Interoperability — The Internet of Blockchains (Cosmos, Icon)

With Ethereum gas prices at an all time high in 2021, we have seen more news around interoperability technology for cross-chain communication. Since 2017, I’ve been a strong believer this is a “must have” feature to further expand the growth of the blockchain ecosystem as a whole.

As noted in previous articles, I see interoperability as the internet to blockchains. As a visual, each blockchain ecosystem is a PC/computer that can only work within itself unless a cross chain feature is added, the internet. As we all know, the power if the internet exponentially increased the capabilities of the computer and I’m a strong believe that interoperability will have the same effect. Recently, we’ve seen notes around the potential power of having cross-chain DEFI, NFTS, and more. The possibilities are endless and this is just the beginning stages of the next step towards a fully decentralized world.

As our readers know, we hold a position in Icon (ICX), so we will be comparing their interoperability feature against what I consider to be the gold standard, Cosmos (ATOM).

Article Overview:

• What is interoperability
• Cosmos (ATOM) Interoperability Feature
• Icon (ICX) Interoperability Feature

What is interoperability

One can move between chains now, but through a centralized body such as an exchange. To reach true decentralization, a feature like interoperability helps remove a centralized power and pushes the space forward to the levels of being independently owned/trustless. In this section, I will highlight what respected companies have noted around this feature to show the value of interoperability.

According to an article written by Deloitte and The World Economic Forum, “Blockchain solutions to date have been formed around existing smaller ecosystems for relatively simple use cases. To realize blockchain’s promising results for global supply chains that intersect with multiple ecosystems and utilize multiple blockchain platforms, interoperability is critical.”

SEBA Bank noted the following:

“Interoperability is the ability of software to exchange information between different ecosystems. In the case of blockchains, it has the potential to break the silos and to create a network of blockchains. It is a catalyst for broader adoption of blockchains and cryptocurrencies.”

“Developers are building interoperability solutions that allow asset transfer between two different blockchains without the need for intermediaries. Seamless portability of assets among blockchains will allow easy access to liquidity and thereby enable liquidity providers to earn yield with less hassle. Thus, interoperability solutions will be able to accrue some value for facilitating the trustless and secure transfer of assets by charging some fee. As the cross-chain transfer volumes increase, interoperability solutions will accrue more value. Therefore, we think that there is merit in evaluating investment opportunities within different interoperability solutions.”

Cosmos (ATOM) Interoperability Feature

Below, I will outline the information around the Cosmos interoperability feature found on their website. Feel free to look deeper — Cosmos

Cosmos is an ever-expanding ecosystem of interconnected apps and services, built for a decentralized future. Cosmos is a decentralized network of independent parallel blockchains, each powered by BFT consensus algorithms like Tendermint consensus. Cosmos uses a protocol called Inter-Blockchain Communication protocol (IBC) to allow heterogeneous chains to transfer value (i.e. tokens) or data to each other. One idea is to connect each blockchain in the network with every other via direct IBC connections. The main problem with this approach is that the number of connections in the network grows quadratically with the number of blockchains. If there are 100 blockchains in the network and each needs to maintain an IBC connection with every other, that is 4950 connections. This quickly gets out of hand.

To solve this, Cosmos proposes a modular architecture with two classes of blockchain: Hubs and Zones.

Hub — A Hub is a blockchain whose purpose is to connect Zones together while limiting the number of connections and preventing double-spend attacks among Zones.

Zone — Zones are regular application-specific blockchains in the Cosmos Network. They can communicate with each other, usually by connecting to Hubs via IBC.

Zones are regular heterogenous blockchains and Hubs are blockchains specifically designed to connect Zones together. When a Zone creates an IBC connection with a Hub, it can automatically access (i.e. send to and receive from) every other Zone that is connected to it. As a result, each Zone only needs to establish a limited number of connections with a restricted set of Hubs. Hubs also prevent double spending among Zones. This means that when a Zone receives a token from a Hub, it only needs to trust the origin Zone of this token and the Hub.

The first Hub launched in the Cosmos Network is the Cosmos Hub. The Cosmos Hub is a public Proof-of-Stake blockchain whose native staking token is called the ATOM, and where transactions fees will be payable in multiple tokens. The launch of the Hub also marks the launch of the Cosmos network.

Tokenomics around the Cosmos interoperability protocol —

• Transaction fees collected on the Cosmos Hub are distributed to staked ATOM holders.
• Current APY — 9.7%

Project Data Points —

• Coinmarketcap rank — #30
• Market cap — $4.3B

In my opinion, Cosmos is the gold standard to interoperability. They’ve solved for a way to efficiently scale the network of blockchains along with providing benefits to participants in the ATOM ecosystem. Stakers will be rewarded in both ATOM and transaction fees collected from their IBC protocol.

Icon (ICX) Interoperability Feature

Below, I will outline the information around the Icon interoperability feature found on their medium page. Feel free to look deeper — Icon

Icon’s vision is to build a trusted decentralized global network, that allows anyone to connect to any blockchain, so people, businesses and communities can all share their services in a transparent way. Icon’s approach to interoperability is through their creation of Blockchain Transmission Protocol (BTP) Working Group, a team of ICON core members along with a growing set of 3rd party developer groups (Edgeware, ICON DAO, and Web3 Labs). The BTP Working Group’s sole purpose is to fulfill ICON’s ultimate vision of becoming a blockchain of blockchains — an elegant web of interconnected networks aggregating all blockchain data into one layer.

BTP security relies entirely on smart contracts. It’s a set of 3 types of smart contracts on each connected network, with a Relay passing information between them. The security of the relayed information is therefore as secure as the two connected blockchains. The key security checkpoint of BTP is the Verifier Contract (BMV). It verifies the signatures of validators and the consensus process of the source blockchain.

Additionally, BTP’s out-of-the-box infrastructure combined with a generalized architecture opens the door for simple integration by any 3rd party developer exploring unique use cases. Individual 3rd party developers do not need their own Relay networks, as the ICON Network provides that infrastructure and covers the costs. Developers simply need to build their own Service Contract (generalized architecture) to meet their needs, submit a Pull Request to get their Service Contract approved, then it will be serviced by ICON’s Relay Network and secured by BTP smart contracts.

And lastly, any network added to the BTP ecosystem becomes directly connected to all other networks in the ecosystem. There is no need to build bridges between all networks. Through inclusion in the BTP ecosystem, all chains are directly connected with one another. BTP

Tokenomics around the Icon interoperability protocol —

• Transaction fees will be aggregated into a smart contract and auctioned off to ICX holders (for ICX). The ICX obtained from the auction will be used to fund the CPS (Contribution Proposal System) to reinvest in the networks ecosystem growth. Once capped (1M ICX), the additional contributions get burned.
• Current APY — 10.60%

Project Data Points —

• Coinmarketcap rank — #67
• Market cap — $1.6B

In my opinion, the best part of the Icon interoperability protocol is the tokenomics. Icon has found a way to utilize it’s interoperability feature to fund the growth of the ecosystem and also burn coin overage. Two methods to potentially deflate the supply — increased Tx fees and burning.

Conclusion

The goal of this article was to share the high level features of both the Cosmos and Icon interoperability protocols. As you can see, there are multiple ways to solve cross-chain communication and with the first few projects already fully functional, I can see similar models used around the blockchain space as the need for this feature widens. As noted in the beginning of the article, I’m very pro interoperability and strongly believe it is a must need for the evolution of blockchain technology and further decentralization.

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Disclaimer:

NO INVESTMENT ADVICE — The Content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice.

We hold a position in $ICX