Josh Lee on Osmosis’ Groundbreaking New v7 Carbon Upgrade
Osmosis Co-founder discusses Superfluid Staking and 6 key takeaways from this upgrade
Last week marked the exciting release of Osmosis Protocol’s latest upgrade, the v7 Carbon Upgrade. We spoke with Osmosis Co-founder Josh Lee about it, including the much-anticipated new Superfluid Staking feature. But first, a quick refresher on Osmosis for anyone who needs it. Built using the Cosmos SDK, Osmosis is an advanced AMM protocol that enables developers to custom-make their own AMMs with multiple tokens and parameters. And as the Cosmos ecosystem’s leading DEX, Osmosis importantly connects nearly 40 different blockchains, thereby providing a seamless trading experience for its users.
So why is everyone hyped about Superfluid Staking in particular? Put simply, this feature allows OSMO token holders both to provide assets as LPs to designated liquidity pools, and to stake these very same assets in order to secure the network. The noted user benefits include more rewards and a significantly better-secured chain.
“You don’t want a situation where you have too many assets on top of the chain being secured by a very small number of staked tokens,” Josh Lee explains. “Small improvements like [Superfluid Staking] can show that Proof-of-Stake AMMs have a different nature from AMMs that exist on Proof-of-Work networks such as Ethereum.” And increasing OSMO’s capital efficiency, according to Josh, is an important step in that direction.
Superfluid Staking also proves the viability, and even the necessity, of application-specific blockchains, or appchains. “Until now, everyone has talked about appchains but it’s been hard to understand how they would work,” he continues. “By providing a feature you can actually use, Superfluid [becomes] a very tangible talking point.”
From Superfluid Staking and the rise of appchains, to the pivotal role of governance and validators, here are 6 key takeaways from this upgrade.
1. A Strong Case for Appchains
“We’ve been talking about how the future of blockchain is going to be application-specific chains,” Josh says. “But I don’t think we’ve seen real examples of what that means.” With the release of Superfluid Staking, there is now a concrete example of what is possible with a chain that is also an AMM; the ability of LP tokens to interact with the base layer of the Osmosis chain itself is possible precisely because it is an appchain.
And according to Josh, this is only the beginning– both in terms of what an AMM can do, as well as what other appchains could achieve. For instance, the use cases and benefits of building an NFT chain or gaming chain. “Valuing the price of an NFT is very hard,” he admits. “But assuming some team figures that out, could the asset value of an NFT be locked in to provide additional economic security?” He also hopes that the success of Superfluid Staking invites other players — especially ones building smart contracts — to consider the benefits of building appchains instead.
2. Security, Security, Security
A strong security layer should always be the top priority, as it is ultimately the foundational layer of a chain. “It may not be as fun as new pools going live with high APRs,” Josh explains. “But the reason you’re able to ape into different pools and earn liquidity rewards is because of this robust security layer.”
And while Josh admits this is an upgrade that slightly favors LPs over stakers, it does still make Osmosis a more attractive chain to stake. An issue initially concerning the team was how much smaller the amount of OSMO staked on Osmosis was than the amount of OSMO being secured. Theoretically, this could incentivize malicious actors to steal funds. But with the release of Superfluid Staking, and the gradual rollout to more pools, he expects to see an increase in staked assets.
Superfluid Staking is currently only enabled for 14-day pools for the same reason. Given that the current unstaking period for OSMO is fixed at 14 days, it makes sense that 14-day LP bonds are exclusively eligible for Superfluid. “If you’re trying to make the security assumption that some of these LP tokens are securing the chain,” he remarks, “at the very least, you need equal or longer unbonding periods.”
3. Governance Will Play a Key Role
Another chief aspect of Superfluid to highlight is the role of governance. This will allow token holders to 1) choose which pools will become eligible for Superfluid Staking, and 2) make changes to the Superfluid discount factor. “Obviously we don’t want the team to decide,” Josh explains. “It’s important that the team builds the tools enabling users to choose how they want Osmosis to upgrade.”
As Superfluid Staking is now primarily an Osmosis-specific product (you can only Superfluid Stake with OSMO), future pools will have to be high-liquidity OSMO pools with low price action volatility. But going forward, governance will be able to vote to include a number of different pools.
The Superfluid discount factor is a parameter that reduces how much OSMO from LPs can be Superfluid Staked to 50%. This means that if you have 100 OSMO and 100 ATOM in a pool, you can only Superfluid Stake your 50 OSMO. Initially implemented to account for market volatility and slashing risks, governance will later be able to adjust the discount factor depending on market conditions and security factors.
4. Choose Your Validator (Carefully)
With great power comes great responsibility. One current characteristic of Superfluid Staking is that you can only designate a single validator. Another is that you cannot override your validator when it comes to their votes (unlike in regular staking, your validator takes over governance for you). And lastly, there is a slashing risk that affects not just your staked OSMO but your entire LP shares. So if your validator double signs and gets a 5% slash, 5% of your total LP shares will be slashed and sent to the community pool. There is also a 14-day unbonding period to keep in mind when switching validators, during which time you are not earning any rewards on your tokens.
All this is to say that when choosing a Superfluid validator, you must look for a solid track record in terms of operations, infrastructure, and how they have voted in governance. As Asia’s top validator, we are backed by the biggest investors in South Korea and deeply trusted by the protocols we support, including Osmosis. Our enterprise-grade infrastructure is built with the aim of making participation in activities like staking simple and accessible to all. To stake with us, simply select DSRV as your validator for Superfluid Staked OSMO.
While these validator parameters are pretty much set for the moment, the team welcomes community feedback. “One idea that we had was to have an on-chain validator preference, where you designate the order of validators and desired delegation ratio,” Josh shares. “The downside is that it becomes a much more complex implementation.” Simplicity was a priority for this upgrade; in the long run it will depend on the community’s needs.
On a last note, relayer incentives will most likely be determined by the IBC core team and implemented in the form of delegations.
5. Interfluid Staking: A Little Teaser
Superfluid Staking is an internal Osmosis mechanism that enables the OSMO not securing the chain to begin securing it. Interfluid Staking, on the other hand, will increase the capital efficiency of the other token in Superfluid Staking-eligible pools. This will allow ATOM in Pool #1 ATOM/OSMO, for instance, to be used to secure the Cosmos Hub Chain. Any slashing that occurs on the other network will be sent to Osmosis over IBC, and slashed accordingly on Osmosis.
“We would like Interfluid Staking pools to be decided on by Osmosis governance,” Josh explains. “But at the same time, it should be able to happen permissionlessly once the other team is ready.” This will be a major new development, because it promotes the notion of an interchain and multi-chain universe while simultaneously boosting the security of the chains involved. Another point Josh makes is the importance of strengthening cross-chain collaborations, as cross-chain ecosystems can suffer from a loss of composability. With Interfluid Staking, the team hopes to prove that composability can still exist within a multi-chain ecosystem.
6. Permissioned CosmWasm as an App Store
While we have mostly looked at the Superfluid Staking feature of the v7 Carbon Upgrade, another notable mention is the permissioned CosmWasm. This feature will effectively allow other applications to access Osmosis DEX features and liquidity, instead of having to launch and operate their own chains. The reason for setting it as permissioned is to prioritize apps that make sense on Osmosis, and that make full use of its specific features.
Making a comparison to Apple’s App Store, Josh explains that “this CosmWasm layer lets us focus on building the best DEX there is, so when someone else has an idea for a product, we are able to leverage their creativity and resources.” And fast-growing applications will always have the option to eventually spin out into their own chains.
This feature really speaks to the overall philosophy of Osmosis, notably its emphasis on interoperability and supporting an interchain ecosystem. “You don’t want to become a monopoly, you just want to be very good at that one thing you’re good at,” Josh tells us. “Permissioned CosmWasm allows others who might be very talented at building secondary markets to use Osmosis instead of building a competing DEX. Then you have a more symbiotic relationship where someone else’s success helps you succeed, and because you succeed, you allow others to.”
Special thanks to Josh for sharing his insights with us! We hope this article provides users with a better understanding of the significance of this upgrade, and how it’s helping to shape this space. And as always, stay tuned for upcoming content!
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