Osmosis for Applications: Cross-Chain Swaps as a Service

Cross-chain is hard, but Osmosis makes it easy.

Following its recent adoption of Axelar as a bridge service provider for chains outside the Cosmos/IBC ecosystem, Osmosis, the Cosmos DEX with the deepest liquidity in the network, is building more pools of cross-chain assets that can easily be swapped, transferred, and used in DeFi on any chain supported by Axelar or IBC, the Inter-Blockchain Communication protocol.

It is simple for DeFi and web3 applications to integrate Osmosis as their cross-chain back-end, thereby giving their users the ability to purchase and use cross-chain assets on any chain, all within the user interface of the integrating app.

Cross-chain is hard

Currently, setting up a cross-chain app-front is time-consuming and expensive, and it splits the attention and liquidity of an application’s developers and users, as well as creating a divide between 1st-class citizens on the main chain and 2nd-class citizens elsewhere. And, unless the cross-chain app quickly achieves broad adoption, the cross-chain venture can serve as a counter-signal, suggesting that interest in the app is lagging.

Even if all goes smoothly, an easy-to-use, highly secure app on a popular chain is worthless without deep cross-chain liquidity. That liquidity can be hard to come by, since a cross-chain app must compete for it against an ecosystem’s native apps and their token emissions. Therefore, a prospective cross-chain app is forced either to dilute their main-chain users and treasury or to present an inferior product that ends up reflecting poorly on the parent app.

Not surprisingly, given these difficulties, previous cross-chain attempts have been lackluster. Sushi, a multichain pioneer, had other problems of focus and management, but their multichain experiments certainly exacerbated them. Compound tried to go cross-chain over a year ago, but has had to recalibrate. Other Ethereum giants like dYdX, Synthetix, and Yearn are largely banking on walled-garden Ethereum L2s that not only lack sovereignty and pay taxes up to the main chain, but are just as expensive to bridge to as L1s.

Still, the potential rewards are great: the first apps to deliver easy, safe, low-fee access to cross-chain assets will acquire new users, volume, and liquidity, as well as a competitive advantage over single-chain apps.

Osmosis makes cross-chain easy

Let’s say that Compound wants to let its users borrow (for example) AVAX on Avalanche against ETH collateral on Ethereum from the comfort of the Compound front-end. Instead of spending years developing a bespoke cross-chain framework, it can simply leverage Osmosis.

A cross-chain swap could be executed with a single MetaMask transaction.

  1. deposit ETH into a lending contract on Compound on Ethereum,
  2. contract locks the ETH in the Ethereum-side bridge contract, and mints ETH.axl on Axelar
  3. ETH.axl is IBC’d to Osmosis and swapped for AVAX.axl
  4. AVAX.axl is IBC’d back to Axelar and locked in Axelar-side bridge contract
  5. AVAX is released to user’s wallet on Avalanche from the Avalanche-side bridge contract

Easy Integration: Developers adopting Osmosis do not have to learn new codebases because the cross-chain back-end is handled. The integration work is largely on the front-end, and since Osmosis has easily accessible APIs and a wealth of tooling, Osmosis widgets are easy to hook up. Likewise, Axelar’s Cross-Chain Gateway and Cross-Chain Transfer Protocols (CGP and CTP) are designed to be plug-and-play, so integrators need only link their front-ends and contracts with their chain’s bridge contract. Finally, the Keplr Wallet team, as Osmosis founders, can facilitate any necessary wallet integrations, e.g. with MetaMask.

Latency: Under normal conditions, Ethereum transactions take 1–2 minutes. Once the ETH is in the bridge contract, the Axelar validators notice and mint ETH.axl on Axelar. Then, the ETH.axl is relayed to Osmosis and swapped, and the AVAX.axl is relayed back and burned. When the Axelar validators notice this, they release the AVAX on Avalanche. Total latency: 2–4 minutes.

Fees: Ethereum fees are the largest factor, followed by bridge and swap fees. Cosmos gas is negligible. Axelar currently caps Ethereum fees at approximately $20, and given sufficient volume, can batch transactions for discounts. Osmosis governance has begun optimizing fees, having recently gone from 30 to 20 basis points on ATOM/OSMO, its largest pool.

Pre-existing Liquidity: Many liquidity pools on Osmosis are already well funded, having been incentivized as part of the Osmosis DEX suite, independent of their potential use in cross-chain liquidity provision. This essentially costless liquidity gives Osmosis a considerable advantage over dedicated cross-chain liquidity services, whose liquidity providers expect to be paid specifically for facilitating cross-chain transfers.

Beyond token swaps

Cross-chain token swaps through Osmosis are just the beginning. Apps that adopt Osmosis as their cross-chain back-end will also gain access to generic interchain messaging, interchain NFTs, and the full spectrum of interchain DeFi through IBC and Axelar.

Further, Osmosis is integrating Kado as a fiat on-ramp, enabling cross-chain app-users to buy any token with fiat from a simple pop-up. With the fiat loop closed, Osmosis is able to equip apps with better UX than centralized exchanges, as well as on-chain censorship resistance.

All in all, with its combination of easy integration, speed, security, low fees, and focus on UX, Osmosis, the Cosmos DEX, is by far the best way for applications to go cross-chain.

— For more details on how Osmosis and Axelar provide secure cross-chain liquidity, see Part II of this post.