Osmosis kickstarted Cosmos interchain DeFi with $17.6 billion in trading volume and the highest IBC volumes in the Cosmos. On the technical side, it developed superfluid staking, the ability to lock up the underlying staking token in an LP to increase the security of the chain, which is the biggest improvement in Proof of Stake since validator slashing.
Indeed, superfluid helped secure Osmosis against a potential one-third liveness attack during the Terra collapse. Because of the extra stake provided by superfluid, an attacker taking over Terra and using its LUNA and UST to buy OSMO would not have been able to buy enough to halt the chain, which might not otherwise have been the case.
Finally, the first year of Osmosis also saw the emergence of one of the most active and innovative governance communities in crypto. The DAO has voted on over 250 proposals, with average turnout rising over the course of the year to its current stable level: 50–70% of staked OSMO voting on most proposals.
The DAO has also spun up several subDAOs — Support, Marketing, and Grants — to which it has delegated (while retaining oversight) functions that need more active management and expertise. More subDAOs are likely to emerge over the next year, both from the Osmosis community and also from external teams building on Osmosis, who, particularly if they have a token, will develop their own Osmosis sub-governance for adjusting things like collateralization ratios, the component parts of yield strategies, rate limits, insurance, and the like.
The core trading engine will continue to become more powerful in year two of Osmosis. First, the stableswap AMM is nearly complete, which will give a better trading and LPing experience for same-priced assets. In addition to the usual perfectly-pegged stableswap, the Osmosis version will include an adaptive function designed to accommodate liquid-staking assets, whose value predictably increases over time. For example, an adaptive-stableswap stkATOM/ATOM pool would dynamically account for the inflation earned by stkATOM and slowly adjust the peg from 1.00–1.00 to 1.01–1.00 to 1.02–1.00, etc., while retaining the hallmark of stableswap: enhanced trading in a narrow band.
An even more exciting upcoming feature of the AMM is volatility awareness, which will also involve the introduction of another big feature: concentrated liquidity. A volatility-aware AMM will give passive LPs the ability to function as sophisticated market makers by auto-removing liquidity during times of heightened (downside) volatility.
A volatility-aware AMM will require automatable limit orders, which can be created with concentrated liquidity positions. This ability (pioneered by Uniswap v3) allows users to provide liquidity in whatever band they choose. For instance, in the ATOM/OSMO pool, a wide band might be between 2 and 20 OSMO per ATOM. This would be less capitally efficient (earn fewer fees) than a narrow band of between 9 and 11 OSMO per ATOM, but it would be less likely to go out of range. Concentrated liquidity that goes out of range earns no fees until it is repositioned, and it also experiences total impermanent loss into the worse-performing asset.
Concentrated liquidity will cost Osmosis much less to incentivize, and if we can solve the passive management/impermanent loss problems with volatility-awareness algorithms, it will earn substantially more fees for LP providers, as well as providing deeper liquidity for trading. This volatility awareness should be much easier on Osmosis than, say, Ethereum, because as a purpose-built appchain, it has extremely low fees, making automated, incremental position management a low-cost affair.
Finally, an Osmosis ecosystem builder, Autonomy, will be providing on-chain, conditional execution for things like stop and limit orders. For avoiding stop-hunting, Void Protocol’s private (Tornado Cash-like) transactions for Osmosis will likely provide some protection, but a fuller defense may require the Osmosis mempool to be made private with threshold encryption — on which, more below.
One of Keplr’s goals is to provide the security of a Ledger with the UX of a hot wallet. To that end, the team is developing wallet rate-limiting. Under this model, the browser wallet would be able to generate a hot key authorized to trade, for example, only 1% of the wallet’s assets. With the hot key enabled, you could potentially trade, stake, lend, LP (under your limits) without actively signing every transaction. If you wanted to go over your hot key amount, you would have to generate a new one.
Keplr will also integrate social recovery, the ability to authorize other accounts to recover a lost account key. Recovery is accomplished with a multi-sig: e.g., you might put 4 wallets in the recovery multi-sig, and if 2 vote to reveal the keys, they are revealed. Users can select whatever numbers of wallets and positive votes gives them the best trade-off of security and usability. This multi-sig capacity will be developed by Apollo DAO, which is launching its Apollo Safe multi-sig on Osmosis.
Beyond Spot Trading: The Osmosis Ecosystem
We have already mentioned several teams building on and with Osmosis: Autonomy, Void, and Apollo — but many more projects have also announced that they are incorporating their projects into the Osmosis DEX suite.
Bridges: Osmosis continues to integrate cross-ecosystem assets from Axelar, such as USDC, DAI, WBTC, and WETH. More assets from other ecosystems (EVM, Substrate, and Solana, Bitcoin, and more) are coming soon, which will allow users to trade BTC, ETH, DOT, SOL, AVAX, BNB, and more. Osmosis is also in talks with Circle to issue native USDC.
Cross-chain UX will continue to improve as well. Right now, users are sent outside Osmosis to bridge, but with fuller integrations, assets can be bridged and traded in one Osmosis UX interaction — and with a Keplr hot key, a single, unsigned click. Other protocols in other ecosystems will be able to use this Osmosis functionality to trade from native assets on one chain to native assets on another, e.g. Uniswap could allow its users to trade native SOL to native AVAX by routing orders through Osmosis with Axelar. See this post for more details.
WosmoNFTs: Led by John Patten, who co-founded the popular Treasure NFT ecosystem, WosmoNFTs are a novel way to do NFTs. Every wallet will get a base Wosmongton, and these will be customizable with accessory NFTs. These accessory NFTs will be attached to on-chain experiences such as providing liquidity to certain pools, getting certain airdrops, or participating on different chains, etc., and will help users develop and display their on-chain identities. Not only will this be fun, it will also help tie the community together within an identity network similar to the the one provided by Ethereum NFTs, and which (according to John Patten’s Osmocon talk) is crucial to making users feel like they belong. And if they belong, they will stay and hang out and trade and even migrate over to the builder side.
Much more: The ecosystem also includes teams building fiat on-off ramps (Kado), automated strategy vaults (Quasar), ETFs (DeFund), DCA protocols (Phase), dampened volatility assets like RAI (Membrane), launchpads (Streamswap), more bridges (Composable: Centauri), and more.
The Osmosis Ecosystem will also function as an interchain incubator. Apps will find product-market fit as well as users on Osmosis, then launch a token, and finally move off onto an appchain, where they will have fuller sovereignty and the flexibility to customize their blockchain stack, while at the same time retaining their users, since they will continue to be fully composable with Osmosis. On the other hand, Osmosis will gain functionality and users from all the apps building on top of it, and as the apps move onto their own appchains, that additional functionality will be retained because of the composability allowed by IBC, authz account-privilege delegation, interchain accounts (more below), and CosmWasm. Everybody wins.
While Osmosis has already attracted a number of projects, there is much more functionality to be built. And if the ecosystem is to retain and foster its teams, helping them quickly deliver high-quality products to the market, it needs exceptional dev tooling.
One of the first major steps in this process was the Osmosis custom implementation of CosmWasm from its creators, Confio, voted on and paid for by the Osmosis DAO. Further, smart contract tooling (à la Ethereum’s Hardhat) is available from Beaker, an Osmosis CosmWasm developer environment now in its first iteration and under active development. Developers on Osmosis will also be able to take advantage of Andromeda’s CosmWasm plug-and-play code automations.
External teams are also building tooling and analytics for Osmosis. Laika is providing ABI (app-blockchain interface) toolkits. CronCat is building an smart contract execution scheduler. And developers, validators, researchers, and end-users can benefit from analytics tools like Dexmos, Token Terminal, Mintscan, Hathor Nodes, and stake.tax, among others.
If Osmosis is becoming a suite of products to rival centralized offerings like Binance and FTX, it is worth asking: what do DEXs do better? What’s the point of trying to do all of this on chain?
The answer is that DEXs do at least two critical things that CEXs cannot: offer full access to DeFi and all the yield available from trust-minimized finance, and they offer transparent accounting instead of a black box. The importance of the latter has been underlined recently by the prevalence of off-the-books, poorly risk-managed loans shared among some of the fallen CeDeFi and crypto venture capital giants.
The transparency of DeFi comes at a cost. We briefly mentioned stop-hunting above. Driving the price in a given direction to force buying or selling (and then taking the opposite position as the market reverts to the mean) requires some amount of guesswork on a CEX, but in a DEX’s public mempool, anyone can see the stop and limit orders.
Additionally, and even more importantly, transactions that are visible prior to execution have a near-certainty of being front-run/sandwiched: where a bot/validator, for example, sees a large buy, and inserts its own buy earlier in the block, driving up the price for the original buyer. The bot then sells back its original buy for a guaranteed profit, minus the costs of gas, overcoming spam prevention, and/or bribing the validator or protocol.
Threshold encryption can make the mempool private, making Osmosis transactions more MEV-resistant, though information about transactions (usually about probable rather than about-to-be-executed trades) can still leak in other ways that will need to be patched. Osmosis has had threshold encryption on the road-map since the beginning, but it is a lengthy project, and the core teams have been busy with other aspects of the DEX. However, the recent explosion of the Osmosis ecosystem will soon free a number of developers to work on it — likely after volatility awareness and concentrated liquidity are either well in hand, or have also been taken over by external teams.
Finally, we end where we began, with interchain DeFi. It has been a year since Osmosis kicked it off, but interchain composability is still very much in its infancy. With new Cosmos SDK / IBC features like Interchain Accounts coming online, the Osmosis ecosystem and apps in the rest of Cosmos will become DeFi legos like the apps on Ethereum, but with sovereignty and superior scalability.
As interchain apps work together in previously unimagined ways, new opportunities will arise, as will new problems to be solved. And as trust-minimized generalized message passing to other state-machine ecosystems becomes available, cross-ecosystem (asynchronous) composability between Osmosis and apps on other chains will be possible.
Similarly, interchain security will tie together the value of Cosmos chains and make them all more secure against attack, solving two of the most salient critiques of the interchain model: token value accrual, and the ability of smaller market-cap chains to protect high TVLs. Likewise on the security front, Osmosis (and the chains that choose to adopt it) will also introduce interfluid staking this year. Interfluid allows staking tokens from other chains to be superfluid staked within Osmosis LP positions, protecting the home chain, and yielding that chain’s staking inflation to its LP providers.
With so much going on in the Osmosis ecosystem, so many apps about to add functionality on top of the core DEX, it is clear that the second year of Osmosis will be even bigger than the first. Adoption and TVL are continuing to rise in OSMO-denominated terms; we are implementing heightened testing and QA processes as well as clearer bug bounty programs in the wake of the (fully repaid) LP exploit; and the UX and usability of Osmosis are ever-increasing, allowing users to do cool things with their money, assets, and time.
Bear or bull, we build.
Thanks to Chjango Unchained