This is Part 3 of a series of posts on the Chorus One blog. Part 1 and Part 2 can be found here and here.
In Part 2 we discussed network effects in the context of the Cosmos Hub. In this post, we will focus on a key innovation in Proof of Stake networks: a mechanism that creates incentives for communities to build network effects.
The NFX venture fund estimates that 70% of the value created by technology startups since 1994 was driven by network effects! So it (a) pays to understand how they work and (b) pays for all stakeholders to go to every effort to nurture them. But network effects are notoriously hard to build. That is why successful startups are known as unicorns: the failure rate is extremely high. For every Uber, there are tens of thousands of “Uber for X” startups that never achieve critical mass, where they can match supply and demand across geographies, offerings etc. When a network effect scales to its full potential, hundreds of billions of dollars of value can be created. But the probability of this happening is very low. The good news is that the expected value across a well-chosen portfolio of networks can deliver great returns (just ask Union Square Ventures).
So what is the connection between Proof of Stake (PoS) networks and network effects?
Last week when I explained the staking economics of a Proof of Stake (PoS) network to a banker friend of mine, he was a little bemused. His intuition of money comes from the “time value of money”. It is the basis for almost everything they do. For bankers, money is created as debt. The person who borrows pays interest. The person who lends gets interest. Money today is better than money tomorrow. So to find out what a future income stream is worth today, you “discount it” by a factor based on the risk involved i.e. by how likely are you to actually get the money. This is at the heart of trillions of dollars of trades every day: bonds, treasuries, repos, CDs, etc. Even stocks are priced based on future income discounted back to today.
The banker’s intuition told him to find out where the interest payment is being made (or more specifically what interest rate — the price of money — was being paid), as this would explain the nature of the transaction and shine some light on the risks being exchanged. But this worldview doesn’t work for a Proof of Stake network and the intuition of the “time value of money” is fundamental to this misunderstanding.
To see why let’s shift back to the tech investor mindset above. Here money is earned based on a principle that we might call “the network effects value of money”. In this worldview, money is not created as debt, nor is the value captured as interest. Wealth is instead created by building a network that provides value to its users and capturing some of that value. As network effects grow according to the square of the user base (or maybe n log n at scale, see Metcalfe’s Law) the best way to build wealth is to scale a network globally. This effect is most mostly clearly visible with centralized networks, e.g. Google Adwords connecting publishers to advertisers, Uber connecting commuters to drivers, and so on.
The reason why crypto is getting so much attention in technology circles right now is that it has the potential to meaningfully reduce the high failure rate of these networks. As we have seen, scaling networks is hard. Anything that reduces this failure rate will increase the expected returns of investing in this space. If it turns out that crypto-powered networks are easier to scale than a typical (non-crypto) two-sided markets like Uber or Airbnb, then crypto networks will out-compete (and eventually take over from) non-crypto networks.
Proof of Stake networks utilize rewards to build network effects. Recognizing that network effects are hard to build, they reward community members that contribute to the network. They ask token holders (aka delegators) to make decisions about who runs the network nodes, via the validator marketplace we discussed in Part 2. By engaging token holders in this way, they incentivize attention through the mix of rewards and slashing. This is interesting from a psychological perspective: ongoing dopamine hits as gains accrue, loss aversion associated slashing risk, an IKEA effect as they are now actively contributing to the running the network. Together these things create a deeply engaged community, who then wants to spend more time on governance, evangelizing the network and contributing to the codebase. Validators, aware that they are being measured by these highly engaged delegators, now compete on the value they can add. So they write blogs and research reports, record podcasts, organize events, and get involved in governance. They build Dapps and tools like block explorers and wallets and contribute to the codebase and protocol specifications.
That is why trying to map crypto rewards in a PoS network to banking terms like interest is doomed to failure. It misses where the value is created and how it is captured. Inflation of PoS token supply is not about interest or yield. Instead, it creates a mechanism to fund public goods and community building on a massive scale. As the value of a network grows faster than the number of participants, this can have a very significant impact on the probability of success. It allows decentralized networks to grow faster with much lower failure rates than any other business model we have seen before.
This is the reason why smart investors have stayed in crypto. With 70% of the value created in the last quarter of a century being attributed to network effects, there are many reasons to believe that crypto-powered network effects will drive much of the growth in the next 25 years.
Stay tuned for more insights into the Internet of Blockchains in Part IV.
We have curated a list of the current top wallets to store and delegate your Cosmos Atoms from. Before diving into the options, I would like to remark that the safest way to store larger amounts of Atoms is on a hardware wallet. There are multiple wallets and tools that allow you to send, delegate, and participate in governance using a Ledger device. But let’s start with our list:
Lunie is the official wallet that was first developed by part of the Cosmos team (then called Voyager). The Lunie team has now spun off as a separate company.
Lunie is available as a web and mobile wallet (in development). There’s also a Lunie browser extension that allows you to securely generate keys. Lunie enables you to safely perform every operation from sending to participating in governance through your Ledger device without having to download additional software.
Find out more at: https://lunie.io/
Evaluation
+ Security audit
+ Web wallet usable with Ledger devices and browser extension
- Mobile wallet can’t store keys yet (in development)
The popular multi-asset mobile wallet with support for ETH, BTC, EOS also has a Cosmos wallet. imToken supports a lot of functions like exchanging tokens, using DApps and now also storing and staking your Cosmos Atoms!
+ Multiple Assets (BTC, EOS, as well as Ethereum and Cosmos assets)
+ Many functionalities (token exchange inside the wallet, DApp support,…)
+ Available on both iOS and Android
+ Security audit
Trust Wallet, the open-source multi-currency mobile wallet, has its own staking platform that also includes Cosmos. The platform allows you to stake from the mobile Trust Wallet application (iOS and Android), as well as from Ledger devices or other wallets that support WalletConnect.
Evaluation
+ Multiple ways to access (Ledger, Trust Wallet, WalletConnect)
+ Support for multiple currencies and applications
- Only supporting a subset of validators and features
This slick mobile wallet is developed by the Korean team at Cosmostation, who also run their own validator and block explorer. The wallet is available as a web wallet, as well as on the Apple App Store and Google Play.
+ Great design and UX
+ Amount of information and features
+ Available on desktop as well as mobile (iOS and Android)
- No security audit
Another mobile wallet from the Chinese team at WeTez, who are already experienced in staking on Tezos. They also operate a validator on the Cosmos network and educate the Chinese community around the staking ecosystem.
+ Support for Cosmos, IRISnet and Tezos
+ Available on both iOS and Android
- No security audit
- No governance features and little information in the interface
There are a variety of tools build by validators to allow for easy staking and governance participation using a Ledger device. These include delegating through the Hubble and Stargazer block explorer and the delegation tool from our colleagues at Staking Facilities, as well as our own tool. The Chorus One tool additionally allows delegators to participate in governance themselves.
+ Easy to use
- Limited features and only Ledger devices supported
There are a variety of wallet options available already today. We recommend storing large Atom amounts on a Ledger device. To do so you will need to have the Cosmos application installed on your Ledger device using Ledger Live. There are also some other wallets in development (e.g. IOV and Lunagram). We are looking forward to trying these out and seeing the wallets and tools mentioned in this article evolve.
Originally published at https://blog.chorus.one on April 26, 2019.
In a post on the Loom blog, I recently wrote about the disruptive potential of crypto in gaming. Loom is not alone in making the realization that gaming is the perfect match for crypto. There are many other teams that aim to achieve what Loom does in different ways. Additionally, Loom faces competition from general purpose blockchains and specialized marketplace platforms for NFT assets.
On the other hand, Loom has already delivered a lot of value and many developers have started to build their decentralized gaming and other applications using the Loom framework. In many ways there are also synergies between “competing” projects.
In this post, I will shortly introduce a few of the main adjacent projects and games that are building on Loom. The whole list of companies in our crypto gaming ecosystem map (pictured below) can be found in our full thesis document on the Loom Network.
The main competitors to Loom are other projects that aim to cater to the same use case as Loom: enabling scalable blockchain gaming. One of the main competitors here is the team at Fuel Games, the creators of games like Gods Unchained that is also building a platform to integrate decentralized assets in games at scale, leveraging state channel technology to ensure high throughput while maintaining low transaction costs.
Another area where Loom is competing in is the area of marketplaces for collectibles and in-game assets (NFTs). E.g. Enjin, who is also starting to compete with Loom on the platform level with their SDK and sidechain network Efinity, is known for their marketplace of in-game assets. Enjin already managed to foster a large community through their wallet and token.
Other competitors of Loom’s marketplace notably include OpenSea and RareBits, both of which provide an interface to browse and trade digital items.
More broadly, the Loom Network as a scaling solution competes with any other project that aims to bring scale to decentralized applications. These include other Ethereum layer-2 solutions that take similar approaches, e.g. Plasma-based efforts like those by SKALE, Matic, or LeapDAO. Any general purpose blockchain implicitly competes with Loom in a way, including Ethereum itself.
Additionally, well-funded general purpose blockchains are also involved in the gaming ecosystem. Examples include EOS and Mythical Games and TRON Arcade, a $100 million commitment by the TRON Foundation to fund blockchain gaming.
Loom is trying to establish as a hub in the emerging network of blockchains by enabling interoperability between their and other major blockchain ecosystems, such as EOS, TRON, and Cosmos. In our interview with Matthew Campbell, this topic was discussed at length. I recommend giving it a listen if you’re interested in hearing about Loom’s strategy from the CEO himself.
Overall the blockchain gaming field is highly contested, and many of the first decentralized applications that saw some adoption have been games ( CryptoKitties). In the face of the alternatives mentioned above, the Loom Network has managed to attract many interesting projects to their platform. Part of this can be traced back to their commitment to build educational resources and tools that they themselves use to develop their own blockchain games. This strategy of the Loom team and their technologies will be covered in detail in another post, in the following I will introduce four games that are currently being built on the Loom Network:
This trading card game is developed by Loom’s in-house game studio utilizing the tools and running on the technologies built by the team itself. As the name suggests, the game plays in a setting where undead creatures battle each other.
The game features Hearthstone-like mechanics with players using decks consisting of (NFT) game cards to defeat their opponents in short, round-based battles. The game is available on iOS, Android, and Steam.
One of the most well-known games being developed on Loom. The game allows you to breed, level up, and equip fantasy creatures (Axies). Axies can also battle other players in the Arena, or go on an adventure together in the story mode.
The world in which Axies live (Lunacia) is controlled by the players. There’s a land sale going on currently in which 25% of the land in Lunacia and various items will be distributed to players.
This strategy game is developed by Experimental and lets players build an empire and an army to try and conquer other players’ empires. The game is completely browser-based with little animated graphics. Players earn resources by building mines and other structures, which can then be used to recruit soldiers to fight.
They are frequently hosting competitions where the best players receive a price, check here for more info.
Neon District is a cypherpunk RPG developed by Blockade Games in which players collect and craft items to fight against evil in a dystopian setting.
Learn more about the game and the “Founder’s Sale” here.
Chorus One is operating a validator on the Loom Network. You can support us by staking your Loom tokens with us and be rewarded for helping to maintain the network. If you’re interested in staying informed about our content around staking and the networks we validate on, follow us on Twitter or join our mailing list below.
Originally published at https://blog.chorus.one on April 16, 2019.
This is Part 2 of a series of posts. Part 1 can be found here.
We often see the term “network effect” in technology discussions. In common usage, the term can be misused to imply a natural tendency for networks to add value to all users as they grow. But this is not always the case.
Firstly, there are many different types of network effects, each with different characteristics and differing strengths. One thing that is often overlooked is that network effects can sometimes be negative and, in fact, sometimes both positive and negative effects can co-exist in the same network. An effect is positive when more people using the network gives everyone access to more value. But a broadband or mobile network may have negative network effects, where more users may lead to more congestion. We see something similar in a social network, where noisy content feeds caused by user growth can make it harder to find quality content. In a marketplace, more sellers result in more competition for other sellers (negative), but more products for buyers (positive), which in turn leads to more buyers which is good for all sellers (positive). This specific example is called an indirect network effect. The NFX venture fund has an amazing collection of essays on network effects here: https://www.nfx.com/essays.
In this post, we’ll show why network effects are so important in Cosmos. The main reason is that Cosmos is not just a network: it’s a network of networks. Each sub-network has its own network effects which will interact with each other. When Ebay started they could focus on one network: buyers and sellers in a marketplace. Likewise for Uber: drivers and commuters. The Cosmos Hub has at least three types of network effects at launch.
NFX defines two-sided platform network effects as follows:
“… 2-Sided Platform nfx … the supply side actually engineers products that are only available on the platform. The supply side has to do work to integrate to the platform. The products created and sold by the suppliers are a function of the platform, not independent of it.”
At first glance, it may seem that Cosmos SDK fits into this classification. Developers build apps as the supply side, with app users as the demand side. And these apps are “not independent of the platform”. So this looks like a typical developer platform such as iOS, Windows, or Xbox. Here we can see that Cosmos is a platform.
But… NFX also define protocol network effects that “arise when a communications or computational standard is declared and all nodes and node creators can plug into the network using that protocol”.
When we look at Cosmos this way our focus is on its ability to become a global standard for inter-blockchain communication, much like TCP/IP powers the internet or VHS became the video standard. So Cosmos is also a protocol.
Another perspective on Cosmos focuses on resource provision. We can look at Cosmos as having two-sided marketplace network effects, with validators providing computational resources on one side and app developers paying for these resources (either directly or by passing the costs onto their end users) on the other side. In fact, we can also see a second two-sided marketplace, with delegators as resource providers providing capital and validators as the demand-side, providing security and a safe return on that capital. So, from this perspective, Cosmos consists of two back-to-back two-sided marketplaces.
For Cosmos to succeed, each of these three classes of network effects (platform, protocol, and marketplace) need to strongly reinforce each other. They will each come into play at different phases in the growth of Cosmos.
As a platform, the focus needs to be on growing the developer community. The Cosmos community will need to build out the best tooling for developers to build, deploy and support applications. It will need to be cost-effective for developers to get their apps into production and in use. The community needs to create the best forums for the community of developers, sharing sample code, supporting each other, updating documentation etc.
But it’s also important that the validators and delegators help to build developer and user confidence in the network, by securing the infrastructure, avoiding network downtime and improving overall resiliency. Cosmos validators will need to work together to ensure that as the first apps take off, the user experience is on par with centralized services like AWS and other centralized networks. The network must also remain cost-competitive so that developers and users are not put off by high fees, while maintaining high enough rewards to support world-class infrastructure providers and to provide competitive risk-adjusted yields for delegators, especially in light of competing investment opportunities in the decentralized finance (DeFi) space. This is why the effectiveness of the marketplace mechanisms are so important.
But the Cosmos vision of multi-token services and the interoperability of chains will become increasingly important over time. This is where protocol network effects become increasingly important. While each effect can be built up over time, all three are mutually self-reinforcing. An early win with a multi-token service, even one with low transaction volumes, could have a meaningful impact on the long-term chances of the Cosmos Inter-Blockchain Communication (IBC) Protocol becoming the de facto standard for token exchange. But if there were weak rewards for validators or a high number of slashing events (causing weak delegator returns), this could start to negatively impact the quality of the network infrastructure thus damaging the long-term potential of IBC and weakening the attractiveness of Cosmos as a developer platform.
What is especially interesting is the relative strength of each network effect. Platform effects are weaker than protocol network effects. This is because developers love nothing more than trying out new tools and platforms, as is evidenced by the huge number of developer libraries and frameworks. Right now this is a strength for Cosmos, as Ethereum developers are more likely to experiment with a new platform. But even though platform effects are weaker, they can still provide an advantage, so it’s important for Cosmos to build an effective community of developers helping each other, contributing to tools, videos, Q&A forums etc. This will serve to strengthen the overall proposition, giving itself more time to build out the stronger protocol effects.
In summary, Cosmos is a network of network effects. If these network effects can reinforce each other, this could make Cosmos more powerful than any protocol, platform or marketplace that has previously existed. But it requires a delicate balance. It will be an exciting experiment!
Stay tuned for more in this Internet of Blockchain series, where we dive into staking economics, value capture, governance and more.
Follow us on Twitter and join our Telegram and mailing list to find out more.
Originally published at blog.chorus.one on April 8, 2019.
.png)
