Osmosis Updates from the Lab, ft. Jake Kim (ION DAO) — Mar. 23, 2022
Osmosis Updates from the Lab occurs every Wednesday at 1 PM EST (5 PM UTC) on the Osmosis Zone Twitter Space. Replays are available on the Osmosis YouTube channel or the podcast.
This week, Jake Kim from Alphaworks came by the lab to talk to Sunny, Josh, DynamicManic, and Kevin about setting up the ION DAO. The contracts are ready to deploy, pending the inclusion of some DAO DAO upgrades. Holders will soon be able to stake ION for voting power in the DAO, which currently has a 16,572 ION community pool. The first three likely proposals are 1) retroactively paying Alphaworks 50 ION, 2) allowing people to stake the ION in their ION/OSMO LP shares, and 3) approving the development of the synthetic asset protocol, Ionize.
Osmosis Updates
frontier.osmosis.zone: A new secondary front-end is coming to Osmosis! (Name subject to change. Send us suggestions!) In order to provide a place for all bridged assets and CosmWasm tokens, the team is putting up a more permissionless front-end, whose only curation involves keeping off obvious scams, like a fake ATOM token.
This is also a governance win. The Osmosis DAO will decide which assets get to “graduate” to the main front-end: tokens given Osmosis incentives will automatically be listed on app.osmosis.zone. The additional front-end is likely a temporary measure until token lists are available that allow users to import asset labels into the Osmosis UI from third-party lists, e.g. CoinGecko, Regen, Evmos. (Importing the assets themselves is already permissionless.)
This does not affect the upcoming bridge-off vote for the primary front-end, where the DAO will still be choosing canonical representations of bridged assets for UX and liquidity/incentive fragmentation purposes.
Transaction Fees: A recent multi-day spam attack from a single wallet degraded the performance of the chain, though it did not prevent transactions from getting through. This has been a reminder that zero-fee transactions may not last forever, so we are getting systems in place for a transition to fees, if it becomes necessary. Multi-denomination fee payments, which allow new users who only have ATOM will be able to use it to pay fees, are already available in the CLI and will soon be added to the front-end. In addition, “Average” fees on Keplr will be set to non-zero, though the “Low” zero-fee option will still work for now. Longer-term, we may be able to use a portion of pool swap fees to pay transaction fees. If we do eventually go to non-zero fees, fees paid in other tokens accumulated will be sold daily and distributed at epoch as OSMO.
Regen Proposal Update: Greg Landua popped in for a brief update as well. See last week’s post for a fuller explanation of Regen’s series of proposals about Nature Carbon Tonnes (NCTs). The first proposal, Prop 176, has passed, so Osmosis will purchase enough NCT to go carbon negative (or neutral at worst) for its first year. Prop 182 is live, which seeks to establish a carbon market on Osmosis by pairing the REGEN granted to the Osmosis Community Pool with an additional 105,875 NCT to be bought by the OCP. The swap fees from this pool will buy enough additional NCT to keep the protocol net neutral or negative in perpetuity. A final proposal to incentivize an NCT/OSMO pool will go up once the NCT/REGEN pool goes live. This may take some time: in order not to artificially pump NCT’s price, the pool will not be activated until a bridge from Polygon (the source of the NCTs) is available on the Osmosis UI.
In other news, Prop 183 to extend voting from 3 to 5 days is now up. Go vote!
Ion Working Group
ION was the mysterious token airdropped along with OSMO at genesis, a coin with no utility, dropped to pre-Stargate Cosmos voters and Sikka delegators as an experiment to see what community might organize itself around it.
During the early months of Osmosis, the Ion Governance Working Group was a lab within a lab. The community was vocal in early protocol politics, especially in the fight against Prop 7. And it proposed many use-cases for ION, usually a stablecoin or synthetics protocol, but also lending platforms, Ohm forks, VC funds, and even a differential reward and gating function for Osmosis liquidity pools. Jae Kwon himself (co-founder of Cosmos) dropped into the group to propose a bounty for reverse-engineering the ION airdrop, which was accomplished by Nostradamus and friends.
For a long time, ION was just a token, a community, and a set of ideas. Meanwhile, the ION working group became a community incubator for Osmosis talent — many of our social media admins, Osmosis Support Lab members, validators, governance wizards, incentives experts, and Osmosis Foundation members came out of the group.
With no ION treasury to pay for development, a use case had to wait for the 6-month Osmosis clawback. Props 29, 32, and 120 (by Nos) were crucial in this process, respectively expanding the clawback beyond the genesis tokenomics to include ION, making the clawback 100% instead of 80%, and having the Osmosis DAO transfer the ION clawback to ION DAO when it became possible.
The creation of ION DAO required not only the clawed back ION, but the addition of smart contracts to Osmosis. Once the agreement was made with Confio to build permissioned CosmWasm, Sunny reached out to Jake on behalf of the Working Group to develop the ION DAO, fulfilling some exploratory discussions that happened at Cosmoverse in November.
Alphaworks
Jake is a long-time Cosmos developer who currently leads a team of 33 people at Alphaworks. He has close ties with Osmosis, having co-founded Everett Protocol, which won the 2019 Seoul HackAtom for their work on liquid staking. Two of our own co-founders, Dogemos and Tony Yun, were also associated with Everett before going on to found Keplr Wallet and Osmosis. The other Everett lead developers went on to build the most important app in the Terra suite: Anchor Protocol.
Currently, Jake and Alphaworks are finishing up the ION DAO contracts and awaiting the results of the Ionize vote. At the same time, they are developing 2 NFT projects: the NBA TopShot of Korean professional sports with Flow blockchain (CryptoKitties, TopShot), and an NFT project involving some of the most popular Korean YouTube stars (1m+ subscribers each). The Alphaworks team also contributed to the new Keplr Dashboard!
Ionize Proposal
Ionize would be the first synthetic protocol of its kind, turning ION into the LUNA of its own ecosystem. While LUNA can only be burned for one type of synth — stablecoins — ION will be burnable to mint any synthetic asset approved by the ION DAO.
Ionize would thus generalize the Terra model in much the same way that Synthetix generalized MakerDAO’s DAI mechanism. Briefly, DAI is an over-collateralized synthetic dollar minted when users deposit assets (e.g. ETH or USDC) into a collateralized debt position (CDP). Some fraction of the position is minted as DAI and loaned back to the depositor against the collateral, subject to liquidation at a governance-set loan-to-value threshold. That DAI can be repaid at any time to unlock the initial assets. Synthetix generalized this idea to allow users to mint other synthetic assets by locking up their native token, SNX, into a CDP. It is also worth mentioning that Terra’s Mirror protocol is also a CDP protocol, not a generalization of the LUNA/UST model.
Turning ION into a burnable, mintable asset means unfixing the 21,294 supply. But synths are exciting and will greatly benefit Osmosis as a whole, bringing more options and flexibility to the trading experience. And if Ionize is successful, ION will continue to accrue value just as LUNA does. Indirectly, holding them is a vote of confidence in their respective protocols achieving mass adoption, or, more recursively, the belief that other people are confident, ensuring that there will be more buyers than sellers. More directly, the goal of the protocols is to encourage adoption. As with UST, if more iASSETs are created than burned, ION becomes scarcer, increasing price and confidence in the protocol and generating more trading fees in the iASSET/OSMO pools.
Example: There are roughly 21k ION (6k in circulation). Let’s say 5k are burned with ION at $10k, creating $50m of iGOLD. If the (pegged) value of iGOLD doubles, the synths could be burned to mint 10k ION. The 5k new ION would presumably create sell pressure and a decline in price. However, not all speculation would be successful. Indeed, iGOLD might decline and be worth only 4k ION, decreasing the supply.
Ultimately, successful bets suck money out of ION, but attract more users, and unsuccessful bets put money into the protocol and do not tend to dissuade people from betting more. Will ION DAO develop something like funding rates or house odds, charging a premium for bets some governance-elected board or algorithm thinks are likely to succeed, or paying for bets likely to fail?
Not all synth use cases are such straightforward bets. What’s ION DAO’s Anchor protocol, its incentive for people to hold iASSETs? LP incentives, described below, are one big method, and Isotonic lending will likely allow the use of synths as collateral. There is also an appetite for the nearly unlimited and largely unexplored synth space.
Synths can build index funds that track any basket of assets, as well as leveraged assets like Squeeth, double-long, double-short assets, and the like. It can create auto-hedged assets, insurance, bonds, commodities, options, futures, perps, bridged asset fungibility pools, fractionalized NFTs, betting and prediction markets. Any financial instrument that you can imagine should be creatable with some combination of oracle data, fungible and non-fungible tokens, fractionalization, liquidity pools, vaults, and smart contracts. Development of more complicated assets would take more time and dedicated governance, but the design space is there.
Ionic Bonds
A standalone part of the Ionize proposal suggests incentivizing OSMO/iASSET pools not with simple ION (the Osmosis model), but by purchasing LP shares with discounted IONic bonds. The exact mechanism would be up to governance, but the DAO would immediately own the shares, and the user would own a bond for some multiple of their LP position’s worth of ION that matures over the course of time — six months, a year, two years.
Example: A user buys ION and uses half to mint iSQEETH. (Would buying these assets from the pool pump the price? Would that be good or bad?) The ION supply goes down and (all else being equal) its price goes up. The user supplies the assets to the pool in exchange for a bond worth, say, 2x the value of the LP position in future ION. In other words, with ION at $10k, depositing $5k into the LP would yield a 1-ION bond, redeemable after some length of time. The LP provider is thus betting on the success of the protocol, and the protocol gets the protocol-controlled value.
If Ionic bonds are voted in, governance will have much to determine, and the developers much to code. What assets would be enabled first? What are the processes for spinning up new ones? How should the bonds work? We could offer minimal ION incentives for users who want to deposit LP shares without participating in the bonding system. Bonds could be structured in many different ways, with variable rates and maturity structures, and they could use different DeFi structures as well. Bonds that pay interest could be represented by NFTs, or they could exist as pools with various characteristics that could release funds upon the meeting of various conditions. The bonds themselves could be synthetic assets or fractionalized NFTs tradeable on secondary markets.
Synths are a fascinating, under-explored area of DeFi, and the Ionize proposal is a great chance to learn more about finance, help expand Osmosis, and build a unique new protocol together.
As always, if you have thoughts about Ionize or anything else we talked about, make your voice heard on Commonwealth and social media. Next week, Guy Zyskind, co-founder of Secret Network will be coming by to talk privacy.
See you then!
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