An Introduction to Osmosis
Two weeks ago we got the fortunate opportunity to ask anything about Osmosis directly from Sunny Aggarwal and Josh Lee, two of the scientists behind Osmosis Labs just before the launch of Osmosis. We knew the community was very excited for this interview because it was Cosmos’ first foray into the massive world of DeFi and it has huge implications for the Cosmos Network as a whole.
Background
Osmosis is a protocol that will allow developers to design, develop and deploy customized AMMs. Osmosis is designed to be an efficient solution that is experimental in nature and customizable to meet the demands of the users. Osmosis will have IBC built in from day 1 allowing for connections across the entire Cosmos ecosystem. Along with Cosmos assets, Osmosis will support ETH/ERC20 through the Althea Gravity bridge and eventually BTC through future bridging.
Sunny is one of the Co-Founders of Sikka validator, a blockchain infrastructure company focused on participating in protocols and networks for the decentralized internet. He is a Co-Host at Epicenter, a renown Blockchain podcast, and has worked with them for the past 3 years, almost in conjunction with his 3 years as a Research Scientist at Tendermint prior to his efforts with Osmosis. While attending UC Berkeley, Sunny also worked as a Course Designer and Lecturer for the college, eventually going on to Co-Found Blockchain at Berkeley.
Fees
This has been a hot topic within the Cosmos Ecosystem, what fees will be used for what? Ideally all of them wherever possible, right? Sunny says, “Depends on what type of fees. Swap fees are paid in the asset being swapped.
Transaction fees depend on what assets validators choose to accept. Personally, I’d like validators to accept a wider array of tokens, to provide the best UX for users.
Lending
Obviously, DeFi is not just swapping and providing liquidity into pools. If you look at the bigger picture, the DeFi space has grown to resemble systems within the traditional finance system. Osmosis is on it’s way to engage with the depth of DeFi, Josh explains that there is, “Nothing confirmed yet, but any new DeFi primitive within Cosmos will create a mutually beneficial relationship for Osmosis. I’d like to see the Osmosis community leverage the community pool to bootstrap/fund new DeFi primitives to be built with incentive alignment to Osmosis. I think it’s worth saying that we’re big believers in the larger scope that is bonding curves. AMMs are a specific type of bonding curve, but bonding curves can be used for all sort of things like stablecoins (Fei), yield curves, lending curves, etc. And we’re interested in exploring more of these over time. Allowing LP-ed assets to be used to generate additional yield is something we’re definitely supportive of. There is research work being done into something called ‘reverse staking derivatives’ where OSMO in liquidity pools can be staked and earn additional yield from staking rewards. Beyond this, there has been approaches similar to Uniswap flash-bots for Arbitrage, and Balancer V3 allowing asset managers to lend part of the pool assets–which I see being applicable for Osmosis as well.”
Governance
Governance is intended to play a very important role within Osmosis, there are already many proposals that have been put on chain and voted on since the date of the launch. One idea a community member had was to have certain liquidity pool fees used to provide a specific service to the chain, an example would be using REGEN/OSMO fees to be used to offset carbon emissions for Osmosis to make it not only a very advanced AMM but also the most eco-friendly. Josh explains that, “This would be a great example of Osmosis LP-governance! The core thesis of Osmosis is for the governance of many similar-minded LPs to create highly competitive and highly attractive liquidity pools with its own thesis/strategy.” Sunny also goes on to say, “Our team is dedicated to improving and building Osmosis for the coming years. We have a lot of ideas of where to take the chain, that we’d like to work hand in hand with the community to finalize and execute on. The developer vesting mechanism on chain is designed to promote a long-term relationship with the chain.
Incentived Pools
Incentivized Pools are also a part of why the Osmosis Governance system will be important, if a user wanted to create an incentived pool of ATOM, AKT, and OSMO, that proposed pool’s incentives would need to go through the vote. Josh explains that, “Osmosis incentivizes on a pool-gauge(bonding periods) basis. ATOM/AKT/OSMO pool would be considered a separate pool, so a new governance vote will need to be passed for the ATOM/AKT/OSMO pool to be incentivized.”
One-Sided Liquidity Providing
The Osmosis team is considering one-sided liquidity providing in an interesting way, Josh explains, “one thing we are actively thinking about is creating a one-sided liquidity matching service for each pool. Essentially you + another person will come to agreement to each provide one side of the liquidity (think Tinder but for Osmosis LPs). ”
Rigorous Testing
One thing worth noting is that Osmosis is brand new software, and as much as it can be tested, there could always be something that goes funny. Sunny says, “We’ve spent a lot of time testing the code, including using the simulator. However, there hasn’t been an audit yet. The Certik team will be starting that in the next couple weeks. As usual with any new software, users should be extremely careful and not deposit more money than they are willing to lose. “
Anti-Front Running
During the community interview, someone showed concern about Front-Running and using trading bots, Sunny explains that, “In one way, bots are actually quite important for AMMs, because AMMs require active arbitrageurs to function effectively. However, where bots become an issue is when they start to exploit users through strategies like front running and sandwich attacks. To solve this, we are building an anti-frontrunning solution called Threshold Decryption. You can learn more about it from a talk I gave a few months ago: https://www.youtube.com/watch?v=6WrFlsDSUYg “
Future Bridges
Currently Osmosis doesn’t have a known timeline to include bridges outside of the Cosmos Ecosystem connected via IBC, but Sunny explains that, “Our current priority is connecting to IBC-enabled chains and the EVM-compatible chains (Ethereum, Polygon, Arbitrum, BSC, etc) via a Gravity Bridge. But, once these two are ready, connecting to Bitcoin-like chains will be our next task. Connecting to Bitcoin is extremely important to us. And yes, also Dogecoin (one of the founders isn’t named Dogemos for nothing!). We’re always actively on the lookout for new designs of how to do this and partners to work with.”
How Does Osmosis Differ From Gravity Dex
This is probably the biggest question everyone wants to know, and it’s hard to truly get to a real answer at this point, as each DeX will continuously be developing and upgrading versions. Sunny does make a distinction that, “At genesis, Osmosis provides two big things:
- Osmosis will support way more powerful pools that have multi-asset support and weights, including a special pool type called Liquidity Bootstrapping Pools which are great for doing IDOs ($REGEN will be using this to do its first initial public pricing! See the announcement here)
- Osmosis will have very strong liquidity mining incentives, because we believe the chain should be owned and governed by its users. This should help it build a liquidity moat that will allow it to be the best AMM platform in the Cosmos.
Over time there’s a number of features we have in the works to continue to improve Osmosis:
- Frontrunning/MEV resistance via threshold decryption
- Privacy via shielded pools
- Customizable and governable AMMs
We have a list of some of our research projects here: https://hackmd.io/@osmosis/B1mmhyhFO “
Last Comments
Josh closed the interview with, “Building a natively cross-chain DEX has definitely been a challenge, but I think that also makes the opportunities much bigger. It’s exciting to see an interchain DeFi ecosystem starting to take shape within Cosmos.
See you all in the lab on Saturday! 🧪👨🏻🔬”
