Osmosis 2022: Retrospective

For a chronological overview of the year, see Osmosis 2022: Timeline.

2022 was a year of innovation and building in the Osmosis Ecosystem, a year of massive growth and diversification. It was also the year the market turned. The year Terra imploded and centralized exchanges blew up, inviting retaliatory regulation. The year that ended with the crypto industry returning to decentralized values.

Defi is rebuilding the world’s financial rails with privacy for the individual and transparency for the system. The security, freedom, and reduced frictions of trust-minimized exchange provide exactly the assurances that regulators should want once sufficiently educated. As such, though the immediate regulatory picture is unclear, and the general public is extremely bearish, the long-term future of decentralized finance looks brighter than ever.

With so many different teams building on Osmosis, so many projects for which Osmosis is the primary market, and so many users trading, arbitraging, investing, governing, and sending assets cross-chain, many stories can be told about Osmosis in 2022.

As we reflect on the year’s events and accomplishments, a number of themes stand out:

  1. Growth of the Osmosis Exchange Ecosystem: CosmWasm, Tooling, Onboarding Teams
  2. Innovating on Interchain Liquidity
  3. Decentralized Governance: Alive and Thriving
  4. User Experience: Making Osmosis Easy and Attractive
  5. Future Directions

But first, let’s see how Osmosis has been performing along various key metrics.

Osmosis 2022: By the Numbers

DEX Volume: Osmosis has become the go-to place to access the entire ecosystem, every IBC-enabled token. As the liquidity center of Cosmos, Osmosis saw some 17 billion dollars of trading volume across 100+ tokens and liquidity pools. That’s the entire Cosmos TVL – swapped nine times over.

Osmosis Cumulative Trading Volume (Token Terminal)

Stickiness/Retention: Osmosis retention rates 18 months after genesis have remained quite high, at least among users who have provided liquidity. The graph below shows the percent of wallets that, in month n after their first action, have by that time made one tx of any type (swap, vote, stake, rewards, etc.). These YES bars indicate wallets that have ever provided liquidity, and the NO bars are those that have not.

Osmosis Retention Rate: from June 2021 (Numia)

Both 16- and 17-month retention are pushing 60% among accounts that also provided liquidity (154K out of 584K total accounts). Providing liquidity, then, is sticky behavior – the game of Defi that keeps users coming back. Those who merely claimed tokens and/or staked or who just bridged in for a swap have a quick drop-off to 20% retention and below. While the stickiness of LPing accounts for some of the decline, it more likely indicates that the bulk of non-LP-providing addresses are trading bots that are spun up and then discarded, rather than unique people that tried Osmosis and then left.

Unique Users: Similarly, the number of unique wallets (not filtered for bots or connected wallets) transacting on Osmosis has remained relatively constant since the post-Terra fall-off, at 55 - 80K every two weeks. This is despite the bear market and the lowering of rewards from the first thirdening of emissions and various other incentive reforms made by the DAO.

Osmosis Transacting Wallets per Fortnight: 2022 (Numia)

IBC Volume: According to data from Map of Zones, roughly 34.2% of IBC send volume – currently $400m/month among some 50 chains – comes from Osmosis, while Osmosis receives 39.1% of it. If these percentages seem low for the de facto interchain liquidity hub, the Osmosis-involved volume of other IBC-connected chains paints a clearer picture: 57% of their IBC sends go to Osmosis, and 60% of their IBC receives come from Osmosis.

IBC Map of Zones Over Time: Composite by Thyborg’s Intern

Overall, the tale of the numbers is that Osmosis, like most decentralized protocols, took a hit from the Terra collapse before entering the ongoing bear market. Nevertheless, Osmosis has been resilient, maintaining the interest and investment of tens of thousands of wallets and continuing to act as the interchain liquidity hub, the heart of a growing mesh of economically interdependent, sovereign chains.

And, as we see below, a host of teams (most of them new in the last year) are continuing to build out Defi apps, AMM and IBC improvements, dev and smart contract tooling, and infrastructure on Osmosis, continually improving the user experience and building the foundations for continued innovation. All this work positions the Osmosis protocol to come storming out of the bear market when public attention returns.

I. DEX Ecosystem Growth

The push to grow the Osmosis permissioned Defi Ecosystem defined the year. As we approach the Osmosis launch of major Defi protocols like Mars Protocol, it can be hard to remember that there was no CosmWasm on Osmosis until the end of February and that the full Confio custom installation was not put on the chain until v9 in June.

Additional Osmosis chain upgrades were also full of non-user-facing CosmWasm improvements and integrations designed to make it easy for teams to build on Osmosis: TokenFactory, TWAP, Stargaze Queries, IBC CosmWasm improvements, and more.

The chain updates were necessary but not sufficient. To attract developers who could work quickly and easily, the ecosystem also needed extensive tooling. This was provided at first by Osmosis Telescope and OsmoJS for connecting frontends to the chain, and then by Osmosis Beaker, a CosmWasm development framework, and later by projects like Croncat (on-chain transaction robot) and Laika (request-builder).

Croncat, Laika, and many other ecosystem projects were funded by the DAO-commissioned Osmosis Grants Program, which under the direction of Reverie has acted as the DAO’s business development arm recruiting developers to build tooling, infrastructure, education, analytics, and Defi apps.

This process was ongoing before the Terra collapse, but it shifted into overdrive after the Terra collapse stranded many of the most talented CosmWasm teams. Since they were courted by nearly every protocol building with CosmWasm or Rust, they could be highly selective in choosing the most exciting, innovative place to build, the place with the right tools, vibes, and framework for long-term success. For most of them, that place was Osmosis.

The number of teams newly building on or integrating with Osmosis speaks for itself. See the end of this post for a list and brief description of 26 of them. These new teams only add to the many existing teams building on, integrating with, or providing infrastructure for Osmosis.

II. Innovating on Interchain Liquidity

The symbol of Osmosis is the rocket lab. Here, endless experiments are conducted under the direction of the chief mad scientist and mascot of the protocol, the [newly reborn] Wosmongton (https://twitter.com/wosmongton). In an industry already at the cutting edge, the Osmosis ecosystem is developing – and running – some of the most exciting new tech.

Superfluid Staking: This “reverse liquid staking” pioneered on Osmosis enables users to bond LP shares such that the underlying OSMO (synthetically minted) can be staked, securing the protocol and thereby earning staking incentives on top of pool rewards. It is a fundamental improvement to proof-of-stake security that completely bypasses the centralization risks of liquid staking derivatives. Instead of trusting a staking custodian (whether DAO or centralized) users can instead retain custody and use their natively staked assets as collateral for Defi.

Superfluid staking immediately hardened Osmosis security when it was deployed at the end of February. For example, if an attacker had taken over Terra during the crash, the additional security from superfluid staking would have made a further economic attack on Osmosis unfeasible.

For all its benefits, superfluid is still just the first form of “stake-last” rehypothecation. The extensible rule of stake-last is this: to unlock the underlying value of staked tokens for use as collateral, they must be bonded again in the protocol by the end-user, making it more difficult for an external party to co-opt the process.

Superfluid can first be extended to other chains if and when they establish the relevant safety, slashing, and rebalancing controls with Osmosis over IBC, allowing their staking assets to be bonded in Osmosis liquidity pools to provide native security on their chains, increasing rewards for their liquidity providers without having to provide additional incentives.

Further, the superfluid design will extend across Defi: for example, Mars Protocol plans to allow the unlent OSMO in its lending pools to be staked (subject to proper risk/liquidation parameters), and ION DAO plans to enable the same strategy for the underlying OSMO in its IBC token basket ($IBCX).

Ultimately, any Defi vault, strategy, or derivative that holds staking tokens can and should accommodate superfluid/stake-last rehypothecation. Currently, only appchain protocols have the chain-level controls needed to develop superfluid, though given the risks involved with LSDs, the fat protocols might be wise to begin developing something similar.

Multi-token Gas Payments: This innovation allows Osmosis blockchain fees to be paid in any whitelisted token. The tokens from these fees are then swapped at epoch for OSMO and distributed to stakers. This upgrade received less attention than it otherwise might have because the major UX problem that it fixes – bridging non-native tokens to a chain with no way to pay gas to do anything with them – had already been (temporarily) solved with Osmosis zero-gas transactions. However, free transactions are not suitable for every chain and, in any case, cannot last forever since chain computation must be metered in some way to prevent spam/griefing.

Multi-token payments should eventually see wide adoption on every chain. But even before then, chains that use Osmosis as the backend for cross-chain swaps can pass along the UX benefit to their users, allowing them to transact cross-chain smoothly without ever having to use OSMO.

Driving Ecosystem Innovation: Finally, and somewhat less visibly, the developer teams working on Osmosis have contributed greatly to innovative work in the greater Cosmos ecosystem.

  • Released just at the beginning of this month, IBC Rate Limits allow chains to restrict the amount of tokens that pass in and out of the chain from IBC – greatly limiting how much can be taken off-chain after an exploit, and how many stolen funds can be brought on-chain, either as an exit strategy or for an economic attack.

  • Osmosis TWAP provides a decentralized price-feed for the Osmosis ecosystem and the broader interchain, already experimentally implemented by the Equilibrium cross-chain swaps project.

  • Other ecosystem improvements that Osmosis teams have helped lead include patching the “Dragonberry” IBC vulnerability, helping take the lead on ABCI 1.0, which will allow more sophisticated interactions between Tendermint consensus and blockchain application modules, and many other smaller upgrades.

The innovations will not stop here, and indeed, with the vastly increased number of developers now working on Osmosis and with much of the underlying infrastructure complete or well underway, even more can be expected in 2023.

III. Osmosis Decentralized Governance: Alive and Thriving
The Osmosis DAO has been a model of active decentralized governance, overseeing chain upgrades, parameter changes, smart contract permissioning, and Community Pool spending by means of over 260 on-chain governance proposals this year.

While many of these votes were routine, approving regular incentives changes with over 99% of the vote, others involved novel blockchain issues – loan swaps with other protocols, an interchain carbon market – and some of the core issues of the protocol. These key issues were hotly debated across social media and the Commonwealth governance forum: bridge safety, canonical bridge assets, incentives, Osmosis Grants, frontends, and more. We take a look at a few highlights below.

Key Governance Proposals 2022

We begin with Proposal #182, which established a carbon offset (NCTs) market on Osmosis, the center of Carbon liquidity across the Cosmos ecosystem. The vote also offset all Osmosis emissions – the first DAO to vote to do so.

Proposal #186 established the Osmosis Grants Program, which funded many of the ecosystem projects discussed above. Some other key grants include the renewed incentives optimization program and Skip Protocol’s ProtoRev module.

In Proposal #206, the DAO took on a major decision: deciding which Canonical Ethereum Bridge Provider Service (BSP) would be selected to onboard Ethereum-based liquidity onto Osmosis. This required a special multiple-choice voting process to decide among the candidates: Axelar, Gravity Bridge, Nomad, and Wormhole, as well as a “Do nothing” proposal. After a long process, Axelar was crowned – just before the Terra collapse, preventing a more timely diversification of liquidity; nevertheless, after Terra, the new canonical bridge led to an explosion of liquidity from assets such as WETH, WBTC, USDC, and DAI.

Proposal #225 showed the DAO’s resilience in the face of the Terra collapse. Governance acted to mitigate the damage, allowing affected LP providers to unlock their Terra liquidity on an emergency basis. The quick response enabled Osmosis users to salvage something from the disaster, and much of that liquidity was converted to Ethereum assets from the brand-new Axelar bridge.

Proposal #252 passed the governance power of superfluid-staked OSMO back to the delegators, who in the initial launch were unable to override their validator’s vote. It thus returned voting sovereignty to superfluid stakers and removed a potential centralization vector.

Proposals #287, #359 and #385 expanded Osmosis’s reach into Polkadot, Binance and Polygon, diversifying Osmosis outside of Cosmos, providing users with popular cross-chain assets, and helping to grow the Osmosis community.

2022 was a year filled with upgrades, optimizations to the incentives model, and the creation of subDAOs focused on the long-term success of Osmosis. Over 260 Proposals went on chain in 2022, each of them doing its part to lead Osmosis into the future. Ultimately, the community’s determination to improve the protocol in every aspect made 2022 a great year for Osmosis governance.

IV. User Experience: Making Osmosis Easy & Attractive

For onboarding users and keeping them, innovative tech is insufficient. Likewise, an ecosystem of things to do and a sense of cooperative community governance have helped to make Osmosis user-ship sticky. But in the end, UX is king.

Most improvements are at least tangentially related to some aspect of UX – like multi-asset gas payments, epoch speedups, and the multi-hop swap fee discount – but for this retrospective, we look at two main areas: user interfaces with Osmosis and Osmosis as a lifestyle.

User Interfaces

Most obviously, there are two major app.osmosis.zone refactors enhanced the speed, attractiveness, and usability of the UI, as well as cleaning up previous technical debt. These refactors also made the UI more suitable for mobile and made it easier for other developers (along with the Telescope work discussed in Ecosystem) to widgetize it or to build their own front-ends.

Speaking of alternative front-ends, frontier. osmosis. zone served well to permissionlessly list assets and to give the Osmosis DAO a way to help curate app.osmosis.zone by giving native incentives to assets it wanted to appear there. Next year, Frontier will likely be deprecated in favor of a more robust, decentralized, and fully user-centric system of token lists. Other alternative frontends this year included ping.pub, citadel.one, and sinfonia.zone (fan tokens).

Further interface improvements include Imperator’s work on info.osmosis.zone, in particular the personalized dashboard that presents information about how users’ staking and liquidity pool positions are performing. They also helped the popular TradingView platform integrate osmosis chain data, and in general, they work behind the scenes to make the chain easy to query.

Finally, much work has gone into making it easy to bridge assets from other ecosystems. Users can now bridge from Ethereum, Polygon, Polkadot, and more without having to leave app.osmosis.zone. Fiat onramps like Kado and Transak work in the same way.
Osmosis Identity

As the ways to interface with Osmosis expand, they should provide more ways to have fun in the lab, both through Defi and also through other expressions of on-chain identity.

One of the first steps in this process is the Interchain Name Service, which attaches a readable identity to an otherwise opaque wallet address. These ICNS names are currently claimable only through the public square of the crypto industry, Twitter. This makes ICNS names resistant to sybilling and squatting/extortion – everyone can get the name they already use.

Names make on-chain identity more fun and legible. Badges and POAPs prove that you were there when things went down: “LP’d with the Defi hub? Here’s proof. Interacted with a social blockchain? Here’s the reputation logged to that same account name. Supporter of artists on a music blockchain? Here’s proof. Top 10 gamers on one of Argus’ blockchains? You can prove that too.” (h/t Victor)

Identity will only become more important as the world moves on-chain – unlocking reputational lending and, farther down the line, mortgages and as much of our financial and online lives as we want. With that, we will have to develop privacy solutions that interact with the public nature of blockchains – shielding with encryption, zero-knowledge proofs, and the like.

A final piece of the Osmosis identity that will be coming soon is WosmoNFTs with customizable attributes and badges of their own.

V. The Osmosis Ecosystem: 2023 and Beyond

Several exciting innovations are well-advanced and should likely be ready during the first half of 2023:

ProtoRev: Skip’s ProtoRev module, voted in by the DAO, is almost finished. Once added to the chain, it will perform cyclic arbitrage on Osmosis liquidity pools from a privileged position in Osmosis consensus, returning the profits to the DAO. This arbitrage is healthy, keeping pool prices aligned without extracting value from users, and the ProtoRev module will prevent the bulk of these profits from being lost to external arbitrageurs. After ProtoRev, if the DAO requests it, the next step of this process will be developing a similar in-protocol blockspace auction module so that the DAO can recoup the bulk of any leftover arbitrage and liquidations.

Concentrated Liquidity Orderbooks: Uniswap v3 has made clear the benefits to protocols and traders from the extreme capital efficiency of concentrated liquidity. Because pools give low-price-impact trading even at low levels of liquidity, LP incentives can be drastically reduced (or spread across many more assets). Since the release of Stableswap in December, concentrated liquidity has been one of the primary focuses of the Osmosis Labs chain development team.

Mesh Security: In development from a multi-team group from across the Cosmos ecosystem, mesh security will allow the bonded staking tokens of one chain to be cross-staked (“re-staked”) to validators on other chains, where their value can provide additional security in exchange for staking rewards and governance power. This combined security will improve the security of participating chains and be an opt-in way for chains to consume and/or provide as much or as little security as they want. It addresses one of the main concerns intelligent critics have had about the Cosmos model, making it possible for the whole system or large parts of the system to pool their security such that it rivals the security available on fat protocols like Ethereum. But it does so in a way that respects the non-negotiable Cosmos values of sovereignty and interoperability.

Osmosis Defi: The many protocols being built on Osmosis (discussed above and listed below) will finally start to come online, in particular, the Mars Lending/Credit Protocol, as well as various strategy, vault, and ETF projects, as well as ION DAO’s $IBCX IBC basket token.

–Beyond these nearer-term innovations, there are a number of longer-term projects in the planning stages for H2 2023 and beyond:

Threshold-Decryptable Mempool: After concentrated liquidity comes online, and with the Cosmos SDK upgrade to ABCI 1.0, the chain development team at Osmosis Labs will be able to begin work on the highly anticipated threshold encryption, which will allow the mempool to be shielded, preventing transactions from being seen by validators (or other parties) until their inclusion in a block. Along with the ProtoRev module and in-protocol blockspace auctions, a shielded mempool should virtually eliminate frontrunning.

Cross-chain swaps / Osmosis liquidity outposts: Using IBC and its Interchain Accounts module, other chains can already tap into Osmosis liquidity and make swaps on Osmosis from accounts on their own chains. A further extension of this idea is Osmosis outposts on other chains – making Osmosis liquidity atomically available with any chain that has an outpost. This would enable atomic cross-chain flash loans, liquidations, and arbitrages, and further, it would give Osmosis and the chains on which it has outposts the chance to collect arbs and liquidations in the protocol rather than losing them to external actors. And because cross-chain swaps could be synchronous on another chain, and that chain could itself have an encrypted mempool, there would be no way for searchers to front-run users, potentially solving cross-chain MEV completely.

Beyond these, who knows? Surely there will be unexpected developments and happy accidents of coordination. IBC will continue to be improved, perhaps sped up, with new message types and IBC middleware/apps. Consensus may also be sped up and improved (Narwhal/Bullshark?). Zero-knowledge technology will improve on-chain privacy and security and also allow for select computation to be moved off-chain. Light clients will begin to become available to farther ecosystems, perhaps even Ethereum.

The interchain itself will continue to expand and tie itself together, attracting new users, developers, and capital across many chains with the infrastructure of IBC and the philosophy of freedom, self-sovereignty, and interoperability. In this system with no declared center, the many teams building on Osmosis will be striving to improve the entire interchain and to make the Osmosis Exchange its mad-scientist heart.

Appendix: Teams New to Osmosis (building or integrating)

  • Mars Protocol is building an outpost-based lending appchain, with its first outpost providing credit, lending, and leverage on Osmosis

  • Skip is building ecosystem-aligned MEV products on Cosmos, such as on-chain auctions and arbers for Osmosis.

  • Kado has pivoted their fiat on-ramp from UST to USDC and is servicing the entire Cosmos ecosystem (and will soon support any Cosmos token by routing through Osmosis)

  • Manythings is developing an IBC basket-token, $IBCX for the ION DAO

  • Levana is building a collateralized perps protocol on top of Osmosis

  • Astroport is building a cross-chain liquidity allocation mechanism for Cosmos DEXs and passive market-making vaults on Osmosis

  • Margined is building a derivatives-focused margining engine and perps protocol on top of Osmosis

  • Membrane is building a floating-peg over-collateralized stablecoin on Osmosis

  • Apollo DAO is building multisig tooling, compounding vaults, staking derivatives, and more

  • Beaker, the CosmWasm development kit, was built by an ex-Terra builder who joined the Osmosis team

  • TFM is expanding the pro-DEX interface to support a variety of Cosmos DEXs

  • Coinhall is expanding their dex aggregator to the Cosmos ecosystem and building new ecosystem tooling like Seer, a real-time data platform

  • Leap Wallet, originally a Terra browser extension, is building a browser and mobile wallet for the entire Cosmos ecosystem

  • Equilibrium, which is building an IBC swap router for auto-balancing cross-chain ETFs based on Osmosis TWAP

  • Laika has created a request-builder for CosmWasm developers

  • Croncat - has built an on-chain transaction robot that makes it possible for accounts and smart contracts to schedule future tasks.