Osmosis Updates from the Lab, November 30, 2022: Osmosis v13 & the Inter-Stable Token (Agoric)
Osmosis Updates from the Lab 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.
Osmosis v13, “Fluorine” is live! And since one of its major upgrades is a brand new stableswap implementation, it seemed fitting to invite Zaki Manian and Dean Tribble to the Lab to discuss $IST. They talked about their plans for price stability in the current bootstrapping phase and beyond, as well as their goal of making $IST the stable asset of the interchain, and indeed, of all crypto.
Osmosis v13, Fluorine
The two top-line features of v13 are stableswap and rate limits. For a more thorough account, see RoboMcGobo’s version update on the DAO’s Osmosis Community Updates blog as well as this tweet thread.
Stableswap: A stableswap is an AMM model that hybridizes an xy = k Constant Product Market Maker curve with a Constant Sum Market Maker line (x + y = k) in order to concentrate most of a pool’s liquidity at a certain point on the curve, i.e. a stable ratio between the pool’s assets.
This allows for lower price impact trading (than in an xy = k or similar pool) with less liquidity. Therefore, for stableswap pools, Osmosis can guarantee better trade execution with fewer incentives. This benefits traders, of course, and further empowers the DAO to keep incentive spending in check (see Prop 364 discussion below).
Less obviously, perhaps, every Defi application building in the Osmosis ecosystem uses stablecoins, and efficiencies at the pool level carry through to lending and liquidations, CDP vaults, perpetuals, ETFs/asset baskets, strategy vaults, and more. Beyond Osmosis alone, IBC-connected chains using Osmosis to facilitate cross-chain swaps for stablecoins (as dYdX founder Antonio Juliano suggests in this interview) will also put Osmosis stableswap to good use.
For more details on the development and implications of Osmosis stableswap, see this post on the Osmosis native blog.
IBC Rate Limits: Osmosis v13 now introduces IBC rate limits, becoming the first DEX (to my knowledge) to do so. Further, the entire interchain can benefit from these limits, not just because the interchain liquidity center will be safer from contagion, but because the brand-new IBC middleware application that enables rate limiting is now available to any IBC-connected chain.
Osmosis is already somewhat protected by rate limits since Axelar meters their bridges, with the USDC bridge, for example, only allowing users to transfer $5m in an hour before a circuit-breaker is triggered. Most normal trading can continue well under the limit, but attackers are prevented from moving more than $5m across the bridge before it temporarily closes itself, giving the validators and developers time to coordinate an emergency response.
Under IBC rate limiting, a token’s IBC inflows/outflows (considered independently) can be limited per time period as a percentage of the total amount of that token on Osmosis. For example, governance could allow 30% of the OSMO on Osmosis to leave per 24 hours, or 30% additional USDC to enter per week. It can do this through its control of the CosmWasm contract that interacts with the IBC rate limiting middleware. Discussion about setting up initial limits will take place on Commonwealth.
The fundamental trade-off inherent to rate limits is safety for liveness. Limits must be high enough to allow normal activity, and further, must be resilient to griefing attempts that attempt to close a channel for chaos or profit. But the limits must also be restrictive enough to offer useful protection. Some kind of rough-and-ready high limits should offer some initial protection against catastrophic loss, but future development should include a whale-trade UX that can safely bypass the rate limit, tooling / real-time monitoring that will hopefully lead ultimately to an automated system that can adaptively protect the chain without affecting normal trading. And even this sophisticated system will need to be integrated into both regular and emergency DAO governance.
Minor Features:
- Wasmd v0.29: this newer version of the CosmWasm integration includes the ability for governance to whitelist developer addresses so that they can upload contracts (including new versions of existing ones) without having to make a separate governance proposal for each one. Mars Protocol alone, for instance, will have something like 8–10 contracts. Having governance permission Osmosis smart contracts on a per team basis seems like the appropriate place to make trade-offs: governance fatigue, auditability (was the DAO going to independently audit every contract from every team), and the streamlined DEX suite experience that permissioned CosmWasm enables in the first place.
- Multi-hop swap fee reduction from Prop 187 finally being implemented! For OSMO-involved swaps, e.g. STARS → OSMO → ATOM, only the higher of the two swap fees will be charged, and the fee split evenly between the pools.
- And more: Query upgrades, Instant Unpooling (to allow LP liquidity to be used as liquidatable collateral in Osmosis Defi), and IBC Memo Fields (for cross-chain swaps).
Zaki helped build Cosmos from the ground up, notably as Director of Tendermint Labs from 2018 to 2021. He also runs the Iqlusion validating and infrastructure company, co-founded Sommelier, and most recently was one of the principal architects of ATOM 2.0.
He has been working with Dean Tribble and the Agoric team for a couple of years to help design their Inter-Stable Token, or $IST, a CDP stablecoin built with Agoric’s “hardened Javascript” smart contracting language and aimed at widespread interchain adoption.
IST’s strategy is to become “the most flexibly minted stablecoin in Defi,” by developing a number of different, interlocking minting modules, each with separately customizable safety parameters. At present, only the Parity Stability Module is live. (Minting instructions.) The PSM is designed to be ultrasafe, a centralized stablecoin wrapper that mints IST only one-to-one with USDC and Tether bridged by Axelar or Gravity, though it may include others in the future. In the event of a bridge attack, IST is currently protected both by Axelar’s rate limits and IST’s own conservative minting limits. Currently, there are 860K IST in circulation out of a mint cap of $5m, so any damage would be relatively contained. This mint limit will likely stay in place at least until native USDC comes to the interchain. In addition to these protections, Dean is eager to dig into the new IBC Rate Limiting that Osmosis upstreamed to the ecosystem.
There is currently an IST/OSMO pool on Osmosis, so users can now pair IST against other stables using pools that employ the Osmosis stableswap AMM. According to Dean, USDC, USDT, and DAI are the most valuable partners for IST, while less-well-pegged coins are not as important. Zaki reports that IST arbs are already occurring in the IST/OSMO pool, helping to equalize the IST price between Osmosis and Agoric. These arbs will become more profitable once the stableswap IST pools are up and running.
The second IST minting module will move beyond stablecoin wrapping to proper CDP vaults. ATOM and potentially OSMO will be able to be deposited at certain collateralization ratios and liquidation points in exchange for IST. Dean reports that these vaults are Agoric’s highest priority, and expects them to be ready Q1 2023. Finally, a third potential module could use Osmosis LP shares as collateral for the IST vaults. There is no current timeline for this, but Zaki likes the idea.
Agoric: In addition to IST, Dean and Rowland Graus also provided some more general updates about Agoric. They last appeared on Updates on Nov. 17th, 2021, and there have been a number of protocols building in their ecosystem since then. Dean singled out Rockaway Labs, which is building a custom liquid staking protocol that dynamically allocates the underlying tokens to validators based on a decentralization/reliability score. He also mentioned Kryha, which is developing customizable NFTs and a rapid NFT auction model. Overall, he sees Agoric thriving in 2023 and helping to drive IST adoption.
Governance Corner
A selection of recent governance proposals. Proposals where vote totals/controversy are not discussed can generally be assumed to have passed overwhelmingly (>90% non-abstaining vote). Parenthetical dates refer to the close of voting.
In Voting (at writing deadline)
Prop 377 — Stableswap Incentive Structure. Proposes an additional Osmosis incentives category, Stable/Stable, that will operate according to its own special rules, some highlights of which include:
- 4% cap of liquidity incentives emissions
- automatic external incentive matching (if meeting certain criteria)
- restriction of internal Osmosis incentives: all of a pool’s assets must be “governance-authorized,” and governance must additionally decide to name the pool itself a “Core Stableswap Pool.” This tag is designed to limit the number of natively incentivized stableswap pools (to prevent liquidity fragmentation and incentive waste), while allowing more than one main stablecoin pool to exist (to allow the market to choose the winners).
Prop 376 — Phase Out Incentives on Low-Revenue Pools. An omnibus package of 12 pools in the Minor/OSMO and minor/non-OSMO incentives categories. Incentives to these pools would be removed over 1–2 weeks. These are the nine lowest revenue earners in minor/OSMO and the three lowest in minor/nonOSMO. The proposal argues this will save incentives for higher-revenue pools and bring minor/OSMO in line with the DAO’s priorities on incentives spending, such that it includes only strategically important smaller-cap assets. (Dec. 12)
Prop 375 — ION DAO Partial Treasury Transfer. Per Prop 120, 16572 ION was to be transferred from the Osmosis Community Pool to the ION DAO treasury once the code to do so existed. This proposal would transfer only 1/3 of that amount (5469 ION) to start with, leaving the rest in the OCP for now as a security measure: “before systematically transferring the rest after this spend contract is proven safe and reliable.” (Dec. 11)
Prop 374 — Replace LUNC (LUNA classic) IBC client, essentially re-opening the IBC connection closed during the Terra collapse. No 3-days-prior Commonwealth discussion included, contra Prop 199, which asks such proposals to be vetoed. However, see Prop 367 (reviving Dig IBC connection), which passed without discussion (albeit with heavy abstention), and this discussion about amending 199 with exceptions or further codifying it.
Passed
Prop 370 — Osmosis v13 Upgrade (Dec. 07)
Prop 369 — Add stOSMO/OSMO to regular Osmosis incentives as a Minor asset. Included here because giving Osmosis incentives to an OSMO liquid staking derivative is potentially controversial — see discussion. Passed roughly 101 million (93.69%) to 2.25 million OSMO combined NO (2.08%), with 4.58m abstaining (4.23%). (Dec. 04)
Prop 364 — Further Reduction of Liquidity Emissions. Originally, 45% of daily OSMO emissions were directed to liquidity incentives. Props 230 & 268 redirected 20% of that to the Community Pool to be used for future liquidity incentives. Prop 274 made the split 71/29. This proposal will bring the split to 50/50 in three equal tranches, overseen by an informal committee. Once fully implemented, 22.5% of daily OSMO emissions will go to liquidity incentives, and 22.5% will go to the OCP for future use (in addition to the usual 5% from the original tokenomics). (Nov. 19)
Props 358, 359, & 360 — Give OSMO incentives to BNB/OSMO, Add BNB to Major Asset category (categories established in Prop 244 and 233), & Add Temporary Bootstrapping Incentives to BNB/OSMO (as a bridge until regular incentives begin) (Nov. 08 and 09)
Prop 355 — Enable Superfluid Staking on OSMO/AXL (Nov. 04)
Prop 354 — Signaling proposal to implement a protocol-wide minimum gas fee of 0.0025uOSMO per transaction. (Nov. 04)
As the old year barrels to a close, there is much to be thankful for and much to look forward to! The proliferation of stablecoins like IST across Osmosis and interchain Defi, v14 and the ProtoRev module, concentrated liquidity, the impending launch of Mars Protocol and many other ecosystem projects, Interchain Names, and the continued improvement of cross-chain composability and general message passing as IBC continues to expand.
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