How Osmosis Could Become Cosmos' DeFi Hub

**A** (0:00): That was, you know, this design that we came up with years ago. And then at some point along the way that team abandoned like the Hub development team abandoned it and moved towards this like very simplistic basic version of ics which is all the Hub validators run all these other chains, which is not really. That's like it's not scalable at all. Right. Like you have to go through a governance proposal to add new chains. You have to like, it's really a block size increase. It's not a scalability solution. **B** (0:33): All right, everyone, welcome back to another episode of Zero X Research, brought to you by the Atom Accelerator. If you're a developer looking for the new home in this industry, the Atom Economic Zone welcomes you. You'll hear more about the Atom Accelerator later in the show. Today is July 3rd and we have a great interview with Sunny, the founder of Osmosis, a cornerstone of the Cosmos ecosystem. And we really dove into like, honestly a great discussion around just Dex architecture as a whole. It's really been a hot topic recently in just the entire industry and the Cosmos, in my opinion, has kind of like whacked a lot of that innovation. You have Uniswap, kind of pioneering the V3 active AMM curve really led the way on this passive AMM structure. And those are both occurring over in the Ethereum ecosystem. But Osmosis is really got some very interesting developments under the hood and it's going to be an exciting few months for them. So really great conversation on why Osmosis is building in the direction they're building. But of course, before we get to the interview, we have a little intro segment, this time with Ren and Westy from the Blockworks research team. Before we jump into our typical hot seat, Cool throne, we got a little governance update for you. So it's a new segment we're trying out. Be sure to let us know if you're a fan, but you know, Defi governance is such a happening area. There's always seemingly some crazy thing going on and this week was no exception. So Curve, AAVE and BitDAO all have some interesting developments. So we'll start with Curve Wrapped Bitcoin and Ethereum are now live as listed and approved collaterals with the game plan to lower interest rates by 40% on those assets. This kind of comes at a time when, you know, there's been a ton of demand already. Over 50 million cr v USD borrowed and the wrapped Bitcoin and just Pure Native east were recently listed. But there hasn't been a huge demand for those two assets and it's really because the interest rates were set a little bit too high. They're kind of more in line with what the liquid staking derivatives are. And the logic is, you know, these, these assets carry less risk and to be more competitive with the rest of the market, we're going to have to drop those rates to a lower rate. So excited to kind of see that kick through. And that vote was just pushed yesterday on July 2nd. So on July 9th that will be either approved or denied. Over in AAVE, Go is still greenlit for an on chain vote. I've said that a few times now. It's pretty interesting. So AAVE Companies, which is the original founding company for the protocol of aave, has created the GO contracts, you know, tested them, gotten them audited and has them ready for delivery. And then ACI is kind of like this third party group that really manages the AAVE forums and a lot of the things that happen on the governance side for the AAVE protocol and the most recent forum post by AAVE Companies said, hey, we're ready to go, we are fully on board. Now is kind of your last time to make any comments. And that was a couple of weeks ago now and the ACI just six days ago left another comment on there saying, you know, this is, this is greenlit from a technical and governance perspective. There's no blockers left and it's been that way for a while. At this point there's really no real reason for this vote not to get pushed on chain. So you know, I've been tracking the deployers and been paying attention to the AAVE governance contract but still no luck. So really excited to see GO Push Live but you know, kind of like sitting in this, this limbo where we kind of are waiting for, for AAVE companies to pull the trigger. And Then lastly with BitDao, if you pay any attention to Defi governance, Bitdao is always this front runner and level of excitement. Right now they're undergoing a migration from BitDao to mantle to kind of more organize themselves around their core product, which is Mantle, an Ethereum roll up. That is an optimistic roll up and interestingly they will be powered by Eigenlayer's data availability service. So Eigen da and that's kind of like their core differentiator at this point. And, and so to kind of get their, their branding right, they really want to rally around this Mantle idea rather than Bit Dao and kind of also just kind of really instantiate that this is like A new product, they're doing a one to one token swap from BIT to mnt. And the community is currently voting on a proposal that will burn 3 billion tokens of VIT tokens that are sitting and being held by the Dow in response to some community current concerns around a super high FDV for an Ethereum L2. So this would actually decrease their FDV by about one and a half billion dollars from 4.8 billion to 3.3 billion. And so, you know, the meaning of an FDV has always been an interesting concept. And like, is FDV a meme? Has been such a burning question. And you know, there's reasons to think yes and reasons to think no. But Wesley, I'm curious on your thoughts here. Is FDV just a meme or is it really a metric that we can rely on? **C** (5:35): Yeah, that's a good question. I feel like people saying FTV is a meme is more of like a bull run phenomenon when people are thinking sort of in the short term because obviously it's supply that's going to hit the market at some point in the future. So you should be thinking about it when it comes from like a valuation standpoint. But at the same time I think it's a good point that FTV, like not all FTVs are created equal because like you said in this bit scenario and I can think of synthetix as a good other alternative. If you have your token, your native token in your treasury and there are sort of ideas circulating to burn your token, all of a sudden the FTV doesn't matter as much. Whereas FTV may be held by investors or things along those lines where you know that supply cannot get burned and it's going to come unlocked at some point in the future, obviously should be counted. But at the same time there are also cryptocurrencies that have sort of inflation or that's not part of the ftv, it's not part of the value that's currently circulating or rather not circulating, but exists and rather has emissions in the future. And so there are ways in which sort of FTV doesn't really exist, but also kind of does exist. So it's definitely a more nuanced subject. **D** (6:46): I think one thing I would add there is that you saw a lot of defi tokens or defi protocols to be more accurate, have really high emissions during the buran and then throughout the past year they realized that all of those emissions aren't doing any good for the protocol. So for example, Ribbon has decreased their emissions by 50%. Marinade has decreased their emissions by 75%. And theoretically that total supply still exists. But your emissions have been greatly reduced. Right? So at that point, do you still think about the FDB as the full sdb? Or maybe the FDB should be compressed a little because that emissions that originally existed probably isn't going to hit the market anytime soon. But then also, for example, with what happened with know, these things can change at a whim. Which is why it's so important to keep track of all of these government updates and use a great product such as ScuffHub to do so. **B** (7:40): The Shameless Plug. Well done, Ren. We love to hear that. But yeah, no, I think Westy hit the nail on the head there. I think the reality is not all FDVs are created equal. And as much as we want to draw parallels from Protocol A to Protocol B, the reality is it's just too hard to do that in almost every situation. So, you know, like Tradfi has EBITDA earnings before interest in taxes. And that's really interesting because it's like this one number you can compare, you know, very much so compare between companies in the same sector and even still to some extent any two given companies and kind of determine that profitability metric. And yeah, that's something we're really still chasing not only on the token level, but even on like a revenue, like a profitability and income statement level. So it's just funny to see we still have so much work to do in so many different directions. But that's why it's exciting. Let's. Let's kick things over to the hot seat, cool through and maybe. Ren, I'll throw it to you first. Who you got this week? **D** (8:35): Yeah, sure. I got Azuki on the hot seat this week. So Azuki was a really popular NFT collection during the pre run. They raised around I think 40 million during their first collection. Last week they announced and raised for a new collection called Elementals. So they sold 20,000 NFTs in total for this collection. 10,000 of these NFTs were airdropped to people that attended their in person Las Vegas event. And then the other 10,000 were sold via Dutch auction to Azuki holders during a 10 minute pre sale and then to Binza holders doing another 10 minute pre sale with Ozuki. They entirely sold out. They raised 20,000 leaf roughly $38 million. But then afterwards people realized that these NFTs weren't as hyped up as they were meant to be. For a few reasons. First of all, there were NFTs in this new collection that basically looked exactly the same as the previous collection, which obviously is. No, no for an nft. And then, for example, there were other people that were annoyed that Azuki holders got a head start versus other holders. And so the TLDR said, the community is mad. They're fuming. **B** (9:47): Right? **D** (9:47): And that. That was shown in the floor price. The floor price of Azuki went down by 50% over the weekend. And Azuki Dao, which is made up by a bunch of OG Azuki holders, basically filed a lawsuit saying, hey, we want to call that 20,000 back and it should be used for something else. It shouldn't go to the team. It should at least be used for community development and rewards. Obviously, Azuki had to sort of tackle this PR disaster in the fact that for some people, their NFT supply doubled overnight. **B** (10:17): Right. **D** (10:18): And it's fair that their price of the NFT goes down by 50%. And so they're doing a few things. They're creating an anime series, they're going to update some of the background artwork. But you know, it just seems like a very low effort attempt by NFT Collection to raise more cash. **C** (10:35): Yeah, I definitely agree with that take. And what I think is interesting, like you said, the artwork is basically exactly the same as the original collection. So you can see why the floor price of Azukis themselves dropped because it basically diluted the supply by double. But at the same time, this is sort of like a catalyst for the entire NFT market and the entire NFT community to just capitulate. Like floor prices, if you scroll on Blur, are just all down like 30% in the past couple days as a result of this. And I'm not sure why this specifically caused that. Maybe people are starting to realize maybe their JPEGs don't have as much intrinsic value as they thought they did. But I think, yeah, it's been a super interesting event as a whole. And I wonder, is this a good time? Let's say you're bullish on Azuki's or maybe a similar nft. Is this the point where you sort of get back in the market is a lot of these holders are capitulating or maybe are you waiting sort of for like a newer round of NFTs and sort of the next bull. Bull market that don't have sort of like a clean slate? So, yeah, I'm wondering what you guys think. **B** (11:38): Well, the fact that I think we'd all probably agree that this is a sign NFTs are truly dying is. Is probably makes it a great, great time to, to go along if, if that's, if that's what you're into. And of course not financial advice. But you know, for me it's like, like what did, what did Azuki holders really expect out of this? Like when you have an NFT that just airdrops you more NFTs, this is like the inevitable death circle. Like what else are the, what is the team supposed to do? Like, okay, would you really be happy if the artwork looked better or if it was like a, you know, a different looking, different style picture? Like would you really not be sitting here complaining? I know in some ways it's like the reality is you just slowly becoming to the realization that, you know this. Pfp NFTs are probably dead. NFTs as art are definitely not dead. You know, the goose, the art blocks, those will continue to be a thing and very much so like royalty art and high end art, luxury art, that is definitely a thing. And putting it on chain makes it a little bit more interesting. NFTs as a technology is absolutely not dead. We're scratched the surface on what that will be. I always use the example of the interchange scheduler that the Cosmos ecosystem is going to implement. And the idea of tokenizing block space using NFTs makes a ton of sense. Every block is non fungible with the other block and having the rights to order the transactions in that block is a very interesting use case of NFTs. But for me it's like, what are we doing here? I do think that's kind of. I don't know if it's a hot take or not, but I really don't think we're going to see the same congregation of attention around PfP NFTs in the next cycle. I'm sure there will be something else, but I just don't think it'll be NFTs. And I'm happy for the service they played and the role that they played in the last bull run. Bringing people on chain and kind of being that first reason for regular old Joes to come on chain and interact with the blockchain. But yeah, just can't see a world where those are really as important as they are made out to be. **D** (13:41): I just thought it's kind of funny that we're talking about. Is SDB a meme during the BitDao discussion just now and we're like bitdao can just decrease bit FTP by what, 3 billion overnight? Joint governance and Azuki kind of did the same thing. They're just like, okay, I'm just going to double the supply. FTB of my NFT collection has now become a meme and that reflected in the market prices. So I just saw the interesting dynamics between sort of like fungible tokens and what are going to be non fungible tokens. **B** (14:13): It's also just wild to me that that team just printed $38 million at a thin air off this. That is props to them. Like they're just doing what they were asked to do. And yeah, I don't know, I guess this kind of got away from the original idea of like, you know, what should happen with the $38 million. Does anyone have a take on if that should be clawed back or if just kind of fair game? **C** (14:37): Yeah, it's a little bit scummy to sort of not reveal that the art is exactly the same, but at the same time, I guess a holder, you have no, I guess obligation to buy these new NFTs for most of the people. Like 10,000 of the 20,000 was AirDropp to people at their event, so it's free to them. And so overall, like I think, yeah, like they're entitled to that money but at the same time they do so at like the result of their reputation being damaged. So I don't think they're going to be able to raise as much if not even close to that much money in the future. And so I just think that's sort of where they lose out. I don't, I don't think the fund should be called back. **D** (15:17): I, I feel like there's a pretty fair legal case, if someone really wanted to pursue it, that what they were offering was a new collection and you could just go to a court of law and say, hey, like these many images of the new collection are exactly the same as these many images of the old collection. You know, like all of your marketing materials say that this is going to be like a new collection. God forbid they say like new artwork or new background, new colors in their sort of like teaser for this new elemental collection. And so I feel like there is actually partially a case out there because there's a lot of time where for example, like someone does product marketing, they put like slightly misleading statements and those do hold up in a quarterfly. You know, someone goes like, hey, your product promised that it would do this, but it didn't. And there's like a pretty big industry around that actually. **B** (16:09): Yeah, that's a fair point there. Rent Westy, who Do you got in the hot seat or Cool Throne this week? **C** (16:14): Yeah, it's Definitely not a 0x research episode without putting Coinbase in the Cool Throne, so I had to do it this week. **B** (16:21): Had to do it, had to do it. **C** (16:23): David is definitely going to have a smile on his face watching this back. Yeah. They could have easily been in the hot seat, though, after the news last Friday that said that the ETF applications of recent, such as the one from blackrock, were deemed inefficient by the sec. And so at the time, it caused the price of coin and BTC to dump in the hours following. But some people were able to catch that the reason that they were deemed inefficient was because the applications just didn't specify the crypto marketplace that they were using because they would need to also enter under the surveillance sharing agreement that the SEC was looking for. And so, like clockwork, almost all the ETF applications of recent, such as Fidelity, Wisdom Tree, Vaneck, Galaxy and Ark, I think were all of them all listed coinbase immediately as their selected exchange. And so obviously that's super, super bullish for Coinbase as a whole, because if one or more of these ETFs were to be accepted, Coinbase would be the exchange of choice. And there's sort of a delayed reaction. Whereas, like, on Friday, we didn't really see a bump after people figured this out. But as of Today and Monday, July 3rd, coin is up like 12% on the day, 11 to 12%, which I think is people sort of digesting that news. And. Yeah, I mean, just another great week for coinbase overall. **B** (17:51): Yeah, this was an interesting one. And I don't know, I have zero information on the success, likelihood of success for the slew of ETFs we've seen come through. I tend to lean towards the camp of, you know, we. We saw this second round and I'd like to think that BlackRock knew something, and even if the other firms didn't know anything, they knew that blackrock knew something. But at the same time, it's like everyone is now listing the exchange that the SEC is actively suing to get approval from the SEC on their ETF application. So it's like, I don't know, it just feels so weird and I want to be bullish about it, but it's tough because that right there, if you just took that sentence out of context, it would make no sense that these ETFs would be getting approved. **D** (18:44): Yeah, I think a few other interesting implications of this is that for Example, is anyone going to come out and there's like a eth, spot Etsy and then just a bit more on the surveillance sharing agreement. So that's basically talking about the fact that a spot ETF needs an exchange with kind of sufficient liquidity so that a manipulator would have to trade on that market to manipulate the spot price of that token. And a surveillance sharing agreement kind of says, okay, if there is any market manipulation occurring, then one thing we're going to need to do is going to share that trade data like see who's manipulating the spot buy, so you can pursue any legal action. I think one thing that I think about is that if someone creates a spot token ETF with where the most liquidity is on chain, right. On a decentralized exchange, whether that's like curve unisoft or FR curve for state thief. Right. How does the surveillance sharing agreement work, you know, or is it just not ever possible to list a spot ETF because say a DEX has like 70% of the trade volume and liquidity, whereas the largest centralized exchange has 30% of the liquidity, then price discovery would likely happen on the Dex. **B** (20:05): Right. **D** (20:05): But how do you do a surveillance sharing agreement with a dex? And I think that's something that like we don't have to think about yet because we're just not that big of an asset class yet. But it's probably a question that someone will have to think about sooner or later down the road. **C** (20:18): Yeah, it's definitely a really good point. Another thing along these lines when Talking about the ETFs is I'm hearing a lot of rumors sort of on many different sides about how this is going to play out. Like no one really has a clear roadmap. I'm hearing from some people that the ETF could be approved as early as August. Mary, some people say that, you know, this is strictly a political move from Larry Fink, that sort of the timing of when this application is up in February sort of time as well with a lot of the, the presidential debates and whatnot. And so there's a lot of different sides of whether, you know, this will be approved, this won't what the timeline looks like. And so there's just a lot up in the air that we really don't know. So like while this could be bullish for Coinbase if they get approved, that's sort of still a big if. **B** (21:05): Yeah. And speaking of timelines, there's actually a red flag this picture to me not too long ago, I will, I only Have a screenshot of this, but we'll figure out a way to get it in the show. Notes for you guys. But it's actually following the life cycle of the iShares Bitcoin ETF, which is the BlackRock ETF. So the first major landmark will come through regards to its approval or deny being denied. It will be on the 12th of August. So at that point the SEC has the ability to approve, deny or extend the proposal for another 45 days. And then 45 days later will be September 26, in which they can either approve, deny or extend for 90 days. And then that would give them A third, a third deadline to approve, deny or extend for 60 days in December. And so generally what we've seen happen is on all three of those deadline dates, the ETF will get, the application will get extended in each period. Which brings US to the fourth and final deadline day, which would actually be on the 23rd of February 2024. And so at this point the SEC would have to make a final call on either approving or denying the etf, which is the expected date. And I'm not a huge political person, but I do believe that February is a pretty big month for the. I think it's the primary elections. So that's an interesting time there, making the SEC kind of come out and take a huge stance on this during this very political point in time. And more importantly, in my mind, the next bitcoin happening occurs roughly around the 25th of March. So roughly one month out, we're going to have potentially an approved ETF. And the Bitcoin happening, which, you know, anyone who spend any time in this industry knows very well that we tend to get the bullish wave kick off right around that, that next happening period. So the stars could very well be aligning here. But I'll jump things over into my hot seat cool throne this week, which is the last one of the week. And I have compounds. So we recently got the announcement of Robert Leshner's new product, Superstate. And so Superstate aims to create this regulated financial product that bridges traditional markets and blockchain ecosystems. And their first product is going to be this fund that holds short term government bonds, specifically SEC approved. So basically combining the tradfi world with the on chain world, and it definitely would need to be KYC approved as well as kind of have this US based focus for US investors. And the tokens themselves will likely not be transferable. So the initial reaction there is kind of like, okay, well what's the point but this very much to me feels like this step one of just bringing traditional markets on chain. We clearly have improved efficiencies with near instant settlement and very cheap transactions that really over the long term traditional markets likely won't be able to compete with. But it's also this kind of like middle ground of is this the next step to kind of bring these off chain yields on chain and find a way to incorporate them into defi. So, you know, I'd like to think the answer there is yes. So Superstate is really trying to be this first SEC compliant kyc, you know, on chain way to hold essentially government T bonds. So pretty exciting development there. However, it gets bearish for comp holders as Robert Leshner has stepped down as the Compound Labs CEO and actually made way for Jason Hobby, who's been with Compound Labs for over three years now. So definitely someone who knows the grounds, knows how the protocol works, knows the ins and outs, and kind of been learning alongside Leshner for this entire time. And you know, Lester hasn't officially stepped down until now, but he's kind of seems, you know, been paying attention to more different areas. I know it does a lot with Robo Ventures and really just hasn't been too focused on Compound. So maybe in that regard it is bullish for them. Like, hey, we've got a new CEO looking over our protocol and kind of, you know, helping push things in the right directions. But for a long time it's felt like Compound has really been losing the battle to aave. And if you look at borrowed outstanding assets deposited now at the launch of, they did successfully launch their V3, but without the native stablecoin. This really hurts the revenue potential of the protocol and there's really no connection to how Super State will benefit or just be totally separate from Compound itself, which I think is most interesting because if you look at the token price, hey, somebody definitely knew this was coming because the token started absolutely screaming a couple days before the SEC's filings were even made public. So the SEC filings went through on the June 26th. The tokens started absolutely moving on the 24th from the June lows to the peak highs during its run. It was actually a 200% move and the rest of the market moved a fraction of that. So definitely seems like somebody new had some privy information here, given that Compound's been down only for quite some time. So I hate to see that. Honestly, we, we really need to be avoiding things like that. But nonetheless, somebody believes quite confidently that there will be a Connection between superstated compound or maybe, you know, there was just a trade that they had some information on like okay, it will be attentionable floated compound. So let me get there first. Hard to say, but definitely some speculators in the water on this one. **D** (26:44): Yeah, I think it's an interesting move that they're starting with this considering there's a few other protocols that are already providing treasury yields on chain, perhaps in a less permissioned manner such as on the finance. And there's a few others that I'm banking on. I think one thing I'd like to point out is that cdfi, like the mix or the intersection of centralized finance and decentralized finance gets a bad rep. Like a lot of people out there is like guys, no, if you want to do DeFi, it has to be entirely decentralized. We're not doing this CD5BS. But I actually think much of the future is probably going to be CD5. If anything, if I had to put a number to it, Tommy, 90% of the value on chain is going to be CDFI. There's a lot of money out there from ultra high net worth individuals, family offices, pension funds that are chasing yields and investment opportunities of different forms. **B** (27:37): Right. **D** (27:37): And bringing it on chain enables two things. One, sort of enabling the opportunity to be accessible in the first place because for example, I don't know, you're in Australia and you want to buy something in Canada, you're probably not going to buy the Canada to sign something in person. West putting on chain makes it a lot more accessible. And two, it makes it sort of like it decreases the cost of processing those transactions. You know, DEFI is all about removing the middleman and putting it on chain does bring up that opportunity. And there is a lot of money chasing a lot of different opportunities. There's family offices worth like hundreds of billions of dollars just spending their entire day looking for the most random investment opportunities, whether that's real estate, venture bonds. And if you put that all in one place on chain in a transparent manner, that's still a lot of bad for a lot of digital. Even if you think about for example your exchanges such as avo, you would think of AVO as like a options dex, but in reality like their matching engine runs off chain. Probably 99% of the liquidity is provided by centralized market makers. Probably like two or three, maybe five. And I don't think it's a bad thing that they're centralized. I still get access to those type of opportunities on chain, whereas in a completely alternative world, I would even have access to those opportunities. **C** (29:02): Yeah, the way I see this is has like a bootstrapping mechanism. I know a lot of other RWA protocols are doing something similar where they're using US Treasuries and the fact that they have high yield, given how high rates are currently, and using that to sort of bridge the gap between traditional investors and sort of defi itself. And so while things may like begin permissions and begin with Treasuries only, I think it's probably going to expand from there. Maybe having more permission pools for different RWA devices, then eventually getting their way to more like permissionless open types of products. But you know, this is sort of the necessary first step because you know, no other RWA product is probably going to do the kind of impact that Treasuries will because treasury yields are higher than a lot of defi yields at the moment. And I agree with you Ren, that it's sort of like a necessary quote unquote evil, although I wouldn't really call it that. And that like permission defi is going to happen whether you want it to or not. I guess the question is how it happens. Maybe we develop things beyond KYC that are maybe more improved, that use CK proofs to sort of prove identity and whatnot. But over time, yeah, I think that's going to be a growing sector of the market and something you're going to have to pay attention to as it grows. **B** (30:31): Yeah, I'm with you on that. And thinking this back to Compound. They had something called Compound treasury for a while there. Right. Right after they launched their V3. I want to say, and I'm not sure if that got killed off or not, but definitely never got a meaningful amount of traction. And so I think Leshner was pretty excited about that. So my guess now is this is kind of superstate is kind of like the reincarnated version of Compound treasury. Really being that institutional borrow and space that kind of helps bridge the gap between TRADFI and being on chain. So that's kind of where my head's at with this. But it'd be exciting to see if anything does develop and there is any rekindling of a connection with Compound. But you know, that'll. That'll be it for us guys. We'll get you over to the interview with Sunny from Osmosis. Again, super exciting conversation around. Really just what it is to. To build a Dex. And how do you kind of shift things back in favor of LPs and really get profitability flowing their way. But before we jump over to that interview, I want to give a quick shout out to the Atom Accelerator for sponsoring our show. And again, if you're a developer looking to build an awesome product that has real economic value or can just in general bring benefit to an ecosystem, the Atom Economic Zone is looking to help you build. Currently the Accelerator is giving out grants in batches of 10,000 to $1 million on a rolling monthly basis and they're super passionate about building up the ecosystem. And so Interchange Security means you can launch with the security of the Atom. The Cosmos Hub itself, powered by Atom ibc, gives you the flexibility of interoperability and in combination with Interchange Accounts gives you this seamless cross chain ability to transact and it truly is becoming quite seamless. And Stride is really can show you what that is. With their one click deposits and they're again Stride is helping push out the advancement of LSTs which improves DeFi alongside Noble, bringing in native USDC and most more recently, you know, we have duality kind of setting the standard on what value accrual should look like when it comes to making a deal for the Cosmos Hub via Interchange Security. So again, if you're a developer looking to build a project and kind of needing that first kickstart again be sure to reach out to the admin accelerator. We will put their link in the show notes. Now onto the interview with Sunny from Osmosis. **E** (32:48): All right, we are joined with a guest who obviously needs no introduction, Sunny from Osmosis, thanks for coming on. Sunny. How'd the hackathon go over with Delphi? **A** (32:58): Good. Really well, the it was a like not like one of those two one, it was like a month long online one but you know, really happy with the result. **E** (33:10): I'm glad to hear that the enthusiasm, despite the bare market amongst Cosmos builders is still robust. It's always good to hear but I did want to obviously Albin, Osmosis here there's been a ton of different changes but before we did that I was hoping you could just give a quick 30 second elevator pitch. What is Osmosis? How has it been since Genesis launch? Would you define it as a success and I guess kind of like what are the goals going forward? **A** (33:33): Yeah, so Osmosis is a decentralized exchange, but what makes it unique it is a decentralized exchange built as its own app chain. So instead of being built on top of Ethereum or EVM or L2s, it's its own chain for the purpose of being the best dex possible because what we realized was when we were trying to design how to build the Dex, we realized most of the limitations come from the constraints that the chain puts on you. If you want to build stuff around privacy, you need to add new cryptographic primitives. If you want to do things around UX of how fees work, you need to go change how the mempool works. If you want to do stuff with MEV mitigation, you have to go also change how the mempool works. And so there was all these things where we thought that like, okay, where the next innovation is really going to come to make DEXs and DeFi, like usable especially for privacy and UX side is comes from building your own chain. So that's what we did. It launched about two years ago. Last week was, or two weeks ago was the two year anniversary of Osmosis. And in that time it's been a lot of ups and downs both, you know, and if we're talking about price or liquidity and usage. But like, so I would say like overall osmosis definitely has been a success. And part of the goal there was to help bootstrap the Cosmos ecosystem. And so we kind of helped do that because that's the stack that we're built on. And so we became the largest DEX in the Cosmos ecosystem. There was a few competitors and still are today, but the lion's share of volume and liquidity is on osmosis. We were the biggest decks for ust, which was what worked really great for us for a long time we were growing like crazy, a lot of liquidity and then obviously that all vanished into thin air. So but we are still, you know, but at the same time the whole Terra explosion kind of, I call it the supernova because it exploded, but it sent stardust throughout the Cosmos. And so a lot of the builders and users and stuff who maybe got onboarded through Terra have like found a new home throughout Cosmos, many of them building on top of Osmosis and like building the other, building this like, ecosystem of applications around the osmosis dex. **E** (36:09): Nice. That actually set me up perfectly for this segue here. The carbon upgrade from 2022 enabled Cosmos Smart contracts on osmosis. And I believe Mars has been the first protocol to util that and launch on Osmosis as an outpost. So how has that gone so far? Have you been happy with the traction? **A** (36:25): Yeah, yeah. So we, what we realized basically was what are we trying to build with Osmosis is like build a platform that is comparable to what you like, see On a centralized exchange and on a, you know, we've been mostly focused on like the Dex, like really the trading engine for spot trading. Right. But if you go on a centralized exchange site, the spot trading is one aspect of it, right? They also do other things like margin trading, perps, launch pads, fiat on ramps. Like you have this like ecosystem of things that are all packaged into one unified experience. And you know, and so what our thought was like originally we were trying to build all of that in house. We were building our own lending protocol in order to do margin trading. We were working on our own launch pad. But then what we realized is like, okay, we were actually kind of spreading ourselves quite thin there. And so what we realized is, hey, instead of us trying to build everything in house, why don't we make a system where we can work with other teams to build these necessary components. And you know, as I mentioned, it just happened to come at a, the same, right around the same time as the Terra debacle. And so that you, you had suddenly had a lot of teams with a lot of COSM WASM development experience, were looking for a new home. And so basically we were able. So yeah, so Mars is this project, you know, built by, by Delphi Labs. And so they were building a lending protocol that they migrated to Osmosis. And now you know, you can do, do borrow, lend on Osmosis. But what the real goal here is to build a proper margin trading experience, which is what they're working on right now. Then you also have projects like Levana and omx. OMX was one of the other Del by Hackathon winners. And then Levana came from Terra. But they're both building GMX style purpose protocols. You have like ibcx, which is a index token for the Cosmos ecosystem. You have people calc who's built DCA tooling. You have Stream Swap, which is this launchpad that we originally started building in house, but that we just like sort of hand it off to another team to be able to run with. And so yeah, now we have all these components that you imagine expect to see in a fully functional exchange. You're now able to start accessing them all on the osmosis chain and on the website for Osmosis. Now we have this like app store where you can access all of these like different tools as well. And then, you know, the goal is right now it's still when you click on them, it, it kicks you off onto a different site. You go onto the Calc site or you go onto the Lavanda site. But the end goal here is to have them all eventually integrated into one ux. **B** (39:21): Oh, that's awesome. I love to see all the pieces kind of falling in place right there. That's, that's honestly really exciting to see. That's, that's the beauty of an app chain is to be able to recreate that off chain like experience and you know, building a chain specifically tailored to your needs. One of the other questions I had related to this was, you know, the hot thing to do these days is build your own decentralized stablecoin. Any plans there? I think there's a team. Membrane Finance, if I remember correctly is doing something similar to this. **A** (39:46): Yep. So Membrane, also a post exterra team but they are building a multi. They're taking sort of some ideas from a bunch of different existing Stable coins and combining them into one. So they take some a lot of inspiration. So they're, they're a multi collateral over collateralized stablecoin and they follow more of a reflexer Rye type of thing where instead of you know, taking the DAI approach and having a PSM which eventually leads you to be mostly like centralized stablecoin back, they are instead making it so you know, it has a free floating exchange rate. But unlike Rye, which is only single collateral with eth, this is going to be multicolateral. So you're able to use Atom, osmo, eth, Bitcoin, all these different assets in order to do this. And then they'll also offer systems like LUSD for direct redemptions. So even though it is does have a floating rate like Rye, the LUSD system, the, the direct redemptions will help it maintain the peg a little bit more strongly than you would with Rye. So yeah, so there it's definitely a little bit of a radical take. Like their whole Rye free floating exchange rate. It's tbd how that fares with like users long term. Right? Because I think, I think long term it is the necessary right thing to do. I saw this interesting graph the other day of like showed that over the course of like the last two years Rye has actually more closely tracked the US dollar than like most like fx, like major FX assets. So like it's better track the dollar than the euro than this was frank then like you know, the pound. And so it's like, it's actually pretty good as a store of value all things considered. And, but so we'll see how it. And I think that's the end goal here. You know, we should be building crypto native units of accounts so yeah, I'm really excited for, for that with membrane. And then I've also been chatting with the membrane team about potentially reusing their contracts. So one of the things that they do also that's different than how DAI does it in dai, even though it is multicolateral, every CDP is single collateral. So you, you can have an ETH CDP and then you can have a WBTC cdp, but they both have their own independent liquidation points. With the membrane design, all your assets are in a single vault and so that way, you know, you don't have to have different liquidation points for every individual asset. They all follow us. You know, even if, let's say your ETH goes down in value but the bitcoin goes up, it's fine because they're all working on a single cdp. So yeah, so that's one of the cool things that they've done. And so what I was mentioning was we're discussing with them about reusing the contract to launch a second stablecoin called bit$, which is going to be a bitcoin only backed stablecoin. So just like, you know, I think the multicolateral stablecoin has some usages, but I think there's also, you know, it's an experiment where we want to run of like, hey, why? What if we had a. Just how you have a lot of stable coins in Ethereum ecosystem that are only backed by eth and there is a demand for those. We want to see how we can, what will, what kind of demand we can drive for a stablecoin that's only backed by bitcoin. **E** (43:16): Interesting. I love how everyone in the Cosmos ecosystem seems to have a soft spot for bitcoin. That's one of my favorite parts, honestly. But I did want to dive in a bit into the Proto Rev module. I actually don't understand this super well at all. But I did read Effort Capital's latest Blockworks research report and he said that you guys had generated about 100k of revenue since launching that, I think in early April. Can you kind of explain to listeners what exactly that is and what the integration entails? **A** (43:43): Yeah, so protorev is the first of a couple of products that we're building around MEV in, in osmosis. And what it, what the idea, our take on MEV in general is we kind of split it into harmful and benign mev. Harmful MEV is the type where you are reading other people's transactions before they're executed and acting upon them. So basically that would include things like front running or sandwiching and stuff. Then there's the benign MEV where it's not really. It's what you do based not off of reading other people's transactions, but just like you know, let's say you're doing an arbitrage, you're arbing a centralized exchange, you know, arbing prices on the decks to prices on external market and you know, no one's really getting harmed there. And so that's kind of what we're, we want to encourage. You know, how can we instead of leaking all of that value to external arbors, how can we capture as much of that value into the protocol itself? So protorev is the first one of these products where what it does is it back runs users where what. What you you can imagine that there's like multiple pools on the decks where let's say there's a way someone wanted to trade USDC for osmo, right. The thing is there might be multiple pool routes with by which to do that. You could, there's a direct USDC to OSMO pool, but then there's also a pool that you can maybe swap USDC for Atom and then Atom for osmo. And you know, we incur, you know, we encourage people to use good routers that like try to split correctly but at the end of the day it's not always possible to split perfectly just because of how you don't know what the state of the blockchain is when you execute the transaction. So what we what protorev does. So normally what happens is there's a lot of back running happening where people would be like spamming transactions, trying to arb background people and arbitrary are the pools. What we realize is hey, why doesn't the protocol just do this itself? So instead of like being spammed by people trying to background, we can just have it after everyone, any, anyone does a swap. The, the blockchain code by itself looks for certain cyclical arbs and executes them and then takes the revenue from those executions and gives. Gives it to. Well, the governor's proposal for what to do with the earned revenue is up for vote right now. **B** (46:20): What's your, what's your insights like? What do you think is the best use of that revenue? **A** (46:24): I think probably a combination of, you know, I would say majority should just be distributed to stakers because I think you know, osmosis currently mostly been, you know, it has pretty high inflationary yields in order to incentivize staking. But the goal here is to switch towards like real yield. Right. You know, similarly like the governance just voted for the activation of a fee switch where basically start charging taker fees on the exchange that go to the protocol. **B** (46:55): Yeah, that's, that's, let's dive into that, that, that fee switch there as well. Because my understanding is this is an additional fee on top of the, the current swap fee that specifically goes to the protocol. So what was your, what was the idea that was really the driving force behind this decision to add this additional fee? **A** (47:10): Yeah, I think the driving force is that at the end of the day the osmosis protocol needs to be self sustainable and up till today it was mostly driven off of inflationary rewards. But as part of OSMO 2.0, which we will talk about, but basically inflation needs to go down. It was a good growth hack. But at some point like any business, osmosis as a protocol needs to be self sustainable and it needs some source of revenue. And the primary source of revenue for any exchange, centralized or decentralized as at the end of the day, you know, we have the MEV revenues as well as a second source. But at the end of the day the trading fees are sort of the primary bread and butter for any exchange. And so, you know, it's two, we're two years in and I think it's, it was government society, it was time to start activating, you know, start charging a taker fee. And it works well because like you mentioned, it is an additional fee on top of the LP fees. I actually don't really like the term LP fees to be honest. I prefer we're actually changed in the code. We went ahead and changed all of them to be called spread factors because that's really, if you think about it, that's what it is. When you set a, in a pool you're basically, you know, what are, what is an amm? It's people market making at a certain price and when you're market making you set a certain spread, the difference between the highest buy and bid and ask. Right. And so basically the spread factor is basically it's the automated market maker, it's what spread their market making at. So it is an additional fee on top of the spread factor of each pool. But we expect that most liquidity is going to start to migrate towards thinner spread factors. So with concentrated liquidity because now you're going to be able to, you know, concentrate and you see this happen on Uniswap for most pairs where you know, active, more active market makers will start to come in and basically start to quote at smaller spreads. And then there's also a cool way, you know, once. It's funny that once you have a protocol fee now you can start to build in mechanisms of reducing the protocol fee. It kind of is that. It's kind of funny where like now you know, you look at a lot of exchanges, do things like affiliate referral links. You can do things like oh, the more OSMO you have staked the your trade, your protocol fees can go down, you can decrease based off of trading volume. That's a common thing that most centralized exchanges do. So now that there's a stick that's involved now you can start to like use it as a carrot as well to incentivize certain behaviors from, from traders. **B** (49:52): So one of the things that you know, between the proto red module and the allocation of what, what to do with that revenue and then with the inclusion of the, the additional fee here, the, the taker fee, you know, I'm starting to get the sense that there's the, the, I guess a difference between Osmosis and let's say Uniswap for example is you know, osmosis has the extra factor of having stakers and they need to take care of that party and make sure that they're incentivized to, to contribute doing their work. I really like the work you're doing and trying to get that towards like this more real yield side of things where it's, it's not just inflationary rewards. But I'm curious, like how do you think about the trade off as well? Because you almost need both parties equally. Without liquidity you don't have a Dex and without stakers and validators you don't have an app chain. So how do you think about the dynamics at play there? **A** (50:38): Yeah, so I think you know, it's not like incentives are going away for liquidity providers. It's they part of Osborne 2.0. All it did was shift more of the incentives towards stakers. There's still, you know, a significant portion of inflation goes towards our daily issue goes towards LPs. And the thing is with concentrated liquidity like Uniswap V3 style concerted liquidity, you just really don't need the same amount of capital in order to provide the same liquidity, the same, you know, at the end of the day you're trying to provide the users with a certain level of price impact when they make trades. And you know, with contra liquidity you can get away with like significantly like a magnitude less of liquidity. And still get the same user experience. And so that's the idea where, you know, we can drive down incentives because we're, we just don't fundamentally need as much capital and we can. That capital in the Osmosis ecosystem can be directed towards other things, you know, being lent out on things like Mars or being, you know, staking to help secure the protocol. **B** (51:44): Okay, I like the breakdown there as well because it's kind of become the hot topic recently to, you know, realizing that LPing just seems to be negative EV, whether you're using IL and permanent loss or LVR loss versus rebalancing or like a markout strategy as the common thing to do in traditional market making. And that's just kind of what every different angle people are coming at it from that. The results just show that being an LP is kind of taking the short end of the stick. So do you, how do you think about that? Like, you know, you see Uni V4 come out ambient and now you guys are using this Uniswap V3 model. It's kind of like this active market making. Like, do you think that that's really the future and more of that, like, you know, the traditional XYK or even something like a curve v2 that's passive concentrated liquidity. Do you think that the future of amms is really just this more active design? **A** (52:33): I definitely think it is the more active design. I think it depends on the stage of the market. Our take has always been AMMs are really good for bootstrapping new ecosystems or bootstrapping new assets. And for the last few years that's what we've been doing is helping bootstrap Cosmos. I think now Cosmos is getting mature enough, there's enough high cap assets that, you know, we need something more capital efficient than what we had before. And so I, you know, I hope you mentioned curve v2 because I, I still do believe that passive strategies are good, but I, I think the passive strategies need to still be smarter than just, you know, xyk. And so Astroport for example, is building a, there's actually a number of teams sort of building market making AMM vaults. You know, they call them AMM because that's what they are. Right? They're automated market makers. But instead of being a Dex that people trade against that pool, it is, they are market making on top of the osmosis contrary liquidity and order books. So that's another thing I didn't mention. We're also building order books as well. And so, and the idea is the order Books and CL pools are actually integrated as one system. But yeah, so with, you know, yeah, you'll be able to do a curve v2 strategy, but it's going to be on the same book as, you know, active, you know, limit orders and stuff or Elixir is building their own strategies as well. And so what I imagine happening is that new tokens at launch, they might go, you know, the nice thing about what AMMS did was it made the process to launch a token much easier. You don't have to go hire a market maker to do that for you. You just put assets into these, into the pool or into this, like these vaults, they'll do it. And then eventually what will happen is if an asset gets enough volume, enough traction, you'll naturally have active market makers come start to market make and then at that point maybe Even a curve v2 style strategy, it probably won't even, you know, maybe it'll still be effective for your mid cap assets, but it's just fundamentally not going to be competitive in like a bitcoin USDC market. And so those are just going to start to go away and it's going to, those are going to be dominated by your active market makers. So the nice thing of having taking this vault on top of a single unified order book, we call these loot books. It's an or, it's the, the combination of the limit or the order book and the contrary liquidity book. We're calling the loot books. It stands for limit orders on ticks. Because basically what happens is, you know, in a CL system you have these like liquidity buckets. And what we let you do is we're going to let you place limit orders at the tick boundary. So if you're making a swap, it first goes through a specific bucket, then it goes FIFO through all the limit orders at the tick boundary and then it goes into the next bucket, then to the limit order. So you kind of get a unified book. And so yeah, the goal here is build a single unified market and then let people build different strategies on top. **B** (55:43): That's incredible. So we just spoke to Doug Kolkat, the founder of CrocSwap, formerly CrocSwap, now Ambient, and they're doing this similar thing with the limit orders, which is so cool. I love the use of this tick methodology to kind of create on chain limit orders. And then in that case you're kind of like the lp, not the trader. Very interesting dynamic, but just for the listener, I feel like everyone's pretty comfortable with what the Uni V3AMM style is. But when we talk about Curve V2, this is an automated concentrated liquidity. That's why I'm calling it passive. So there's basically a trailing exponential moving average that the pool is aware of what trades get executed through the pool and then the liquidity in that pool will continuously be rebalanced back to the current point. So basically creating a Uni V3 style, but without the LPs actually having to move the liquidity, the pool does it instead. And so I love to hear that you guys are kind of innovating and shoving these two models together. It's funny. Effort capital and I were actually talking about that just a few days ago. So he probably was talking to somebody over there and then brought that idea to me. Trying to seem like the genius in the room. I love that. But so yeah, we were talking about the trade offs between stakers and LPs but there's also like the same trade off between LPs and traders. And so the like leading methodology to kind of bring some value back to LPs has been. All right, well let's institute a. Instead of just a flat fee on trades, like a dynamic fee based on volatility or trade size or something of that nature, are you guys thinking about kind of introducing this dynamic fee model? Like Trader Joe made this popular. Univ4 is talking about it. Curve does it. **A** (57:23): Yeah. So I, this is part of the job of a vault basically. Like I said, I think the notion of the framing of LP trading fees is kind of off. What it really is is these are spreads, right? And what curve V2 does by having a dynamic fee, right? And but if you think about it, if it's a vault that's market making on top of an order book, all it's doing is based off of the volatility. It's replacing limit orders at like changing the spread that it's charging on on these limit orders. And so that's kind of what these, you know, this is what Astroport is building right now is a vault that like, you know, it places limit orders on the order book and just shifts the limit orders based instead of changing the fee. It's not really a fee, it's just changing the spread that it's charging. **B** (58:16): Ah, got you. Gotcha. **A** (58:17): Just keep in mind this is what market makers do in the real world when, when volatility is high. They do two things actually, right? They do one, which is they change, increase the spread. But the other thing they also do is they Pull liquidity. And that's the other thing. I think we were working on a design for this. It kind of ended up kind of being put on the hold because we decided to focus on building like contract liquidity and order books instead. But we were building a passive contra liquidity system as well that would like, not just increase the spread, but also pull liquidity at times of high volatility and then re add liquidity once the volatility goes down. So that I imagine, you know, I think that by having a really good order book and a system for people to experiment with building vaults, we're going to start to see all sorts of interesting, like passive vault systems being built. **B** (59:10): Okay, that's pretty interesting. And are these vaults like, you know, permissionless? Like can anyone go create a vault and pair it with different assets or what's the idea there? **A** (59:17): So they will be. So deploying contracts on Osmosis is permissioned, so it'll have to be whitelisted by governance. But you can also do it via interchain accounts, right? So you can have a contract on a different chain like Quasar, for example. And you know, all the vault logic happens there and it just like using an interchain account, it just replaces the positions. The benefit to having a native whitelisted one on the osmosis chain is that with the app chain functionality we can give a little bit more benefits where like, let's say something like Astroport. If it's like something this curve v2 strategy is this like, you know, special strategy that we want to encourage. We can actually give the Astroport vaults the ability to like replace their limit orders at the beginning of every block because otherwise they're kind of playing this race game against other traders. But instead if we like say like, oh no, we're going to treat this curve v2 strategy as something native. We can like poke it at the beginning of every block and it will reposition its limit orders before anyone has a chance to trade against the stale data. **B** (1:00:31): Okay, awesome, Awesome. I love that as well. Now this is super cool. And one of the other things that's kind of been a hot topic these days is like, if you know a user is bringing you toxic flow, should you discriminate against their order and maybe charge them a higher fee? What are your thoughts on that? **A** (1:00:50): The who should discriminate? The job of a market maker is to do literally that. And the problem is how do you know? You can't really know. The job of the exchange is to at least our job, how we See it is to build privacy. And so right now this is the whole idea behind jit, like just in time liquidity where you know, the idea is oh, you're only going to be market making against non toxic flow and pulling out when this toxic flow. And some people actually, you know, I think this is like harmful meme narrative that like this is good because it gives better execution to traders. But I think that's actually like not exactly correct where I think second order it actually hurts the market because the job of an order book is to like aggregate information in the market and when people are keeping liquidity off of the order book, there's less information in the market, there's people don't know how to set their slippage bounds correctly. And then because of that that will actually, because it looks like there's less liquidity on the book and because people have set larger slippage bounds now you're actually going to have more front running and sandwiching happening. So I think really this like JIT liquidity is kind of harmful to the network where and like I said it's fundamentally coming from a privacy breach right now where the fact that you can see trades in the, in the mempool. So you know what we're, what we're moving towards is like making you know, private trading. And then if market makers have other ways of figure of differentiating toxic flow or not, that's up to them to build strategies around. **E** (1:02:38): Interesting. So switching gears a little bit, there is a ton of different Dex primitives launching in the cosmos. You got Astroport, which you've mentioned a few times. You've got duality which is more atom economic zone centric. You've got, I mean say like the list goes on. You got DYDX coming. So I guess just how are you thinking about this competition? Do you think it's like synergistic or are you looking at it as like man the time to ship and make changes to osmosis. **C** (1:03:02): This is now. **A** (1:03:05): I guess both like, I mean obviously I think competition is good. It puts a fire under our asses to like ship a lot of this, you know, ship faster and you know, I think more dexes, more activity in Cosmos is always good. Just like, you know, we can't be everything for everyone. Like, like dydx. Right. Like we are not even like going after the same market whatsoever. Right. DYDX is very much focused on like only on perps and like way more like institutional traders. That's you know our internal mission statement is we want to be like we're our biggest competitor. We see it is Coinbase. Right. We're trying to be like the best retail experience for trading crypto, but in a decentralized way. And so it's like we're not competing with dydx and we're actually like, I think it's actually quite synergistic. We were just chatting with them about what are ways that they're going to use us for onboarding flows of bringing users from Ethereum into their DYDX v4 chain or even once they one day start to go towards multicolateral using osmosis for liquidations, for example. I think a lot of synergies there and then. Yeah, Astroport right now they're kind of acting like a Dex themselves. That's kind of the strategy that they're going on for. Like how they are on Terra and Neutron for example. But on osmosis, like I mentioned, like their goal is less to be the decks. They're not. They, they know that long term, like you need order book style stuff and that's not what they're building. Right. Their goal is to build AMMs, whether that means you have a AMM that people can trade against directly or whether it's an AMM that a vault that market makes on top of order books. And that's what they're doing on top of osmosis and on top of injective as well. So, you know, with Astroport, I think, you know, we're collaborating on stuff duality. To be honest, I actually don't know too much about like what, what, what exactly it is that they're building. I haven't really seen or played around with the product yet. **E** (1:05:14): Yeah, that's that. I was curious specifically about duality, just because they're probably not launching their own token. They're like atom economic zone. I'm just curious if you think, I guess this atom economic zone is like the right path forward for the cosmos as a whole or whether you think they need to be remaining more incredibly neutral. Like was there, you know, kind of original mission statement? **A** (1:05:35): No, I mean, I think the atom economic zone is a good strategy. I don't understand why duality doesn't have a token though. Or like, I don't know, the whole duality proposal was a little bit odd to me. I don't. Well, keep in mind, like, this is not the first time the Cosmos Hub has tried to build a fully atom owned dex. Right? There was gravity dex, but it kind of failed against osmosis because of a Lack of incentives, of a lack of incentive for the dev team, really. Right. And so it kind of seems a little bit odd to me that the Duality system is like, oh, kind of just repeating the same thing. There's no token for incentives, there's no. Why is the dev team even incentivized to work on this two, three years down the road if they don't have any upside on it? Something feels a little bit too good to be true in the Duality proposal to me, but I don't know if there might be other tricks up their sleeve on how they plan on doing it. The AEZ stuff is interesting. You see what Stride did, getting Atom from the community pool, Put it on sdatom, then LP on Neutron. The problem is Atom st. Atom is not really a trading pair, right? That's like a single asset. There's two versions of the same asset. It's like, you know, I think how you build up liquidity is you need actual users who are willing to take risks and like market make assets. **D** (1:06:51): Right. **A** (1:06:52): You need, you know, Atom sd, Atom is not really a dex, right? You need Atom with USDC or you need Atom with osmo. You need ball assets. You need, you need multiple ball assets. So tbd, how the AEZ manages to build up liquidity for non Atom assets. **E** (1:07:11): Yeah, I think that's a super fair take and a good point. In terms of, you know, you brought up Interchange Security with Stride. I'm curious about Mesh security. Can you kind of explain exactly how that's different, just to clear it up for me, honestly, and then how Osmosis is planning on implementing that, if at all? **A** (1:07:27): Yeah. So Mesh security is kind of was what Interchange Security was supposed to be. Interchange Security was this idea that like has or like the original idea was this move is to build this like restaking protocol where, oh, Atom holders are going to be able to restake their atoms. Like they and like be used to secure all the different Cosmos chains. And then the atoms on the Cosmos hub will get slashed if there's anything malicious happening on any of these chains. And so that was, you know, this design that we came up with years ago. And then at some point along the way that team event, like the Hub development team abandoned it and moved towards this like very simplistic basic version of ics which is all the hub validators run the all these other chains, which is not really, that's like, it's not scalable at all. Right. Like you have to go through a governance proposal to add new chains. You have to like it's really a block size increase. It's not a scalability solution or like anything, right? And so the, the goal really was supposed to be this opt in thing where individual validators or stakers can choose which chains to get give security to. And the whole point is that like the belief in Cosmos is not all chains need the same level of security. Like you know, the example I always gave was maker does not need. So cryptokitties does not need the same security as the maker chain. Right? It's fine for cryptokitties to have less security. And so that's what the opt in model does. And so because the ICS development team effectively abandoned it, we were like, okay, well someone has to build this because this is like how security needs to work in Cosmos. So that's kind of why we ended up building mesh security. And along the way while building it, we were like, hey, there's ways of using this protocol in ways we hadn't thought of before. Like so instead of just so mesh security is really just this primitive of restaking where you. But we realized, hey, why do we actually only have to get restaked from one chain? Why can't we get restaked from multiple chains? Let's say Osmosis wants to get, you know, get security from Atom, but why can't we also get security from eth via Eigen layer? Or why can't we also get security from, I don't know, Bitcoin via Babylon, right? Like why don't we get security from multiple places at the same time? The other thing one is like, why aren't we actually running these things bidirectionally? Like why aren't like, hey, if the Atom, sorry, if the Osmosis wants to provide security to the Axelar chain, but Axelar wants to provide security to Osmosis, that's actually win win for both of us because now both of our chains are being secured by the sum of our market caps. And this kind of builds this level of resiliency where we don't want our entire ecosystem kind of. The whole premise of Cosmos has always been this very mesh decentralized idea of no one central point of failure, IBC is point to point and something like Terra, right? It's always possible that the base asset of a system could go to zero in a day. And so it's like, let's not build all of our security assumptions around a single asset or system. Let's make it so security is this very poly, polycentric thing of getting security from as Many different places as possible. So yeah, like I said, mesh security, it's a primitive, it's a set of things that you can use. And then the economic constructions that people use this mesh security primitive in there's going to be a bunch of different ones. So we'll see how those play out. **B** (1:11:09): Yeah, that'll be interesting to watch the dynamics play between. And I'm just curious like if I'm a hub validator and I'm just running you know, my software and hardware to power the hub and now I'm powering multiple chains through, through ics. Like how does my, how does my like you know, let's say just utility costs, like hardware costs, software costs, like how does that change with the inclusion of ics and is that any different for this mesh security model? **A** (1:11:35): So the, the thing with the ICS model is that as a validator you are forced to validate every chain that like gets approved by ics. And I think there's almost this weird mismatch between like the validators who incur the cost but are not the ones who are these sole people of governance. And so governance keeps us like approving every ICS chain that comes along. But like validators are like bearing this cost of increasing fees. And so maybe what end up might happening is like validators have to start charging more and more on commissions for example to cover these costs. But obviously it's possible as well that revenues from these chains could also offset the cost that they have to do. But the idea is that with mesh security is by making it optimized in validators choose which chains they want to run on that now it becomes a, you know, instead of like use instead of this like very top down decision making that's going to be like oh like governance selects that like oh the this is what very command economy style. Like the idea behind mesh is like supposed to be like way more Hayekian, right? Like individual people will make decisions of which chain validating which chains makes economic sense for them. And what you'll end up happening is having these power laws of security where like some validators are going to be so efficient and they're going to like run on every chain possible. Or maybe they'll run on the chains that they have incentive alignment with. While some chains are going to be like so important and so lucrative that every validator is going to like co validate that chain as well. So yeah, it's just more like let the market figure out where security like the balance between security and economics. **B** (1:13:23): Right on. Right on and we just did a podcast with the Matter Labs team on the announcement of ZK Stack and I'm curious to get your take on more broadly. Like the Ethereum vision has kind of like shifted over the years and it's kind of like culminating at this point that it looks quite similar to what the Cosmos crowd has been banging a drum about for quite some time as well. So I'm curious to get your take. Like, you know we have app chains, role apps now they're calling them hyper chains. That's basically just change using like the Cosmos SDK. You know, the Cosmos ecosystem has IBC for native out of the box communication where the ZK Stack is using this. When you're using the same prover, you have the ability to like what they're calling hyper bridges. So there's a lot of parallels that are getting drawn between the two. What do you think about that? And like, is this the right path forward for the Ethereum crowd? **A** (1:14:12): I think it's definitely the right path forward for Ethereum. I think this architecture is the correct architecture and why we've been working towards it for years. I think obviously it does lead a question to okay, in this world, where does Cosmos land given all of this, right, if everyone in Ethereum is just building the same thing, what differentiates Cosmos now? And I think, you know, I mean, I have my own answers to that but I, you know, I think we'll see how the market plays out. **E** (1:14:42): I also wanted to get like a more high level question from you. We were all speculating on what you meant by this in our analyst chat in Slack, but you tweeted out proof of stake was a mistake. You please elaborate on what you meant by that. **A** (1:14:57): Yeah, so I think what I, I've just been a little bit disappointed with how like with staking derivatives in general, I think, or just like the impact that they've had on. Honestly, I'll admit it was a little bit of a just like in the moment tweet. I didn't realize it would get this much attention and it might have been one of my most popular tweets in like a while because I think all the proof of work Maxis founded and were like, oh look, see, and that's not really what I meant. But what I, what I really was trying was, you know, we spent so much time like building these like mechanisms into proof of stake built like having like, you know, economic make it so, oh, validators have something economic at stake being this very open market where you say, oh, the holders of the tokens of the network will make decisions up to choose who the validators are and using like risk decisions that they make. But then the problem with stake narratives is they come along and basically hand select validators via sometimes a pretty opaque process. And then you know, all the users choose to stake through these liquid staking providers in order to get the liquidity, you know, to get the staking derivative because they want that liquidity. And so it just feels to me that like proof of stake is almost evolving somewhat into this like proof of authority system instead where it's like being select selected by a hand selected people. And it's like. I guess my point was more like well if we're going to do that, why don't we just do it? Why don't we just like do a proof of authority system instead? Maybe let governance like whitelist validators instead of having this whole like proof of stake system. So it wasn't saying that proof of stake was like wrong. I think the mistake was that we spent a lot of the time in the design of proof of stake not expecting staking derivatives to become as dominant as they are today. And so there's things I think we can solve like in the short term. One of the things I've been pushing for heavily is this idea of copy staking, which is this idea that staking derivative providers should exactly copy the delegation distribution of non liquid staking derivatives users. So now that way when you're staking you have the choice of either you go through the staking derivative provider and you get this like, you know, liquidity on your staked assets or you stake directly. You, you're, you're forgoing that liquidity. But now you have the ability to choose the distribution of voting power. So you know, you can imagine it basically ends up devolving down into like validators. Self bonds are the ones that are actually directly staked while everything else is going through liquid staking, which seems like the end, end goal we're going towards. So might as well make it so the liquid staking providers aren't the ones selecting the validators. Rather it is still somewhat proof of stake ish in selecting the validator. So that's one thing long term. I mean I've always been a big fan of reputation based systems. That's, I think, I think proof of stake was better than proof of work in many ways and worse in some ways. But like I, I think the end goal here is like okay, well proof of stake is done, we've solved it. I think I Wonder what are other mechanisms we can do to build decentralized consensus protocols. And I really think like web of trust reputation systems are this like interesting avenue worth exploring. **B** (1:18:31): Yeah, shout out to our, our good friend Ian for that tweet. He, he really got, got everyone thinking on that one. But I do agree like, you know, if you look at back at the Ethereum ecosystem for example, Lido has such a, you know, overwhelming dominance and there's only 29 provider node providers that are operating the, the stake behind that ecosystem. And you know, there are things like Rocket Pool that exist and that are kind of working to a much more decentralized model. But specifically in the cosmos, you know, we really only see Stride who is kind of building towards a more decentralized model that's similar to the one you just described. And they've mentioned the use of like bonded delegations and things like that. But like is, I guess. Yeah, it's just interesting to think through the dynamics of the one protocol really being the deciding factor on stake, especially when there are pretty aggressive winner take all forces in the LST market I think. So do you think there's a possible solution would be other liquid staking providers kind of coming to market and having a great product and kind of helping balance that back out? **A** (1:19:30): I think that's one thing that we're starting to see in Ethereum. I think Rocket Pool and CBE and stuff are starting to provide reasonable competition to Lido. But we'll see. I think the two things that I think I would be the biggest threat to a dominant liquid staking providers like a Stride or Lido would be one of two options. One is chains start building their own native liquid staking. So imagine someone builds like here's a, this whole copy staking thing I mentioned, right? Someone could just go build a module that anyone can import into their Cosmos SDK chain and it just auto distributes like it mints liquid staking tokens following this copy staking mechanism. And so it's like why do you need a separate option when every chain can just issue its own lst? So that's one option. The other option is every defi protocol becomes its own liquid staking provider. So this is something I've been, I don't know, I still think makes a lot of sense where like let's say something like Mars, like a lending protocol instead of it accepting ST Atom and ST Osmo as collateral, what it could do instead is say like oh, it's only going to accept Atom and OSMO and then it's going to go use the non lent out atom and OSMO and put it, stake it and like earn the revenue from that. Treat it as, you can either treat it as protocol revenue or you could like use it as incentives in your system. Or like basically like, why give up that revenue to a liquid staking provider when you know, the defi protocols are really the ones who have the TBL at the end of the day and they could cut out a liquid staking provider as the middleman and just build that as a function of their defi protocol. This is kind of what Anchor was trying to do in Terra. So I think those are the two systems I see, you know, potentially disrupting the LST monopolies. **E** (1:21:34): Interesting. All right, well, we're running up on a, an hour here actually. It's, it's getting close to time. But I did have one more question I wanted to ask you before we let you go. ABCI plus plus. What is that exactly and how is it beneficial for osmosis? **A** (1:21:51): Yeah, ABCI is, it's a way of. The way the Cosmos SDK stack was Tendermint Stack was designed was basically you have a state machine that doesn't have to think about consensus. You can write a state machine, your business logic, without even knowing it's running as a blockchain. You write it and then you just run it on top of Tendermint. And now it's like, boom, now you have it distributed state machine. Which sounded nice in theory, but in practice, what we realized over time was like, no, actually when you're designing decentralized blockchain, like decentralized protocols, there's actually times when your state machine does want to be more opinionated about how consensus works. And so ABCI was the name of the original protocol. It stands for application Blockchain interface that the Cosmos SDK used to talk to Tendermint. And what we did was we were like, we ABCI was basically something that our team like invented over two years ago. Now at this point where we're like, hey, okay, let's add more ways. This is like extension of ABCI. We called it originally ABCI 2.0, but it was a way of like the state machine being more opinionated about the consensus protocol. And that gives you just the ability to do so much stuff. Like our original use case was we were trying to build the threshold decryption which was like the private MEM pools. But you can also do things like validator provided price oracles you could do. Obviously like there's a presentation we gave like two years ago that kind of like lists out all the different things you could do with with abci. So it's really that's ABC is what's going to give most unlock a lot of the app chain benefits. **E** (1:23:38): Awesome. Sunny. Well, thank you so much for coming on. This has been a fantastic conversation. And again, thanks for being so generous with your time. Do you want to tell people where they can find you and learn more about Osmosis? **A** (1:23:48): Yeah, sure. You can find me on Twitter. I am Sunny A97 and you can on Twitter Osmosis ismosis Zone. And then the website is you can try it out using Osmosis dot zone. **E** (1:24:05): Awesome. Well, until next time. See you, Sunny.