Why we invested in Neutron

LongHash Ventures
7 min readJul 7, 2023

The Cosmos ecosystem was designed with the vision of creating an internet of blockchains. The philosophy behind the architecture was that each project should be able to spin up their own dedicated blockchain, modify it to a large extent based on their application requirements, and retain the security properties while having the ability to interoperate with each other. All the modules of the CosmosSDK and Inter-Blockchain Communication (IBC) were designed with this purpose in mind. This architecture did solve a lot of problems that exist in other blockchain architectures like limited scalability, network congestion, and less flexibility for developers. However, this approach had a few challenges of its own.

Current Challenges

For applications that already have good traction, for example dydx, it makes more sense to build your own app-specific chain. However, developing a blockchain for early-stage applications is challenging since it requires good technical knowledge and is time-consuming. Since each blockchain is responsible for its own security, they are required to bootstrap their own network of validators. This is resource-intensive and time-consuming. Moreover, achieving a high level of security with a new token is not feasible because the total capital staked by validators is quite low before the application gets significant traction and the token price appreciates. This poses a chicken-and-egg problem as applications struggle to achieve traction before the blockchain is secure. This slows the iterations and inhibits early-stage developers from experimenting with novel use cases in Cosmos. DeFi adoption in Cosmos has lagged behind other ecosystems due to low liquidity, low security of Cosmos smart contract platforms, and competition from high staking rewards.

ATOM Community Alignment

A pure app-chain approach also does not lead to any value accrual to ATOM tokens on a long-term basis leading to a lack of alignment with the ATOM community. While there exists some alignment via airdrops as most new projects in Cosmos airdrop their tokens to ATOM holders, this is not an ongoing relationship.

Neutron Approach

In order to solve these challenges, the Proposal 72, proposed in June 2022, marked a soft consent in favor of Replicated Security (RS). RS is a shared security system that allows a larger chain (for example Cosmos Hub), known as the provider chain, to provide security to a smaller chain, known as the consumer chain. Using IBC, the provider chain sends a series of messages to the consumer chains’ consensus engine. These messages will notify the consumer chain of the validators participating in its validator set as well as the share of voting power that these validators obtained by staking on the provider chain. In exchange, the provider chain receives fees and revenue from the consumer chain as part of a flexible security agreement. Neutron is the first consumer chain to leverage the Cosmos Hub as the provider chain. Proposal 72 also accelerated this development through the earmarking of 150k ATOM from the community pool to fund projects that support and that are supported by RS, including Neutron.

By launching as the consumer chain of Replicated security, Neutron

  • Has the highest level of security in the Cosmos ecosystem from the day of launch
  • Has immediate incentive-alignment with the ATOM community by sharing 25% of the transaction fees and MEV revenue with the Hub
  • Marks the beginning of Atom Economic Zone (AEZ), which is an ecosystem comprising of the Cosmos Hub and its Partner/Consumer Chains which are synergistically aligned around the hub to mutually strengthen the ecosystem.

Neutron is a permissionless blockchain that allows anyone to easily launch their application by using CosmWasm smart contracts. Neutron lets projects leverage RS as smart contracts without generating any additional cost for the Hub. Now, projects have the option to launch their application in the Cosmos ecosystem without any concerns about security and without spending too much time and resources on blockchain development. Neutron has been designed to develop a strong cross-chain DeFi ecosystem and strengthen ATOM’s position as Cosmos’ base asset. This is being done by leveraging the power of Interchain Accounts (ICA), Interchain Queries (ICQ), CosmWasm smart contracts, and modular governance. The functionality of ICA and ICQ can be achieved today even without the ICA and ICQ modules, but it requires the logic to be coded at the chain level. ICA and ICQ will allow projects to leverage these functionalities at the smart contract level in a standardized format making the applications more programmable.

Interchain Accounts (ICA)

ICA allows one blockchain to securely control an account on another blockchain, using IBC. Cosmos ecosystem blockchains can access the application features of another chain and carry out any action native to that chain. Before ICA, if a user had different tokens like $ATOM, $OSMO, $EVMOS staked across the ecosystem, they were required to go to each chain to claim rewards. Using ICA, they can perform these actions from a single blockchain. This will be particularly useful for liquid staking application, Lido, which will soon launch on Neutron.

Interchain Queries (ICQ)

ICQ enables applications on Chain A to query chain B to perform some transactions on chain A. With ICQ, queries are packaged as an IBC packet on the querying chain. With an IBC channel established with the target chain, the IBC packet carrying the query is simply sent to the target chain with the help of relayers. On arrival, the IBC packet is unpacked by the ICQ module to reveal the query which is then executed on the application layer of the target chain, just as normal domestic queries within a homogenous blockchain network. Finally, the response of the query is sent to the querying chain within the returned IBC packet acknowledgment. ICA and ICQ together can be used to perform multichain liquid staking. ICQ can be used to query the accrued reward balance for liquid staking on another chain and ICA can be used to transfer the rewards to the delegation account on the host chain.

Governance and Liquidity Module

Modular governance has been designed in Neutron to avoid voter fatigue, allow the chain economy to adapt to market conditions, and incentivize users to provide more liquidity. In return for bonding NTRN tokens, users will get voting power in the DAO which controls the treasury or the community pool. The tokens in the reserve pool are not liquid and are released based on the on-chain activity. High on-chain activity and revenue translate to more tokens being released by the reserve, which instead of directly going to the treasury, pass through a distribution module. The distribution module can direct a certain portion of the tokens to a module like a liquidity module from where they can be directed to different liquidity pools. The users, based on their voting power, can decide the allocation of tokens across different pools. This creates a strong incentive for users to provide liquidity. Users can provide liquidity, get voting power based on provided liquidity and use the voting power to programmatically direct the liquidity from the reserve into pools of their choice.

New Era for DeFi

ICA and ICQ will together unlock new composable utilities. By leveraging ICA, ICQ, modular governance along with CosmWasm, Neutron will foster the development of applications that will enable users to use native and liquid-staked ATOM to provide liquidity, lend, borrow, wield governance power, strip bonds, and more. Astroport is an excellent example of the kind of cross-chain applications that will be built on Neutron. Astroport was initially a single blockchain protocol operating solely on Terra. It has now expanded to other networks such as Neutron and Injective, with an upcoming launch on Sei Network. As a next-generation AMM and DEX, Astroport embraces the power of IBC to create a unified, cross-chain experience and supports cross-chain governance, token transfers, and fee collection. Other projects working on integrating with Neutron include:

  • Lido (Liquid staking derivatives platform)
  • Mars Protocol (looking to deploy the second outpost on Neutron after launching the first outpost on Osmosis)
  • Catalyst (cross-chain swaps between Neutron and other Catalyst-enabled chains)
  • Pulsar Finance (cross-chain portfolio management platform)
  • Amulet Finance (self-repaying loans)
  • Coinhall (Track real-time price charts & analytics for all token pairs)
  • Celaton (smart-contract explorer already live on Neutron)

Primitives such as DAODAO, Timewave, and Gitcoin could possibly launch on Neutron, enabling the Hub to have the tools to enter secure, programmatic agreements with other chains, protocols, and treasuries like tokenswaps, quadratic funding rounds, loan agreements, protocol-owned liquidity, etc.

Conclusion

Neutron’s highly secure nature, neutral positioning, and a feature set designed for cross-chain smart contracts make it an attractive home for DeFi and other cross-chain dApps. Neutron will empower developers and users to transact and innovate without borders or limitations. LongHash Ventures is committed to playing an active role in the adoption and growth of Neutron by actively contributing to the discussions in governance forums and launching an AEZ Accelerator & Builders’ Fellowship in partnership with ATOM Accelerator DAO. Having incubated more than 70 projects in the past in partnership with ecosystems like Polkadot, Filecoin, and Axelar, Our accelerator arm LongHashX will now support 25–30 startups and accelerate the growth of the 5 most promising projects building on Neutron and the ATOM Economic Zone. We strongly believe that Neutron is ushering a new era to Cosmos and is in a prime position to power a new generation of cutting-edge composable cross-chain applications.

About LongHash Ventures

LongHash Ventures specializes in bootstrapping Web3 ecosystems. Our venture funds invest in early-stage Web3 protocols, and our LongHashX Accelerator partners with ecosystems and protocols to accelerate early-stage founders.

About LongHashX

LongHashX is one of the world’s leading Web3 accelerators with the strongest Asian network. We partner with the leading Web3 ecosystems and infrastructure protocols to build their developer communities by funding and venture-building with early-stage founders.

--

--

LongHash Ventures

We specialize in bootstrapping Web3 ecosystems. We invest in Web3 protocols and our LongHashX arm partners with ecosystems to accelerate Web3 founders.