Osmosis Updates From The Lab

Osmocon’23 Recap | Wormhole | August 2, 2023

Hosts: Aaron Kong | Sunny Aggarwal (Osmosis)
Guests: Nikhil Suri | Robinson (Wormhole)

TL;DR

• Supercharged liquidity is launched and with Osmo/Dai pool migration over half the liquidity already migrated to the new CL pool.
• Upcoming features: Notification alerts on Osmosis and vaults collaboration with Quasar team for passive liquidity providers.
• Frontier will be deprecated, and its assets will be accessible on the main Osmosis site through a toggle in the settings modal.
• Concentrated liquidity migration process will be carried out in the v17 upgrade, aiming for permissionless pool creation by the v18 upgrade.
• BitGo plans to launch native WBTC on Osmosis for minimizing bridge risks and promoting hyper Bitcoinization within Cosmos.
• Wormhole is a generic message passing layer connecting different blockchains and enabling cross-chain communication and token bridging. Initially connecting with Osmosis and later with more Cosmos chains. Prop will be on chain for voting on August 7.
• V16 upgrade introduced Transmuter with CW stable swap pools with a rate-limiting feature to protect liquidity providers from potential bridge vulnerabilities.
• Osmosis is introducing ‘alloyed assets’, allowing LP shares of the Transmuter to serve as the canonical version of an asset, providing a unified bridging experience.
• Assets like Solana, TBTC, ARB, OP, and stETH being considered to be bridged through Wormhole.

Sunny
Welcome to the first ever Osmosis X spaces

Sunny
The two biggest updates from the lab are the launch of supercharged liquidity and the migration of the Osmo dai pool. Over half of the liquidity has already migrated to the new CL pool, which is positive. For passive liquidity providers, it’s essential to check their positions regularly to ensure they remain within the desired range.

To make things easier, two upcoming features will be introduced. Firstly, notifications will be implemented for various events, including asset receipts, unbonding completion, and most importantly, when a liquidity position goes out of range. Secondly, there are vaults being developed in collaboration with the Quasar team, similar to the real yield eath strategies in DeFi but applicable to Atom and Osmo pools. For those who prefer a more passive approach, depositing into these vaults could be a good strategy.

Keep an eye out for notifications and updates on the availability of the vaults from the Quasar team, as well as other teams like Elixir and Astra port, who are also working on vault development.

Aaron
Can you tell the differences between those vault providers ?

Sunny
Different strategies are being used by various teams. Quasar and real yield teams opt for actively managed vaults, which involve some risk as the manager decides on the market-making algorithm, which may not be open-sourced. However, Quasar implements checks and balances to prevent misuse. On the other hand, Elixir and Astroport follow fully algorithmic strategies, using on-chain Dex AMM algorithms like Curve v2. While actively managed vaults might be more profitable due to information asymmetry, passive strategies are suitable for mid to minor cap pools where no active manager is present.

Aaron
Which one are you most bullish on?

Sunny
Actively managed vaults are more suitable for major cap assets like Atom and StAtom or Atom and Osmo, where market-making strategies are crucial. However, for minor cap assets like Juno and USDC or new tokens, where active management might not be available, using Curve v2 strategies in passive vaults makes more sense. Different use cases dictate the choice between actively managed and passive vaults.

Aaron
Can you touch on the changes we had with Frontier?

Sunny
Frontier will be deprecated today as a separate site. Instead, its assets will be accessible on the main Osmosis site through a toggle in the settings modal. This change streamlines development and eliminates the need for maintaining two different sites with varying UI elements. If you wish to access frontier assets, visit the main site and activate the frontier mode in the settings. A pop-up will guide you on how to do it. The update is currently in the staging environment and will likely be live by the end of the day.

Aaron
Awesome. What else do we have?

Sunny
Next steps with concentrated liquidity involve migrating existing pools. Every pool will have an equivalent concentrated liquidity pool created alongside the classic pool. Incentives will be split between the two, with the classic pool offering a 5% reward discount. Migrating to the concentrated liquidity pool, even if fully ranged, is recommended for higher incentives. The migration will exclude Osmo USDC and Osmo Atom due to security concerns, but they will be considered later. Some pools with 18 decimal points for the base asset will not be switchable now due to precision issues. Stables pair pools will be created, and future upgrades aim to enable permissionless pool creation. The process will be carried out in the v17 upgrade, and if everything goes smoothly, the target is that by the V18 upgrade, we should be able to open permissionless pool creation.

Aaron
What do you think the timeline is on the permissionless?

Sunny
In probably about a month.
Another major event that occupied our attention was Osmocon, which was successful and well-received by participants. Many consider it their favorite event of the year. We had exciting announcements from ecosystem partners like Mars, Babylon, OMX, Levana, and others, along with talks from Osmosis core team members. Videos of the event will be available within the next week.

One of the most exciting announcements is BitGo’s plan to launch native WBTC on Osmosis. Currently, WBTC on Osmosis is bridged from Ethereum via Axelar, which entails some bridge risk. By deploying a native WBTC contract on Osmosis, we can minimize this risk, as WBTC acts somewhat like a stablecoin, being issued by a centralized issuer, BitGo. This move is a step towards the larger goal of hyper Bitcoinization within Cosmos. We continue to collaborate with other teams, such as Wormhole and TBTC, to work on proper decentralized Bitcoin bridging.

Aaron
Awesome. Robinson and Nikhil, can you guys introduce yourselves and give us a TLDR on wormhole?

Nikhil
I’m Nikhil Suri, I’m a product lead at the Wormhole foundation. Been working on wormhole gateway pretty heads down recently. Super excited about the announcement we made at Osmocon and the upcoming launch.

Robinson
I’m Robinson, the lead strategist for the Wormhole Foundation. Wormhole is a generic message passing layer, connecting different blockchains or “islands.” We enable them to share data and state, mostly in the form of assets like tokens and NFTs. Our goal is to securely connect as many chains as possible and make cross-chain interactions seamless for developers. We recently launched our Cosmos SDK chain gateway at Osmocon, and we are thrilled to be part of the Cosmos ecosystem.

Aaron
Can you touch on the journey that you guys have gone through over the past year and how did everything lead up to here?

Nikhil
Our journey into building with Cosmos and the Cosmos SDK started over a year ago. Initially, we built a chain to enhance Wormhole’s security by adding features like the global accountant for resilience against chain hacks. Cosmos SDK proved to be an excellent framework for quick blockchain bootstrapping and module addition. As we got deeper into the Cosmos ecosystem and learned about IBC, we realized that Gateway could also bridge tokens in a fungible way without fragmenting liquidity. This led us to announce the Gateway product at OsmoCon, facilitating token bridging in and out of the Cosmos ecosystem.

Aaron
Can you explain to the audience what the Guardians are?

Nikhil
Wormhole is a multisig bridge with 19 well-known validator companies as guardians. These guardians attest to every message passing through the bridge. Once 13 out of the 19 guardians sign a message, it becomes an attested message called VAA (Verified Arbitrary Action) in Wormhole language. This VAA can be redeemed against any Wormhole contract on the destination chain, allowing users to take the action encoded in the VAA.

Aaron
So why 19 of them?

Nikhil
Wormhole originally when it first started was a bridge between Ethereum and Solana. And we chose 19 because of block size limitations or multisig limitations on Solana.

Robinson
Originally, the gateway was called “worm chain,” and the concept of Wormhole entering the cosmos ecosystem became somewhat of a meme. The main focus was on enhancing security for bridging. The team developed a global account system for security. However, they also identified unmet needs for Cosmos and a more efficient way to go to the market. Gateway, the evolved version, allowed for an extensible network using IBC to connect to Cosmos chains and bring liquidity from outside the cosmos, leading to potential growth and better go-to-market opportunities.

Aaron
All right. So what are the timelines coming up?

Nikhil
We are planning to launch Gateway on the 15th of August launching with the connection to osmosis, and then following up with connections, some more Cosmos chains afterwards.

Aaron
What will be the initial assets that are going to be first supported?

Robinson
Wormhole enables cross-chain communication across various runtimes, connecting not only EVM worlds but also ecosystems like Solana, Algorand, and others. We aims to provide Cosmos users with access to previously unavailable assets, such as Solana, Near, Algorand, Aptos, and Sui. We also collaborate with TBTC, a decentralized Bitcoin from Ethereum, offering an alternative version with potentially different flavors and risks. The team is excited about the current proposal to become a service provider, opening up these other economies to Osmosis.

Aaron
think that you know, what you guys offer versus what Axler offers it’s nice little Venn diagram, that’d be pretty valuable. Sonny, what about hopping into alowed assets.

Sunny
Over a year and a half ago, we conducted a bridge-off to determine the most suitable bridge, with two key criteria in mind: user experience (UX) and avoiding liquidity fragmentation. After careful evaluation, Wormhole and Axelar emerged as the top contenders, a choice that was similarly validated by Uniswap. From the outset, we recognized the need to move towards bridge quantification, and with the recent V16 upgrade, we’ve achieved that goal.

The recent upgrade introduced Concentrated Liquidity as well as CW pools, allowing for the creation of custom automated market makers (AMMs) through Cosmwasm contracts. Among these, the Transmuter, a new type of stable swap, which offers a one-to-one stable swap experience without incurring any fees or slippage. What sets the Transmuter apart is its built-in rate limiting feature, which plays a crucial role in safeguarding liquidity providers (LPs) from potential bridge hacks.

Let’s consider an example scenario: the pool comprises 60% ETH from Axelar and 40% ETH from Wormhole. By parameterizing the pool with a rate limit, we ensure that the percentage of Wormhole ETH in the pool cannot increase by more than 10% within a 24-hour period. This means that in any 24-hour window, the proportion of Wormhole ETH in the pool will be capped at a maximum of 44%. The rate limiting algorithm, based on an exponential weighted moving average, provides a simple yet effective mechanism to protect LPs from potential losses resulting from bridge vulnerabilities.

The Transmuter’s security properties make it a powerful tool in our ecosystem. We plan to use it for the upcoming USDC migration, encouraging users to switch from Axelar USDC to Noble USDC by offering a safe and seamless process. Moreover, we envision using the Transmuter for other assets like ETH, where we introduce the concept of “alloyed assets.”

Alloyed assets allow LP shares of the Transmuter’s special stable swap to serve as the canonical version of the asset (e.g., alloyed ETH). Users can mint alloyed ETH by depositing either Axelar ETH or Wormhole ETH, thereby providing a unified and simple experience for bridging and depositing to Osmosis. This approach also enables future expansions, where we can add other bridges or even assets from other networks (like Polygon or Optimism) into the stable swap pool, further enhancing security and liquidity options.

Aaron
Would there ever be a number where there are too many assets or versions of an asset?

Sunny
I’m sure there’s some technical cap of not exceeding a certain amount due to the contract. We’ll just get too gas heavy or something like that. But I don’t see that being a big.The introduction of alloyed assets doesn’t mean we should be less opinionated about the bridges we whitelist. We must still prioritize high-quality and secure bridges because while alloyed assets cap losses, there will still be some losses if a bridge’s assets make up a significant portion of the composition. Governance needs to carefully choose which bridges to include as canonical bridges. Additionally, accepting assets like ETH on Polygon via Wormhole implies a bet not only on Wormhole but also on the Polygon bridge, considering the risk assumptions associated with the source assets. So, it’s crucial to remain mindful of the risks involved in selecting bridges.

Aaron
Let’s say all these assets are alloyed together. Wouldn’t there be some security concerns if some of them are not as robust as others?

Sunny
Governance should have the ability to set hard caps on these assets. For instance, limiting assets from a specific Layer 2 to, say, 2% of the pool’s composition. The primary goal is to improve the user experience, making it easier for people to deposit assets from various L2 networks.

Aaron
The most in demand alloyed assets would be like Bitcoin and Ethereum. What do you foresee beyond those?

Robinson
I believe there’s a strong demand for certain assets in the Cosmos ecosystem, such as Solana, BTC, ETH, and stablecoins. Transmuters could be used for specific versions of USDC like Noble USDC or Bridge USDC. Additionally, L2s like Arbitrum and Optimism could be considered. TBTC can be one of the best assets to trade BTC on Cosmos, and there’s room for both TBTC and WBTC given their different functionalities. stETH is also popular, and we’ll see how it integrates into the ecosystem in the future.

Aaron
What’s the ticker for the assets from Wormhole?

Robinson
Usually, it’s wh.USDC or wrapped assets, but it can vary depending on the community and token registries used by dApps. For example, Aptos has a token registry and the prefixes specified in that registry are considered canonical. wh is commonly seen as the most used prefix.

Aaron
Cool. Sunny, any additional thoughts with Wormhole?

Sunny
I’m personally most excited about accessing assets currently unavailable in Cosmos, like Solana, Near, and Aptos. These high-cap assets are not present in non-EVM chains, making it a significant development.

Robinson
We’re going to on chain vote on August 7.

Aaron
Awesome. I want to give a shout out to Soi2Studio for helping us with the video editing side with Osmocon. He’s a professional video editor. Thank you so much Soi.

Aaron
Thanks, everyone.