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How Osmosis Could Become Cosmos' DeFi Hub | Sunny Aggarwal

Wed Jul 05 2023
Hub Development Team's ICSDEX ArchitectureGovernance UpdatesCollateral ListingsFDV CompressionAzuki Dao PR DisasterCoinbase ETF ApplicationsSpot ETFsSuperstateCompound Labs CEO ChangeCD5 and DeFi OpportunitiesOsmosis DEXTerra ExplosionMembrane StablecoinMEV CaptureProtocol FeesCapital EfficiencyActive Market MakingOrder BooksInner Chain AccountsCompetition Among DecksDuality ProposalMesh SecurityValidators and Proof of StakeOptions for Liquid StakingABCI++
  1. Hub Development Team's ICS and DEX Architecture
  2. Governance Updates and Collateral Listings
  3. FDV, DeFi Tokens, and NFT Market
  4. Azuki Dao Lawsuit and Recovery Efforts
  5. Tokenizing Block Space and Coinbase's ETF Applications
  6. Spot ETFs, Superstate, and Compound Labs CEO Change
  7. CD5, DeFi Opportunities, and Liquid Staking
  8. Osmosis DEX and Terra Explosion
  9. Membrane Stablecoin and MEV Capture
  10. Protocol Fees and Capital Efficiency
  11. Active Market Making and Order Books
  12. Inner Chain Accounts and Competition Among Decks
  13. Duality Proposal and Mesh Security
  14. Validators and Proof of Stake
  15. Options for Liquid Staking and ABCI++

This comprehensive summary covers various topics including the design of the hub development team's ICS, interesting developments in the DEX architecture by Osmosis, notable governance updates from Curve, Ave, and BitDow, the listing of Wrapped Bitcoin and Ethereum as approved collateral by Curve, the ongoing migration to Mantle by BitDow, the potential compression of FDV due to reduced emissions in DeFi tokens, the PR disaster faced by Azuki Dao and their recovery efforts, the potential case against bit.dao for misleading marketing, Coinbase's position with ETF applications and the SEC's active lawsuit against them, the requirements for spot ETFs and the uncertainty surrounding their approval, the aim of Superstate to bridge traditional markets and blockchain ecosystems, the change in Compound Labs CEO and its implications, the potential of CD5 and DeFi opportunities, the building of a decentralized exchange called Osmosis and its collaboration with other projects, the development of a decentralized stablecoin by Membrane and its use cases, the capture of MEV in Osmosis and its impact on revenue distribution, the introduction of a protocol fee in Osmosis for self-sustainability, the importance of capital efficiency in providing liquidity on Osmosis, the different strategies for market making on Osmosis including active and passive approaches, the challenges in discriminating against toxic flow in market making due to privacy concerns, the competition among different decks and primitives in Cosmos, Osmosis's competition with Coinbase and its focus on decentralized retail trading experience, the duality proposal and its potential impact on security and economics, the role of validators in different chains and the dominance of staking derivatives in proof of stake systems, the potential options for liquid staking including native liquid state within chains or DeFi protocols becoming their own liquid-staking providers, and the extension of ABCI protocol through ABCI++ enabling various functionalities. The summary also provides information on specific projects and initiatives within Osmosis such as Mars, Levana, OMX, IBCX, Calc, StreamSwap, Pronelev, and Anker in Terrap.

Hub Development Team's ICS and DEX Architecture

00:00 - 06:46

  • The design of the hub development team's ICS is not scalable and lacks innovation.
  • Osmosis is building interesting developments in the DEX architecture.

Governance Updates and Collateral Listings

00:00 - 06:46

  • Curve, Ave, and BitDow have notable governance updates.
  • Curve has listed Wrapped Bitcoin and Ethereum as approved collateral to lower interest rates.
  • Ave's Go contracts are ready for delivery but waiting for approval.
  • BitDow is undergoing a migration to Mantle and considering burning VIT tokens to decrease FDV.

FDV, DeFi Tokens, and NFT Market

06:29 - 12:58

  • FDV can be seen as both a meme and a metric depending on the context.
  • DeFi tokens had high emissions during the bull run, but emissions were reduced later.
  • FDV may need to be compressed due to reduced emissions.
  • The NFT market experienced a drop in floor prices after the Azuki Dao PR disaster.
  • This event may be a good time to go long on NFTs if interested.
  • PFP NFTs may be dying, but NFTs as art and technology are still relevant.

Azuki Dao Lawsuit and Recovery Efforts

06:29 - 12:58

  • Azuki raised $38 million through their NFT collection Elemental.
  • Community was upset about similarities with previous collection and unfair advantage for some holders.
  • Azuki Dao filed a lawsuit demanding the use of funds for community development.
  • Azuki is taking steps to address the PR disaster, including creating an anime series and updating artwork.

Tokenizing Block Space and Coinbase's ETF Applications

12:36 - 19:13

  • NFTs have potential for use cases beyond PFP NFTs.
  • Tokenizing block space using NFTs is an interesting use case.
  • The $38 million raised by bit.dao through NFTs was impressive.
  • There may be a case against bit.dao for misleading marketing of their new collection.
  • Coinbase is in a good position with ETF applications selecting them as the exchange of choice.
  • The SEC deemed some ETF applications inefficient due to lack of specified crypto marketplace.
  • Coinbase saw a delayed reaction but is now up 11-12% after the news broke.
  • The selection of Coinbase as the exchange seems odd given the SEC's active lawsuit against them.
  • Spot ETFs may require exchanges with sufficient liquidity and surveillance sharing.

Spot ETFs, Superstate, and Compound Labs CEO Change

18:45 - 26:43

  • Spot ETFs require an exchange with sufficient liquidity for price manipulation.
  • Surveillance sharing is necessary to identify market manipulation in spot ETFs.
  • Listing a spot ETF on a decentralized exchange raises questions about surveillance sharing.
  • Approval of the ETF is uncertain and rumors suggest different timelines.
  • The iShares Bitcoin ETF has multiple approval deadlines, with the final one in February 2024.
  • Superstate aims to bridge traditional markets and blockchain ecosystems with SEC-approved financial products.
  • Robert Leschner stepped down as Compound Labs CEO, replaced by Jason Hobby.
  • Compound has been losing ground to other protocols and lacks revenue potential without a native stablecoin.
  • Speculation suggests a connection between Superstate and Compound.

CD5, DeFi Opportunities, and Liquid Staking

26:17 - 33:07

  • There is speculation about a connection between a super stated compound.
  • CD5 (Centralized Finance and Decentralized Finance) has potential for the future.
  • Bringing investments on-chain makes them more accessible and reduces transaction costs.
  • There is a lot of money from high net worth individuals, family offices, and pension funds looking for investment opportunities.
  • Even centralized exchanges like Avro provide access to opportunities on-chain.
  • Using US treasuries as a bridge between traditional investors and DeFi is a necessary first step.
  • Permissioned DeFi will likely expand to more permissionless products over time.
  • KYC improvements may be developed to prove identity in permissioned DeFi.
  • Super state could be the reincarnated version of Compound Treasury, bridging the gap between traditional finance and being on-chain.

Osmosis DEX and Terra Explosion

32:49 - 39:54

  • Osmosis is a decentralized exchange built as its own app chain, making it unique.
  • The goal of Osmosis was to help bootstrap the Cosmos ecosystem, and it has become the largest DEX in the Cosmos ecosystem.
  • The Terra explosion led to many builders and users finding a new home in Cosmos, including Osmosis.
  • The carbon upgrade enabled CosmWasm Smart Contracts on Osmosis, allowing protocols like Mars to launch on the platform.
  • Osmosis aims to build a platform comparable to centralized exchanges by collaborating with other teams to develop necessary components.
  • Projects like Mars, Levana, OMX, IBCX, Calc, and StreamSwap are building various tools and protocols on Osmosis.
  • Osmosis has an app store where users can access these different tools and protocols.
  • The end goal is to integrate all these components into one unified user experience on Osmosis.

Membrane Stablecoin and MEV Capture

39:39 - 47:25

  • Membrane is building a decentralized stablecoin that combines ideas from existing stablecoins.
  • The stablecoin will have a free-floating exchange rate and support multiple collateral assets.
  • Membrane's direct redemptions system will help maintain the peg more strongly than other stablecoins.
  • Rye has closely tracked the US dollar over the past two years, making it a good store of value.
  • The goal is to build crypto-native units of accounts with stablecoins like Membrane's.
  • Membrane's design uses a single vault for all assets, eliminating the need for different liquidation points.
  • There are discussions about reusing Membrane's contracts to launch BitDollar, a Bitcoin-backed stablecoin.
  • Pronelev is one of the products being built around MEV in Osmosis, focusing on capturing value into the protocol itself.
  • Harmful MEV includes front running and sandwiching, while benign MEV involves arbitrage without harming others.
  • Protorev back runs users by executing cyclical ARBs after swaps and distributing revenue to stakers.
  • A combination of distributing revenue to stakers and using it for real yield would be a good use of earned revenue in Osmosis governance.
  • The fee switch in Osmosis adds an additional fee on top of swap fees to make the protocol self-sustainable.

Protocol Fees and Capital Efficiency

46:55 - 53:02

  • The additional fee on top of the swap fee is meant to make the Osmosis protocol self-sustainable.
  • Trading fees are the primary source of revenue for any exchange, including decentralized ones like Osmosis.
  • The additional fee is called a spread factor and is expected to encourage liquidity migration towards thinner spread factors.
  • With the introduction of a protocol fee, mechanisms can be built in to reduce the fee based on certain behaviors or factors such as trading volume or stake amount.
  • Osmosis aims to balance incentives between liquidity providers and stakers, with a shift towards incentivizing stakers more.
  • Capital efficiency allows for lower incentives as less capital is needed for providing liquidity while maintaining a good user experience.
  • Being an LP has been seen as negative EV due to various factors like impermanent loss, LVR loss rebalancing, and market making strategies.
  • Active market making designs like UniSwap V3 are considered the future of AMMs, especially for bootstrapping new assets or ecosystems.
  • As Cosmos matures and high cap assets become more prevalent, there is a need for more capital-efficient solutions.

Active Market Making and Order Books

52:38 - 59:36

  • AMMs are good for bootstrapping new ecosystems and assets.
  • Passive strategies like Curve V2 are still valuable, but need to be smarter.
  • Teams are building market-making AMMs on top of Osmosis liquidity and order books.
  • Order books and CL pools are integrated as one system called loot books.
  • Active market makers will dominate high-volume markets, while passive strategies may still be effective for mid-cap assets.
  • The goal is to build a single unified market and allow different strategies on top of it.
  • Ambient is using tick methodology to create on-chain limit orders.
  • Curve V2 is an automated concentrated liquidity model that rebalances the pool without LPs moving the liquidity.
  • Dynamic fee models based on volatility or trade size are being considered for LPs.
  • Market makers increase spreads and pull liquidity during high volatility periods in the real world. Passive concert in the liquidity system could replicate this behavior on Osmosis.
  • With a good order book and vault-building system, various interesting passive vault systems can be built on Osmosis.

Inner Chain Accounts and Competition Among Decks

59:30 - 1:06:38

  • Using inner chain accounts on Osmosis allows for contract placement on different chains like Quasar.
  • Native white listed accounts on Osmosis provide additional benefits, such as the ability to replace limit orders at the beginning of every block.
  • Discriminating against toxic flow in market making can be challenging due to privacy concerns and lack of information in the market.
  • Competition among different decks and primitives in Cosmos is seen as a positive, driving faster development and increased activity.
  • Osmosis sees Coinbase as its biggest competitor and aims to provide a decentralized retail trading experience.
  • Collaboration and synergies exist between Osmosis, DYDX, Astroport, and Duality in terms of user onboarding, liquidations, and AMM building.
  • The Adam economic zone strategy is considered a good path forward for Cosmos, but some aspects of the duality proposal raise questions about incentives for developers.

Duality Proposal and Mesh Security

1:06:16 - 1:13:23

  • The duality proposal seems too good to be true, but there may be other tricks up their sleeve.
  • AESE is interesting, but it remains to be seen how they will build up liquidity.
  • Mesh Security is what Interchain Security was supposed to be.
  • ICS is not scalable and does not provide the same level of security for all chains.
  • Mesh Security allows restaking from multiple chains and bi-directional security arrangements.
  • The goal is to have security from as many different places as possible.
  • Validators in the ICS model are forced to validate every chain approved by ICS, which could increase costs for validators.
  • With mesh security, validators can choose which chains make economic sense for them, leading to a more market-driven approach.
  • The market will determine the balance between security and economics.

Validators and Proof of Stake

1:12:58 - 1:20:22

  • Validators will run on different chains based on efficiency and alignment.
  • Ethereum's vision is similar to Cosmos with app chains and hyperchains.
  • Proof of stake was a mistake due to the dominance of staking derivatives.
  • Copy staking allows users to choose distribution of voting power.
  • Web of trust reputation systems could be an interesting avenue for decentralized consensus protocols.
  • Liquid staking providers need competition for a more balanced market.
  • Possible solutions include chains building their own native liquid staking or using copy staking mechanism.

Options for Liquid Staking and ABCI++

1:19:52 - 1:24:08

  • Two potential options for liquid staking are building a native liquid state within each chain or having DeFi protocols become their own liquid-staking providers.
  • The first option involves chains issuing their own liquid staking tokens (LST) through a copy-staking mechanism.
  • The second option suggests that DeFi protocols, such as lending platforms, can use the non-lent out assets as collateral and stake them to earn revenue.
  • Anker in Terrap is an example of a project attempting to implement this approach.
  • ABCI++ is an extension of the ABCI protocol used by the Cosmos SDK stack, allowing state machines to be more opinionated about consensus protocols.
  • ABCI++ enables various functionalities like threshold decryption and validator-provided price oracles.
  • To learn more about Osmosis, you can find Sunny A97 on Twitter and visit Osmosis's website at Osmosis.Zone.