Osmosis Updates from the Lab, January 11, 2023: Concentrated Liquidity, Scanworks, Zodiac

Osmosis Updates from the Lab (UftL) occurs on alternating Wednesdays at 1 PM EST (5 PM UTC) on the Osmosis Zone Twitter Space. Replays are available on the Osmosis YouTube channel or the podcast.

Quick Updates

• Over 38K names have already been claimed from ICNS, the Interchain Name Service built largely by Chainapsis, and whose contracts are currently on Osmosis. For more on ICNS, see December’s UftL recap.
• Beaker, the CosmWasm contract builder from Osmosis Labs, is being generalized to support ALL CosmWasm chains.

Osmosis Chain Upgrade

Osmosis v14, “Neon” went on-chain on Monday, January 24. It is a smaller upgrade with mostly invisible updates in preparation for future updates.

• IBC hooks for Cross-chain Swaps — code is nearly finished and should be ready within the next few weeks, after being fully audited.
• Geometric Mean TWAP — similar to the Uni v3 TWAP, this makes Osmosis time-weighted average price feeds smoother and more resistant to upward manipulation and volatility versus the previous arithmetic mean TWAP (still available). For a deep dive into this phenomenon, and TWAP more generally, see this excellent post from Euler Labs.
• Downtime Detector Module — an easy way for apps building on Osmosis to query whether the chain is or has been down.

Check out Robo’s usual upgrade article for the full run-down.

Concentrated Liquidity

Adam Tucker from Osmosis Labs talked about the launch of Concentrated Liquidity. The CL code should be finished in the next couple weeks, after which it will undergo thorough testing before launch.

In many respects, Osmosis concentrated liquidity will be similar to Uniswap v3, but with better UX, legible tick spacing at dollars and cents instead of long decimals, and, of course, access to the Osmosis ecosystem and the broader interchain.

In broad strokes, instead of providing liquidity from 0 to infinity, LPs will concentrate their liquidity in the custom price ranges that they expect the assets to trade in. Because the ranges are so much tighter, substantially more fees can be earned than in non-concentrated liquidity pools.

CL pools are also extremely capitally efficient, delivering excellent trade execution even with relatively low liquidity. This is great news for Osmosis UX, as well as for ecosystem apps that use the DEX. It also means that Osmosis can radically reduce its LP incentives, since much less pool liquidity is required for good trading. And further, LPs can be primarily incentivized with fees.

The downside to CL is that LPing becomes more difficult. While narrow band range fees are high, LPs can still experience loss vs. simply holding (divergence loss) because 1) positions earn no fees when the price is out of range, and 2) Impermanent Loss (IL) is much higher, since as the price of one asset moves through the range, the worse-performing asset is bought. The result is that when positions move out of range, the LP will have a position made up entirely of the under-performer.

The result is likely to be that LPing is somewhat more professionalized. At the same time, moderate price bands will likely perform well, and strategy vaults building on Osmosis will be able to build in automation, allowing investors to once again invest passively. Finally, because it is useful to have some full range passive liquidity in pools to guard against oracle manipulation, there will likely be some limited incentives for full-range liquidity, subject to governance approval.

Osmosis Grants Program

The OGP is pleased to announce the latest round of grants, Batch 9, which includes a $350,000 deal with auditing firm Oakwood Security:

“To block audit slots in Oak Security’s backlog in advance so Osmosis ecosystem projects do not have to wait for 12 weeks for a start date. These projects will also receive a 15% discount on the typical audit fee. As part of this bulk audit purchase, Oak Security has offered a package of 12 weeks, with a minimum consumption of 1.5 weeks/month (1.5-weeks is the average duration per audit), starting January 1st 2023, until these weeks are consumed. Oak Security will also record a video that outlines at which stage an audit makes sense, what to expect from an audit, and how to best prepare for it.

It’s important for Osmosis ecosystem projects to be audited before deploying on mainnet. This grant will allow a number of ecosystem projects to get audited in a timely manner to speed up the deployment process on Osmosis. Oak Security is a leading CosmWasm smart contract auditor and has worked on relevant projects, such as Axelar, Lido, and Mars Protocol in the past.”

OGP Grantee Showcase: Scanworks & Zodiac

Grantees appear periodically on UftL as part of the Osmosis Grants Program’s outreach efforts.

Scanworks — Osmosis Alerts
Co-founder Andreas came by to talk about Scanworks, a relatively new Cosmos team that is building “security tooling and infrastructure for the IBC ecosystem.” Their OGP grant is for creating a specialized, customizable monitoring and alert system for Osmosis. You can find this at range.org, and sign up for the Osmosis private beta testnet.

Andreas expects the Osmosis alerts to be useful for protocols and smart contract builders, as well as stakers and validators. Any type of on-chain action can be set as a trigger for an alert: e.g. if a certain size swap happens from a given wallet, or if a TWAP reading for a pool hits a certain level, a Telegram (or other social media) message can be sent. Similarly, if a validator changes their commission, stakers could be notified. One could imagine future automated systems being built on top of these alerts as well.

If their grant is a success, Scanworks is hoping to develop security and financial analytics for Osmosis, or anything else that has strong community support.

Zodiac Protocol — Splitting GAMM into Yield and Principal Tokens

JC from Zodiac came to Updates to talk about their new token primitives. Zodiac Yield and Principal tokens allow users to separate out certain of the risks and benefits of LP tokens, similar to Element Finance or Prism.

How does this work? Their introductory article explains:

Principal Tokens allow for investors to invest in LP tokens at a discount while removing the uncertainty associated with trading fees.

Yield Tokens allow for investors to invest in a stream of trading fees generated by an LP and removes the Impermanent Loss risk inherent to LPs using a CFMM (Constant Function Market Maker) model.

These properties allow users (and strategy vaults) a much higher degree of control over an LP position’s IL and risk/return profile, as well as enabling new sorts of Defi games.

In order to build their protocol, Zodiac has also uptreamed two public goods to the broader Cosmos

• Pybc relayer — a simple cross-chain governance script in Python that allows voters on two chains to vote on a single proposal over IBC. When the proposal closes on one chain, it queries the vote on the other chain, closes it, and tallies the votes appropriately.
• Eternal flashloans — a mechanism originally built so that their single-pool system could allow Principal and Yield tokens to be swapped in the same pool. As with Pybc, this is open-source and can be used by any app

Governance Corner

Props are passed or passing unless otherwise mentioned. Voting end date in parentheses.

• Prop 405 — Enable Superfluid on OSMO/WBNB (Jan. 26)
• Prop 404 — Incentivize Core StableSwap pool: USDC/USDT/BUSD, Pool 877. (Jan. 23)
• Props 402 and 403 — Recognize USDT and BUSD as Stablecoin assets (Jan. 23)
• Prop 401 — v14 Upgrade (Jan. 22)
• Prop 400 — Phase Out 1- and 7-day LP Bonds. Passed with 43% abstain. Does not go into effect until after v15 or v16 upgrade. Since Osmosis is moving largely to concentrated liquidity, which will be incentivized differently, the need for this change is unclear. (Jan. 22)
• Prop 398 — Enable Superfluid on OSMO/MATIC (Jan. 21)
• Prop 397 — Phase out Incentives for EEUR. Since e-Money is no longer issuing EEUR, it does not make sense to incentivize it. (Jan. 21)

Finally, there has been much discussion about Validator Set (ValSet) preferences. in particular the forced 14-day bonding of LP rewards to the LPs chosen ValSet, and an on-chain proposal is expected soon.

The forced bonding issue has perhaps obscured the UX and decentralization achievements of ValSet preferences, which are expected to be released in v15. With this feature, users will be able to make their own sets of validators to delegate (or auto-delegate) to in different weights (or choose from other users’ sets). This saves users from having to make separate transactions to delegate to each validator they like. They can make an initial ValSet decision and essentially leave their staking on auto-pilot.

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