Osmosis Updates From The Lab

Levana Protocol | June 28, 2023

Hosts: Aaron Kong | Sunny Aggarwal (Osmosis)
Guest: Jonathan (Levana Protocol)

TL;DR

• Osmosis is in the final stages of testing Concentrated Liquidity (CL) on the testnet and plans to submit a proposal in a week or two.
• Multiple wallets (Leap and Cosmostation) are now integrated on Osmosis. More wallets will be rolled out gradually ensuring proper testing.
• Osmo 2.0 has been implemented, adjusting APRs for LPs and stakers to encourage more Osmo staking.
• Streamswap has launched its third token, Nolus, which allows leveraged trading on Osmosis.
• Tether (USDT) is coming to Kava and there will be incentives on Tether/Atom, Tether/Osmo, and Tether/USDC pools on Osmosis.
• Osmosis will be introducing Transmuter, a contract enabling one-click conversion between axl.USDC and Noble USDC, with no fees or slippage.
• Levana, a perps platform, is preparing to launch on Osmosis, offering leverage products for various crypto assets.
• Levana differentiates itself from other platforms by using a “peer to pool” model, avoiding order books and enabling anyone to create leveraged markets.
• Levana has submitted a proposal to upload its contracts on Osmosis and aims to go live on the mainnet soon.

Aaron
Hello everyone thanks for tuning in. Let’s get started here. Sunny, updates from the lab. What do you have for us today?

Sunny
Hello. About Concentrated Liquidity (CL), we are in the final stages of testing on the testnet. If all goes well, we anticipate submitting a proposal within the next week or two. Initially, we will focus on the Osmo/Dai pool for testing purposes. This pair is large enough to effectively evaluate CL functionality while minimizing the impact in case of any unforeseen issues. Starting with a stablecoin pair makes it simpler for users to engage in CL positions, as stablecoins are easier to quote and work with.

Aaron
What about USDT given the announcements that are now out? Any thoughts of how that will be playing in, since we’re starting off with Osmo/Dai first?

Sunny
Yeah. Really excited that Tether is going to be coming to cosmos. We’ve been working with the Kava team for a while on making this happen. I think more stable coins is good for the ecosystem. They’ll be putting some external incentives on pools-Tether/Atom, Tether/Osmo, and Tether/USDC as a stableswap. Right now there’s no Atom/stablecoin pool, given that’s the most common popular trading pair. Getting that bootstrapped with Tether might drive some demand for building up liquidity on the new stablecoin in Osmosis. We’re waiting for the Noble USDC, hopefully, that will also be right around the corner. Tether, USDC will probably exist as a CL pool as well, rather than stable swap, just because it gives you a lot of benefits.

Sunny
One of the big upgrades that happened to the frontend this past week, is Multiple Wallet support. I think there are 10–15 wallets that are going to be able to support Osmosis. But, instead of dropping 15 wallets at once, we’re going to roll them out over a few weeks and gives us time to actually properly QA and test every wallet integration. We now have live along with Keplr, the Leap wallet and Cosmostation wallet.

Sunny
The other big thing this week was all the Osmo 2.0 stuff went into effect. So on June 19, there was obviously a little bit of hiccups, but the thirdening has gone through. The lengthening might have seen a little bit of drop in the APRs for LPs, but the Staking APRs have gone up significantly. Moving towards this world where, encouraging more Osmo to be staked because we need less liquidity, when CL comes around to get the same value.

Sunny
Streamswap keeps crushing it, we now had our third token launched by Streamswap, which was Nolus. They raised over 500k from their stream and have been able to bootstrap a liquidity pool on osmosis, as well as launch their product. It should be live today on the Appstore on Osmosis, where you can use Nolus to lever long on different assets on Osmosis. You can go up to 3x leverage on them.

Jonathan
I have a question. I’m curious about the existing bridges and the existing USDC and how you see the transition to the noble USDC? Is there any stuff that we as users of osmosis, liquidity providers to existing pools need to keep in mind as this transition happens?

Sunny
We’ll introduce a contract called Transmuter, similar to a stableswap but with a one-to-one ratio, no slippage, and no fees. It allows converting one axl.USDC to one Noble USDC. Altruistic liquidity providers, such as the Noble team or Osmosis foundation, will support liquidity transition. If governance approves Noble USDC as the canonical USDC on Osmosis, axelar USDC will be relabeled as USDC.axl. Users can easily convert their axl.USDC to Noble USDC with a single click. Liquidity providers using CL can move their position from axl.USDC to Noble USDC without unbonding periods. Hopefully Noble USDC will be launched before we are ready to migrate the Osmo/USDC pool. But if not we’ll make it work. Right now things are a little bit up in the air just because we don’t know the timeline from Noble yet.

Aaron
Awesome. What are your thoughts on USDC vs USDT? How will Tether’s early entry into the market, without an official launch date for USDC, impact Osmosis and the broader ecosystem?

Sunny
Kava and Tether aim to establish Tether as the leading stablecoin in the Cosmos ecosystem. However, our objective is to promote stablecoin diversity to mitigate risks associated with relying heavily on a single stablecoin, as seen with USDC. In the upcoming v17 release, we will implement volume splitting incentives. Rather than assigning incentives to specific pools, governance will allocate them based on actual trading volumes. For example, we can allocate incentives to Atom/stable pairs and automatically distribute them between Atom/USDC and Atom/Tether based on trading volume. This market-driven approach allows users to choose their preferred stablecoin and the most efficient on/off-ramping option. USDC and Tether serve different markets and use cases. USDC is widely used in the USA and Ethereum DeFi, offering easy on/off-ramping for Coinbase users. On the other hand, Tether dominates global usage on centralized exchanges and payment infrastructures. Our goal is to leverage both stablecoins to provide diverse onramps into the ecosystem.

Aaron
Thank you. Assuming that USDC and USDT will dominate the market share, how can future stablecoins, whether centralized or decentralized, compete to enter this market alongside existing stablecoins in the ecosystem?

Sunny
If a new stablecoin emerges, we can include it as a ‘quote asset’ in Concentrated Liquidity pools with approval from governance. Similar to traditional exchanges that have a limited number of quote assets, such as USDT, Bitcoin, or BNB on Binance, we plan to designate USDC, Tether, and Osmo as the base quote assets. However, when a new stablecoin is approved as a quote asset, we can adjust the incentives accordingly based on volume and demand, leading to increased liquidity.

Aaron
Will there be any kind of dynamic or relationship between stablecoins, apps, and protocols in the next six to nine months? Could they coordinate exclusively with certain teams and work out deals? How does Jonathan see this with Levana launching?

Sunny
I could see that happening. When launching a new stablecoin, you can form partnerships with other projects seeking liquidity for their assets. By offering incentives, you can foster liquidity growth for their tokens. An example of this approach is Kava’s collaboration with Tether, where they provide external $Kava incentives for the Atom/Tether and Osmo/Tether pools to enhance liquidity for their stablecoin.

Jonathan
I just add to that, to ensure the growth of a stablecoin, two key factors are crucial: high fungibility and easy tradability, as well as offering unique use cases and utilities to gain a competitive edge. Business development plays a pivotal role in identifying killer apps that drive adoption by facilitating lossless swapping, attracting users and establishing a thriving economy. If the products within the ecosystem are sticky enough, users are likely to remain engaged and contribute to its growth.

Aaron
Yeah, all very good points. One last question for Sunny. With all the stablecoins, the USDC, USDT and all these other smaller ones, how does Osmosis position itself with perfect equilibrium, to make sure that all of them are appeased, and all of them are betting their money with Osmosis?

Sunny
The purpose of volume splitting incentives is to ensure the Dex remains neutral towards stablecoins. If the market lacks trust in Tether, there will be minimal volume and liquidity in Tether. Conversely, if a decentralized stablecoin gains more trust, volume and incentives will shift towards it. Osmosis serves as a neutral platform, combining aspects of both Uniswap and Curve, because we have our own stableswap pools as well. So, the more stablecoins there are, the more volume is driven into our stableswap pools as well.

Aaron
Awesome. Thank you. Jonathan from Levana, let’s start talking about that. The past three days, your discussion has been up on Commonwealth and from here things are ready to get moving. Tell us more.

Jonathan
Levana has been around for about two and a half years, which is very, very long for a project in this space. Levana is an acronym that stands for ‘Leverage any asset’. We were created out of the Delphi labs group, which has brought fabulous projects such as Mars, Astroport to the world of Cosmos.

Aaron
I just want to say I had no idea about that acronym. I thought it was like a dragon name.

Jonathan
Levana means moon, and in Latin means to lift up. If you’re Harry Potter fans, you’ve probably come across the term Levana. So you could interpret it as lift up to the moon. Levana offers various leverage products, including applications in GameFi, NFTs, and the core product is a perpetual swap. There’s many different ways to build a perpetual swap, you can build it with orderbooks like Dydx, where you have to have makers and takers, and there’s kind of a blackbox matching engine.

Aaron
For anyone that might be at their computer right now, is there somewhere they can follow on along and look at what you’re talking about?

Jonathan
Yes. We have actually been live on Osmosis testnet since September. I believe, over 10,000 members of the Osmosis community, play with the Levana testnet. The best way to find that is through blog.levana.finance. We’ve gone through two comprehensive audits, we’ve gone through detailed modeling and simulations and back testing and stress testing. We’ve actually broken the osmosis testnet like three or four times. I think one time from our stress testing, it was down for two days, so I apologize.

Jonathan
Levana simplifies leverage trading for popular crypto assets like Atom, with Osmosis being the ideal Defi platform for trading Atom on leverage. Osmosis stands out in the Cosmosverse as it interconnects various blockchains. Levana aims to provide a powerful yet user-friendly leverage tool, avoiding offchain matching and complex market making. By depositing Atom as collateral, users can easily go long or short with up to 30x leverage. Advanced trading features like on-chain stop-loss, limit orders, and automatic take profit can be set when creating orders, and adjustments can be made at any time. Additionally, closing all positions is just one click away.

Jonathan
Levana has focused on creating an exceptional leverage trading perpetuals platform through extensive beta testing and usability analysis. Inspired by the GMX protocol, Levana has rebuilt a Rust-based Cosmwasm 1.0 platform, addressing technical challenges and improving existing perpetuals. At the upcoming Osmocon event, as a keynote speaker, I will discuss the technical decisions made by the Levana engineering team and head architect, highlighting the differences in generating perpetual swaps. Our goal is to build a superior perpetuals platform with cutting-edge technology, lower fees, reduced insolvency risk, and a user-friendly mobile-responsive interface that allows anyone to instantly open or close positions.

Aaron
So you touched on these comparisons with GMX and the journey as a learning curve. How would you compare yourselves as well to Injective and Dydx?

Jonathan
One notable difference between platforms like Injective and Dydx, which utilize order books, is that they limit the participation of the majority of the population as market makers. The maker-taker system creates complexity and segregates the market into retail traders and institutions. However, the evolution of crypto, smart contracts, and open finance to DeFi has seen the rise of automated market makers like Uniswap. These platforms have successfully democratized liquidity provision and allowed anyone to trade instantly while enabling the building of additional infrastructure. Levana consciously followed a similar approach, opting to avoid the concept of an order book and embracing the simplicity and robustness of platforms like Uniswap and eventually Osmosis Dex.

Jonathan
Levana’s decision to adopt the “peer to pool” model was driven by several factors. In the “peer to peer” model, each order needs to find a matching taker, which can result in being stuck in a position when entering or exiting. This poses challenges for third-party applications and user experience, particularly when bootstrapping new markets. Additionally, providing liquidity becomes an oligarchy position rather than a democratized one. In contrast, the “peer to pool” model ensures there’s always a counterparty available, allowing users to enter and exit positions, even in new markets. Levana’s aim is to create a permissionless network where anyone can independently create leveraged markets. This model is unique within Cosmos and other platforms, including Ethereum’s rollups, Layer One, and side chains, where the peer-to-pool perpetual swap model has seen success. Levana is excited to be the first to market with this important DeFi primitive, launching it on Osmosis.

Aaron
So when is that happening now that the Commonwealth is done?

Jonathan
Currently, Levana has submitted proposal number 548 — ‘Allow Levana contracts upload’ on Osmosis. Levana is optimistic that the community will vote in favor of the proposal within the next five days. The goal is to go live on the mainnet before Osmocon, enabling Levana to showcase the product and gather valuable feedback from the core audience.

Jonathan
We’re super excited. What’s nice about the method that we built this is we don’t use stablecoins. When leveraging on Atom, you simply deposit Atom and take a Long or Short position collateralized by Atom. Since it’s single-sided liquidity, there’s no impermanent loss. As a liquidity provider, you deposit a single asset, Atom, which can be done with or without an unbonding period. By providing liquidity, you earn real yield rewards, not subsidized by Levana. These rewards reflect the return on your capital and enable the creation of leverage positions.

Jonathan
One advantage Levana has over GMX is the inclusion of mechanisms that maintain a delta-neutral protocol. This means that if there are more long positions than shorts, a funding rate from longs to shorts (and vice versa) is implemented. This opens up various strategies, such as cash and carry or purely LP positions, allowing users to earn fees without being exposed to the price of Atom. For instance, imagine you are bullish on Atom and you have staked or liquid staked Atom, earning a APR of around 14–15%. If you want to secure some gains but cannot exit immediately due to an unbonding period and the attractive risk-free rate from validators, Levana perps can come to your aid. In this case, the funding rate is going to be paying to anybody taking the short side, presumably because the market is bullish. This means you can earn additional income by owning Atom, depositing it to a validator, and simultaneously taking a short position on Levana, effectively making your staked Atom market neutral.

Jonathan
We’ll be publishing advanced trading strategies that demonstrate how you can enhance your portfolio and existing strategies using perps. It’s not solely about taking high leverage long positions as a degen trader. Levana’s perps system is designed to prevent insolvency by ensuring every position is fully collateralized. Whether you choose long or short positions, or participate as an LP without impermanent loss, you can leverage these different position types or combinations to augment your current portfolio.

Aaron
What if users do want to use stablecoins? Is this something that is in the plan in the future?

Jonathan
That would be for synthetic asset markets. Synthetic asset markets are great, because you could open up a market around, the amount of rain in Paris, for example. It doesn’t even need to be something on chain, because it’s it’s purely synthetic. I want leveraged exposure to the amount of rain going up, and you might bet that it’s going down. I just give that as an absurd example to demonstrate that, if you’re using stablecoins, you have the flexibility to create leverage markets on things that don’t even exist on chain. So obviously, ETFs or traditional commodities Gold, Silver, Forex things like that, those are probably more popular usecases than other things like Pokemon cards or soybean or rain volume. While our perps system can support synthetic markets, our initial focus is on assets already traded on Osmosis, with Atom being the most popular. We’re excited to launch these markets and let the community determine their trading interests. This approach gives us the flexibility to adapt to community preferences and expand our offerings accordingly.

Jonathan
Levana aspires to produce fully collateralized leveraged positions, minimizing insolvency risk of the exchange. For instance, if you want to collateralize 10 Atoms at $9 each for 20x exposure, that would be $1,800. The exchange takes the role of the house, like a casino. However, if there are not enough short-side participants to balance your position, the exchange faces a challenge. If Atom’s value rises to $100, there’s $18,000 of assets in the exchange, but it’s unclear where the money comes from when withdrawing. So either one of two things needs to happen. Either the exchange needs to become insolvent, which means that there’s a bank run, only the first 10% of depositors will be able to get their assets out, or there needs to be some massive insurance pool where liquidity was provided from some altruistic purpose, or there was some type of farming reward for contributing to the insurance pool. Levana addresses this issue with its fully collateralized and well-funded approach, described in the blog post ‘Introduction to Levana Perps v2'.

Aaron
Awesome, thanks for breaking down so much of that. You have five days to go live on chain, are you going to be live? What do you expect to see in the current climate, in terms of volume, users adoption?

Jonathan
We plan to deploy Levana on the 15th or 16th of July, initially setting a cap, likely around 10,000 Atom. The cap will be filled by supportive individuals who have been familiar with the project for the past few years. As liquidity may be low at the start, we anticipate minimal trading activity, allowing for a comprehensive soft launch. This approach enables us to carefully analyze performance, evaluate the effectiveness of the Delta neutrality mechanisms, and ensure well-fundedness. We will establish precedents for average APRs for liquidity provision and, based on market interest, user feedback, and other factors, gradually increase liquidity pools over time. The soft launch process will span from the middle of July to the middle of September.

Aaron
Gotcha. So, given the way Mars raises their caps, how will you be doing it since you are not in the same setup?

Jonathan
Currently, Levana does not have its own hub or token. While we have aspirations for these in the future, we are not in a hurry to launch our own blockchain. That’s why we have chosen to deploy on Osmosis. User feedback and recommendations will primarily be gathered off-chain through Discord, allowing for voting and discussions. As our product matures and demonstrates early signs of product-market fit, we will consider transitioning governance to a more decentralized methodology using blockchain technology.

Aaron
Awesome. Sunny, do you have any final thoughts or things you want to chime in on with Levana?

Sunny
I’m just excited to see it live. I wonder if anyone’s building any vaults to do bases trades while hedging out on the spot side?

Jonathan
We have talked to a couple of different teams who have done such things for Ribbon finance, or Umami. We have very comprehensive documentation including TypeScript sample code, of how you would build these things. So we’re very excited for people to build them. We’re even interested in a grant program to help fund third party teams that want to build these types of user experiences.

Aaron
Awesome. Where listeners can check out about Levana, stay up to date and how to get involved with your community?

Jonathan
The best way to get involved is to follow us on Discord, Twitter. To vote on our proposal, you can find on mintscan. We will have people in Paris next month and happy to meet in person. I look forward to giving a report as to how Levana perps is performing as things progress.

Aaron
Awesome. Thank you Sunny. Thank you Jonathan, and thank you everyone for tuning in. Take care.