Can Mesh Security Vitalize the Osmosis Ecosystem?

With the development of blockchain technologies like IBC, application-specific blockchains, known as application chains or appchains, have garnered increasing attention as a solution that provides sovereignty. Appchains allow application developers to control and customize various aspects of their blockchains to meet specific needs and achieve optimal results. This article will look at a notable appchain project, Osmosis, and discuss why it’s worth paying attention to and how its journey of innovation will unfold in DeFi.

Application-specific blockchains give developers the ability to maintain sovereignty over their blockchains, enabling them to unleash more creativity. With appchains, developers have the flexibility to explore and experiment with the best solutions for their ideas. They can decide which framework they want to use to build their state machine, which consensus mechanism they want to govern their application-specific blockchain, and what requirements they want to set for their validators. As tailor-made standalone blockchains, appchains can optimize their design and balance tradeoffs to maximally support the application they are meant to support. Such sovereignty also allows their communities to have full control over how they want respective projects to proceed.

It needs to be noted that appchains are not a panacea for all projects but rather a choice of subjective trade-offs. Poor synchronous composability and liquidity fragmentation are among some of the issues with appchains mentioned by critics. That said, just like liquidity on general-purpose L1s has become concentrated within a few popular applications, the same is likely to happen in the world of appchains where various features will become consolidated into the core products of a few extremely liquid appchains, making fragmentation much less of an issue. This seems to be what Osmosis is trying to do within Cosmos.

Concentrated Liquidity

DeFi projects have a less-than-satisfactory user experience, with complex procedures, costly transaction fees, network congestion, and low liquidity. As an appchain DEX and emerging liquidity hub within the Cosmos ecosystem, Osmosis is trying to grasp the power of appchains to solve these issues. With Osmosis, users can create liquidity pools with specific parameters, such as bonding curves and multi-weighted asset pools. Osmosis has already introduced a number of innovative features to the market, including superfluid staking, which allows users to stake LP share tokens containing $OSMO to secure the chain, incentivizing user participation while driving value back to the community.

As we have mentioned in our previous articles, in Cosmos, liquidity means security. Osmosis launched during the early stages of IBC when liquidity within the entire ecosystem was very limited. To address this issue, Osmosis introduced Balancer-style pools and took incentive measures that attracted a significant amount of liquidity into Cosmos. However, as funds were scattered across many pools, much of the liquidity remained underutilized.

Concentrated liquidity emerged to allow liquidity providers (LPs) to choose to provide liquidity within a specific price range. Concentrated liquidity opens up new opportunities for LPs to refine their liquidity allocation strategies. More importantly, according to an announcement by Osmosis, concentrated liquidity will provide a 100x to 300x increase in capital efficiency, meaning that a pool can have significantly less liquidity for the same volume and still not cause slippage for traders.

Supercharged Pools, Osmosis’ take on concentrated liquidity, are expected to improve the capital efficiency of liquidity pools further. This model allows users to collect rewards when requested, without waiting for specific time windows. Additionally, Supercharged liquidity positions will not be bonded. But bonding will still be required if a user wishes to participate in Superfluid Staking.

Mesh Security

Another important innovation of Osmosis and a natural complement to concentrated liquidity is Mesh Security, which is an innovative cross-chain security model designed to increase the economic security of the Cosmos ecosystem. The core idea behind this model is cross-chain staking, which addresses security vulnerabilities like validator takeover that are present in traditional cross-chain models. In traditional interchain security models, security is unidirectional. One approach is for the entire validator set of the base blockchain to validate any new chains in the ecosystem. While this approach is efficient, it results in a lack of sovereignty for ecosystem chains. An updated approach is to permit a subset of the validators to validate an ecosystem chain. This approach is more scalable but there’s still no sovereignty. In contrast, with Osmosis’ Mesh Security, security can flow bi-directionally. Mesh Security not only enables ecosystem chains to have their own sovereign validator sets but also allows two chains to provide security to each other.

By allowing delegators with staked tokens on one chain to restake their bonded tokens to validators of their choice on the partner chain, Mesh Security allows Cosmos chains to consolidate the value of their validator stakes against security attacks, increasing the economic security of a Cosmos chain. In all, Mesh Security leverages the economic strength of $OSMO to secure the Cosmos ecosystem while getting ATOM’s protection at the same time.

We believe Mesh Security model will bring a long-term boost to the Osmosis ecosystem. Mesh Security can discourage malicious validator behaviors, thus preventing consequent slashes and ensuring the safety of transactions. It can also improve protection against MEV attacks, ensuring the fair ordering of transactions. Mesh Security, combined with concentrated liquidity that improves transaction efficiency, will create a more reliable and secure trading environment for users and ecosystem participants, driving the sustainable development of Cosmos.

The Way Ahead for Osmosis and DeFi Appchains

Osmosis is working towards providing a first-class user experience to its users, including offering margin trading and lending as part of its core product. They are working with Mars Protocol on integrating lending directly into the Osmosis trading engine. The team is also exploring several creative approaches to dealing with MEV such as threshold encryption, fee discrimination, building Flashbots-like features into the base protocol, and internalizing MEV.

As a trailblazer in DeFi appchains, Osmosis takes advantage of the robust developer tooling and asynchronous composability provided by the Cosmos ecosystem and has the potential to bring significant impact to the overall DeFi ecosystem.

On Mesh Security, Osmosis may need to work to address some of the challenges and risks associated with Mesh Security, such as centralization risks and the complexity of cross-chain collaboration and governance.

On MEV protection, Osmosis has already demonstrated its capabilities and advantages, especially in threshold encryption. This paves the way for more effective MEV protection solutions, potentially giving Osmosis a competitive edge over similar projects in the Ethereum ecosystem.

Building on liquid staking which offers competitive rates and moderate lengths of lock-up periods, further innovations like demand loans and leveraged staking can provide users with more flexible liquidity management options, further increasing capital efficiency and staking rates.

Last but not least, we are bullish on innovations around stablecoins. Stablecoins have the potential to become an important pillar for Osmosis’ development. By introducing a diversified range of innovative stablecoins, Osmosis can consolidate its position as a liquidity hub within Cosmos, facilitating the development of its liquidity market. Expectedly, users will benefit from more diversified trading and investment opportunities to meet their different needs.

About Bing Ventures

With a team of veteran financial professionals, researchers, and technologists, Bing Ventures is a pioneering venture capital firm that backs startups and entrepreneurs driving the next wave of Web3 and blockchain innovations.

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