Evaluating the Cosmos Chain vs L2 Decision for Investors and Builders

Key Insights

• dYdX recently announced it is leaving the Ethereum Layer-2 (L2) ecosystem to launch its own Cosmos chain. This decision prompted many investors and builders to reconsider the tradeoffs between these two ecosystems.
• L2s inherit the massive security budget of Ethereum at almost no cost. The tradeoffs are less flexibility for builders, along with a broad set of additional constraints, many of which will likely ease over time.
• Cosmos allows builders more flexibility in creating their own chain while also allowing them the potential for value accrual (MEV, transaction costs, etc) for their own native token. The stark downsides are the cost and risks of maintaining a standalone set of validators and attracting users to the new ecosystem.
• The implications for how builders evaluate these two ecosystems has important investment implications for ETH, ATOM, and the underlying protocols on each ecosystem.

Decentralized exchange dYdX recently made headlines in the crypto community when it announced it was leaving the Ethereum L2 ecosystem powered by StarkWare to launch its own Cosmos chain. dYdX was the biggest protocol by TVL on L2 at the time of the announcement. The move prompted questions from the Ethereum community on the long-term attractiveness of L2s for builders.