#dao-tool #fund-management #deep-dive # An Investigative Research on Cogito Protocol ## Table of Contents **1.** [**Cogito Protocol, What Do They Plan to Do and How**](#1-Cogito-Protocol-What-Do-They-Plan-to-Do-and-How) >**1.1.** [**Products Offered by Cogito.**](#11-Products-Offered-by-Cogito.) >**1.2.** [**Innovative Practices Proposed by Cogito**](#12-Innovative-Practices-Proposed-by-Cogito) **2.** [**Discussion**](#2-Discussion) >**2.1.** [**The Indices**](#21-The-Indices) >**2.2.** [**AI integration in Algorithmic Stability Protocol**](#22-AI-integration-in-Algorithmic-Stability-Protocol) **3.** [**Additional Facts and Opinions**](#3-Additional-Facts-and-Opinions) **4.** [**Glossary**](#4-Glossary) --- ## 1. Cogito Protocol, What Do They Plan to Do and How. The current crypto world provides only two type of assets, stable and hyper-volatile. Therefore only two group of people are inclined to invest in crypto assets: 1. People who come from **high inflation economies or emerging markets** lean towards stablecoin investment since it allows them to store the value of their savings in an asset pegged to a more stable currency, such as the U.S. dollar. 2. People who have a higher risk tolerance and live by the principle **"no pain, no gain"** or true crypto believers who look forward to seeing a time when digital currencies replace dollars and euros for making transactions. Given the case, the average investor would rather invest in **stock market**. The main reason being, the ability to **diversify their portfolios** with a collection of different investments that combined reduce their overall risk profile. As of October 2021, Global Equity Market was valued $122 trillion (60% of assets being low to medium risk), and Crypto Market Cap was $2.35 trillion (consisting only of stablecoins and high risk assets). Taking into account that the oldest crypto coin is only 13 years old, this figure is **outstandingly impressive**, however, one can't help but wonder, what this figure would be if crypto investors could diversify their assets. **Cogito Protocol** claims to have the solution to this problem. They suggest a new class of digital assets called **tracercoins** that range from **low volatility** stablecoins to **medium volatility** growth assets, hence giving investors the opportunity to diversify their crypto assets and manage risk as they see fit. **Tracercoins** leverage both algorithmic protocol and fractional reserve framework to approximately track **synthetic indices**, moreover they utilize an open-source and permissionless protocol that combines AI with traditional algorithms. More on that later in this article ... ### 1.1. Products Offered by Cogito. **Cogito** is launching two tracercoins called **GCOIN** (*tied to the Green Index, which tracks green indicators reflecting environmental progress*) and **XCOIN** (*tied to the Technological Index, which tracks technological indicators reflecting progress towards the technological singularity*). **GCOIN** has a low volatility and therefore is going to be used as a stablecoin. On the other hand, **XCOIN** has a higher volatility and will offer a new asset class for users with a higher risk appetite. (***<u>Note:</u>*** **XCOIN** has a higher volatility relative to **GCOIN**, however, when compared with other coins such as Bitcoin or Ether it should be considerably more stable.) **Overall, **Cogito** is a <u>*Two-Token, Fractional-Algorithmic Stablecoin Protocol*</u> that uses both collateralization and algorithmic processes to create its decentralized stablecoin.** The idea of using two different types of coins or tokens in a cryptocurrency system **(two-token protocol)** is not a new or novel idea, actually, it is a common algorithmic stablecoin structure. This system has been proposed, discussed and applied by various individuals and organizations in the crypto community. And its record is not good. In an [**article**](http://www.wakeforestlawreview.com/2021/10/built-to-fail-the-inherent-fragility-of-algorithmic-stablecoins/) published in 2021 by **Dr. Ryan Clements of University of Calgary**, he states: > Uncollateralized Algorithmic Stablecoins are fundamentally flawed because they rely on **three factors that historically have proven to be uncontrollable**: > 1. They require a **support level of demand for operational stability**. > 2. They rely on **independent actors with market incentives** to perform price-stabilizing arbitrage. > 3. They require **reliable price information** at all times. However, when algorithmic stablecoins are partially backed by collateral **(like in the case of Cogito)**, the situation has shown to improve favorably. A good example of this is [**Frax Finance**](https://docs.frax.finance/), they claim to be the first to introduce this concept back in 2019, and as of December 2022, they are ranked as the 5th largest stablecoin by market capitalization. ### 1.2. Innovative Practices Proposed by Cogito Traditionally, algorithmic stablecoins use central bank indexes as a reference for maintaining the stability of the stablecoin by designing the algorithmic stabilization mechanism to automatically adjust the supply and demand of the stablecoin in response to changes in the central bank index. For example, if the central bank index indicates that the economy is growing, the **algorithmic stabilization mechanism** may increase the supply of the stablecoin to maintain the stability of the stablecoin and the opposite action is taken when the economy is slowing down. However, **Cogito** has a completely new approach. They plan to tie **GCOIN** to the Green Index, which tracks green indicators reflecting environmental progress, e.g. greenhouse emissions, air quality, health, freshwater resources, and **XCOIN** to the Technological Index, which tracks technological indicators reflecting progress towards the technological singularity, e.g. processor speed, the cost of sequencing a human’s genome, the size of the smallest engineered machine, etc. According to **Cogito**, this indices will be constructed as weighted averages of a reasonably large set of quantitative indicators, with data coming from trusted third-party sources such as the World Bank, OECD, United Nations, etc, which are free of protocol-level dependencies, meaning that users are not required to use specific software or protocols to access and use the data. This makes it easy for anyone to access and use the data for a variety of purposes. One additional new practice that **Cogito** intends to implement is Algorithmic Stabilization Protocol backed by Artificial Intelligence. For more on this check [AI integration](#22-AI-integration-in-Algorithmic-Stability-Protocol) segment. **For the most part, Cogito is introducing a new class of assets designed to increase in value smoothly and steadily with <u>*the progress of humanity*</u>, by soft-pegging to synthetic indices that quantify aspects of <u>*global human development*</u>. As for Algorithmic Stabilization, apart from incorporating AI predictive analytics and reinforcement learning, everything else is standard practice.** --- ## 2. Discussion After a careful examination and a thorough research based on the strategies and practices described in the [**whitepaper**](https://cogito-protocol.gitbook.io/cogito-protocol/) of **Cogito Protocol**, I am confident I can make a clear assessment of the situation. I have decided to focus on the indices reflecting Environmental Progress for **GCOIN** and progress towards the technological singularity for **XCOIN**. As well as the incorporation of AI predictive analytics into the Algorithmic Stabilization Protocol. It is my opinion that the assessment of the concepts mentioned above is critical to understand what **Cogito Protocol** is all about. Everything else is standard practice, therefore I can safely assume that Cardano community is already familiar <u>*(and for those who aren't, a simple Google search will provide more information than I could ever do)*</u> ### 2.1. The Indices Pegging a crypto asset with an **Environmental or Technological Progress Index** would involve linking the value or price of the crypto asset to the performance of those progress indices. A crypto asset is a digital asset that uses cryptography for security, and it can be traded on a blockchain or other decentralized platforms. An **Environmental or Technological Progress Index** is a measure of the improvements and advancements that are made in protecting and preserving the natural environment or the newest innovations that have taken place in Technology. Pegging a crypto asset with such a progress index could potentially provide a number of benefits. For example, it could help to align the value of the crypto asset with the performance of the **Natural Environment or Technological and Scientific Innovations**, in such case, everyone wins. The crypto asset stays secure and unaffected by financial trends and at the same time may incentivize the development and implementation of sustainable practices and technologies. It could also provide a transparent and verifiable mechanism for tracking and measuring **Environmental and Technological Progress**, and for holding individuals and organizations accountable for their performance in these two fields. By applying such a pegging mechanism, the positive impact has the potential to go beyond the crypto ecosystem and the value of the assets, it can impact the real world as well. However, there are also challenges and limitations to pegging a crypto asset this way. One of the main challenges is the complexity and subjectivity of **Environmental and Technological Progress Indices**, as it can be difficult to identify and measure all of the relevant factors and aspects that affect the performance of these two categories. This could make it difficult to design and implement a reliable and accurate environmental and technological progress index, and to ensure that it accurately reflects the true state of the **Natural Environment and Technological Industry.** In addition, pegging a crypto asset with an index that is so hard to quantify could raise concerns about ***fairness, transparency, and accountability***. For example, there may be questions about how the value of the crypto asset is determined, and about who has control over the index and the decision-making process. There may also be concerns about the ***potential for manipulation and exploitation***, and about the impact of the crypto asset on the **Natural Environment, Tech Industry** and on society as a whole. **Altogether, pegging a crypto asset with an <u>*Environmental or Technological Progress Index*</u> is a fascinating idea worth exploring, but it is not without challenges and limitations. Further research and development would be needed to explore the feasibility and practicality of this approach, and to address the potential challenges and concerns.** *More on this in [**Opinions**](#3-Opinions) section.* ### 2.2. AI integration in Algorithmic Stability Protocol Algorithmic stabilization of cryptocurrencies refers to the use of algorithms and AI to automatically manage and stabilize the value of cryptocurrencies. Cryptocurrency assets use cryptography for security, and they are decentralized and not controlled by any central authority or government. As a result, their value can be highly volatile and subject to fluctuations based on a variety of factors, such as ***market demand, investor sentiment, and external events***. The use of algorithms and AI to stabilize the value of cryptocurrencies could potentially help to reduce this volatility and make cryptocurrencies more stable and predictable. This could be achieved by using algorithms to automatically monitor the market and identify factors that are affecting the value of a particular cryptocurrency, and then using AI to make decisions about how to manage and stabilize the cryptocurrency's value. This could involve buying or selling the cryptocurrency on the open market, or implementing other strategies to maintain its value within a desired range. While the use of algorithms and AI to stabilize the value of cryptocurrencies is an interesting idea, it is not without some possible drawbacks. One of the main challenges is the ***intricacy and uncertainty of the cryptocurrency market***, which can make it difficult for algorithms and AI to accurately predict and respond to market conditions. In addition, the use of algorithms and AI to stabilize the value of cryptocurrencies could ***raise concerns about fairness, transparency, and accountability***, as the decision-making process and the underlying algorithms and AI systems may not be easily understandable or verifiable by humans. **All in all, the use of algorithms and AI to stabilize the value of cryptocurrencies is an intriguing concept, but it is still an emerging and developing area of research and development, and <u>*it is not yet clear how effective or practical it will be in practice.*</u>** --- ## 3. Additional Facts and Opinions Based on the information provided by the team of **Cogito** in its whitepaper document, their project sounds promising, and in a personal note I can say **it is way better than the alternatives, nothing can get more decentralized in the current world**. In addition to the whitepaper, the **Cogito** team has issued a long document (107 pages) called [**"General assessment of financial viability of Cogito coins"**](https://www.academia.edu/87487188/General_assessment_of_financial_viability_of_Cogito_coins) where they do exactly what the title suggest. >The paper includes simulations of indices, estimations on the long term financial returns, modeling the network growth and investment strategies. This paper is more of **an experiment on the principle** rather than the actual plan of action for **Cogito** and focuses on the Environmental Progress only (meaning the **GCOIN**). Basically, they have generated an Environment Index based on different environmental indicators provided by the **World Bank**, such as access to clean fuels, agricultural emissions, threatened bird species, CO2 emissions, renewable electric consumption, forest areas, water flooding, urbanization and many others. And with this index they create a financial simulation that tests their model of **stablecoin**, based on conservative estimation (*worst case scenario*). It is worth mentioning that this generated Environment index is an **rough approximation** of the real Index that they will use . According to them, the actual Index which is still a work in progress, will be even less volatile and much easier to predict.  In the simulation, it was assumed that the Cryptocurrency Market experiences shocks very often and on a large scale. Despite that, their simulation shows that the proposed strategies work and will make the protocol a stable environment for its investors, even during a market crash. As I mentioned on the beginning of this part, **Nothing can get more decentralized this**, and I firmly believe that the strategy proposed by **Cogito** is the best one around. However, there are one issue I wish to talk about. But first let me tell you a short story. On 2002, **Quarterly Journal of Economics** published a paper called "*The Regulation of Entry*". The paper presented data on the regulation of entry of start-up firms in 85 countries covering details such as, the number of procedures, official time, and official cost that a start-up must bear before it could operate legally. The collection of data for this paper was financed by the **World Bank’s** *Research Advisory Group* and the *World Development Report*. Countries were ranked in ascending order: first by the total number of entry procedures, second by the time it takes to complete them, and third by the cost of entry. Due to the fact that it provided quantitative data on the process, it got the attention of politicians who could leverage it for political gain. Next year, seeing its potential, **World Bank** took matters in its own hands. Since 2003, every year, it has provide an assessment of objective measures of business regulations and their enforcement across 190 economies on ten parameters affecting a business through its life cycle. They called it **Doing Business Index**. Many countries started introducing new policies and regulation to improve their ranking in order to lure foreign investors. In 18 years the report recorded nearly 5000 regulatory reforms in 190 countries, and it influenced major financial decisions all around the world. Everything was going great, until 2020 when employees of the report began spotting irregularities, soon after the media was tipped of and many major newspapers including **New York Times** and **Wall Street Journal** announced that China and Saudi Arabia may have influenced **The Bank** to manipulate the ranking. Soon after these allegations were made, an independent investigation for the past 4 years was launched. The investigation found that the employees of **Doing Business** had been under constant pressure to manipulate the date in all past 4 years, but the actual manipulation only happened only 2018 and 2020. Half of the staff interviewed admitted to manipulating data under pressure from **The Bank** management. **The Bank** pulled the plug on the report and promising to take a hard look on the culture that permitted this to happen. Well, I must say, **Too little, too late**, the damage was done. Check out the report published by the **World Bank** on the [**findings of the investigation**](https://documents.worldbank.org/en/publication/documents-reports/documentdetail/134831608154762985/data-integrity-in-production-process-of-the-doing-business-report-assurance). Yet another event occurred in October this year. An article by [**The Guardian**](https://www.theguardian.com/environment/2022/oct/03/world-bank-criticised-over-climate-crisis-spending) reported tha **Oxfam research** suggests that up to 40% (*$7bn*) of **World Bank’s** reported climate-related spending cannot be independently verified. The reason why I chose this two stories is: the first one is very significant and it shows how things can get ugly real fast, and the second one is very recent. Implying here that problematic events concerning the **World Bank** are neither rare nor small. What concerns me the most is how certain individuals on top of the system may bring down the reputation of powerful institutions in a very short period of time. The investigation covered only 4 years and the misconduct was present in half of them. This suggest that similar misconduct may have taken place in many instances but they did not get caught. Once again, a failure of a **Centralized Environment**. All these raise reasonable concerns on the integrity of the data provided by this organization. In the end one question remains: **Is there any way around this? A way to being decentralized all the way?** ## 4. Glossary **Quarterly Journal of Economics** is a peer-reviewed academic journal published by the Oxford University Press for the Harvard University Department of Economics.