Cross chain liquidity and Osmosis
In Osmosis for Applications: Cross-Chain Swaps as a Service, we introduced the idea of Osmosis serving as a back-end service for applications looking to offer cross-chain features to their users. In this second article, we go into greater detail about the cross-chain liquidity available on Osmosis and how Axelar enables that liquidity to move beyond the Cosmos ecosystem quickly, cheaply, and, above all, securely.
The State of Osmosis Cross-Chain Liquidity
Osmosis already has deep liquidity for both Cosmos and select Ethereum assets, even after the collapse of Terra and the crypto bear market. The top Cosmos assets by token liquidity are ATOM ($46.1m), JUNO ($4.8m), CRO ($2.3m), STARS ($2.3m), SCRT ($1.7m), AKT ($1.5), XPRT ($1.4), and for Ethereum there is USDC ($12.2m), WETH ($5.6m), WBTC ($4.7m), and DAI ($1.9m). More assets are coming soon through Axelar, such as DOT and KSM from Moonbeam, as well as assets like AVAX, MATIC, BNB, SHIB, STETH, and SOL from other EVM chains and Solana.
Osmosis maintains high liquidity in these pools primarily through its incentives, which have remained effective despite the bear market and the first annual “Thirdening” of OSMO incentives in June. These incentives have been targeted by the Osmosis DAO towards the most strategic assets, through an evolving system of dynamic feedback control based on volume/fees (dampened by various factors), and the division of assets into strategic categories: major, minor, stable. Additionally, external teams with tokens are encouraged to (and generally do) provide external incentives for their pools that are matched up to a certain point with extra Osmosis incentives.
Osmosis has also pioneered superfluid staking: the use of 50% of the underlying OSMO in DAO-selected LPs to bolster the chain’s security. Indeed, superfluid-staked OSMO helped protect the platform from a one-third liveness attack during the Terra crash. For that important work, superfluid LPs receive staking rewards on top of regular LP incentives, making that capital more efficient, and in turn incentivizing deeper liquidity. To extend the usefulness of superfluid staking, Osmosis is also developing “interfluid staking” with other IBC-enabled chains, which will allow participating chains to superfluid stake their own staking tokens from Osmosis LPs back to their home chain. For example, the REGEN underlying Osmosis REGEN/OSMO LPs could be staked back to Regen using IBC, helping to secure the Regen Network and further increasing the capital efficiency of pools/chains where it is adopted.
Pools are also incentivized by trading fees, which are usually twenty to thirty basis points. As competition between DEXs ramps up, these fees may go down, but Osmosis is exploring concentrated liquidity options, as well as continuing to develop its widely hailed UX, developing technology like private, MEV-resistant transactions through threshold encryption, and building out the Osmosis DEX suite ecosystem with external teams building lending, derivatives, ETFs, yield vault strategies, options, and the like.
Cross-Chain Security & Trust Assumptions:
Bridge security is paramount, considering the list of recent $100m-plus bridge hacks (Wormhole, Ronin/Axie, Harmony). When assets are on the Axelar and Osmosis blockchains, they are secured by their respective validator sets. When those assets (and messages about them) are transferred within the Cosmos ecosystem, they have all the security benefits of IBC, widely acknowledged to be the most trustless, secure cross-chain communication protocol. IBC’s main current limitation is in making the difficult connections to ecosystems outside of Cosmos, which is where Axelar comes in.
The Axelar chain is secured by 40+ independent validators, a number will increase when the AXL token is publicly launched on Sept. 14. Axelar aims to be almost as secure as IBC light-clients that verify the block headers of other chains. However, it is extraordinarily difficult to write light clients for chains that do not have Tendermint instant finality guarantees because there is a non-trivial chance that transactions get rolled back.
With that in mind, what attacks could be made on Axelar-bridged assets? The gateway smart contracts on the various chains could be hacked, as with any mint-and-burn bridging system, but the contracts have been audited and tested in production. Further, if the validators notice unusual activity, one-third of the validating power can halt the bridge, either with pre-specified rate-limiting or by emergency shut-down.
A further type of attack could be a one-third (liveness) or two-thirds (safety) attack. However, these are unlikely, since the colluding validators would be slashed (and possibly socially slashed in addition), and the validators would stand to lose more in future earnings than they would stand to gain by colluding, particularly since most of the validators are heavily invested in validating other chains as well. Additionally, interchain security (the renting of validator power from other chains to increase the amount of staking power a would-be attacker has to buy or otherwise control) will make it even harder to perform these Proof-of-Stake attacks.
Finally, if all of this security somehow breaks down, Axelar has dedicated 5% of the AXL token to an insurance fund to repair any losses.
No Competition for Secure Cross-Chain Liquidity
No competing cross-chain liquidity service provider can offer Osmosis and Axelar’s combination of decentralization, safety and liveness guarantees, low latency, deep liquidity, and ease of integration.
The closest competitors have fatal flaws. Wormhole’s reliance on Jump is a double-edged sword, enabling quality engineering and bridge insurance at the expense of decentralization writ large. Connext’s optimistic mechanism introduces latency, resting its security on a liveness assumption that can be compromised in a DDoS or other attack. Other protocols, like Gravity Bridge and Thorchain, have excellent, highly secure mechanisms, but cannot offer the range of cross-chain services or the integration speed of Osmosis and Axelar.
UX for the Next Million Adopters
Finally, both Axelar and Osmosis are focused on providing single-click UX wherever possible, with deep integrations into the Osmosis app and easy front-end integration with Osmosis for other apps. These integrations are made possible by front-end work like Telescope and OsmoJS, and Axelar’s use of deposit addresses to simplify cross-ecosystem UX. In addition, Axelar has developed a generalized message-passing service, solving the problem of sending any kind of payload between all kinds of state machine. Further, swaps between chains will be pseudo-atomic, such that users can set slippage constraints and get a refund if all the steps do not go through.
All of this front- and back-end flexibility is made possible by the full customizability of both the Osmosis and Axelar stack, from the consensus layer, to CosmWasm smart contracts, through the customizable modules of the Cosmos SDK, and the use of IBC.
Ultimately, the use of Osmosis, Axelar, and IBC for cross-chain swaps provides the best combination of security and user experience for traders, developers, and liquidity providers. Get in touch with the Axelar or the Osmosis teams today to start building cross-chain swaps into your applications.