March 2022

The Growing Gnosis Ecosystem

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Gnosis is steadily building one of the most interesting ecosystems in the blockchain space. As we have begun building a position in Gnosis for Fund 4, this month we are going to dive into the history of Gnosis, its product suite and how it is on track to grow in importance and adoption.

Gnosis is steadily building one of the most interesting ecosystems in the blockchain space. It is not a single product, but a suite of products and tools that aim to “build new market mechanisms for decentralized finance”. Amongst the Ethereum developer community, Gnosis is highly respected for its Gnosis Safe, an open-source multi-signature wallet that is used by many of the leading Ethereum projects. More recently, Gnosis products are looking to gain traction with end-users rather than developers, with the launch of Gnosis Chain, CowSwap and the continued roll out of Gnosis Safe. As we have begun building a position in Gnosis for Fund 4, this month we are going to dive into the history of Gnosis, its product suite and how it is on track to grow in importance and adoption.

Gnosis was founded back in 2015 by Martin Köppelmann and Stefan George. It was one of the first projects to be backed by Consensys, the Ethereum venture production studio. In April 2017, Gnosis spun out to become a stand-alone project and conducted one of the most prominent and successful ICOs of early 2017. The ICO lasted a mere 15 minutes and raised 250,000 ETH for the project, valued at USD12.5m at the time and closer to USD750m at today’s prices – much of which is still in their treasury.

With funding in place, the original focus of Gnosis was to build open-source infrastructure for prediction markets on Ethereum. The idea was that users should be able to trade the outcome of events through marketplaces that leveraged the Gnosis protocol. While the idea made sense, it was a little ahead of its time in 2017 and the protocol received limited usage by end users. Undeterred, the team continued to build open-source infrastructure around this idea and subsequently became one of the earliest pioneers of decentralized finance (DeFi).

Today, there are three established Gnosis products: 1) the conditional tokens framework, 2) the Gnosis Protocol, and 3) the Gnosis Safe. There is also the more recent Gnosis Chain, which is well placed to act as a payments platform.

Conditional Token Framework

The original vision for Gnosis was to provide infrastructure for prediction markets, which is what the Conditional Token Framework does. As the title suggests, the framework allows for the creation of “conditional tokens”. These are tokens that are attached to a condition. For example, a conditional token could represent the chance of rain tomorrow in Hong Kong or the probability of a global recession next year. Conditional tokens can be combined into complex positions so that rather than having token x or token y, where x and y represent the outcomes of two events, a user can hold position xy, representing event y given that event x has already occurred.

At its most basic, this framework allows users to create markets around the likelihood of an event. More interestingly, it allows users to create markets around how the likelihood of an event is affected by any other event. For example, what is the probability of a global recession, if Russia invades another country. It also allows traders to trade any asset under the condition that a specific event happens. For example, a user could buy a tokenized Russian Ruble contingent on the condition that Russia’s sanctions are lifted by the end of the year.

The Conditional Token Framework is fascinating but remains ahead of its time. The Gnosis Protocol and Gnosis Safe are more relevant and are being actively used today.

Gnosis Protocol

The first version of the Gnosis Protocol launched in early 2020 and introduced a new decentralized exchange mechanism to Ethereum. A year later, version 2 launched with some significant upgrades and a first proof-of-concept application called CowSwap.

There are two key innovations that the Gnosis Protocol offers:

  1. MEV protection: “miner extractable value” or “maximal extractable value” (MEV) refers to the value that miners can extract from transactions happening on chain. The most common form of MEV is frontrunning, where the miner can see a transaction in the mempool and can trade ahead of this transaction to make a profit. The Gnosis Protocol v2 protects against this using its batch auction mechanism (many transactions grouped together) and off-chain order placement (if two traders match up in a coincidence of wants, then trades are directly settled between them).
  2. Liquidity source aggregation: the protocol taps into all the major on-chain liquidity pools on Ethereum (other DEXes). Traders receive a price quote that guarantees that they will receive the same price or better than other existing DEXes.

CowSwap is the first instantiation of the Gnosis Protocol v2. With CowSwap, trades can be settled via underlying on-chain AMMs directly or via DEX Aggregators, depending on which pool/path offers the best price. In addition, before finding the best price for a trade from available on-chain liquidity, CowSwap first seeks a coincidence of wants within the existing batch to offer an even better price than any pool can.

Gnosis Safe

Gnosis Safe is the Gnosis product that is best known within the crypto community. It is a multi-signature “multisig” wallet on Ethereum that is widely used by project teams and DAOs. The product supports ETH, ERC20 tokens (the main standard for fungible tokens on Ethereum) and ERC721 tokens (the main standard for NFTs). Gnosis Safe is used by many of the largest projects on Ethereum such as Yearn, Aave and Balancer. The user experience is straightforward, and the product can be used through a browser, desktop app or on a mobile device. It can also be used in conjunction with other hot and cold wallets.

If you have tried storing and transacting digital assets outside of exchanges, then you have most likely used an externally owned account (EOA). These are accounts that are secured with a single private key, saved on your computer (hot wallet) or on a hardware device like a Ledger (cold wallet). These EOAs work well for individuals but work poorly for businesses, who may want multiple signers for a transaction to reduce the risk of a rogue employee. Gnosis Safe is a smart contract wallet that requires multiple signers to approve a transaction, meaning that no single person can control and compromise funds.

Gnosis Chain

Gnosis Chain is the latest product to come out from the Gnosis team. Rather than being a brand-new project, Gnosis Chain is the result of a merger between xDai Chain and Gnosis. xDai Chain launched in late 2018 as an Ethereum-based sidechain using proof-of-stake. The chain used the stablecoin xDai as its native currency, with the focus on very fast and inexpensive transactions. In November 2021, Martin Köppelmann put forward a proposal to merge Gnosis with xDai Chain, with the promise of providing technical resources and a war chest of GNO tokens (over USD100m) to help grow the chain into a leading contender in the Layer 1 protocol space. The merger took place and xDai Chain formally rebranded to Gnosis Chain.

As a chain that uses the EVM (Ethereum Virtual Machine), Gnosis Chain is highly compatible with Ethereum, and it is easy for existing Ethereum applications to port over. The Gnosis community sees the chain as an experimental version of Ethereum, similar to how Kusama is the experimental version of Polkadot. The benefits of the chain over Ethereum are its faster transactions, lower fees, and the use of the USD-pegged stablecoin xDai to pay for gas fees. Its operational proof of stake network foreshadows Ethereum’s 2.0 upgrade, and the network already has over 50,000 validators. While still very early, the Gnosis Chain ecosystem is growing, with over 100 projects now building on it.

Governance - Gnosis DAO and GNO

From a governance perspective, Gnosis is a decentralized project and is controlled by the Gnosis DAO. As one of the earliest projects built on Ethereum, the team raised 250,000 ETH in its 2017 fundraise. Today, the Gnosis DAO treasury still has over 150,000 ETH (over USD400m) and around 8m GNO tokens (over USD2.5bn).

GNO is the token that governs the Gnosis DAO and it is up to GNO token holders to vote on how to use the treasury. Anyone holding at least 1 GNO is eligible to vote on proposals submitted to the DAO, and there is a formal process by which governance proposals can be submitted. Additionally, with the launch of Gnosis Chain, the GNO token now also acts as the staking token used by validators. As a result, the GNO token is a cross-chain token, existing natively on both Ethereum and the Gnosis Chain.

There is a total circulation of 10m GNO tokens, with 1.8m currently in circulation. Of late, there has been much discussion in the Gnosis community as to whether the Gnosis DAO should burn some of the GNO held in its treasury. Some people feel that the Gnosis DAO has too much GNO and that this reflects poorly on the project, turning potential investors away. Removing GNO from circulation gives each existing GNO holder a greater share of ownership in the network and improves the token distribution.

We have previously written about different builder mentalities, with some founders driven by money (the Mercenaries) and others driven by purpose (the Missionaries). Founded in 2015, Gnosis is one of the oldest Ethereum projects, created by some of the most passionate missionaries in the blockchain space. There are very few blockchain projects that remain from 2015, and the fact that Gnosis has evolved with the changing landscape reflects the founders’ characters and commitment. The long-term minded approach of the team, coupled with the confidence to be experimental is a powerful combination.

At CMCC Global, we have conviction in the Gnosis team and that long term value will accrue to GNO. We are holders of GNO in Fund 4 and have locked up our holding in the Gnosis Lock, a staking contact that rewards long term holders with airdrops from new Gnosis products. We are excited by the evolution of the Gnosis product suite and know that more innovative products will emerge. We look forward to supporting the ecosystem as it continues to evolve.