ICO Analysis: Cosmos “Blockchain of Blockchains”
Cosmos is a novel answer to “sidechains,” which aims to enable users to traverse a galaxy of blockchains with ease. One intended usage of the platform will be to enable automated overflow of transactions, due to the congestion in current cryptocurrency designs. Cosmos consists of “zones” and “hubs.” A “zone” can become congested, just like a traditional blockchain, but a hub operator can simply redirect portions of the traffic through other zones. Anything can be traded, including Bitcoin, provided that the zones being traded through are trusted by the trader(s).
Cosmos uses proof-of-stake instead of proof-of-work, which normally means that the computational capacity required for securing the blockchain is replaced with ownership. Those who own large amounts of coins generate larger amounts than those with smaller amounts, rather than competing in a mining race for block rewards, but Cosmos uses a slightly different method of doing so via Tendermint.
Interesting, right? Sounds like it has a lot of potential.
But we know how these “ICO” things go here at Hacked. Too often, the “initial coin offering” is in fact the only offering the coin ever produces. The Paycoin fiasco and others illustrate what can happen when you fork over money for something that doesn’t yet exist. There are a lot of things to consider when considering an ICO as an investment vehicle. For starters, is there a “premine,” or initial reward of coins to the creators in order to “fund development”? Premines are a huge red flag, because if the initial offering price of the coin is relatively high the temptation for said creators to simply cash out on the backs of investors is very real. Cosmos has no such premine, because it is not a cryptocurrency in and of itself, but it does have these early investors who have already claimed 5% of the total proceeds of the project.
These “initial investors” are not as much of a red flag, but rather a positive sign. If their investment can be verified, and they are not known scammers, then this investment could act to create an overly positive mood for later investors. These guys are already holding down 5% of the fort. Another 20% of the fort is held by Intercoin Foundation and the developers of Tendermint. This leaves 75% for the public to hold.
While having no premine per se, Cosmos does have another pretty severe liability: it does not yet exist. The funds being raised are intended to develop the concept. This means that your money could be better invested simply funding your own competing development. The lack of existing code for security and other researchers to audit is a major drawback to this offering. It’s almost enough to make this writer recommend against the risk.
What Cosmos does have is Tendermint. Tendermint is an interesting spin on proof-of-stake, and it is the technology Cosmos intends to underpin the blockchain of blockchains with. Rather than using the amount of coins that a user holds to determine new coins that enter the ecosystem and what transactions are confirmed when, the concept of block “validators” is introduced. A validator is a user who has placed a “bonding transaction,” which locks a certain amount of his coins away. Groups of validators submit “commit signatures” in order to confirm blocks. Blocks can be “forked” if two groups, each with a two-thirds majority vote, vote oppositely on the same block. This is unlikely, however, because validation groups are kept in check by a punishment system, in which whoever cast a duplicitous vote (there is no such thing as four thirds) will have their bonded coins eliminated from the system.
Cosmos is offered by the Interchain Foundation, which is (allegedly) a non-profit based in Switzerland. We use the term “allegedly” here because unlike the United States, Switzerland has no convenient way to verify the non-profit status of an entity. Swiss law does, however, make it very easy to create a non-profit and, by law, the status offers significant legal protection, as told by the NGO Service:
The members of an association, as well as the Committee members, cannot personally be held responsible for debts and obligations contracted by the association, neither for the damages caused in the pursuit of its activities.
The civil and criminal liability of members of the Committee cannot be invoked for offences committed by the association in its own name.
However, Committee members may be considered criminally liable if they have deliberately committed misdemeanours or have broken the law (theft, misuse of assets, sexual abuse, etc.)
ICF itself consists of the two people who started All-in-Bits (Tendermint, more later) and a person called Guido Schmitz-Krummacher. This Guido is apparently their man in Switzerland, and his qualifications seem to stem from a career of good management in avuncular fields.
Tendermint, on the other hand, is provided by a for-profit company called All-in-Bits, Inc., which has worked with other blockchain developers in the past. Founded by two of the same people who are behind the ICF, All-in-Bits has seen some significant successes in the blockchain space. Notably by helping eris, a blockchain development platform with an apparently promising future. AIB founder Yong Jae Kwon registered the corporation, which is based in Delware, in California two months ago in order to apply for a trademark on Tendermint. He lists a residential address of 1319 South Van Ness Ave #a, San Francisco, CA 94110 as the contact address for AIB in California.
But Wait a Minute
Effectively, the fact that the three-person board of ICF and the co-founders of AIB overlap, two individuals appear to have access to somewhere in the neighborhood of > 15% of the total atom supply at the outset.
The unit of exchange in Cosmos will be the atom. Atoms were sold to the pre-fundraisers at a discount of 15%. It is important to note that the ICF has reserved the right to raise more funds in the future by offering a discount of up to 25% to what they consider “strategic partners.” Strategic partners for Cosmos would be exchanges and others which have more incentive to act as honest validators than to attempt to attack the system. The Bitcoin enthusiast is likely thinking “inflation,” and Cosmos has addressed this in detail here.
- The minimum inflation rate is 7%.
- The maximum inflation rate is 21%.
- In the beginning, the inflation rate will be 7%.
- If in the past 4 months more than 2/3 of atoms were bonded more than 1/2 of the time, then decrease the inflation rate.
- Otherwise, increase the inflation rate.
Atoms themselves are only valuable if the entire system has some value. This means that the functional value of an atom will require adoption of the platform, but those who hold the atoms and are therefore capable of validating will increase their holdings year-over-year just like a certificate of deposit. Assuming the rate of exchange is comparable upon exit, the ability to lose money is limited.
The initial cost of an atom for you will be ten cents each. The offering will begin April 6, 2017 at 6:00 AM PDT (9AM EST) – just a few hours from now. A total of 25% of the coin supply will be eliminated from the public offering, being awarded to the ICF and the Tendermint team, as well as the initial investor group. Interchain Foundation has published detailed instruction manuals on how to invest in atoms. They are accepting Bitcoin and Ether in exchange for atoms.
On a scale of 1 to 10 in terms of smart investments, Cosmos probably rates a 4.8 or so. There are significant drawbacks: technically hard to grasp and therefore potentially lacking mass appeal; 25% withheld from public hands, increasing the risk of a major pump and dump; non-existent technology (excepting Tendermint); concept/market has already seen and will continue to see significant competition, meaning an all-in bet on this could equate to a total loss on the opportunity (perhaps better to spread the eggs amongst the “blockchains of blockchains” baskets).
That said, there is a lot of potential for this technology. One can imagine massively multiplayer online games creating assets on the Cosmos network for in-game transactions; companies issuing rewards programs using zones designed for as much; relay networks for large financial institutions; stock exchanges tracking trades; inventory applications, and much more.
Despite the low rating, it’s hard to advise against putting a few dollars into the project. If you pick up a few thousand atoms and the whole thing goes sour, you can dump along with everyone else and suffer a minimal loss (if any) in the deluge. As previously noted, however, it’s probably wise to invest in similar plays, like Ethereum, simultaneously.
As a pure stock-like investment, though, it rates even lower than previously rated. The liquidity has too few guarantees, for one, but also a significant time would have to be spent compensating for technical debt in the investor. This time might be better spent actively trading coins which have less of a learning curve.
Yet, again, as a complex investment, wherein you are willing to take the steps to learn how to maximize the yield (such as starting up zones, lending your atoms to validators, and building applications around the platform), it could be the most profitable buy you make this year. Could be. It’s hard to express an extreme amount of confidence in a product which does not yet exist. Further, not enough is known about the process which will be used to hire a development team. This part alone contains all the makings of a great scam: convince people they are investing in development costs, award the development contract to yourself, and never deliver the product.
It’s all very complex, and requires a technical mind to fully grasp. However, so was Ethereum, and while many bet heavily against it believing it would be just another scam coin, an ether is currently worth over $40, making it one of the best performing non-Bitcoin cryptocurrencies around.