**A** (0:00):
Foreign.
**B** (0:06):
This is the Defi Decoded podcast by ninepoint Partners in cooperation with Prophecy Defi. The ideas and opinions expressed in this podcast should not be taken as investment advice. Always consult with your financial advisor before investing.
**A** (0:26):
Hi everyone and welcome to another episode of Defi Decoded. I'm Alex Tapscott coming to you live from Sunny Las Vegas, here with Andrew Young, my co host. And we are delighted to have Sunny Aggarwal on the program today. Sonny is someone that I've known for a few years in the crypto and defi space. He's a visionary, he's a business builder and he has created one of the fastest growing defi protocols in the world today. It's called Osmosis, built on the built within the Cosmos ecosystem. And Sunny, our timing is very good. We're recording this on Wednesday, October 27th, and just a couple of hours ago it was announced that Paradigm, the huge crypto VC firm, is leading a major funding round into your project and that it's the first time that they've funded an AMM and outside of the Ethereum ecosystem, which I think is a pretty big milestone for the entire Defi space for them and obviously for you guys as well. So thanks for joining us on the program. Why don't you maybe just start with Osmosis? What is it? What are you trying to build? And why do you think it's had so much early success?
**C** (1:41):
Thanks for having me on. Yeah, so Osmosis is a. It's like the premier Dex in the Cosmos ecosystem, which I know, Alex, you've been following for a long time. So I was actually one of the core developers of Cosmos and I've been working in this project and ecosystem for about four and a half years now. And when we're building Cosmos, our vision was this world of interconnected blockchains and application specific blockchains. And I'd been working on this core technologies such as Tendermint and Cosmos SDK and IBC for many years. And then about last year, I was watching Defi Summer happen on Ethereum and I was like, okay, it's time. How do we start bringing this stuff onto Cosmos? And so that's why I left the sort of core Cosmos development team and started figuring out, okay, how do we start? We have all these core fundamental pieces of technology now. How do we start building real applications with it? And we went through a couple of different ideas and essentially settled on Osmosis as a Dex, which looking at the Ethereum ecosystem, we saw there was a couple of main primitives that started the DEFI on Ethereum ecosystem, I guess, arguably. I think the two base ones were Maker and Uniswap. And so we're like, all right, let's start building one of them. And so that's why we started with the AMM and we. So yeah, we started basically working on it back in January of this year. It actually technically started as a hackathon project last November by one of the co founders, Tony, and he built, built it as a hackathon project, a MVP of it. And then this January we were like, hey, let's go all in on this. And so we were building it and we were able to ship it pretty quickly. We launched in June of this year and so we've been live for about four months now. And yeah, just been seeing some great success. And it's really mostly the most exciting part is finally seeing. I've been working on Osmosis for maybe nine months now, but really I see it as the culmination of a lot of the work we've been doing on Cosmos as a whole over the last four years.
**A** (4:15):
Yeah, well, I think of Cosmos as the core infrastructure and I think a lot of people rightly have been very excited about it for a long time. A lot of different projects connect into Cosmos using ibc, but Osmosis feels like one of the first killer dapps that exist inside of the ecosystem. And I think it's sort of interesting. Our listeners are real mixed bags. I mean, we've got some folks who are very crypto native and others that are still new to this space. And I think you raised an interesting point, which is last year Defi summer was happening on Ethereum and even in January of this year, I think something like 99% of all DeFi activity was happening on Ethereum and now it's more like 70%. And that's not criticism of Ethereum, it's just a revealing fact that this is growing very quickly and there's lots of other platforms. Right. But I think what's important and so interesting about Cosmos and Osmosis is it's not like you're trying to build something in a new silo to kill Ethereum or something. It's all about interoperability and composability. And the idea that know we're going to have this one Internet of blockchains. Is that how you see it as well?
**C** (5:33):
Yeah, exactly. I mean, in a way, I think all of this is sort of part of the Cosmos ecosystem, you know, because Cosmos was just this idea of many interconnected chains. And so I see all the, you know, whether it's Ethereum or Solana or anything that is able to talk to this like, you know, this mesh of blockchains, I think that is part of the cosmos. And so yeah, what was the exact question again?
**A** (6:03):
Well, just to talk about, you know, how important is interoperability.
**C** (6:06):
Right, right.
**A** (6:07):
To what you're building basically.
**C** (6:09):
Right, yeah. So I think interoperability is like extremely important. I think that like, you know, currently most applications are sort of built to like fit provide services to the assets on a single blockchain. So you have Uniswap that's providing Dex for Ethereum based assets and then you have Quicksop on Polygon and Serum on Solana. But really we want to build something that provides something to the entire ecosystem. So I can trade Ethereum assets with Solana assets or with Cosmos based assets. And so to do that we need to have a one stop shop which is able to connect to all of these different places and provide and source liquidity from all of them and create one this whole multi chain vision. I guess four years ago when we started working on it, it was this very radical idea where it was, we were going around saying like, hey, back then everyone was like okay, this Ethereum thing, this single chain is going to scale and it's going to put all the world's applications going to be on it. And we were saying like oh, we don't know about that. We see this multi chain vision going out and back then it's a very radical idea. But I think today that's like the default. That's what everyone assumes. That's how the blockchain world is developing. I guess one thing that makes our vision of interoperability still a little bit different than what maybe most people have is I put it into two camps. I call this the multi chain vision versus the interchain vision. And what the multi chain vision is sort of this idea that we'll have all these many generalized blockchains and you'll have applications just deploying multiple versions of themselves on all these different chains. So you see this on Defi applications like Sushiswap or, or ABE where Sushiswap is going around and just redeploying itself on. They have an instance on Ethereum, they have one on Arbitrum, on Polygon, on bsc, they just have different sushi swaps on every chain. But all of these ecosystems are kind of separate and it's like what they're essentially doing is just splitting their liquidity across all of these different chains, across all these instances, the interchain vision is this idea of application specific blockchains where we're not saying, hey, we're going to go deploy osmosis on all these different chains. We are saying that hey, we're going to have one chain that is the osmosis chain and it's going to connect to every chain. But then those assets will come onto our chain and this way we don't split our liquidity across all these spots. And I think there's people who get this as well. I guess the defi blue chip that gets it is compound. Right? Where compound is also saying, oh, we're not going to go redeploy on 20 different chains, we're going to go build compound chain and that's going to connect to all of these different blockchains. And so I think that's going to be sort of the interesting thing to watch now as this multi chain world comes to view. Is it going to be this multi chain or is it going to be the interchain? And we're betting very heavily on this application specific interchange.
**D** (9:38):
Yeah, that's a great sort of thesis. I actually totally agree with it too. I think part and it's kind of horizontal expansion versus almost vertical expansion if you're kind of an application, I think something like Sushiswap, which was obviously kind of just born as a fork of Uniswap, it's a little bit more commoditized in some ways versus something like Osmosis, which has like a lot of really interesting features. I actually wanted to dive a little bit into that because I think one of the really, one of the coolest things about Osmosis is this idea of superfluid staking and MeV resistance. Do you want to talk a little bit about those features, Andrew?
**A** (10:15):
Do you want to find those first for our audience?
**D** (10:18):
I'll actually let.
**A** (10:18):
Or maybe Sunny, you want to just give us a, you know, a plain, plain explanation of those two concepts.
**C** (10:24):
Yeah, sure. So, you know, I love that you mentioned this like horizontal versus vertical thing because I think that's actually one of the main theses we had about this application specific blockchain. So which was, you know, osmosis is sort of this like bet on vertical integration where on other, other dexs that are building on other people's platforms they, they sort of only control the application layer of their product. But on Osmosis we not only do we control the application layer, but we also control the blockchain itself. And Then we control like, you know, the front end. Our team also maintains the Kepler, which is like the biggest wallet for the cause ecosystem. And so by having this like vertical stack of like all the way down from the low level up to the user experience, I think we are able to provide a, A, you know, user a UX that's like outshines what other dexes are able to do. And we're also able to provide certain features that other dexes are not able to do, such as superfluid staking and threshold encryption. So I can go dive into those two. So superfluid staking, the first one is it's this idea that, you know today when you have this, the native token of osmosis. Osmo. So osmosis is a proof of stake chain and you have to like stake OSMO to help secure the network. If I have osmo, I have to choose between staking or lp. I can either go stake, it helps the network and earn staking rewards, or go put in liquidity pools, earn liquidity rewards and the swap fees and things like that. But this is a kind of required on other chains where like the application layer is above the protocol. But what's cool about osmosis is because it's this integrated stack, our proof of stake system is aware of the defi applications that are built on top of it. And this enables us to do something very cool, which is I can have OSMO and some other asset, let's say atoms, we can put those into a liquidity pool. And what you get back when you do that is an LP share that represents your share of that liquidity pool. And then we can actually go stake the LP share itself. So instead of staking pure osmo, what we're doing is we're staking defi assets that have OSMO underlying them. And we can do this because our proof of stake system can understand what is this defi asset. And so that's really cool because now people no longer have to choose between staking and LPing. They'll be able to get more rewards from doing both. And it will help bolster the security of the network because we'll have more assets, all the defi assets also helping secure the chain itself. So that's one thing that we're really excited about. The other feature that you mentioned was threshold encryption. So threshold encryption was actually sort of where we started osmosis with where one of our theses was. Well, we had this idea of when we were trying to figure out how do we bring defi To Cosmos, we're like, okay, what is going to be the killer feature here? And we thought about, okay, when we started working on blockchains, there was these three things we wanted to work on, right? There was proof of stake, scalability and privacy. And so proof of stake, I think we've done it right. You know, I think every chain that launches today uses proof of stake. And that's done scalability. I think, you know, it's well underway. I think a lot of it's done, but I think there's a long way to go. But there's a lot of people working on it and it's making good headway. Privacy is sort of like the last one, which was like, oh, you know, that that's like not, not as far as long as we thought it would be. There's a lot of good theoretical work done, but like, in practice, there's not a lot of blockchains that have like great privacy features built in. And so from that we're like, okay, what privacy features do we want to start with? And from talking to users, what we came to the conclusion is the main thing. One of the biggest things people are worried about is like front running and MEV on Ethereum. And so we're like, hey, what if we can design a privacy solution to fix this? Where in, you know, normally what happens when you make a transaction on a blockchain is you send your transaction, everyone in the world can see your transaction, and then it's put into a block and like, you know, committed and executed on the chain. What if there was a way of having it? So before it's put in a block, the transaction is encrypted such that no one can read it. And this is because allows us to. No one can front run you if no one can read the transactions before they're on the blockchain. And so this solution that we created called threshold encryption kind of enables this. And so that's one of the pieces we're really excited about solving this MeV problem that's become this big thing in the entire simply, I think we have the best solutions.
**A** (15:50):
Well, that to me is fascinating. And I'm always looking for ways in which these defi protocols could eventually replace or supplant existing financial infrastructure. And in the market for securities and other financial assets, where the settlement of an asset might take days and be very, know, old school, the clearing of a transaction does happen in sort of microseconds, right. And the ability to, you know, beat someone to a trade within a, you Know, a millionth or billionth of a second is actually a competitive advantage. So I think about blockchains, you know, and the average clearing time on blocks, especially some of these new ones, is, you know, a matter of seconds, but it's not picoseconds yet. And so the idea to of course creating a trading infrastructure where you're basically putting in orders through a blind pool, in effect where they can't, where the market doesn't see the nature of an order until it's executed, I think is an amazingly powerful innovation and something that will obviously, I think drive adoption and interest in osmo, but also could be applied to a variety of other kinds of marketplaces as well to make them more efficient and more fair to too. I think that's really interesting. I know it's sort of interesting. You said you've been working on OSMO for nine months, but really it's the culmination, as you said, of all the work that you've been doing in Cosmos and elsewhere. But what does the next nine months look like? I mean, it's so amazing how quickly things move in space. You just close this big round from Paradigm, they're moving, they're looking at AMMs like you outside of Ethereum. What does success look like for you for having this conversation in a year's time?
**C** (17:37):
Yeah, I think the next steps for us are like we have a wide set of features that we want to ship, such as this privacy and staking stuff. We have a bunch of new defi primitives that we're working on. So some things like improved AMMs, we have ideas on how do we make AMMs more efficient and new models of AMMs that we're developing along with some like features like how do we build in like native leverage features and things like that into the blockchain, into osmosis. And then I think one of the big ones is Interchange ux. So you know, it's been the culmination of the work we've done so far in Cosmos. It's interesting. Like, you know, today I think everyone in the cosmos or everyone in the blockchain ecosystem is like starting to think about cross chain communication right now. You know, you hear about all of these new bridge projects and stuff spinning up. But within the Cosmos ecosystem, not only have we been thinking about it, but we've been building it and we've shipped it. Over the last two years we've done cross chain communication, but there's still a long way to go. And now we're thinking about cross chain Composability. And so one of our team's main focuses is Interchange ux. We, we want to show the world that like the user experience of the, of a interchain can be as good, if not better than the user experience on a single chain. And so our team is working on a lot of like composability features right now. How do you make it seamless to transfer between blockchains? How do you make it so I can, you know, do a swap on one blockchain, go bar, you know, if I want to do a leverage loop by like swapping and borrowing like and these two things are on different chains. How do you make that, you know, user experience very seamless? Yeah, and I think that's sort of like one of the, one of our main focuses as well is like you know, building out this like Interchange ux. And I guess the last piece would just be like, you know, we believe that like if we really want to replace Centralized exchanges with DEXs, centralized exchanges offer a, you know, they're more than just the trading infrastructure. Right. Centralized exchanges offer this like suite of products that are sort of this like package that users get. So along with the trading infrastructure you get things like, you know, it's a custodian, right. And it's also a, you know, aggregator and it's a id, you know, an initial offering platform. And so it's like all these different products, like how do we provide those in one place so that like users. So that the experience on the fiat on ramps. Right, that's another one. So how do we provide all of these in one place so that users. It can serve as a true alternative to what centralized exchanges offer today?
**D** (20:43):
How do you think, and that's a great point too. How do you think about what do you think is going to be kind of the future of this user experience? Do you think it's going to be because you talked about composability a lot, which is obviously kind of one way of bringing all of these different features to the user by essentially allowing users to bridge to compound chain for lending and things like that. Or do you. That's like one kind of vision of how this could play out. Another vision that kind of strikes me as kind of obvious is just projects like Osmosis that already have the users trading tokens, they could launch their own sort of lending platforms directly on the osmosis chain. I guess those are two sort of competing visions of the future. Which one do you sort of subscribe to or do you think it'll be Kind of a hybrid of both.
**C** (21:35):
Yeah, I think it'll be sort of a hybrid of both. And there's also a third thing as well, which I can talk about, which is. So the one, the first one is. Yes. So, you know, as I mentioned, there's a lot of cool things that our team is working on in house, such as like a new model of how to do IDOs, you know, this leverage platform. So we have these like, things that we're working on in house. But at this time we understand that we can't build everything right? And so, you know, to make osmosis go from just a single product, but to be like an ecosystem, we need more people building products complementary to our core product. And so, you know, where those products exist is, you know, is open. You know, sometimes I think some products might be like big enough that maybe they do want their own chain and are, you know, will be able to talk to them over ibc. And so maybe something like a lending protocol or maybe a new, you know, and a great example is something like Terra, right? So Terra, we just connected with them. So Terra is like the, you know, one of the biggest stablecoin, decentralized, stable coins in the world right now. And so they just activated their IDC protocol and you know, now it's like, okay, instead of us building a native stablecoin, it's like, okay, they have a great stable coin that has wide adoption. Why don't we just work with them to bring, allow UST to become like this native base pair for the osmosis ecosystem. And it's like a win win for both of us. And then the third option, sort of this middle ground is having ways of people, external parties building things on top of the osmosis chain as well. So there's this smart contracting framework called CosmWASM, which was built on the Cosmos SDK and what we call is importing like a cosmos onto osmosis. But in my opinion, a little bit more of a permissioned way because we still don't want osmosis to become this generalized smart contracting platform. We really want it to be something that's like. So what we do is have a more permissioned mechanism where people who want to deploy new contracts to osmosis, it has to be voted by governance. So that way the contracts that are being deployed to osmosis are things that are complementary to the core. So whether it's a liquidity managers or leverage platforms that are like, make sure that they're tightly integrated with the core.
**A** (24:18):
Features of osmosis that's interesting because it's like, on the one hand this is open source and a lot of the innovation within blockchain happens from people creating on the margins. But on the other hand, it seems like there's a strategic vision and a direction that you're being quite purposeful in executing on. Right?
**C** (24:42):
Yeah. And I think that's why it's important to like have both of these systems. Right. Where it's like IBC is this permissionless thing that anyone can connect to Osmosis and start interacting with it and. But then, you know, there are things where, you know, kind of like this idea of like co location if you want a product sitting on the osmosis chain, like right next to our core functionality that, you know, we want to make sure there's a certain level of like alignment there. Right.
**A** (25:17):
Andrew, do you have any thoughts? I'm wondering from the layer 2/Procycy DeFi perspective as it relates to osmosis. So one of the things that Prophecy is trying to do is identify emerging defi protocols where your expertise can be helpful to those things in scaling. Are you doing anything in this area yet?
**D** (25:41):
We haven't yet gone into the cosmos and osmosis ecosystems as of yet. We've been more in the polygon, I would say networks and a little bit optimism arbitrum. But I think what's really interesting to me about sort of Cosmos is that it's in a lot of ways it's very much aligned with sort of Ethereum. Whereas something like Polkadot or I guess Cardano or something like, I guess back in the day Eos, they're more people kind of think of them as Ethereum killers. Whereas the Cosmos vision is very. It's kind of a big tent approach to the, the whole space. And so I think it's a very interesting ecosystem to sort of operate in. And Osmosis is kind of the first, I guess, true cosmos defi ecosystem. And it's obviously you guys have grown so fast since starting, so it's a very exciting ecosystem to sort of research and deploy. And one thing I did want to actually ask you about because one of the things I think that you guys did so well was bootstrapping the initial liquidity and getting so much interest. And a lot of Defi projects do sort of traditional airdrops. But you guys did a very interesting thing. You did this quadratic fair drop. Do you want to talk a little bit about how that worked and how that was kind of instrumental in getting bootstrapping liquidity?
**C** (27:09):
So Fast. Yeah, sure. So we. One thing that's interesting about launching a new chain is that you need a decentralized token distribution from T equals zero. So a lot of these defi protocols will do some sort of liquidity mining scheme or retroactive airdrop, but it's like that means that you don't have a token distribution at T equals zero. And so that's why we're like, okay, what's the way of doing this? So we thought of doing an airdrop. And who did we airdrop to? We airdropped to atom holders because they were sort of the ones who helped find a lot of this infrastructure that went into making osmosis possible. And we did this notion of a quadratic airdrop. And what that means is instead of you got airdrop OSMO proportional to the square root of the number of atoms in your account at the snapshot time. And what this was for was we wanted to make sure that the larger atom holders did get a bit more. But it was scaled down a bit in large part because a large portion of the tokens are being distributed through this liquidity mining program and stuff. Because of that, we knew that a large portion of the liquidity mining rewards will be going to the whales, right? And so that's why in the initial distribution we wanted a way of like, you know, getting, you know, nudging it a little bit in favor of the smaller users so that, you know, it becomes more fair once like the whales start accumulating through like liquidity mining. And I think it was cool because it like got a lot of people interested. And it's worth noting that like, the amount of the airdrop is actually, in the grand scheme of things is actually kind of small. So, you know, there's a total of 50 million tokens airdropped, but there's actually a maximum supply of Osmo of 1 billion. And so that's only 5% of the maximum supply at the end of time. And the reason was, you know, I see this airdrop sort of as a invite. It's like a call to action where it's like all these users got their airdrop and it's like an invitation of like, hey, you have this also now, why don't you bring over your atoms and put them in a liquidity pool together? And it's like, and that's really the real distribution scheme is this like liquidity mining program that's like ongoing and we want to make sure it's like active, incentivize users. So one thing that's pretty cool is to actually claim your airdrop users had to do this like, you know, gamified it a little bit where they had to do a series of like activities. So you know, it was swapping, lp, staking and voting in a governance proposal. And so every time users did one of those activities they got 20% of their airdrop and then they got 20%, you know, for free up front. But so that way it also acted as this sort of educational process where I think we've built like a really fun and easy to use product. But this is how we get people to like, hey, try out the product. And so yeah, I think that worked out pretty well.
**A** (30:47):
I would say so.
**C** (30:47):
And then any users that don't get claim it within six months, their AirDrop gets taken from them and put into the community pool. So it could be like reinvested to grow the ecosystem.
**A** (30:58):
Yeah, I love that for so many reasons. We talked a little bit before in the past about governance issues around token holder apathy. So the fact that there's an incentive and disincentive in a way to get involved is really interesting. I also think that rewarding people for being large holders is reasonable, but within a. Within a reason. Right to a point. And I think that the distribution probably helped to encourage holders of various sizes to start staking and lping to osmosis, because I think a lot of people were kind of surprised and very pleasantly so, at how much osmo they received as a result. I'm speaking on behalf of a friend here. No, but I just think it's all been really well done and I think that, you know, obviously the future is uncertain and there's lots that you still want to achieve, but I think it's been a really great start and I think this has probably been a helpful episode too for some of our non crypto folks, if only to understand that just how far flung and how widespread the innovation is in the space. I think a lot of people are on a journey where they learned about Bitcoin, they've learned about Ethereum. Now they understand that there are all these different defi applications being built on top of platforms like Ethereum, but that there's this wide, wide world out there and some really exciting things happening in it. And I think that Sunny, you and Ethan and the other original team from Cosmos and other projects have really helped to grow the pie, so to speak, in terms of what's possible in Defi. So that concludes our episode for today. This has been so awesome. Congrats on the big funding round. I know that you will put that to work and I think Paradigm and the other folks that are involved are great partners. And of course we would love to be helpful as always in any way that we can. But we just appreciate you joining us today, taking the time and good luck next week. Anything you want to say or plug before we sign off here?
**C** (33:10):
No, just thank you guys for having me on. And there's a lot of cool stuff coming along in the Cosmos ecosystem, not even just from our team, just from the community has just been amazing. And so stay tuned for the cool stuff coming from them as well.
**A** (33:27):
And where can people find you? You're on Twitter, obviously. I know that. What's your handle?
**C** (33:33):
Yeah, so my handle is sunny a97. And then the Osmosis account is Osmosis Zone. And yeah, that's the best place for updates. We have active telegram and discord. And then if you want to keep up with the latest stuff going on, probably Gov Osmosis Zone. So that's like the forum and it's like one of the most active governance forums I've seen. Great.
**A** (34:03):
Awesome. All right, well, that concludes today's episode of Defi Decoded. I'm Alex Tapscott here with Andrew Young, and thanks to Sunny for joining us. We'll see you next week.
**C** (34:14):
Thank you so much.
**B** (34:18):
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