In the Interchain, the Only Viable Business Model is to Make Something Other Chains Want

Polkachu Team | 2022-10-20

Make something people want -- Paul Graham

Paul Graham has famously summarized the mission of a startup: make something people want.

Similarly, in an IBC-connected Interchain world, the only viable business model is to make something that other chains want. A big advantage of the Interchain is that every chain can specialize in its own niche. It means that it can focus on its core mission while "importing" all secondary features from other chains. The flip side is that it must be able to "export" its product to other chains to realize its value. Once a chain is well-established in the import/export economy of the Interchain, its long-term economic viability has a moat.

Of course, a chain can try to be self-sufficient by building its own empire. But it has 2 disadvantages:

1. It might not be feasible to build the full stack in an advanced Interchain world.
2. If it is successful, its profit margin can be competed away because it is easy to copy a self-contained chain with no import/export relationships.

Chains and Products

A good comparison is between Cosmos Hub and Osmosis. Cosmos Hub is the first Tendermint chain as a proof of concept. It does not have anything that other chains want (maybe except for the fiat on/off ramp). As a result, ATOM has struggled to justify its value proposition despite its OG status.

Osmosis, on the other hand, has built something other chains want: exchange and liquidity. At this point, Osmosis is so entrenched among the token economy of other chains and widely used by the users of other chains. Many have joked that Osmosis is the real hub.

When a chain has a product that other chains want, it is an instant product-market fit. What's remaining is just execution. When a chain does not have such a product, it needs to find one. No amount of execution can make up for the lack of product-market fit.

Below is a list of chains / products with instance product-market fit because they make something that other chains want.

Osmosis: As discussed above, its export is exchange and liquidity.

Axelar: The export is bridged tokens from the outside into the Interchain.

Stride: The export is liquid staking tokens.

Stargaze: Other chains do not need Stargaze's NFTs as manifested in their JPEG format. However, it has recently announced its naming service. The latter is a much more interesting product than NFTs, because it can export identities to other chains.

Mars Protocol: Its export is lending/borrowing credit. It seems that Delphi Digital team has been aware of this "making something other chains want" thesis. They are building Mars Protocol as an export business. When the chain is launched, very little will happen on Mars Protocol the chain, and most activities take place through its outposts.

USDC Chain: The export is its stable coin USDC, a coveted product that every interchain DEX desires.

Babylon Chain: The export is checkpoint on the Bitcoin chain, a highly desirable security feature given Bitcoin's high security budget.

In contrast, many chains have no figured out their export product yet. For example, we have many meme chains, EVM chains, and smart contract chains in the Interchain. While users can definitely do things on these chains, their position is not secure and their moat not strong. Another smart team can easily copy Chihuahua, Evmos and Juno.

In the long run, these chains need to figure out what to export. For example, Juno might need to export DAO governance to become the social/political capital of the Interchain; or Chihuahua finds a way to export culture to become Interchain's cultural capital.

ATOM 2.0

As discussed above, Cosmos Hub has struggled with product-market fit and has a value accrual problem. As more and more chains have grown up and established its direct trade relationships with other chains, Cosmos Hub has become less a hub but more a fiat on/off ramp. In the long run, even this is not secured, as evidenced by the recent Binance listing of Osmosis and the Kraken listing of Juno.

Then we get ATOM 2.0, a bold rethinking of Cosmos Hub. At the time of this writing, Prop 82 is hotly debated among Cosmonauts and still has 4 days to go before the vote closes.

Most of the discussions on ATOM 2.0 have focused on token emission schedule, inflation, community tax, governance structure, etc. These are all fair points, but we believe that they miss the most important reason behind this revamp: Cosmos Hub need to make something other chains want.

While others see ATOM 2.0 as a sovereign entity managing its monetary policy to enhance token values, we see ATOM 2.0 as a struggling startup looking for the elusive product-market fit.

The whitepaper proposes 5 different products that Cosmos Hub can potentially export to other chains. The success is uncertain, as each faces tough competitions.

Social Coordination Technology: The export is DAO governance. The competition is Juno.

Interchain Security: The export is blockchain security for other chains who prefer not to run their own validator set. The competition is Saga and potentially Mesh Security as proposed by Sunny.

Liquid Staking: The export is liquid staking tokens; The competition is Stride, Quicksilver, and Neutron.

Interchain Scheduler: The export is atomic transaction. The competition is probably Anoma (although we are not too knowledgeable about this emerging chain).

Interchain Allocator: The export is capital investment and treasury management for other chains. We are not aware of any competitor chains, since it is a rather unexplored space in the Interchain.

Putting it together, ATOM 2.0 is an attempt at multiple shots to make Cosmos Hub relevant in the interchain import/export economy.

"But Ser, I see a flaw in <Insert any of the 5 products here>..." This is a common pushback against this whitepaper. Some have wished to break down the vote into multiple sub-votes so we can collectively determine the fate of each.

We disagree. We believe that the product-market fit is not achieved through political deliberations by an expert committee or through a popular vote. Rather, it is achieved by builders who rally around a common vision and explore the idea maze collectively. Many of the plans will inevitably fail or change course as we gain new info through our executions in the rapidly changing Interchain economy. But some will hopefully succeed to establish Cosmos Hub as an important import/export partner in the Interchain.

Conclusion

We believe that the rationale behind revamping ATOM is sound and the timing is urgent. We are aligned in the vision of ATOM 2.0: It will allow Cosmos Hub to export something other chains want and allow ATOM to accrue value by actively participating in the Interchain economy. Cosmos Hub deserves the multiple shots at the goal, as some products outlined in the whitepaper will fail and other will succeed. The fate of each product will be determined by market dynamics as builders execute the plan with a nimble hand and an open mind.

We vote "Yes" on Prop 82 on Cosmos Hub.