Author: Bing Ventures

Key Points:

1. Liquidity Concentration Comparison: The Cosmos ecosystem is highly dependent on its native asset Atom for liquidity, showing greater concentration compared to other ecosystems like Polkadot. This concentration can have positive effects for initial development and ensuring ecosystem health, but may pose risks in the long term, especially when facing external market risks.
2. Cross-Chain Asset Trading Activity: Osmosis has demonstrated high activity and attractiveness in cross-chain trading, significantly differing from Injective and KAVA. This indicates that Osmosis has a more prominent strategic layout and technological advantage in cross-chain operations.
3. Development Direction Focused on Native Assets: Although native assets can bring stability to the Cosmos ecosystem, the low liquidity of BTC and ETH suggests that there is still room for improvement in introducing cross-chain assets within the Cosmos ecosystem.
4. Health of the Lending Market: Umee and Kava Lend in the Cosmos ecosystem show certain limitations in the lending space. Especially when compared to mainstream lending platforms like Aave and Compound, there is a noticeable lack of liquidity and competitiveness for mainstream assets.

As multiple blockchain projects vie for dominance, each trying to become the "next Ethereum" or "Blockchain 3.0," Cosmos has chosen a different path.

It all began with a simple idea: how to create a decentralized, interoperable blockchain network, rather than a single, isolated ecosystem? The design philosophy of Cosmos is aimed at addressing this challenge. Its vision is not just to create another blockchain, but to build an "internet" that connects all blockchains, allowing various blockchains to communicate and interact freely. The concept of "linking blockchains" is widely used by many cross-chain projects and mainnets, but in comparison, Cosmos has been the most successful to date, providing stronger connectivity and greater developer freedom.

From Concept to Practice

Design Philosophy

Source: Medium@Tendermint

As a public chain based on Tendermint consensus, Cosmos differs from most blockchain projects at the time. Cosmos provides developers with a consensus mechanism and application development tools (SDK), rather than a traditional execution engine (virtual machine). This innovative model offers developers greater freedom, allowing them to customize the operating environment and transaction types of application chains according to their specifications.

Interestingly, during the initial development phase of Cosmos, its cross-chain technology was a core competitive advantage that led to fierce competition with Polkadot. As both have gradually evolved, we can see that they have taken completely different technological paths. Polkadot aims to create a seamless cross-chain information flow infrastructure using its cross-consensus messaging format XCM. Additionally, Polkadot shares security through its relay chain and parachains, with each parachain directly obtaining security from the relay chain through built-in parachain protocols. In contrast, the Cosmos ecosystem and its various chains do not fully rely on the Cosmos Hub for inter-chain communication and security. Cosmos adopts a mesh structure, where application chains are responsible for their own security. This design means that DeFi projects in the Cosmos ecosystem can have greater flexibility and autonomy.

The core components of Cosmos include the Cosmos SDK, IBC protocol, and Tendermint consensus engine. The Cosmos SDK serves as an open-source framework and toolkit for building public chains, significantly lowering the difficulty for developers to create blockchains and related applications. The IBC protocol allows for information exchange and interoperability between different blockchains, enabling the various blockchains in the Cosmos ecosystem to form a unified network. The Tendermint consensus engine provides an efficient and reliable consensus mechanism, allowing nodes in the blockchain network to quickly and fairly reach consensus.

With the powerful toolkit provided by the Cosmos SDK, DeFi developers can more easily establish and operate their applications. Specifically, its advantages are reflected in the following aspects.

1. Modular Design: The biggest feature of the Cosmos SDK is its modular design. It provides a series of pre-set modules, such as authentication, banking, governance, etc., which developers can use directly to quickly build applications. For DeFi projects, this means they can focus more on optimizing user experience without having to reinvent the wheel.

2. Flexibility: The Cosmos SDK allows developers to write their own modules in Go, providing enormous flexibility for DeFi projects. Developers can create new financial tools, transaction types, or other functionalities according to their needs, which is crucial for innovation in DeFi projects.

3. Cross-Chain Interaction: The Cosmos SDK supports the IBC (Inter-Blockchain Communication) protocol, enabling chains within the Cosmos network to interact and transfer data with each other. For DeFi projects, this means they can access a wider variety of assets, increasing the attractiveness of their applications.

4. Security: Although application chains in Cosmos need to address their own security issues, the Cosmos SDK provides some built-in solutions, such as using staking and slashing mechanisms to protect network security. For DeFi projects, this reduces the difficulty of developing network security measures.

Overall, through the Cosmos SDK, DeFi developers can quickly develop high-performance, innovative, and secure applications, while also leveraging the cross-chain interaction capabilities of the Cosmos network to expand their applications' influence.

Market Overview

The DeFi market in Cosmos can be roughly divided into the following five categories: Source: Bing Ventures

*Given that each project in the Cosmos ecosystem essentially operates as an independent public chain, this classification is merely a summary based on their primary use cases, while the Infrastructure category is categorized based on the ecosystem's vastness and diversity.

1. Infrastructure

Cosmos is a project dedicated to providing modular blockchain solutions, enabling developers to create public chains tailored to their applications. Through its inter-blockchain communication protocol (IBC), Cosmos allows applications and protocols within the ecosystem to connect and facilitate the free exchange of cross-chain assets and data. The widespread use of the Cosmos SDK has enabled many public chains to create their own ecosystems, including several DeFi applications.

2. Liquidity Staking

The liquidity staking market in Cosmos is currently dominated by two projects, Stride and pStake, both of which offer PoS staking derivatives. Stride allows users to maintain liquidity of their assets while earning PoS staking rewards. Similarly, pStake enables users to stake assets for staking returns while utilizing staking representative tokens in DeFi for additional earnings, as well as transferring across different networks via the IBC protocol. Currently, the relevant tokens received from staking are difficult to find significant use cases in related DeFi protocols. Compared to the use cases of ETH staking-related tokens, the staking market in the Cosmos ecosystem still has a long way to go in its development.

3. Vaults

The vault market in Cosmos is currently evolving towards more complex and adaptable strategies, moving beyond simple funds and basic strategies of the past. Sommelier's "smart vaults" represent this shift. Traditional methods, such as investing in index portfolios or specific pools and reinvesting returns over time, are becoming outdated. Instead, the focus is shifting towards smart vaults that can adjust their compositions based on current market conditions or predetermined indicators. The transition to smart vaults marks a significant advancement in the Cosmos vault market. The new era of smart vaults can adapt to market changes, providing DeFi users with more flexible, agile, and potentially more profitable solutions.

4. Lending & Borrowing

The lending market in Cosmos is currently developing, with Umee being the main lending protocol, offering universal cross-chain lending capabilities and introducing basic principles from traditional debt markets.

5. DEXes

The decentralized exchange market in Cosmos is rapidly developing, with Crescent and Osmosis being two of the DEX platforms aiming to provide efficient capital utilization and liquidity. Decentralized exchanges on Cosmos, such as Osmosis, have high interoperability through the Cosmos cross-chain communication (IBC) protocol, allowing support for different blockchains to expand their ecosystems and communities. Capital allocators can efficiently utilize their capital through DEXs like Osmosis, earning trading fees by providing liquidity and obtaining additional incentives through liquidity mining, thereby enriching liquidity and reducing trading slippage. Source: DeFiLlama, as of August 24, 2023.

The Cronos chain and Kava chain in the Cosmos ecosystem are the most mature, with both having over 100 protocols and far ahead of other projects. Source: DeFiLlama, as of August 24, 2023.

However, compared to other layer 2 projects (such as Arbitrum), their TVL is negligible, with Arbitrum being nearly 5-10 times that of the two, and both lack support from star projects. As seen in the chart, the TVL of both has not fluctuated significantly since the beginning of the year. Source: Bing Ventures, as of August 24, 2023.

The above pie chart shows the composition of the Cosmos DeFi market, with data based solely on protocols built directly on the Cosmos SDK. Some projects are built on public chains based on the Cosmos SDK and are not included in this calculation.

As shown in the chart, the Cosmos DeFi ecosystem has Infrastructure as the largest locked value proportion, mainly because it includes many public chain projects. They also have their own DeFi ecosystems, such as Cronos, which has 108 projects, and Kava has built a complete set of DeFi foundational services, with Kava Mint, Kava Lend, and Kava Swap collectively locking a total value of $200 million, achieving a closed loop of Kava's DeFi business scenarios.

DEXes account for the second-largest locked value segment, with Osmosis and Thorchain being the main contributors, both supporting the DEX business of Cosmos. The Superfluid Staking feature offered by Osmosis has successfully maintained the position of the Osmosis DEX, allowing users to earn exchange price differences while providing liquidity, enabling them to stake the earned cryptocurrencies on the same blockchain, maximizing user returns.

The biggest selling point of the Cosmos DeFi ecosystem is its diverse products, with nearly 400 protocols derived from the Cosmos SDK alone. Coupled with the convenience of technical construction, it has attracted many builders to develop. Although other segments such as lending & borrowing and vaults seem to have a small proportion, there are indeed more projects built on public chains in Cosmos that also involve the aforementioned two product tracks, which will be analyzed in more detail below.

Scanning the Landscape: A Thunderclap in a Dull Ecosystem

Infrastructure: Major Projects' TVL Hit, Future Development to be Observed

Kava

Source: Bing Ventures

1. Overview:

• Kava is built on the Cosmos SDK, a popular framework for building blockchain applications in Go. This provides Kava with modularity and interoperability capabilities.
• It adopts a Tendermint-based PoS consensus mechanism. Tendermint is known for its Byzantine fault tolerance, ensuring network security and reducing the risk of double-spending attacks.

1. Major Applications:

• Kava Mint: This application allows users to collateralize their assets to obtain USDX loans. It is reminiscent of MakerDAO's system but has its unique features, especially regarding accepted collateral assets.
• Kava Lend: This is a money market where users can provide and borrow assets for rewards. The renaming signifies its integration and alignment with the broader Kava ecosystem.
• Kava Swap: This application name remains unchanged, facilitating the buying and selling of tokens on the Kava chain. It uses an automated market maker model to ensure liquidity and competitive prices for traders.

1. Token Ecosystem:

• KAVA: The native token of the Kava blockchain. It plays a key 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 guide the ongoing development and governance of the product.

Source: DeFiLlama

The above image shows the narrative of Kava's development events over time. The early development of Kava's three major applications (Mint, Lend, Swap) has positively contributed to the ecosystem's growth. Later, as the Kava network became more formally completed and fully launched, it achieved a co-chain architecture between Ethereum and Cosmos. Developers will be able to seamlessly build in both EVM and Cosmos SDK execution environments. Unfortunately, following a series of events in 2022 (the collapse of Terra, Celsius's inability to repay user funds), Kava was also affected by the broader environment, leading to a significant decline in TVL, which has yet to recover.

Persistence

Source: Persistence

Persistence aims to drive institutional open finance by facilitating cross-chain interoperability, providing seamless solutions for the flow of value globally. The Persistence ecosystem includes a suite of cutting-edge financial products, such as PStake and Dexter.

pStake

1. Background:

• In 2021, with the launch of stkATOM on Ethereum, pSTAKE became the first liquid staking solution for $ATOM.
• In 2023, stkATOM returned as a new IBC-native version on the Persistence chain.

2. Core Features: Source: pStake

• Liquid Staking: pSTAKE resolves the staking dilemma for PoS asset holders, allowing them to earn rewards while using their tokens in DeFi.
• How it Works: Through pSTAKE, users can securely stake their PoS assets (like $ATOM) to earn staking rewards and receive tokens (like $stkATOM) representing the staked assets, which can be used for additional earning opportunities in DeFi.
• Supported Chains: Currently, pSTAKE supports liquid staking for Binance Chain, Cosmos, Persistence, and Ethereum.

3. Features:

• Operation of stkATOM: It follows an exchange rate model, where the value of stkATOM increases as the staking rewards accumulated by the underlying ATOM increase.
• Fees: pSTAKE sets relatively low fees to ensure user experience, such as 0% deposit/withdrawal fees, 5% protocol fees, and 0.5% instant redemption fees.
• Security: pSTAKE has undergone comprehensive audits by Halborn Security and Oak Security. Since April 2023, pSTAKE has also hosted a bug bounty program with a total prize of $100,000 on Immunefi.
• Special Feature: pSTAKE has a unique "instant redemption" feature that allows users to avoid a 21-25 day unlocking period.
• Wallet Support: pSTAKE supports Keplr and Ledger at launch, with plans to support more software and hardware wallets soon.

Source: Dune Analytics @Shini

Liquid Staking is crucial for the economic benefits of a network and the impetus for staking, and pStake attempts to play this role. However, due to the persistent lack of capital inflow into Cosmos's DeFi, Liquid Staking funds are often siphoned off to Ethereum, and the price of Atom is relatively weak, resulting in pStake's TVL performance being rather mediocre, failing to gain user support.

Cronos

Source: Bing Ventures

Crypto.org Chain was launched in March 2021 as a public blockchain developed by Crypto.com, aimed at achieving fast and secure transactions with low fees. The Cronos sidechain is compatible with Ethereum EVM, allowing Ethereum's Dapps and DeFi ecosystem to migrate quickly.

VVS Finance

VVS Finance is the first native AMM decentralized exchange built on the Cronos blockchain. The project utilizes some already proven and audited protocols. Unlike other projects, VVS Finance has a comprehensive reward scheme for different participants, supported by its governance token VVS.

• Two-thirds of the swap trading fees collected by the platform will be distributed to liquidity providers (LP) of the corresponding liquidity pool.
• Staking VVS can earn rewards in VVS or partner tokens.
• Trading Rewards: Swapping tokens on the VVS Finance platform can earn rewards.
• Referral Program: Referring trading users to the platform can earn rewards.

Tectonic

Tectonic is a lending protocol on the Cronos chain, holding a status comparable to VVS Finance. It is a fork of the Compound protocol. Source: Tectonic

Tectonic allows users to provide cryptocurrencies to the platform, earning interest and TONIC token rewards as liquidity providers.

Each asset has a corresponding collateral ratio (i.e., loan collateral ratio), indicating the amount that can be borrowed against each collateral asset. For example, a 75% collateral ratio means that users can borrow cryptocurrencies worth 75% of the value of the collateral asset. If the value of the collateral asset decreases or the value of the borrowed asset increases, some outstanding loans will be liquidated at a discounted market price. Data Source: DefiLlama

Both Tectonic and VVS Finance are important projects in the Cronos DeFi ecosystem. As shown in the chart, although VVS Finance's total locked value was initially much higher than Tectonic's, after experiencing a series of DeFi/CeFi disasters, the TVL of VVS Finance has stabilized at a low level, narrowing the gap to about 2 times compared to Tectonic. Both are a microcosm of the Cronos DeFi ecosystem, which will need sufficient catalysts—stable and outstanding project developments—to have a chance to revive the sluggish TVL.

Liquidity Staking: The Huge Potential of Liquid Staking and the Innovation of Economic Mechanisms

Data Source: Token Terminal, Stakingrewards.com Data Source: DefiLlama

From a macro perspective, about 20% of the total supply of the Ethereum network is staked, while the Cosmos Hub has as much as about 70%. However, of the 70% staked ATOM, only 1.5% is liquid staking, while ETH is as high as 9.3%. This indicates that in terms of economic benefits, ETH's liquid staking is more advanced and developed, which is also a reason why Ethereum's DeFi leads that of Cosmos.

But at the same time, this is precisely an element that provides vast development space for Cosmos DeFi. The 70% staking ratio gives Cosmos a foundation for developing liquid staking. If relevant protocols are developed properly, it will certainly further tap into this vast market, bringing considerable returns to the Cosmos DeFi ecosystem. Currently, within the existing liquid staking market in Cosmos, Stride's TVL is far ahead, reaching 75%, while pStake, once a leader, now ranks second, accounting for about 20%. Source: Bing Ventures

Stride

Driven by the adoption of Stride's liquid staking token stATOM, the Cosmos DeFi ecosystem is experiencing a surge. One of Stride's unique value propositions is its direct reward of protocol income to stakers through $STRD. Additionally, Stride will also benefit from the Interchain Security (ICS) mechanism of the Cosmos Hub, further enhancing its security. As the ecosystem grows, the demand for $STRD is expected to increase, promoting further adoption of stATOM.

stATOM Liquidity and Adoption:

• stATOM provides a solution to the dilemma between liquidity and staking rewards. With over 70% market share and nearly $30 million in TVL, its dominance is evident. Upcoming features from Stride, such as liquid governance and instant redemption, further enhance its appeal.
• Comparison with stETH: The adoption of stETH is driven by users' desire to leverage ETH through platforms like Uniswap and Aave for leveraged trading strategies. For example, the following chart shows that the adoption rate of stETH was boosted by the launch of the Aave V2 market, indicating a clear correlation. stATOM focuses on converting 70% of already staked funds into liquid staking funds, while most stETH converts unstaked funds into liquid staking funds.

Data Source: DeFi Llama Data Source: @LidoAnalytical, Dune Analytics

$STRD Token Economic Mechanism and Similarities/Differences with $LDO:

• Stride directly rewards stakers with protocol income, while Lido charges a 10% fee on staking rewards to deposit into the Treasury. Therefore, relatively speaking, $STRD stakers have a more favorable position.
• Recent governance voting on Snapshot for Lido shows that its governance participation rate is only about 1.5% of token holders. This indicates that the high trading volume of $LDO is largely not driven by a desire to participate in governance.

Interchain Security (ICS):

• Unique Value Proposition: ICS allows the security of the ATOM validator set to be replicated across different application chains. The alliance with ATOM ensures income and value accumulation for ATOM stakers, enhancing the overall security of the Cosmos Hub's crypto economy.
• Liquid Staking Module (LSM): LSM restricts the amount of ATOM that can be liquid staked to 25% of the total staked ATOM, thereby reducing the risks associated with liquid staking. At the same time, LSM introduces a mechanism that allows already staked ATOM to immediately enter liquid staking without undergoing a 21-day unbonding period. This framework regulates the adoption of liquid staking, preventing liquid staking providers from controlling more than one-third of the total staked amount, avoiding validator corruption, and reducing the potential maximum risk of cascading liquidations.

As the entire Cosmos ecosystem adopts liquid staking, the combination of liquid staking and LSM will drive the use of stATOM in the Cosmos DeFi ecosystem, thereby increasing TVL in lending markets and DEXs. As Stride's market penetration strengthens, the increasing fees paid to stakers may boost demand for $STRD.

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

Data: DefiLlama

Among the DEXs in Cosmos, Osmosis is undoubtedly the leading protocol, with various Staked ATOM primarily serving as LP on this protocol, thus becoming a major pillar of Cosmos DeFi. As seen in the chart, other projects have relatively low TVL, averaging just over $25M, with most funds concentrated in the Osmosis DEX. Data: DefiLlama

Despite Osmosis's leading position in Cosmos, the overall DEX market still exhibits relatively low liquidity and usage. The chart compares the TVL of Balancer v2 and Osmosis, showing that before the series of crises in DeFi/CeFi (before the summer of 2022), Osmosis's TVL barely kept pace with Balancer v2. However, due to the massive withdrawal of liquidity, during the bear market, $Atom was not considered a worthwhile asset to hold, leading to Osmosis's TVL remaining stagnant at low levels since the summer of 2022.

Osmosis

Osmosis is a DEX built on an automated market maker (AMM) mechanism designed for the Cosmos ecosystem. By integrating the IBC protocol, it supports cross-chain trading while also providing good flexibility and composability.

1. Basics:

• Osmosis combines the benefits of staking and liquidity provision, allowing investors to maximize their returns. Unlike traditional DEXs, where users must choose between staking and providing liquidity, Osmosis integrates both.
• As a platform supporting staked ATOM as LP, Osmosis lays the foundation for Cosmos LSDFi and is a key reason for its prominence in the Cosmos ecosystem's DEX.

1. Advantages of Osmosis as a DEX:

• Superfluid Staking: Osmosis introduces an innovative mechanism that allows investors to benefit from both liquidity provision and staking simultaneously. This dual-benefit system enables users to leverage two earning methods without having to choose between them.
• Customization of Liquidity Pools: Osmosis allows users to adjust the parameters of their liquidity pools, such as fees. This decentralized AMM framework enables market participants to find the best balance between fees and liquidity, rather than adhering to rigidly defined protocol parameters.

1. Points of Concern and Considerations:

• Market Competition: The DEX market is highly competitive. Osmosis needs to continuously innovate to maintain its unique value proposition and attract users.
• Security: As with all DEXs, security is paramount. Ensuring the safety of funds and the absence of vulnerabilities in smart contracts is crucial.
• Adoption: The success of Osmosis will also depend on the broader adoption of the Cosmos ecosystem. If Cosmos gains more attention, Osmosis is likely to benefit as well.

Injective Protocol

Injective is a DEX that offers cross-chain margin trading, derivatives, and forex futures trading. It utilizes Cosmos-based Layer-2 sidechain technology to achieve zero gas fees, high-speed trading, and complete decentralization.

1. Core Constructs of Injective Protocol:

• 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: By bi-directionally anchoring with Ethereum, Injective Chain provides strong cross-chain compatibility and liquidity.
• Decentralized Order Book: Injective offers a decentralized order book, enabling on-chain trade matching and settlement.
• Free Market Trading: Injective allows users to create their own derivatives markets, providing a fully decentralized peer-to-peer derivatives trading environment.

1. Technical Components of Injective Protocol:

• Injective Exchange Client: The front-end interface for users.
• Injective API: The middleware connecting the Injective Exchange client and the Cosmos layer.
• Cosmos Layer: A Tendermint-based blockchain supporting instant finality.
• Ethereum Layer: Composed of Injective Bridge smart contracts, achieving bi-directional anchoring with Ethereum.

1. Smart Contracts of Injective Protocol:

• Injective Coordinator Contract: Coordinates Injective's derivative trades on Ethereum and the Injective chain.
• Staking Contract: Manages core functions for stakers on the Injective Protocol.
• Injective Derivative Contract: Allows traders to create and use decentralized perpetual contracts.
• Injective Bridge Contract: Manages bi-directional anchoring between Ethereum and the Injective chain.
• Injective Token Contract: An ERC-20 contract designed for INJ.

Prospects for Dexes

1. Dependent on the Development of Staked Assets on Cosmos

Data Source: Staking Rewards

The development of DEXes largely depends on the adoption rate of LST assets. LSDFi will become a new income domain. For example, the LSDFi on Ethereum has reached a market value of $1.9 billion. If Cosmos successfully develops its own LSDFi ecosystem, the most direct beneficiaries will be the DEXes. Additionally, LSTFi can bring more users to DEXs. In the LSTFi ecosystem, users can earn income not only through trading but also by providing liquidity. This new income model will attract more users to use DEXs, further promoting the development of DEXs.

2. Limitations of the Ecosystem Source: Osmosis Source: Shade

The advantage of Cosmos lies in its creation of an ecosystem composed of many protocols that are interconnected through Inter-Blockchain Communication (IBC) technology. However, this is also a double-edged sword, as many decentralized exchanges (Dexes) in the Cosmos ecosystem are primarily built around assets from the Cosmos ecosystem.

In these Dexes, the main trading tokens are platform tokens based on projects built on the Cosmos SDK, such as Osmosis and Shade protocols. Many liquidity providers' (LP) assets, such as stATOM, SHD, AKT, INJ, etc., are tokens from the Cosmos ecosystem. This leads to a lack of LP for popular assets outside of Cosmos, which limits the liquidity growth and usage of these Dexes to some extent.

To allow these Dexes to grow, one possible strategy is to promote tokens on Cosmos to make them more widely traded. However, this strategy is also limited, as it relies on the growth and development of the Cosmos ecosystem.

On the other hand, Cosmos and its Dexes could consider introducing popular assets from outside of Cosmos. This could be achieved by establishing cross-chain bridges or collaborating with other blockchain platforms. Introducing more external assets could not only increase the liquidity of Dexes but also attract more users to use Dexes, thereby promoting the growth of Dexes.

Lending: Awaiting the Singularity of Cross-Chain Lending

Source: DeFiLlama

Umee

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

1. Unique Value Proposition

Source: Umee Whitepaper

• Cross-Chain Interoperability: Umee allows seamless interaction between different blockchains (such as Ethereum and Cosmos). This interoperability means users are not limited to one blockchain's ecosystem but can leverage assets and opportunities across multiple chains.
• Collateralization of Staked Assets: A unique feature of Umee is the ability to use staked assets from Proof of Stake (PoS) blockchains as collateral. This means users can collateralize their staked assets without losing potential staking rewards. This is a dual benefit—earning from staking while gaining liquidity.
• Algorithmic Interest Rates: Umee employs algorithmically determined interest rates. These rates adjust based on market conditions, ensuring fair and dynamic borrowing rates for users.
• Security and Efficiency: By utilizing bridging solutions like Gravity Bridge, Umee ensures the security and efficiency of cross-chain interactions, which is crucial for trust in the DeFi space.

1. Boosting the Cosmos Lending Market: Source: Umee

• Influx of Liquidity: By allowing assets from other chains, especially popular ones like Ethereum, to be used within the Cosmos ecosystem, there could be a significant influx of liquidity. More liquidity typically means a stronger lending market. The above chart shows the assets from other chains supported by Umee.
• Increasing Utility of Staked Assets: Cosmos has nearly 70% of its assets staked. Umee's model of using these staked assets as collateral can unlock a significant amount of value, driving more activity and growth in the Cosmos lending market.
• Attracting New Users: Cross-chain functionality can attract users from other ecosystems to Cosmos. If they can easily move and use their assets across chains, the friction of entering the Cosmos DeFi space will be reduced.
• Innovative Lending Mechanisms: Umee's universal capital facility, designed to facilitate cross-chain lending, can introduce new financial products and services, further enriching the lending ecosystem in Cosmos.

Prospects for the Lending Market

Essentially facing the same situation as DEXes—dependent on the development of staked assets in Cosmos and the limitations of the ecosystem. In simple terms, staked assets will also be a crucial factor in determining the value release of the lending market in the future, and this market is similarly constrained by the focus on Cosmos ecosystem assets. Although protocols like Umee and Tectonic have incorporated lending services for assets from other chains, they are not the primary lending targets for users. Tectonic Lending Performance Umee Lending Performance

As shown in the charts, the two major lending protocols primarily service stablecoins and assets within the Cosmos ecosystem (stATOM, OSMO), with no significant trading activity for assets from other chains. This limitation may hinder further market development.

Vault: Smart Vaults and Cross-Chain Technology Driving Liquidity and Diversity Growth

Sommelier

Source: DeFiLlama

Sommelier is a decentralized asset management protocol that introduces the concept of "smart vaults" in the DeFi space. Unlike traditional static strategies that may become outdated due to market changes, Sommelier's vaults are designed to predict, react, optimize, and evolve based on real-time DeFi market conditions. Built on the Cosmos SDK, it bridges to high-value EVM networks, allowing seamless integration across different blockchain ecosystems. The project's TVL has steadily increased since the launch of the Real Yield ETH Cellar, serving as a necessary bridge for connecting external interest-generating protocols to the Cosmos ecosystem.

1. Value Proposition of Sommelier:

• Smart Vaults: Sommelier vaults are characterized by their adaptability:

--- --- Predict: Use predictive methods to estimate future yields.

--- --- React: Adjust positions and leverage ratios in response to significant market changes to prevent potential liquidations.

--- --- Optimize: Implement efficient leverage solutions to reduce associated costs.

--- --- Evolve: Discover new yield opportunities by updating algorithms and protocols.

• Off-Chain Computation: Sommelier's architecture allows for off-chain rebalancing calculations. This not only ensures that strategies remain private but also enables the use of complex data modeling techniques similar to those used in traditional finance.
• No Bridge 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 managed by a collection of validators, ensuring the security of user funds and responsiveness to user preferences. This decentralized approach ensures that the platform remains censorship-resistant.

1. Boosting the Cosmos Lending Market:

• Increasing Liquidity: By bridging to high-value EVM networks and introducing smart vaults, Sommelier could bring more liquidity to the Cosmos ecosystem, which is crucial for a thriving lending market.
• Innovative Lending Mechanisms: The adaptability of Sommelier vaults means they can adjust to market conditions, potentially introducing new lending strategies that enrich the lending ecosystem in Cosmos.
• Cost Reduction: Sommelier's aggregation and batching of transactions can lead to lower gas fees, making lending on Cosmos more economical and efficient.

Prospects for the Vault Market

Sommelier's smart vaults and cross-chain capabilities not only provide users with more advanced asset management tools but also bring broader liquidity and diversity to the Cosmos ecosystem.

Sommelier's unique architecture, particularly its off-chain computation and no bridge assets capability, offers a more efficient, secure, and economical solution for DeFi. This model may attract more developers and projects to the Cosmos platform, as it provides a more flexible and scalable environment for building and optimizing DeFi applications.

Additionally, Sommelier's decentralized governance and validator collection ensure the transparency and security of its protocol, further enhancing user trust in the Cosmos DeFi ecosystem.

In summary, as Sommelier continues to develop and improve, it is believed that it will make significant contributions to the prosperity and growth of Cosmos DeFi, bringing new opportunities and possibilities to the entire cryptocurrency space.

In-Depth Observation

Liquidity Concentration: High Dependence on ATOM Further Increases Pressure on Its Token Narrative

The Correlation Between Liquidity Concentration and Protocol Value

In the blockchain and decentralized finance (DeFi) space, liquidity is a key indicator that reflects the health and attractiveness of a protocol or platform. The higher the liquidity, the lower the cost of trading for users on that platform, and the faster the transaction speed.

The native asset ATOM of the Cosmos main chain has extensive applications across multiple DeFi protocols. If a protocol has a high proportion of ATOM liquidity, it means that the protocol is highly dependent on the assets of the Cosmos main chain. In other words, if a large amount of the Cosmos main chain's assets (ATOM) is removed from that protocol, the value of the protocol may be severely impacted.

The Relationship Between ATOM and Protocol Value

If a significant portion of a protocol's value is concentrated in ATOM, we can say that the value of that protocol largely depends on ATOM. This means that any factors affecting the value of ATOM, whether market dynamics, technological updates, or governance decisions, may indirectly impact the value of that protocol. Source: Bing Ventures

The liquidity concentration in the Cosmos ecosystem shows a high dependence on the native asset ATOM. Data indicates that LP pools composed of ATOM assets (including stATOM, qATOM, and other staked assets) average around 40%. This means that protocols within the Cosmos ecosystem are relatively highly concentrated in ATOM assets in terms of liquidity, unlike mainstream liquidity providers like Uniswap and Balancer, which focus on providing liquidity for various assets.

The Importance of Liquidity

In the DeFi space, liquidity is a critical indicator. High liquidity means that users can trade more easily and quickly, and transaction costs are lower. For any DeFi protocol, maintaining high liquidity is essential, as it can attract more users and capital. The high LP pool proportion of ATOM provides a good barrier effect, steadily providing funding sources for assets.

Characteristics of Cosmos

Cosmos utilizes its Cosmos SDK and superchain features, allowing various blockchains to communicate and interact freely. This enables protocols in the Cosmos ecosystem to better provide liquidity for Atom. Additionally, due to Cosmos's cross-chain characteristics, it can interact with assets from other chains, further enhancing its liquidity. Source: Bing Ventures

As a supplementary example, the liquidity concentration in the Polkadot ecosystem is relatively low. This means that protocols in the Polkadot ecosystem have a lower dependency on Dot for liquidity, or that other assets in the Polkadot ecosystem contribute more to liquidity. This sharply contrasts with Cosmos, highlighting the barrier effect advantage of the native asset (Atom) on Cosmos.

Cross-Chain Asset Trading Activity: The Large Ecosystem Has Not Shown the Expected Interaction Activity, Reflecting Certain Closedness

Source: Bing Ventures

To understand the activity of cross-chain asset trading, we selected the three public chains with the highest market capitalization on the IBC Network to observe their cross-chain performance. From a macro perspective, these three public chains primarily use ecosystem assets as their main on-chain assets. Among them, the ecological asset proportion of Injective is nearly 100%. This indicates that public chains on the IBC Network currently tend to focus on developing their internal ecosystems. Source: Bing Ventures, Osmosis vs. Injective vs. KAVA

Osmosis has the highest total value of cross-chain assets, nearly twice that of Injective and almost three times that of KAVA. This indicates that Osmosis leads in cross-chain trading activity and attractiveness compared to the other two public chains.

Reflection of Cross-Chain Activity

The high total value of cross-chain assets in Osmosis reflects its core advantages as a DEX and its ability to attract cross-chain liquidity and trading. This also means that users and projects on Osmosis are more inclined to engage in cross-chain trading. Although Injective's total value of cross-chain assets is lower than Osmosis, it is still quite high, reflecting its cross-chain trading activity for certain specific assets or trading pairs. KAVA has the lowest total value of cross-chain assets, which relates to its core business as a lending platform, focusing more on intra-chain lending activities rather than cross-chain trading. Source: Bing Ventures

Characteristics Focused on Native Assets

The three public chains, Osmosis, Injective, and KAVA, primarily focus on native assets, reflecting the current developmental focus of the Cosmos ecosystem. The high proportion of native assets may indicate that these public chains place greater emphasis on their ecosystem construction and the development of internal applications.

Lack of BTC and ETH

Despite BTC and ETH being the two major assets in the cryptocurrency market, their liquidity on Osmosis, Injective, and KAVA is relatively low, especially on Injective and KAVA, where it is almost nonexistent. This indicates that the Cosmos ecosystem is still in the early stages of introducing cross-chain assets.

The Closed Nature of the Cosmos Ecosystem

This closed nature of the Cosmos ecosystem may be intentional, aimed at protecting its internal ecosystem from external market fluctuations. On the other hand, it also reflects the technical and strategic choices of the Cosmos ecosystem, which places greater importance on the interactions between chains within the IBC Network.

Health of the Lending Market: Lack of Attractiveness for Mainstream Assets and Absence of Aggressive Innovation

In the current cryptocurrency ecosystem, lending protocols have become an indispensable part, providing users with a decentralized way to borrow or lend assets. To gain deeper insights into the performance of lending protocols in the Cosmos ecosystem, this comparison will focus on Umee, Kava Lend, and other ecosystems like Aave and Compound. Through this comparison, we can clearly see the position and potential of the Cosmos ecosystem in the lending field, as well as its differences and characteristics compared to other mainstream lending protocols. Source: Bing Ventures

The collateralization rate for lending on Cosmos is generally similar to the public average, around 75%. Source: Bing Ventures

As one of the main lending protocols in Cosmos, Umee offers higher interest rates for BTC than other well-known projects, but Aave leads in ETH and USDT. KAVA Lend has no data for ETH and USDT. It is evident that lending protocols in Cosmos focus more on borrowing assets from their own ecosystem, and their lower interest rates have not attracted investors. To succeed in the competitive DeFi market, these protocols may need to consider adjusting their strategies, raising interest rates, or introducing other incentives to attract users. Source: Bing Ventures

From a liquidity perspective, there are indeed significant limitations in the lending protocols within the Cosmos ecosystem. The liquidity of Umee and Kava Lend is primarily concentrated on tokens from the Cosmos ecosystem, showing a clear gap compared to mainstream assets like BTC, ETH, and USDT.

Liquidity Advantage of Ecosystem Assets

Tokens from the Cosmos ecosystem enjoy significantly higher liquidity on Umee and Kava Lend compared to other assets. This high liquidity provides a stable market for tokens in the Cosmos ecosystem, helping to maintain their value and demand. The concentration of this liquidity also provides a certain degree of price stability for tokens in the Cosmos ecosystem, reducing the impact of market volatility.

Limitations of Liquidity

Although tokens from the Cosmos ecosystem enjoy high liquidity on these protocols, this also limits the inflow of other mainstream assets and stablecoins. BTC and ETH, as the two dominant assets in the cryptocurrency market, have liquidity that is crucial for any DeFi protocol. The strategy of Umee and Kava Lend may have its advantages in the short term, but in the long run, it will limit these protocols' ability to attract a broader user base and capital.

Market Competition and Strategic Adjustments

The current DeFi market is highly competitive, with various public chains and protocols striving to offer more asset pairs and services to attract users and capital. In this environment, an over-reliance on ecosystem assets may put the lending protocols in the Cosmos ecosystem at a disadvantage in competition. To address this competition, lending protocols in the Cosmos ecosystem need to adjust their strategies, introduce more mainstream assets and stablecoins, and provide more competitive interest rates and services.

Conclusion and Outlook

Overall, the Cosmos DeFi ecosystem is not merely a stack of single DeFi projects. What Cosmos has built is a large infrastructure ecosystem, where each DeFi project can be a public chain or a project on a public chain; this complexity makes the Cosmos DeFi ecosystem quite intricate. Projects can be chains that subsequently develop their own ecosystems, or they can be projects that cross-chain to other chains to make their specific segments (such as DEX, Lending, etc.) larger.

Releasing the Value of ATOM

The Cosmos DeFi market is at a critical stage of development, with the introduction of LST assets by Stride and Osmosis bringing new vitality and opportunities to the entire ecosystem. Stride provides the opportunity for ATOM to serve as an LST asset, while Osmosis offers a platform for LSTFi, providing a strong foundation for Cosmos to better interoperate with other blockchain ecosystems. However, the staking ecosystem of Cosmos has a significant gap compared to Ethereum, and the staking ecosystem's high dependency on the core mainnet ecosystem means that the development of the Cosmos ecosystem will largely determine the future of its staking ecosystem.

For innovative projects related to ATOM's Staking Derivatives, it is essential not only to consider providing opportunities for ATOM holders to stake on validators but also to think about how to obtain liquidity through cross-chain derivatives markets. This not only increases the liquidity of ATOM but also brings additional earnings for users outside the ecosystem. In short, Cosmos currently lacks a black hole like Terra.

Innovation in Cross-Chain Asset Management

Sommelier, with its smart vaults and cross-chain capabilities, provides users with advanced asset management tools while bringing broader liquidity and diversity to the Cosmos ecosystem. Its unique off-chain computation and no bridge assets capabilities offer an efficient, secure, and economical solution for DeFi, attracting more developers and projects to the Cosmos platform.

Additionally, the introduction of native USDC addresses the long-standing lack of stablecoins in Cosmos, providing market participants with better on-chain trading strategies and risk management tools.

Tracks We Are Watching

Trading Aggregators and Cross-Chain Bridges: In a multi-chain world, trading aggregators and cross-chain bridges provide users with a seamless experience, enabling easy asset transfers between different chains. Cosmos's IBC (Inter-Blockchain Communication) is a perfect example, but there is more room to expand this area in practical applications.

Stablecoins and Currency Markets: As a native token, Cosmos's ATOM has irreplaceable value within its ecosystem. However, for greater stability, a stablecoin system is needed. The opportunity here lies in developing a stablecoin system closely tied to ATOM, while also integrating different fields and types of currency markets, such as RWA.

From an overall market perspective, the current crypto market is generally in a bear market phase, with liquidity relatively scarce. The DeFi projects in the Cosmos ecosystem are affected by the overall market environment, with current TVL generally not high. The Cosmos ecosystem itself, based on its unique heterogeneous architecture, has seen its token ATOM's utility remain a point of debate in the market and community. However, the uniqueness and variability of Cosmos also attract many developers to participate in the Cosmos ecosystem. At the same time, as the crypto ecosystem develops, many established projects will choose to transition from single projects to developing their own public chains, and the SDK components of Cosmos, along with its relatively developer-friendly environment, make the Cosmos ecosystem one of the chosen options.

Meanwhile, Ethereum's DeFi innovation is shifting to layer two, and due to the lack of native interoperability, liquidity will continue to fragment, posing certain obstacles to the overall growth of the ecosystem. In contrast, Cosmos DeFi is thriving due to its native IBC interoperability.

In summary, the development momentum of the Cosmos DeFi market is strong, with various innovations and project launches bringing tremendous growth potential. With the introduction of more projects and technologies, it is believed that the Cosmos DeFi market will continue to expand, provided that it effectively releases the value of staked assets and addresses the liquidity issues of protocols.