Gnosis provides tooling for decentralized prediction market applications on Ethereum. By locking up an amount of the GNO token, users can access Gnosis' range of crypto products, including Gnosis Protocol, Gnosis Safe, and the conditional tokens framework. Also, developers can use the open-source code for Gnosis’ CowSwap exchange to create trading interfaces using batch auctions to match trades using multiple liquidity sources to optimize trade settlements. For those wondering, “what is Gnosis?” - let's dig a little deeper!
In this article, we’re going to dive deep into the Gnosis crypto ecosystem. We’ll discuss the GNO token, the conditional tokens framework, Gnosis Safe, and GnosisDAO. Also, we’ll explore the CowSwap decentralized exchange (DEX), batch auctions, maximal extractable value (MEV), and the economic phenomenon known as “coincidence of wants (CoW)”.
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What is Gnosis?
Gnosis is creating novel market mechanisms for use in decentralized finance (DeFi). With three interoperable product offerings, users can trade, hold, and mint digital assets on Ethereum.
The Gnosis network consists of two customer-facing platforms that provide infrastructure and tooling to create prediction market applications. There are several use cases for these applications, including financial markets, data collection, betting, and decentralized governance. To interact with these applications, users must pay fees to gain shares from the result of market prediction. The platform uses a peer-to-peer pricing mechanism to represent the probability of an event occurring.
The two platforms offered by Gnosis are the basic platform (Gnosis Basic) and the premium platform (Gnosis Premium). Gnosis Basic is an open-source platform that does not collect fees from users. Some of the services operating from Gnosis Basic include market scoring, API management, settlements, and an oracle marketplace. The Gnosis development team does not directly support these services.
However, Gnosis Premium is host to some of the more significant applications the project has to offer, which the development team does support. This includes market mechanisms, state channels, stablecoin creation, and customization tools. Furthermore, services on Gnosis Premium require the payment of fees.
Gnosis Protocol
Gnosis Protocol V2 uses batch auctions to provide protection against the maximal extractable value (MEV). Also, Gnosis Protocol integrates liquidity from multiple decentralized exchanges (DEXs) to offer the lowest price available with minimal slippage. Transaction settlements comprise “consecutive, recurring batches”, with the gas block limit as the only restriction. This process ensures that every order in the batch receives the same price for asset swaps. Furthermore, traders can settle transactions directly without liquidity providers (LPs) or market makers.
The "Balancer-Gnosis-Protocol" (BGP) maintains tight slippage using a single-vault architecture and deep liquidity pools provided by Balancer. Also, Gnosis Protocol uses order settlements known as “ring trades”.
Ring Trades
Ring trades share liquidity across multiple orders instead of just a single trading pair. This type of trade is suitable for prediction market tokens. As ring trades spread liquidity across all orders within a batch instead of it going only to a single trading pair, this results in a better token price for traders. This is because traders don’t need to wait for trades to be perfectly matched, increasing cost and time efficiency. Furthermore, ring trading can match multiple trading pairs in a single batch auction. This helps traders to avoid interacting with automated market makers (AMMs) and liquidity pools.
Miner Extractable Value (MEV)
Miner extractable value, or maximal extractable value (MEV), is the term describing the value that miners capture from reordering and censoring transactions before a miner creates a block. For example, miners on the Ethereum network generally process transactions with the highest gas fees first. This can work as a sort of bidding mechanism and is a simple form of MEV.
Another form of MEV is when miners scan the Ethereum "mempool" and target liquidation and arbitrage opportunities. Upon finding such an opportunity, miners can replace profitable transactions with new ones. The new transaction is then processed before the original because it has a higher gas fee. This type of value extraction is known as “reordering and insertion”, and the result is that the person who initiates the original transaction misses the profitable opportunity.
Coincidence of Wants (CoWs)
"Coincidence of wants" (CoW) refers to an “economic phenomenon where two parties each hold an item the other wants, and then exchanging these items directly”. With regard to Gnosis Protocol, this means that trades can be settled directly between parties without external market makers or liquidity provision. Gnosis Protocol achieves this using a “multi-dimensional order book”.
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The GNO Token
The GNO token is an ERC-20 token responsible for facilitating “the provision and receipt of prediction market services”. Also, developers can use the GNO token to build fee-less applications using Gnosis Premium. These applications use wisdom tokens (WIZ) for transaction fees. The GNO token is a prerequisite for creating WIZ tokens. The number of WIZ tokens spent as fees and the total number in existence in a previous lock-up period determine the number of WIZ tokens a user can generate.
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Initially, 30% of all newly created WIZ tokens are made available to participants. The distribution of the remaining 70% takes place according to a predetermined lock-up period between 30 and 365 days. Once the lock-up period has been chosen, users are informed of the formula used to calculate the amount of WIZ tokens a user can mint. Also, a bonus factor applies to GNO tokens locked for longer than 30 days, with a maximum factor of around 1.6 for lock-ups of one year.
At the time of writing, the GNO token is trading at around $414, with a market cap of around $620 million, according to CoinGecko.
Developer Portal
The Gnosis developer portal offers a wealth of technical documentation and educational material for building applications using the Gnosis product suite. Also, developer teams can access the Gnosis ecosystem fund (GECO), which provides funding of up to $100,000 for new projects to assist with marketing and mentoring when building using Gnosis Protocol.
The developer portal provides access to the three core Gnosis product offerings, Gnosis Safe, Gnosis Protocol, and the Gnosis conditional tokens framework. Developers gain access to the Gnosis CowSwap decentralized exchange (DEX) aggregator code via the developer portal. CowSwap uses batch auctions to match trades across various on-chain liquidity sources, which can be settled using optimal pricing routes. Using the open-source CowSwap code, developers can build their own application interfaces that can execute trades without the need for users to send transactions. Instead, users send a signed message off-chain containing acceptable trading parameters.
Gnosis Safe
Gnosis Safe is a customizable multi-signature (multisig) wallet for teams and individuals operating with smart contracts. Using Gnosis Safe, teams and individuals can require a specific number of addresses or devices to confirm each transaction prior to execution. This aims to reduce unauthorized transactions. Rather than using an externally owned account (EOA) model, Gnosis Safe removes any single-point-of-failure that could compromise funds when using a multi-signature approach.
Gnosis Safe supports ETH, ERC-20 tokens, and ERC-721 non-fungible tokens (NFTs). Also, Gnosis Safe can interact with various decentralized finance (DeFi) protocols. In addition, users have complete self-custody of their assets.
GnosisDAO
GnosisDAO is a collective of Gnosis' product users that aims to “transparently guide decisions” around the development, support, and governance of the Gnosis ecosystem. With “effective control” over 150,000 ETH and eight million GNO tokens, GnosisDAO is responsible for overseeing the allocation of community funds to expand the ecosystem via update proposals. Furthermore, GnosisDAO hosts polls to determine the outcome of each governance proposal. In addition, users must hold a minimum of one GNO token to participate.
Also, GnosisDAO uses permissionless prediction markets for platform governance. Though currently operating as a “minimum viable futarchy network”, the GnosisDAO prediction markets use a three-phase system for governance proposals. First, proposals are posted in the Gnosis forum. This phase is known as “ideation”. Second, the “specification” phase occurs when a proposal gains support from the community and “one outcome with a relative majority of votes on the forum poll” has been agreed upon. Polls are taken to gather further feedback about the proposal before the third and final phase. In the third phase, proposals are collateralized using the GNO token and stablecoins. Using the Gnosis Impact app, users can see the projected price impact on the GNO token and other digital assets taken from prediction markets on the "Omen" platform.
Gnosis Auction
Gnosis Auction is a batch auction platform operating through GnosisDAO. The Gnosis Auction platform uses a “fair, transparent, and decentralized” mechanism for batch auctions to enable new tokens to achieve price discovery which communities and market forces determine. As a highly-composable platform, Gnosis Auction offers seamless integration with other decentralized finance (DeFi) protocols. Also, timed batches help to avoid front-running and gas wars between bidders during token sale events. Plus, auctions can settle over 10,000 bid orders at the same settlement price at the same time.
Conditional Tokens
Conditional tokens are an “event-based digital asset class”. The value of conditional tokens correlates directly with the outcome of an event. The framework used to create conditional tokens can cater to several use cases, including prediction markets and conditional bounty payments.
Furthermore, the conditional token framework uses conditional logic for the creation of tokens with value “contingent on arbitrarily complex logic”. This means that users can mint tokens in a variety of ways, with the value of the tokens coming from outcomes of real-world or on-chain events. Also, the framework for conditional tokens is oracle agnostic. As such, users can select their preferred sources of information for reporting event outcomes. Moreover, users can mint and redeem conditional tokens directly without intermediaries, thanks to the conditional tokens explorer (CTE).
Exploring Gnosis and the GNO Token - Summary
Gnosis Protocol is developing innovative prediction market applications on Ethereum for decentralized finance (DeFi). Thanks to the use of batch auctions and ring trades that cater to coincidence of wants (CoW), Gnosis Protocol offers highly competitive prices for trading. This is due to the low spread, efficient liquidity sourcing, and “optimized transaction management” afforded by this type of transaction.
Furthermore, Gnosis Protocol is an uptick in enterprise adoption, with Gnosis Safe offering users a safe and secure way to store assets on-chain using customizable multi-signature wallets. Plus, using conditional tokens enables developers to create fee-less applications for a broad range of use cases.
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