. Due to its lack of inherent interoperability, liquidity remains fragmented, posing challenges to the overall ecosystem’s growth. In contrast, Cosmos DeFi is flourishing with its native IBC interoperability.

Overall, the Cosmos DeFi market is on a strong growth trajectory. The rollout of various innovations and projects provides it with immense growth potential. With the integration of more projects and technologies, it’s believed that the Cosmos DeFi market will continue its expansion, given that the value of staked assets is effectively unlocked and protocol liquidity issues are addressed.

About Bing Ventures

With a team of veteran financial professionals, researchers, and technologists, Bing Ventures is a pioneering venture capital firm that backs startups and entrepreneurs driving the next wave of Web3 and blockchain innovations.

For more information, please visit us at the following channels:

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