Web3 founders face a crucial decision when deciding to launch their product. If they want to avoid the layer 2 option due to concerns surrounding centralized sequencers and multisig bridges, they must choose between two main paths: developing their product as a smart contract and deploying it on an existing Layer 1 blockchain, or taking the ambitious route of creating their own blockchain from scratch. The former option comes with different advantages, notably removing the complexities of infrastructure management, ensuring a decentralized foundation, and leveraging the network effect inherent in the underlying blockchain.
Yet, opting for a smart contract deployment is not without tradeoffs. It leads to a competition for block space, resulting in a worse user experience characterized by inflated gas costs and transaction fees, coupled with an impact on transaction executions. The immutability of smart contracts can also be restrictive, offering little flexibility for the protocol in the case of critical bugs or hacks. The smart contract approach also lacks sovereignty, as the protocol will be subject to the rules of the hosting blockchain.
One solution that has gained popularity in the last two years to address the challenges of the smart contract approach is the appchain thesis, which was pioneered by Cosmos and followed by Polkadot. The idea behind this model is to build a dedicated blockchain for one application. Compared to the smart-contract solution, this model offers sovereignty and full customizability from the blockchain to the application. It also enhances performance and scalability since the application has its own blockspace. This leads to increased opportunities for the token to capture value, such as MEV, as Osmosis does, in addition to capturing other network fees.
Certainly, this solution involves several important factors to consider. It requires the management of the chain's infrastructure, ensuring its own security, attracting validators, and designing a tokenomics model that aligns the interests of validators, stakers, and app users.
What if we could easily launch an application, similar to deploying a smart contract, and gain the benefits of an appchain, all without any initial investment or extensive effort? This is exactly what Saga's value proposition is about.
The Saga protocol functions like application-specific blockchains as a service. In other words, Saga is a blockchain used to easily launch other blockchains, called “Chainlets” in the Saga ecosystem. Chainlets are secured by the Saga blockchain and its validators through a mechanism called Interchain Security, a well-known shared-security system in Cosmos.
Interchain security means that one blockchain, in this case Saga, acts as a provider of security for other blockchains, in this case the Chainlets. As a result, the Chainlets inherit the benefits of running a Cosmos SDK appchain but outsource their block validation and validator set to Saga.
Therefore, a Chainlet is a sovereign blockchain that has the same level of security and decentralization as Saga.
Saga introduces an easy, decentralized, and secure approach to deploying application-specific blockchains. This solution also grants developers the autonomy to choose their preferred Virtual Machine (VM), with initial support for the Ethereum Virtual Machine (EVM).
In the long run, Chainlets aims to be VM agnostic, which means that developers would have the flexibility to choose from a variety of virtual machines, including the EVM, CosmWasm, or the Javascript VM for example.
The way Chainlets are created differs slightly from what we can observe on the Cosmos Hub when launching consumer chains with Replicated Security. In contrast to the Cosmos Hub, the launch of a Chainlet with Saga is entirely permissionless.
Developers only need to have SAGA tokens to pay for setting up and maintaining their Chainlet. This is similar to services offered by Amazon Web Services and other SaaS platforms, except that here the subscription fee is paid in SAGA tokens to create and maintain a Chainlet.
This means that once the fee is paid, the role of Saga validators is to set up and run the infrastructure for a Chainlet, similar to how Cosmos Hub validators also operate the infrastructure of the consumer chains.
To launch a Chainlet, a developer is required to allocate funds to an escrow account using SAGA tokens. This escrow account can be pre-funded to any desired amount and works like a prepaid service to cover the costs associated with the Chainlet. If the deposited fee is depleted, the Chainlet goes offline until the developer deposits more SAGA in the account. The fee is determined per epoch, where one epoch lasts approximately one day.
Diverse methods could be used for funding the escrow account with SAGA tokens:
This subscription fee is determined by the Saga validator set. Before the start of a new epoch, each Saga validator submits the fee they would like to receive for running a Chainlet. These bids are then locked before the start of the next epoch, and a Musical Chair Auction begins.
The Musical Chair Auction is a process that aims to establish a universal price for running a Chainlet. In this context, each validator presents their bid, and only the w validators with the lowest prices are included in the 'Winning Set'. The remaining validators with higher bids constitute the 'Losing Set'.
The final cost of running a Chainlet is determined by the highest bid within the Winning Set. This implies that the validator with the highest bid in the Winning Set gets its desired price, while other validators within the Winning Set not only secure their desired price but also receive an additional margin on their bid.
The price that developers will have to pay for Saga validators to run a Chainlet is:
Pricerun chainlet = max(BidWinning Set )Number ValidatorsSaga
To prevent collusion or Sybil attacks related to the Winning and Losing Set, the count of validators within this set must be large enough to make controlling the Winning Set challenging. According to the Saga team, this number should range between 75% and 85% of the participants in the Musical Chair Auction.
However, the Musical Chair Auction is not riskless for a validator. In fact, the mechanism is designed to incentivize validators to submit bids as low as possible, rewarding validators within the Winning Set, while penalizing those in the Losing Set.
A possible way for the team to handle punishment is to treat it like validator downtime: validators who are down for a certain period get a minor slash and are jailed (removed from the active set). Validators who lose the auction too often in a given period could also be minorly slashed and jailed.
Hence, the SAGA token has multiple use cases: it is used as a subscription fee to keep the Chainlet alive and to reward the validators for running the infrastructure. In this case, there is a 1:1 relationship between costs and revenues with the auction system. We can also think about having pools of validators that share the cost, with validators only running some Chainlets and not others, to improve scalability.
Saga and its Chainlets introduce an interesting token structure, as gas fees are not explicitly collected from end users. Within a Chainlet, gas fees can be paid using Saga, the developer’s own Chainlet token, no tokens at all (gasless transactions), or even other tokens such as ETH or USDC.
It's worth noting that gas fees generated within a specific Chainlet are directed to a wallet managed by the developer. This confers a high degree of flexibility to the Chainlet and its team in determining their preferred monetization approach.
Consequently, with Chainlets, developers benefit from predictable and low costs, an easy process for deploying their blockchains, and the capacity to horizontally scale applications. While Chainlets inherit security from Saga, there exists a method for a Chainlet to also leverage and inherit Ethereum's security using the Saga stack. Let’s delve into this aspect in the following section.
Saga Ethlet is a new Ethereum scaling solution that combines the best attributes from appchains, rollups, and validiums into a single product. Launching an Ethlet will be as easy as launching a Chainlet: with one click, an Ethlet can be created and inherit Ethereum's security.
How does this mechanism work? Ethlets work with three essential components: Data Availability, State Hash Commitment, and Fraud Proof.
At the end of each epoch (~ 1 day), blocks produced during that time frame are batched, forming the 'batched epoch'. A new epoch referred to as the 'challenge period' then begins. During this challenge period, Saga’s validators can use a fraud-proof mechanism (optimistic ZK or interactive) that enables the identification of any fraudulent transactions or state transitions that might occur within the blocks from the batched epoch. If, by the end of the challenge period, no fraud-proof has been presented, the state hash of the previous batched epoch is committed to Ethereum, and therefore, this committed state inherits the security of Ethereum.
This implies that there is a one-epoch delay for a state hash to be committed to Ethereum and inherit its security. However, it's important to note that blocks inherit Saga’s security even before being committed to Ethereum.
Finally, Saga will be used as a Data Availability layer, similar to a validium, to avoid the high Data Availability costs of Ethereum. An Ethlet thus achieves fast finality through Tendermint, facilitates rapid bridging, and leverages the advantages of IBC. This approach ensures cost-effectiveness while also inheriting Ethereum's security.
Saga offers any developer the ability to easily launch their application as a Chainlet and inherit Saga’s mainnet level of security and decentralization from the start. By choosing this option, the application will benefit from its dedicated blockspace, and the team will gain more control over the blockchain and the application layers compared to launching as a smart contract. If the developer choses, they can upgrade a Chainlet into an Ethlet and gain the benefits of Ethereum Security.
Saga is initially focused on gaming and entertainment chains, as we can notice from their partnerships. Gaming applications are one of the fastest-growing sectors in web3, and a gaming project, such as a video game, needs its own dedicated scalable blockchain capable of supporting high transaction volumes – exactly what Saga is offering and what Chainlets based on the Cosmos SDK can provide. As web3 gaming and entertainment continue to grow and the demand for scalable architecture for users increases, Saga presents itself as the solution to provide the necessary architecture and is confident in onboarding the next 1000 chains in the Multiverse.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 40+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures.
This document is a summary of a longer article — “The financialized staking economy” — published in Chorus One’s ‘Annual Staking Review’ for 2022. Click here to read the entire report.
Cryptocurrencies can be used in three kinds of yield-bearing activity. These have cumulative trust assumptions -
We believe staking yield is the most attractive risk-adjusted source of yield in crypto for two reasons:
Proof-of-stake ecosystems do not have an anchor in the real world. This means that the staking yield rate denoted in native terms is completely decoupled from any kind of factor in the wider economy. For staking, endogenous capital (e.g. ETH) is the only factor of production.
This is a difference to proof-of-work (PoW) systems, where electricity and hardware costs serve as an unbridgeable anchor to the real economy, directly affecting a miner’s yield rate. It is also different from most CeFi and DeFi yield sources, which depend more heavily on user activity.
The above implies that staking can be an uncorrelated yield source for two kinds of investors — those that are bullish long-term and denominate their holdings in native units, and those that are hedged against the price risk of the staked asset.
The token price risk may be hedged out through on- or off-chain solutions. The former case has the advantage of transparency, reflected in an improved counterparty risk assessment and iron-clad terms. With some of the largest lending desks in the space embroiled in a liquidity crisis, this is a significant factor. Validators are ideally positioned to execute on-chain hedging, as they directly interface with the staking yield source and thus no custody transfer, i.e. additional risk, is required to interface with a hedging solution.
One increasingly popular on-chain hedging solution is a “staking yield interest rate swap”. This allows validators to swap token-denominated staking yield for a stablecoin, typically USDC, locking in a stable and predictable income for a staking client. The associated risk is very minor as neither the validator nor the swap counterparty takes custody of the principal — the worst case, a counterparty default, would reduce to the price risk on the yield earned on the staked notional. Chorus One can leverage Alkimiya, the leading protocol for on-chain capital markets, to execute this type of hedge.
A second way to hedge is by using the staking yield to finance classic options-based strategies. For example, a zero-cost collar options package may incorporate the staking yield in a way that enables an asymmetric pay-off.
Chorus One is invested in & advises a range of solutions optimizing staking yield for return (i.e. MEV) and risk (i.e. hedging). Reach out to us at sales@chorus.one to learn more about how these can be tailored to fit your use case.
About Chorus One
Chorus One is one of the biggest institutional staking providers globally operating infrastructure for 35+ Proof-of-Stake networks including Ethereum, Cosmos, Solana, Avalanche, and Near amongst others. Since 2018, we have been at the forefront of the PoS industry and now offer easy enterprise-grade staking solutions, industry-leading research, and also invest in some of the most cutting-edge protocols through Chorus Ventures. We are a team of over 50 passionate individuals spread throughout the globe who believe in the transformative power of blockchain technology.
For more information, please visit chorus.one
Cosmos is steadily becoming the place to create the ultimate modular blockchain. Cosmos SDK allows developers to effortlessly roll out tailored blockchains, resulting in a flood of new projects that provide specialized settings for novel products. The goal of modular blockchains is to divide Execution, Settlement, Consensus, and Data Availability. Refer to page 19 of this report to learn more about modular vs. monolithic blockchain designs (Ethereum). As a result, we see various teams tackling the issues of each layer and creating optimal solutions and developer environments. Ultimately, developers could use these optimizations to create an application that is highly performant using such an ultimate modular blockchain. Not to mention the greater decentralization that comes with spreading your product across numerous ecosystems.
Let’s go over the problems that current ecosystems face in each layer of the modular stack, and how various quality teams are solving these issues. Please bear in mind that there are other teams that are solving these issues too, we are just exploring some.
It is important to explain that when a block is appended to the blockchain, each block contains a header and all the transaction data. Full nodes download and verify both, whilst light clients only download the header to optimize for speed and scalability.
Full nodes (validators) cannot be deceived because they download and validate the header as well as all transaction data, whereas light clients only download the block header and presume valid transactions (optimistic). If a block includes malicious transactions, light clients depend on full nodes to give them a fraud proof. This is because light nodes verify blocks against consensus rules, but not against transaction validity proofs. This means that a 51% attack where consensus is altered can easily trick light nodes. As node runners scale, secure methods to operate light clients would be preferable because of their reduced operational costs. If nodes are cheaper to run, decentralization also becomes easier to achieve.
The DA problem refers to how nodes can be certain that when a new block is generated, all of the data in that block is truly published to the network. The problem is that if a block producer does not disclose all of the data in a block, no one will be able to determine if a malicious transaction is concealed within that block. A reliable source of truth as a data layer is required that orders transactions as they come and checks their history. This is what Celestia does, solely optimizing the Consensus and the DA layer. This entails that Celestia is only responsible for ordering transactions and guaranteeing their data availability; this is similar to reducing consensus to atomic broadcast. This is the reason why Celestia was originally called ‘Lazy Ledger’, however, efficiently performing this job for a future with thousands of applications is no easy job. Celestia can also take care of consensus. See the different types of nodes in Celestia here.
Two key features of Celestia’s DA layer are data availability sampling (DAS) and Namespaced Merkle trees (NMTs). Both are innovative blockchain scalability solutions: DAS allows light nodes to validate data availability without downloading a complete block; NMTs allow Celestia’s execution and settlement layers to download transactions that are only meaningful to them. In a nutshell, Celestia allows light nodes to verify just a small set of data, that when combined with the work of other light nodes, provides a high-security guarantee that the transactions are valid. Hence, Celestia assumes that there is a minimum number of light nodes sampling the data availability layer.
“This assumption is necessary so that a full node can reconstruct an entire block from the portions of data light nodes sampled and stored.”
It is worth noting for later that these layers (DA & Consensus) are naturally decentralized and easier to have fully on-chain, as most of the work is taken on by the validators. Scaling here will ultimately depend on the consensus algorithm. ‘Rollapp’ developers will not need to assemble a validator set for their applications either.
The present web3 environment suffers from centralization in the execution and settlement layers. This is due to the fact that the on-chain tech stack severely limits an application’s functional capability. As a result, developers are forced to perform heavy computation off-chain, in a centralized manner. On-chain apps are not inherently interoperable with external systems, and they are also constrained by a particular blockchain’s storage and processing capability.
More than just a distributed blockchain database is required to create the ultimate decentralized apps. High-performance processing, data IO from/to IPFS, links to various blockchains, managed databases, and interaction with various Web2 and Web3 services are all common requirements for your application. Additionally, different types of applications require different types of execution environments that can optimize for their needs.
Blockless can take advantage of Celestia’s data availability and focus to improve application development around the execution layer. Blockless provides a p2p execution framework for creating decentralized serverless apps. dApps are not limited by on-chain capacity and throughput by offloading operations from L1 to the performant, configurable execution layer offered by Blockless. With Blockless you can transfer intensive processing from a centralized cloud service platform or a blockchain to the Blockless decentralized node network using built-in functions. With the Blockless SDK, you can access any Web2 and Web3 applications as it currently supports IPFS, AWS3, Ethereum, BNB Chain, and Cosmos.
Developers using Blockless will only need to provide the serverless functions they want to implement (in any language!), as well as a manifest file that specifies the minimal number of nodes required, hardware specifications, geolocation, and node layout. In no time, their services will be operating with ultra-high uptime and hands-free horizontal scaling. To learn more about the architecture of the Blockless network go here, but yet again, its orchestration chain is a Cosmos-based blockchain responsible for function/app registration. The cherry on the cake is that you can use and incorporate or sell community functions and extensions into your own application design in a plug-and-play manner using Blockless Marketplace. In Cosmos, you can already do this through projects like Archway or Abstract.
Popular L2s and Rollups today like Arbitrum, Optimism, and StarkNet use Ethereum for data availability and rely on single sequencers to execute their transactions. Such single sequencers are able to perform fast when submitting to Ethereum but evidently stand as a centralized point of failure. Saga has partnered with Celestia to provide roll-ups as a service to enable a decentralized sequencer set.
Saga provides easy-to-deploy “chainlets” for any developer to roll out an application without having to care about L1 developments. Although their main focus is to support full appchain formation on top of the
Saga Mainnet, the technology can also support the modular thesis. This means that rollup developers can use Saga’s validators to act as sequencers and decentralize their set. In other words, Saga validators can also work in shifts submitting new blocks for Celestia rollups.
Saga offers a service that organizes validators into sequencers and punishes misconduct through shared security. Saga’s technology provides functionalities to detect invalid block productions with fraud proofs and to manage censoring or inactivity, challenges are made to process a set of transactions. This means that Saga can enhance the settlement layer whilst using Celestia for data to generate fraud proofs and offline censor challenges. This could also even be done for Ethereum, with the additional benefit of having shared security between chainlets and IBC out of the box. To further understand the difference between running a rollup or a chainlet, please refer to this fantastic article.
In such a modular world, developers finally have full customization power. One could choose to build sovereign rollup or settlement rollups, or even a hybrid. In our example, it could even be possible to use Saga’s consensus instead of Celestia’s. Referring to our example, we could have an application that decentralizes its execution computing through Blockless whilst programming in any language, decentralizes its sequencer set and is able to deploy unlimited Chainlets if more block space is required with Saga, and has a reliable and decentralized data availability layer with Celestia. What’s best, all these layers are built and optimized with Cosmos SDK chains, meaning they will have out-of-the-box compatibility with IBC and shared security of Chainlets.
The MEV supply chain is critical to the future performance and business models of the Solana network. Solana is in a phase of actively searching for, and ultimately choosing its MEV supply chain. One approach is to replicate the model established on Ethereum, building a searching and block-building marketplace. This path has multiple downsides, such as artificially introducing a global mempool that would increase Solana’s latency, and may also increase the risk of centralization and censorship.
We’re happy to announce that Chorus One has released a whitepaper today where we contrast the most relevant characteristics of Ethereum and Solana; review some of the features of the block-building marketplace model, i.e “flashbots-like model”, and what retrofitting it onto Solana would entail.
Given the particularities of Solana, we also propose an alternative to the block-building marketplace: the solana-mev client. This model allows for decentralized extraction by validators, through a modified Solana validator client, capable of handling MEV opportunities directly in the banking stage of the validator. Along with the whitepaper, Chorus One is also releasing an open-source prototype implementation of the approach detailed inside the whitepaper itself.
The client can be run by any validator. Even small validators or those with no specific expertise can benefit from MEV rewards by choosing to run the solana-mev client. That means the validators will be able to execute MEV strategies as they appear in their slot, in contrast with the current competitive aspect of searching, which results in a few winner bots extracting the value.
The model shrinks the incentive for independent bots to spam the network which ultimately contributes to episodes of intense traffic, as most of them send transactions targeting the same MEV opportunities.
Given that not all MEV strategies can be implemented inside the validator, independent searchers will continue to play a relevant role in the MEV space on Solana. That is guaranteed by their advantage of quickly building and updating sophisticated strategies, as well as expanding their focus to newly deployed programs and pools. This includes long-tail MEV.
In summary, the MEV client enables permissionless and decentralized extraction that benefits the ecosystem through transparent and ethical strategies, as well as increased financial returns for network participants.
For a comprehensive overview of the motivations and the model, please refer to the whitepaper here.
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