The internet of blockchains

Polkadot is the most talked-about multichain protocol, but there are many other Layer 1 networks that can support a constellation of independent blockchains capable of exchanging data and assets. We will look at several emerging multichain ecosystems, including Polkadot/Kusama, Avalanche, and Cosmos.

What is a Layer 1 multichain network?

In blockchain, a Layer 1 network is a blockchain on which cryptocurrencies and decentralized apps run. The best-known blockchains, such as Ethereum, Bitcoin, Dogecoin, Litecoin, etc., are all Layer-1.

The single biggest issue that all these older chains struggle with is scalability. A blockchain’s processing capacity is limited, so as the number of queued transactions mounts, you end up with lags, or rising fees, or both. The best example is Ethereum, which hosts over 2,500 dApps but can process only 15 transactions per second, resulting in an average fee of $50 as of the end of October 2021.

To solve the problem, third-party teams came up with so-called Layer-2 solutions – integrations that make the ecosystem more scalable and performant without changing anything in the base blockchains. Examples include Lightning Network for Bitcoin, as well as Polygon Matic and Plasma for Ethereum.

However, there is another solution, more radical: multichain networks. These are Layer-1 networks that can support multiple blockchains – interconnected but independent. This approach has several advantages:

• No competition for resources. Each chain has its own state and transaction queue, so that hundreds of operations can be executed in parallel. This means higher processing speeds and no bottlenecks.
• Interoperability. The main Layer-1 network (sometimes also called Layer 0) provides an overarching structure that lets individual chains ‘talk’ to each other and exchange assets. You should be able to send tokens from a dApp on Chain 1 to a dApp on Chain 2 – something that’s not possible with a dApp on Ethereum and one on TRON, for example.
• Independent rules. Each chain can come up with its own rules of consensus, fees, and governance. They can decide how many transactions to include in a block, how to choose validators (if any), if they should support NFTs, and so on. This enables developers to created purpose-specific blockchains, centered on DeFi, gaming, NFTs, and so on.
  

You can think of a multichain network as a condominium, where every property owner decides independently how to decorate their apartment and how to live their life - but has to pay condo fees and adhere to a shared set of rules.

Ethereum itself is slowly evolving from a regular Layer-1 blockchain to a multichain ecosystem known as Eth 2.0. It will include a central Beacon Chain and up to 64 separate chains, or shards.

The full transition to Eth 2.0 will take another year or more - and in any case, the new network won’t be able to sustain blockchains with varying parameters the way Polkadot can, for example. Meanwhile, there are already several multichain ecosystems that are operational or about to be launched – and we’ll focus on them next.

Polkadot

Polkadot is probably the best-known interoperability platform, and we’ve posted a lot of in-depth articles about its architecture and staking mechanism. We’ll give you a gist here.

Polkadot is built on Substrate – a modular framework that enables developers to roll out new blockchains faster and with minimal costs.

At the center of the ecosystem is the Relay Chain, which lets all the individual blockchains (called parachains) communicate. The Relay Chain also provides shared security and records information about all  new blocks added to each parachain.

The Relay Chain is secured by validators, who need to stake a lot of DOT to be selected for this role. At present, there are 297 active validators, and the smallest of them has a stake equivalent to $73 million. Most of these come from a mechanism known as nomination: regular DOT holders can stake their coins on a validator and get a percentage of the validation rewards in return.

As for parachains, there can be 100 of them for now, though the number can be expanded in the future through a governance vote. Parachain slots will be distributed through a system of auctions, due to start in November 2021 (read our detailed article about blockchain auctions for more info). Judging by the level of competition in each auction on Kusama (see below), the race for the slots on Polkadot will be fierce.

Each parachain can have its own consensus mechanism, governance system, fees, staking rules, and so forth. Since transactions on all parachains run in parallel, they don’t compete for resources – thus there should be no lags or fee hikes, as it happens on Ethereum.

A parachain is linked to the Relay Chain through a collator or collators – special nodes that transmit the information about every new block to the main set of Polkadot validators. A parachain itself decides how to pick collators, be it through staking and delegation or in a different way.

Polkadot will also have a set of bridges linking it to other blockchains: Ethereum, Binance Smart Chain, Polygon etc. Thus will help create a truly interoperable ecosystem that goes far beyond Polkadot itself.

For now, the Relay Chain is operational, but there are no functioning parachains – since, as we said, the auctions haven’t started yet. This means that there are no dApps running on Polkadot, either – though many are ready or almost ready for deployment. To get a better idea of what these projects will be like, we should take a look at the canary network for Polkadot, Kusama.

Kusama

Kusama is the incentivized testnet for Polkadot – a space where developers can test-drive apps, see if they break, and fix bugs before launching the ‘real’ version on Polkadot. It doesn’t make Kusama-based projects any less real or valuable, though: for example, the market cap of Moonriver’s native asset  MOVR is getting close to $1 billion.

The two platforms have a very similar architecture and differ more in their concept: the official Wiki describes Kusama as ‘wild’ and Polkadot as ‘more conservative’. Whereas Polkadot prioritizes security and stability, Kusama adheres to the great startup principle ‘fail fast, fail cheap’. It is easier to launch a parachain, validators need to bond a smaller amount of funds, and the penalty for breaking the rules  (if a validator stays offline for too long, for example) is lower.

Another significant difference is the governance process. Both networks implement upgrades through referendums held among the token holders. But on Kusama, each referendum takes just seven days, and not 28 as on Polkadot; and if a proposal is approved, it is enacted after 8 days, not 28. Thus, Kusama can evolve and get upgraded four times faster.

The total number of parachain slots on Kusama is 100, just like on Polkadot. The auction system is also the same. And while Kusama’s tagline is ‘expect chaos’, so far the parachains launched on the platform have been running quite smoothly.

In our previous articles, we’ve talked in great detail about parachain auctions on Kusama and their recent winners:

• DeFi projects Karura, Bifrost, Calamari, Basilisk, Altair, and Heiko;
• smart contract platforms Moonriver and Shiden;
• cloud computing platform Khala;
• Web3 credentials service KILT.
  

All these parachain projects are worth keeping on your radar; and with over 80 auctions more to go to fill all the slots, Kusama can grow into a massive multichain ecosystem in its own right.

Speaking of incentivized testnets, our own Pontem Network plays a similar role as Kusama – but in relation to the Facebook-backed Diem blockchain. While there is no set launch date for Diem yet, developers can already start building Diem-compatible dApps and test them out on Pontem.

Since Pontem Network is built on Substrate, it is compatible with both Polkadot and Kusama ecosystems, including dApps like Karura, etc. This means that teams who launch dApps on Pontem will be able to tap into the liquidity on Polkadot and Kusama and reach out to their audiences. It’s a very valuable opportunity, considering that we still don’t know on which terms new dApps will be added to Diem.

Cosmos

For some reason, Cosmos spent a long time in Polkadot’s shadow, with ATOM slightly lagging behind DOT in terms of price performance. And yet, as of October 2021, there are already over 250 dApps and services running on Cosmos, while Polkadot doesn’t have even one live parachain yet. What led to this quiet success?

Perhaps the focus on interoperability is the key. Whereas Polkadot will have only 100 parachain slots (for some time, at least), Cosmos allows for an unlimited number. No need to attract millions of dollars in backing to win an auction; anyone with relevant technical expertise can launch a Cosmos ‘zone’, or blockchain.

At the center of the ecosystem is  a Proof-of-Stake blockchain called the Cosmos Hub, secured by 100 validators. Its role is to link the many chains (zones) together and allow them to exchange assets and data using the Inter-Blockchain Communication Protocol, or IBC. In the near future, the Cosmos Hub should also provide shared security for the zones, like the Relay Chain on Polkadot.

While the Cosmos Hub does play the leading role, it isn’t the only hub. Cosmos is more decentralized than Polkadot in the sense that it doesn’t rely on a single ‘mother chain’: it’s more like a world divided into many regions, each with its major economic center. Other functioning hubs include Kava, IRISnet, and Sentinel. In fact, it’s relatively easy to create a fork of the Cosmos Hub and start a new hub.

Each hub incentivizes its validators with its own native asset – and not ATOM. In general, ATOM plays a smaller role in Cosmos than DOT in Polkadot – and perhaps this is the reason why it hasn’t been so prominent in the crypto market. However, when shared security becomes reality, we might see a surge in demand for ATOM.

Cosmos uses a consensus engine called Tendermint Core, which also powers major projects like Binance DEX, Terra, and Oasis Labs. Tendermint is Byzantine fault tolerant, meaning that the blockchain will run smoothly even if a large number of its nodes (up to 1/3) start to behave maliciously. It’s also a very fast consensus algorithm: a transaction is considered final as soon as it’s included in a block, so that no further confirmations are needed.

Apart from Tendermint and IBC, Cosmos has one more ace up its sleeve: Cosmos SDK. It’s a modular framework that lets developers pick and match different pre-built elements instead of creating a blockchain from scratch. The library includes such modules as Governance, Staking, Bank, and Slashing.

Perhaps as you are reading this, you’re asking yourself: which well-known projects form part of the Cosmos ecosystem? The list indeed includes many prominent names:

• Terra (LUNA), a stablecoin protocol with a $17B market cap;
• Kava (KAVA), a DeFi lending platform;
• Secret Network (SCRT), a smart contract platform centered on data privacy;
• Band Protocol (BAND), a cross-chain oracle;
• Osmosis (OSMO), a popular decentralized exchange;
• Akash (AKT), a decentralized cloud computing platform, and many others.
  

Avalanche

Of all smart contract platforms, Avalanche has the fastest time to finality, meaning that asset transfers are processed almost instantly. Its processing capacity is also among the highest in the industry: around 4,500 transactions per second. This makes it a great choice for DeFi dapps, especially decentralized exchanges (DEXes). Indeed, trading volumes on the Avalanche-based DEXes Pangolin and TraderJoe have grown tremendously in the past months.

However, few people realise that Avalanche can support multiple blockchains, not just different dApps. In fact, it already has four live chains:

• Primary Network: similar to Polkadot’s Relay Chain, it secures and validates the whole network.
• X-Chain (Exchange Chain): an extremely fast chain for simple asset transfers and trading;
• C-Chain (Contract Chain), designed for smart contracts. It uses Ethereum Virtual Machine (EVM) and is fully compatible with Ethereum dApps and ERC-20 tokens;
• P-Chain (Platform Chain): a coordinating chain that manages validators, staking, and subnets, or individual blockchains built on top of Avalanche. This is the equivalent of Polkadot in Avalanche: a system that allows multiple chains with different rules to communicate.
  

For our purposes, subnets are the most interesting part here. A subnet can be a single custom blockchain or a set of blockchains: for example, X-Chain, C-Chain, and P-Chain are all part of the same subnet. Anyone who runs a node on the Primary Network can create a subnet and enjoy the sub-second time to finality and blazing speed. Better yet, you can start a subnet using any virtual machine: EVM, AVM (Avalanche Virtual Machine), WASM (WebAssembly, used by Polkadot), or something else.

As of the time of writing, there were 109 subnets and 93 blockchains running on Avalanche, secured by 88 validators. But you can keep creating new subnets as needed: no competing for slots, like on Polkadot. The maximum number of Primary Network validators isn’t capped, either, so in theory you can have many thousands of subnets running on Avalanche. This could make it a serious contender for the crown of the multichain space in the future.  

What’s next?

The upcoming launch of parachain auctions on Polkadot will trigger a new evolutionary stage in the blockchain space. Plus, Kusama’s ecosystem will come into its own in the next few months with the next batches of auctions. If you invest in cryptocurrency, you should keep DOT, KSM, and various parachain assets on your radar.

We are also likely to see the first independent chains launch on Avalanche and more hub activity on Cosmos. Finally, Polygon Network is bound to yield surprises: most know it as an L2 Ethereum scaling solution for dApps, but it has multichain features, too. As usual, Pontem Network will bring you all the updates – follow us in Telegram and Discord for the latest on interoperability projects.