Cosmos is quickly gaining attention this year. While ATOM’s price performance has been underwhelming (as per usual), the broader Cosmos ecosystem is drawing eyes for new networks deploying on Cosmos tech, airdrop rewards for stakers, and overall DeFi innovation.
In today’s edition, we’re giving you some insights on the Cosmos ecosystem from Sunny Aggarwal, a Co-Founder of Osmosis and a key figurehead in the Cosmos space.
Stay alert in the markets ⬇
Liquid Staking and Osmosis
Sunny Aggarwal, Co-Founder of Osmosis, says that liquid staking will be implemented for the entire Osmosis ecosystem.
stkOsmo from Persistence is expected to be released soon.
White Whale has submitted a proposal regarding LSDs (Liquid Staking Deriviatives).
Multiple options for liquid staking are beneficial for avoiding dominance by a single solution.
Sunny says that initially, there were concerns about LSDs undermining security properties of proof-of-stake.
Emotional attachment to an idealized version of proof-of-stake economics played a role in the hesitation.
The focus should be on making proof-of-stake work with LSDs in the current reality.
Sunny says that as LSDs gain more capital, they become dominant governance holders in crypto.
To encourage diversification and prevent one dominant LSD, a political component can be added to LSDs.
This involves turning LSDs into political parties, allowing stakeholders to align with their preferred party based on their beliefs and values.
Osmosis’s Introduction of Staking v1
Restaking and IBC Architecture
Sunny says that restaking is seen as a positive concept, allowing staking on various chains.
Mesh security, similar to restaking, was developed alongside IBC.
He expresses some concerns about the design of IBC using LSDs directly in the protocol.
He believes that restaking should be one level below LSDs in the architectural stack.
Liquid Staking's Impact on Osmosis
Liquid staking breaks traditional staking patterns but offers capital efficiency and upside potential.
Modular airdrops are expected to benefit staked $TIA holders.
Opportunities for using Osmosis will increase due to liquid staked tokens.
$stkOsmo is expected to be integrated with Osmosis, which aims to become a DeFi Hub for Cosmos and have many offerings.
Sunny says that people prefer using $stATOM as collateral rather than regular ATOM.
Collateral should be yield-generating for users.
This approach will likely lead to increased adoption.
Growth Trajectory for IBC and Cosmos
Sunny says that the growth trajectory of Cosmos and $ATOM should be separated.
The success of Celestia, dYdX, and more shows the potential for Cosmos USDC to surpass Optimism.
Cosmos is working well and now gaining more traction.
More users using the stack will improve network effects.
$ATOM has had some questionable moments but aims to become an interchain money asset.
There is a unique opportunity for $ATOM to become a decentralized governance token in crypto, as well as become an interchain money asset with decentralized governance.
Sunny says that BTC’s success came from its unchangeable monetary policy; ETH took a different route with dynamic policies.
Copying ETH’s monetary policy won't lead to success; $ATOM has a unique opportunity to be a third capital asset.
$ATOM’s decentralized governance sets it apart from other projects in terms of distribution.
Importance of Decentralized Governance
Sunny says that $ATOM has the most decentralized governance token in crypto.
The distribution of supply is more evenly spread compared to other projects.
He adds that $TIA, while promising, may not replace $ATOM due to its VC-centralized supply distribution.
$ATOM’s culture of decentralized governance adds value and sets it apart.
Sunny says that a decentralized governance system allows for control over monetary policy.
With a governance system, it is possible to modify monetary policy and implement protocol-owned liquidity injections.
Incentives can be provided to drive the usage of a currency as money.
He highlights that active intervention and policymaking were crucial in establishing the US dollar as the global reserve currency.
A governance system offers opportunities for $ATOM to play a similar role, but it depends on community decisions.
Sunny says that the community's decision to use governance led to changes in $ATOM’s inflation schedule, despite initial intentions outlined in its white paper.
This event marks the first triumph of governance-backed money.
He expresses support for the ongoing proposal and says the high inflation of LSD tokenomics, had negative consequences for the ecosystem.
An external factor like Anchor cannibalized Terra's ecosystem and disrupted its intended purpose.
Similarly, $ATOM’s staking rewards are cannibalizing its usage in other areas of the Cosmos ecosystem.
Lowering staking reward rates is seen as a solution to drive more demand for $ATOM in DeFi systems like Osmosis and Levana.
Liquidity Challenges and Protocol-Owned Injections
Sunny says that building liquidity in the stATOM-ATOM pool is difficult due to the need for LPs to deposit $ATOM without earning staking rewards.
Liquidity injections by the Cosmos Hub into Neutron and Osmosis have partially addressed this issue but are not considered a sustainable long-term solution.
Lowering staking reward rates would help drive more demand for $ATOM and $stATOM in DeFi systems.
He expects to see increased usage of $stATOM in various systems within Cosmos.
Projects like Levana, a perps platform on Cosmos, are likely to play a significant role in facilitating liquidity for these protocols.
Sunny says that $stATOM can serve as valuable collateral for new perp DEXs, helping bootstrap their development.
He plans to launch a perp DEX with a vault where users can deposit and engage in market-making activities.
Many projects will become profitable as they can reduce incentives and rely on protocol fees and revenue from auctions.
Fee Switches
Sunny says that Osmosis has recently turned on protocol fees, but it hasn't significantly affected trading volume or user behavior.
Volume remains stable regardless of the specific fees charged for different swap pool options.
He adds that during high volatility periods, volume tends to increase even without significant arbitrage opportunities.
Turning on fees has brought attention to osmosis as a protocol with real revenue-generating potential.
Sunny says that charging fees allows osmosis to generate revenue comparable to centralized exchanges like Binance.
With a steady stream of revenue, osmosis can implement various strategies to reduce fees and incentivize users.
Examples include trading tiers where fees decrease based on trading volume and referral bonuses for inviting new users.
The generated revenue can be used for growth techniques such as affiliate marketing, gamification, or NFT-based incentives.
Sunny says that fee switches are becoming more common among DEXs like Uniswap, and now Osmosis.
Users are willing to pay for security, trustworthiness, and a reputable brand.
Charging fees is seen as a way to provide economic value to users who are willing to pay for it.
Osmosis has gained attention and excitement due to its real protocol revenue generated through fee switches.
How does Osmosis fit into the modular narrative?
Sunny says that modularity can be described in multiple ways, including horizontal modularity and vertical modularity.
Horizontal modularity, like Cosmos' app chain concept, allows different chains to focus on specific functions.
He adds that vertical modularity refers to how integrated a system is.
Osmosis is considered modular from a technical perspective but may not be overly modular from an organizational perspective.
He believes in extreme vertical integration for better product experiences and performance optimization.
While components may be technically modular, excessive modularity can lead to fragmented user experiences and increased costs for users.
Contrasting approaches: Ethereum vs. Cosmos
Ethereum started as a single chain but is now exploring rollups with layer 2 solutions and app chains.
Cosmos initially adopted a horizontal stack approach but is now working on bringing together various app chains into a more seamless experience within Osmosis.
Building bridges requires specialized care and expertise, so Osmosis decided to outsource bridge development to partners like Axelar, Wormhole, and Hyperlane.
Strategic outsourcing allows Osmosis to focus on its core strengths while leveraging specialized services for complex tasks.
The Landscape of Liquidity on Cosmos
Sunny says that many crypto projects focus on building trading infrastructure, including layer-1s, layer-2s, and DeFi platforms.
Osmosis aims to vertically integrate various apps into its stack to create a shared liquidity model for increased efficiency.
By bringing together different app chains within Osmosis, a more seamless and efficient liquidity experience can be achieved.
Sunny says that any token that is not trying to build trading infrastructure should consider listing on Osmosis.
Osmosis has a large user base, high volume, and a great user experience.
$NTRN is a popular token but the team chooses not to list it on Osmosis to maintain volume on its own chain.
Astroport takes a different approach by deploying versions of their DEX on each chain they support.
Sunny says that Osmosis needs to capture some of the volume from other chains.
A pool for $NTRN was created on Osmosis, which already accounts for 10% of the volume happening on the Neutron chain itself.
Users prefer trading where they are already comfortable, such as using Osmosis.
Dispatching trades to other exchanges or DEXes may be considered to provide better liquidity for certain tokens.
Consensus Between Chains
Sunny says that when sending an order from one chain to another (e.g., from Osmosis to Avalanche), consensus needs to be derived between the validator sets of each chain.
Currently, Osomis outsources this process to the Axelar validator set, which acts as a bridge between the chains.
The Axelar validator set triggers smart contracts on the target chain using General Message Passing (GMP) protocol.
He adds that mesh security is important to ensure economic guarantees for both Osmosis and Axelar.
Combining the two validator sets through mesh security allows for increased economic security.
Sunny says that Osmosis can bridge different chains using protocols like Axelar or Wormhole, or a combination of both.
This enables users to access various functionalities within Osmosis without needing to go elsewhere.
The vision is to have osmosis as a one-stop platform for swapping, lending, and other functionalities.
The infrastructure is catching up to support this vision.
Liquid Staking and Unlocking Liquidity
Sunny says that liquid staking in Cosmos will allow for more money floating around while maintaining the same governance properties.
This will enable unlocking liquidity in Osmosis and other chains.
There may be concerns about security when moving stake tokens from chain to chain, but it is important to ensure that governance and distribution are not compromised.
When a protocol goes live, stakeholders can trade their staked tokens for liquid stake tokens.
These liquid staked tokens can then be used for trading or other activities on chains like Osmosis.
All transactions will be tracked back to the home chain to maintain security.
There may be concerns about security when bridging from one chain to another with liquid staking tokens.
It is important to consider potential risks such as rehypothecation and ensuring proper governance distribution across chains.
Important Links
Become a Premium member to unlock all our research & reports including access to our members-only discord server
Join thousands of sharp crypto investors & traders by becoming a Premium Member & gain an edge in the markets. For just $33.25/month you’ll get:
Premium access to the entire Revelo Intel platform
*NEW* Raise Alpha- Weekly reports on interesting project raises
*NEW* Sector Overviews - 90 day Reports with data and insights on key sectors
Launch Alpha - Weekly report highlighting new projects
The Trace - Real-time onchain alerts for smart money movements
Airdrop Guides - Reports on airdrop opportunities
Members Only Discord server
Analyst Insights reports - actionable trade ideas
Project Snapshots - Monthly protocol-specific performance reports
Project Breakdowns & Timelines - Deep dive 50+ page protocol-specific reports
Notes - Summaries of your favorite podcasts & AMAs