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Guide to Osmosis

January 26, 2022

Coinbase Cloud now supports participation on Osmosis

  • Osmosis is a proof of stake (PoS) blockchain with a decentralized exchange application enabling users to provide liquidity, swap, and in the future natively stake the tokens of blockchains from across the Cosmos ecosystem.

  • Osmosis serves as an automated market maker (AMM) that connects to other Tendermint‐based blockchains, creating a heterogenous and interoperable cross‐chain trading experience for users.

  • Run your own dedicated Osmosis validators with Coinbase Cloud to actively secure the network. Clients can earn participatory rewards through self‐staked tokens and may also earn fees through tokens delegated to their validators.

  • OSMO holders can delegate their assets to Coinbase Cloud's public validator to earn a share of participatory rewards.

An introduction to Osmosis

Osmosis is a proof of stake blockchain that serves as an automated market maker (AMM) protocol for the Cosmos ecosystem. AMMs are typically pools of digital assets managed by a smart contract used to enable decentralized trading. The liquidity pools and smart contracts replace the order book system; liquidity providers lock their assets into the pool and earn fees when people trade in these pools.

Unlike typical smart contract‐based AMMs, Osmosis is built using the open‐source Cosmos SDK. Osmosis’ goal is to enable developers to customize and deploy AMMs in the Cosmos ecosystem and to innovate in liquidity pools by using Osmosis’ governance processes and interoperable builder toolkit. OSMO, the native token of Osmosis, is used for governance and paying transaction fees.

The Cosmos ecosystem has a vision of full interoperability between Tendermint‐based chains. To reach this goal, the Inter-Blockchain Communication Protocol (IBC), a protocol for relaying messages between independent distributed ledgers, was created to connect Tendermint‐based blockchains to one another. Osmosis users can provide liquidity, swap, or stake the native tokens of the blockchains that use the Tendermint IBC, with Osmosis serving as the liquidity gateway into the Cosmos ecosystem by enabling IBC deposits and withdrawals from one simple interface.

The Osmosis decentralized exchange will include three key features:

  • Self-governing liquidity pools: Liquidity pools (LPs) on Osmosis are completely customizable via governance. According to the Osmosis team, nothing in the underlying structure of Osmosis’ AMMs is hard‐coded. LP providers can vote to change all of the pools’ parameters, including curve algorithms, TWAP calculations, swap fees, token rates, reward incentives, and more.

  • Superfluid staking: When users deposit any two supported tokens into an Osmosis liquidity pool, they will be able to stake their liquidity shares to validators on the tokens' chains. Therefore the deposited asset will not only earn its share of fees from the liquidity pool’s swap transactions, but will also earn rewards from helping secure the chain, allowing users to simultaneously provide liquidity to the Osmosis AMM and still participate in the native ecosystems of the tokens they hold by staking. For example, an OSMO<>AKT pool’s LP tokens will be able to secure both the Osmosis and Akash networks.

  • MEV resistance: Osmosis was conceived with the goal of MEV (Maximal Extractable Value) resistance at its core and it includes solutions to help limit MEV. You can learn more about Osmosis' vision for preventing MEV in Sunny Aggarwal and Dev Ojha's interview with Zero Knowledge.

As a PoS network, Osmosis is secured by validators who produce blocks for the blockchain and earn block rewards in exchange for providing these services. Token holders with the minimum required OSMO can operate an Osmosis validator with ease with Coinbase Cloud. Validators may also attract delegated OSMO from their community members, increasing their overall stake to increase the likelihood of being selected to perform work and earn rewards.

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How to participate on Osmosis

Validator nodes are the nodes that participate in Osmosis’ consensus, propose blocks, and verify blocks proposed by other validators. At genesis, validator nodes are only expected to participate in consensus. However, over time, validators will be able to incur more responsibility in the ecosystem, such as acting as price oracles or bridges.

Osmosis’ other node types are:

  • Full nodes, used to interact with the Osmosis blockchain

  • Archival nodes, used to store the full historical state of the chain

  • Seed nodes, used to help nodes find and connect to peers

  • Sentry nodes, used to stand between a validator and the rest of the network, ferrying messages and protecting the validator from DDoS (distributed denial of service) attacks

At launch 100 validators are included in Osmosis’ active set, determined by total OSMO staked. While there is no minimum self-bond to activate a validator on Osmosis, to be in the active set a validator must have more stake than the 100th validator in the network. As of October 2021, the variable minimum to enter the active set is approximately 31,000 OSMO.

The active set can eventually scale to 125 via governance proposals. A validator’s chance of being selected to perform work, and to earn rewards for doing so, is also determined by the overall weight of OSMO staked to the validator including both self-bonded stake and delegated.

Those holding any amount of OSMO may delegate their tokens to an active validator to help secure the network and earn a portion of the rewards. Validators set a commission fee charged to all delegations pro rata; fees range from a minimum of 5% up to 100% of total rewards earned by the delegators, depending on the validator’s goals. As with most Tendermint‐based protocols, a validator also specifies the maximum commission fee they could ever charge, along with the maximum rate of change in the commission fee per day (e.g., setting a 1% maximum change rate means the validator can increase or decrease their fee by 1% per day).

There is a 14 day unbonding period for delegation, during which time the unbonding OSMO does not earn rewards but is eligible for losses due to slashing. Delegators may redelegate to a different validator one time with no unbonding period; any subsequent redelegations made within 14 days of the first redelegation are subject to a 14 day redelegation period. Delegators also have full voting rights within Osmosis’ governance.

Rewards and economics on Osmosis

Parameter

Token name

OSMO

Initial token supply

100 million OSMO

Total planned inflation (pa)

76%, with inflation cut by 1/3 per year

Maximum token supply

1 billion OSMO

Current token supply

170 million OSMO

Active set of validators

100

Target staking rate

N/A

Expected reward rate (pa)

160% (Oct 2021)

Minimum validator stake

None

Active set minimum

Variable, currently 31,000 OSMO (Oct 2021)

Minium delegation

None

Warm-up period

1 epoch (~24 hours)

Redelegation period

None for first redelegation, 14 days for subsequent redelgations

Unbonding period

14 days, no rewards earned during this time

Reward distribution

On-chain

Reward compounding

Manual

Reward payout frequency

Daily, per epoch

OSMO, the native token of the Osmosis network, is a governance token used to vote on proposals, as well as to pay transaction fees and to provide rewards to participants for providing security to the chain.

The current expected annual reward rate for Osmosis is 160% per annum for validators. Each epoch (daily), 25% of released tokens will be issued to validators and their delegators as reward for their work participating in the chain’s security.

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There are currently three types of fees paid by users on Osmosis:

  • Transaction fees are paid by any user who transacts on the chain, and are variable depending on the computation and storage costs used by the transaction along with the minimum gas cost determined by the block’s proposer. Transaction fees are distributed to OSMO stakers and validator operators can choose which Tendermint assets to accept for fees in blocks their validator proposes.

  • Swap fees are charged to any trader swapping assets on Osmosis’ decentralized exchange. Swap fees are determined by the liquidity pool’s self‐defined parameters and the size of the trade. Fees are distributed pro‐rata to the pool’s liquidity providers.

  • Exit fees are a percentage of LP shares self‐defined by a pool’s parameters, and charged to liquidity providers who are pulling their liquidity out of a pool. The LP shares are burned, effectively distributing their value to the other liquidity providers in the pool.

An additional 45% of tokens released per epoch are designated as rewards for liquidity providers in Osmosis’ pools—a parameter which can be changed by governance if the community chooses. Any designated rewards that are reduced from liquidity mining rewards by governance would instead be directed to the Osmosis community pool.

Inflation on Osmosis is structured around a "thirdening" model with token issuance cut by one‐third each year. Following the initial released supply of 100m OSMO in June of 2021, in year one 300m tokens will be released, in year two 200m, and so on, until a maximum supply of 1bn OSMO issued is reached.

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Token release schedule Source

Risks of participation on Osmosis

Slashing is enabled in Osmosis. A validator committing a slashable offense will result in loss of funds and missed rewards for both the validator operator and any delegators who have staked their OSMO to that validator.

Though there is no slashing for downtime, after 50 hours of downtime validators are jailed and must wait for a cooling period (60 seconds) to elapse before submitting an un‐jail transaction to rejoin the active set. While jailed, validators are not eligible to participate and earn rewards. However, a delegator may choose to redelegate their stake to a new validator at any time during which the validator to which they were delegated is jailed.

Double‐signing results in a 5% slashing penalty deducted from the validator’s overall stake, including self‐bonded and delegated tokens. The validator is also jailed and is not eligible to submit an un‐jail transaction, effectively removing the validator permanently from participating in the network.

Governance on Osmosis

Governance is identified as a critical piece of the Osmosis ecosystem by their team, citing that the rate at which Osmosis will be adding new features will rely on the active participation of the community in passing protocol upgrades. In this spirit, Osmosis is self‐described as being "designed such that the most efficient solution is reachable through the process of experimentation and rapid iteration by leveraging the wisdom of the crowd."

Any OSMO holder can participate directly in Osmosis governance via the Osmosis app or CLI, and any OSMO holder may submit a new governance proposal by submitting a small deposit which functions to prevent spam. Delegators inherit the vote of the validator they are delegated to unless the delegator actively submits a vote themselves, which overrides their inherited vote.

5% of tokens released per epoch (daily) on Osmosis are directed to the Osmosis community pool. This pool is governed by community governance, and any OSMO token holder may submit a proposal for a vote to improve or build the ecosystem. An initial request for proposals published by the Osmosis team encouraged community members to submit governance proposals to develop pool‐level analytics, expand the chain’s infrastructure, improve governance tooling, and more.

Why run Osmosis nodes?

  • Governance plays a crucial role in Osmosis' success. Pool composition, pricing curves, supported assets, swap fees, and more are all determined via governance, so having an active voice is crucial to those who are invested in the network. Running a validator provides an outsized voice in governance as delegators inherit the votes of their validators by default.

  • Future releases of superfluid staking modules can directly increase the potential for active validators to earn rewards, as liquidity providers will be able to simultaneously stake their LP shares.

  • Osmosis’ deep liquidity and easy access to Cosmos‐based tokens make it an attractive target for DeFi builders and exchange integrations. First movers as participants in the ecosystem will benefit from early‐stage high returns and an outside portion of transaction fee rewards.

  • Validator operators can attract delegation from their community to increase overall stake and move up in the active set, increasing the likelihood of being selected to perform work and earn rewards and increasing revenue from operator fees for providing the service of validation.

Why choose Coinbase Cloud?

Participate with confidence based on Coinbase Cloud's expertise and experience with other Tendermint‐based chains including Cosmos, where we were active community members in the Cosmos Gaia testnet for over a year before its mainnet launch. Coinbase Cloud is committed to supporting the growth of the Cosmos ecosystem and our technical experts maintain close relationships with the Osmosis team along with the other Tendermint-based chains our platform supports.

  • Leverage our deep experience building on other Tendermint-based chains including Cosmos, Terra, Crypto.org, Oasis, and Provenance, as Bison Trails has been building Tendermint infrastructure since the Cosmos Game of Stakes launch.

  • Coinbase Cloud is trusted by the highest tiers of financial institutions for quality, reliability, and security.

  • Participate with industry‐leading security, including offline‐generated validator signing keys and HSM‐supported secure backups.

  • Protect your validator nodes from DDoS attacks with our unique node architecture and Equinix‐metal infrastructure.

  • Easily access data from Osmosis to analyze trends or build robust applications.

  • Manage governance and participation with insights and guidance from our Protocol Specialists.

  • Delegate to Coinbase Cloud's non-custodial Osmosis public validator to earn staking rewards without operating a full validator.