They say communication is key, but to what door? It turns out that inter-blockchain communication is the key to unlocking the full potential of crypto.
Updated Jun 22, 2022
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DeFi
Crypto
Polkadot
The scaling wars are well underway and we are now in the midst of the battle of the interchains. In one corner we have Polkadot, a network of interoperable blockchains that's designed to put security first without compromising scalability. In the opposite corner, we have Cosmos, an interoperable blockchain hub with a protocol for seamlessly and securely transferring assets across networks.
Their commonalities don't end there—Cosmos and Polkadot also face very similar challenges when it comes to generating value in and of themselves. While these two interchain networks are going head-to-head, they face as many challenges from within their own ecosystems as they do with each other. Let's break down how they're similar, what makes them different, and which one has a more promising future.
Polkadot is a proof of stake blockchain developed by Parity and the Web3 Foundation. Polkadot was created as a security alliance to foster a network of application-specific blockchains called 'parachains' that deliver value to the network. Polkadot consists of a central 'relay chain' that provides security to the parachains so that the network doesn't have to compromise scalability or security when a new utility is introduced. Validators and delegators can stake or "bond" the DOT crypto to help secure the network, and potential parachains must also stake DOT to participate in the 'slot auction' to become part of the Polkadot network.
Cosmos is a proof of stake blockchain developed by Tendermint Inc (now Ignite) and the Interchain Foundation. The Cosmos Hub serves as the epicenter of a network of interoperable blockchains that can transfer assets to and from each other using the Inter-Blockchain Communication (IBC) protocol. The native ATOM crypto can be staked by validators or delegators to help secure the Cosmos Hub and each IBC blockchain is secured using its own native currency.
| Polkadot | Cosmos |
|---|---|---|
Native coin | DOT | ATOM |
What is it? | Interchain Network | Interoperable Blockchain Hub |
Market cap | $12 Billion | $4 Billion |
Maximum supply | ∞ | ∞ |
Number of validators | 297 | 150 |
Bottom line | More decentralized | Faster & more user friendly |
Since they have so much in common, it's easier to point out the similarities between Cosmos and Polkadot to better identify the differences. Both are interchain networks connected through a shared consensus protocol where each blockchain in the ecosystem is deployed independently and offers a particular application or utility. But, while Polkadot's relay chain aims to provide security, the Cosmos Hub contributes to its network slightly differently.
Having a shared blockchain infrastructure is what makes interchain networks like Cosmos and Polkadot work. Each network has a software development kit (SDK) that provides tools to developers for building blockchains from the ground up, with IBC blockchains using the Cosmos SDK and Polkadot blockchains using the Substrate SDK. Polkadot and Cosmos also have their own consensus protocols, but they're implemented slightly differently.
Polkadot's consensus protocol is consolidated into the relay chain to create a system of shared security. Parachains are just partitions of the relay chain and collators transmit data from the parachains to the relay chain so that all operations are validated by Polkadot nodes. The difference with Cosmos's Tendermint consensus protocol is that it enables IBC blockchains to have their own validators which allows them to operate independently from the Cosmos HUB.
Another similarity between Polkadot and Cosmos is that their native cryptocurrencies are used to pay for fees only on their respective blockchains. This means that DOT is only used to pay for transaction fees on the Polkadot relay chain and transaction fees on the Cosmos Hub can only be paid in ATOM. Transaction fees on blockchains that are part of an interchain ecosystem are usually paid in the native crypto of that blockchain.
While the way fees work on these two interchains are quite similar, their native coin is used to secure the network in different ways. Cosmos uses a standard proof of stake model where validators must stake a minimum amount of ATOM to run a node that secures the network by storing the blockchain and validating new transactions. Validators earn ATOM as a reward, but those without the resources to run a node can delegate their ATOM to a validator to earn part of their rewards.
DOT staking uses a similar system of proof of stake validators who run the network and delegators—called "nominators"—who help secure the network by staking a minimum amount of DOT with a validator, but there's another way to stake on Polkadot. Substate blockchains must also stake DOT to enter a slot auction for a chance to join Polkadot as a parachain.
DOT holders can support some Polkadot projects by staking through the project's loan option. Those who loan their DOT can help a blockchain win a slot auction, with little to no risk because slot auction loan stakers either get their DOT back if they lose or can unstake it after if they win. While the DOT you stake is still yours, it becomes locked so you can't transact with it or withdraw it.
DOT and ATOM are very similar in their distribution, with the main difference being DOT's higher market capitalization. First, both ATOM and DOT are inflationary with no maximum supply, which means both are continuously minting new coins and growing in supply with no plans of stopping.
This has a lot to do with their high staking reward since you can earn about 14% APY by staking DOT or 16% APY by staking ATOM depending on how much of the respective coin is currently being staked. The result is high inflation for both cryptos, with DOT's annual supply growth at around 7.84% and ATOM's at about 10.7%. Passive income from staking cryptos like ATOM and DOT have contributed to their popularity.
Another tokenomic concern is how highly concentrated the supplies of both ATOM and DOT are when looking at the top 25 wallets. On Polkadot, the top 25 wallets hold around half the total DOT supply, and on Cosmos the top 25 wallets hold around 40% of all ATOM in circulation. While the poor distribution of either crypto should by no means be a dealbreaker, what matters is who controls the wallets, whether it's centralized exchanges, their respective foundations, or whales.
When it comes down to it, both Cosmos and Polkadot achieve a lot of the same things just in different ways. Both offer similar levels of interoperability but with varying degrees of decentralization as well as different models for security and scalability. An objective weighing of the pros and cons of each network can be divided into four main points: security, interoperability, scalability, and user-friendliness.
Polkadot's shared security model clearly has an edge over Cosmos's structure of independent blockchains using the same Tendermint consensus protocol. Polkadot's central relay chain offers a novel shared security mechanism that allows the parachains to operate efficiently and to scale on a shared consensus without needing to address their own security. While Cosmos is working on creating a shared security model, the IBC infrastructure is technically not as secure and the Cosmos Hub doesn't offer security like the Polkadot relay chain does.
Cosmos and Polkadot are efficient in different ways. Cosmos has superior interoperability because it can easily scale without compromising the blockchain's efficiency. Since each IBC blockchain is secured by its own validators, adding new blockchains to the Cosmos interchain doesn't impact the throughput of IBC or the Cosmos Hub. Polkadot offers internal efficiency because the entire interchain relies on a single set of validators and a system of collators who help consolidate data from the parachains to the relay chain.
While Polkadot has nearly twice the number of validators than Cosmos, these validators are less efficient overall because they must process all of the interchain's transactions to maintain shared security. The IBC ecosystem doesn't rely on Cosmos Hub validators unless assets are transferred to or from another IBC blockchain, so the only reason IBC blockchains communicate is to facilitate cross-chain transfers. This is great because integrating an existing blockchain into IBC is much easier than creating a substrate chain and winning a parachain slot auction.
While both Cosmos and Polkadot are scalable to a similar degree, each one executes this differently. Polkadot's scalability is limited by the number of validators securing the network. So, while more validators will make Polkadot more decentralized and more secure, adding new parachains will dampen scalability by curtailing the network's throughput. This means Polkadot suffers from the classic blockchain trilemma: it can be more scalable, more efficient, or more decentralized, but it can't be all three at the same time.
Cosmos doesn't suffer this trilemma the same way as Polkadot does due to IBC blockchains having more agency and Cosmos Hub not imposing a shared security infrastructure throughout its interchain. Any blockchain using the Tendermint consensus can connect to the Cosmos Hub using the IBC protocol without having much of an impact on the Cosmos Hub. While this means the Cosmos interchain has the potential to scale much faster, it can deteriorate the value of ATOM since the scalability is facilitated by the IBC protocol and not the Cosmos Hub itself.
Developers like working with Cosmos because the Tendermint consensus and IBC protocol are fairly straightforward and don't involve the same technical or logistical barriers as Polkadot. While this is important for growing the interchain and implementing new utility, it's arguably more important for a blockchain network to be accessible to its users.
Polkadot is complicated for both developers and users, and while most people who get the hang of Polkadot do appreciate it, gaining an understanding of Polkadot requires consuming a high volume of complex literature with technical jargon obscuring the conceptual ingenuity. The opposite can be said of Cosmos since documentation for the Cosmos Hub and IBC blockchains usually gloss over the technicals to cut straight to the chase. Additionally, the Keplr DeFi wallet makes managing assets throughout the IBC ecosystem very practical.
User experience is arguably everything when it comes to DeFi, and Cosmos is definitely winning on that front. The Cosmos ecosystem is comprehensible by anyone curious enough, the IBC protocol is easy to use, and there are plenty of DeFi applications to play around with. Meanwhile, DOT is three times larger than ATOM in terms of market cap and there is tons of innovation happening on Polkadot's Kusama testnet. While Cosmos feels more like a finished product, Polkadot may be at a higher stage of development and is just becoming more refined.
One major problem both Polkadot and Cosmos Hub share is that they are less in competition with each other than they are with their own ecosystem. For Cosmos, ATOM has very little utility other than securing Cosmos and being the de facto central currency of the IBC protocol—which is making Cosmos into less of a "hub" and more of an onboarding platform for new IBC users. While DOT has slightly more utility, the Polkadot ecosystem as a whole is still lacking, and this may be due to having to compete against Kusama and parachain projects for developers.
Both ATOM and DOT suffer from a lack of utility since they must compete with the native tokens of blockchains within their own interchain system. For example, the Osmosis and Terra blockchains are beating Cosmos Hub in IBC transfer volume because of the superior utility they offer. While Polkadot's interchain is still underdeveloped, a particularly useful parachain with a valuable native token could have the same effect. However, since Polkadot's effective security model relies heavily on DOT, the viability of Cosmos is in greater jeopardy if substantial utility isn't introduced to ATOM.