"Undercover Bitcoin Maxi": A Talk With Osmosis Co-Founder Sunny Aggarwal

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With a market capitalization of over $740 million, Osmosis is currently the third-largest decentralized exchange in crypto and a central piece of the Cosmos ecosystem. Its co-founder, Sunny Aggarwal, is also the co-founder of Sikka Tech, which builds infrastructure for decentralized networks and is one of the biggest validator sets on Cosmos Hub. 

Another thing to know about Aggarwal is that he showed up on stage at Cosmoverse this year wearing medieval chainmail armor for the sole purpose of making a pun about mesh security.

So it was with enthusiasm that Crypto Briefing sat down to talk with him about Osmosis developments, ATOM 2.0, the Terra crash, bridge security, Bitcoin, and the Cosmos ecosystem as a whole. 

Crypto Briefing: Your name does not appear on the new Cosmos Hub whitepaper, but it’s hard to think you didn’t collaborate with the authors. Were you involved in fashioning the proposal or consulted?

Sunny Aggarwal: Not really. So keep in mind I work on Cosmos, the ecosystem, and then Osmosis, the chain. I don’t really work too much on Cosmos Hub/ATOM stuff. Because ATOM is just one thing in the ecosystem. It’s not something I focus on, or spend too much time on. 

But I think a lot of these ideas that went into the ATOM 2.0 stuff came from discussions that we started. This whole, like, Interchain Allocator module—that actually started as a joke that I made nine months ago. This was when OlympusDAO was all the hot rage and everyone was asking “Oh, what’s going to be the OHM token of Cosmos?” There were like five people trying to build Olympus on Cosmos. And at the same time, this is when all the discussion was starting around needing some new vision for ATOM, of what it was going to be. So I was just hanging out with people there and I was like, “What if ATOM is the OHM of Cosmos.”

It started as a joke, like, “ATOHM”, but then we started thinking about it and we realized, actually, this makes a lot of sense. What was Olympus at the end of the day? It was a way of doing protocol controlled value—PCV—and having it be used to increase the protocol’s own holdings. Right? The way they applied it was this very “ponzinomics” sort of mechanism, which wasn’t great, but the fundamental idea of the bonds and the PCV were directionally correct. So that became a big part of the Interchain Allocation system.

And obviously, a lot of Interchain Security stuff and all of that—these are also things that I have been contributing to. 

CB: You said that nine months ago people were discussing Cosmos and ATOM extensively. Did anything in particular happen to trigger this conversation?

SA: No, that was just when a lot of the discussion was starting. Like, “Hey, what are we doing now with Cosmos Hub and ATOM?” What happened is that the ATOM community made this bet in 2021 on Gravity DEX and the Gravity Bridge. And those didn’t really play out very well for them, because Gravity DEX got outcompeted and Gravity Bridge moved onto its own chain. So I think that’s why around December of last year these discussions were being held, like, “Okay, what’s the next thing Cosmos Hub should try to do.” 

CB: If I understand correctly, the Interchain Allocator may end up giving Cosmos Hub an advantage over Osmosis in terms of liquidity provision. Is there a concern that the Hub may end up siphoning liquidity away from Osmosis?

SA: No, I don’t think so. I don’t see why the Allocator would siphon liquidity from Osmosis. At the end of the day, what matters is where your users are, right? Today, when someone wants to buy Cosmos-based assets, they come to Osmosis. And liquidity follows where the users are. Institutional volume follows liquidity, but liquidity follows retail volume. 

So our goal has always been to build the best product, build the best UX. Everything else will fall into place. Just because the Cosmos Hub has ATOM to spend… First of all, to build liquidity markets you don’t need just ATOM, you need two sides of the market, you need the other tokens. And all the other projects launched in Cosmos know Osmosis is the go-to market.

CB: How do you think Osmosis fits in the Cosmos ecosystem if ATOM 2.0 is implemented? Does its place change? Does it stay the same?

SA: I think Osmosis a little bit independent of what happens to ATOM. Osmosis has its roadmap that it’s focused on shipping—like building this DeFi ecosystem. But having more strong chains in the Cosmos ecosystem is just good for everyone. As Osmosis, we’re already the biggest DEX and liquidity venue. If Cosmos as a whole grows, that’s good for Osmosis. So if ATOM 2.0 helps the Cosmos ecosystem grow as well, at the end of the day, that’s helpful for us. But if it doesn’t work, I don’t think it would impact Osmosis significantly.

CB: Bridges have proved to be vulnerable to exploits, especially in the past year. Any fear that the Cosmos ecosystem as a whole may end up becoming a target when more liquidity flocks to it? And is this something that’s worrying?

SA: Yeah, definitely. As the amount of assets sitting on these bridges increases, they become more of a honeypot. And you know, the recent BNB Chain exploit involved some Cosmos software. There’s definitely a need for more focus on security. So we’re doing that right now. After the BNB Chain hack, we took time to do internal auditing of our software stack again. And we found some concerning stuff—that’s what this whole dragonberry thing was about. We found an issue and we were like, “Hey, okay, let’s have this rollout to patch it for the ecosystem as a whole.”

So I think there’s going to be a renewed effort towards that. But I think there’s also other ways of increasing the security of things. For example, we are huge believers in this idea of rate limiting. I think that rate limiting is how you build security. Axelar, which is our primary bridge provider for Osmosis with EVM, has implemented rate limiting, and we’re actually adding rate limits to Osmosis’ IBC in our next upgrade in mid-November. What that does is that we can decide to only allow, say, 20% of our bridge’s (or our IBC channel’s) TVL to flow off every six hours, or something. You want these circuit breakers. If you look at traditional systems they always have circuit breakers. 

We’ve always been believers in Cosmos, at the consensus layer, of this idea of safety over liveness. If there are ever issues, if something is acting abnormally, the consensus protocol pauses. We should be building those ideas, “safety over liveness,” into our application-level designs as well. We’re building them into the bridges, and that’s one thing that will be live very soon. But we should also build them into the AMMs, build them into lending protocols… I think more things need these rate limiting-based circuit breakers. Honestly, the impact of a lot of past bridge exploits could have been massively mitigated if they had these sorts of things.

CB: Mesh Security decreases the ecosystem’s reliance on Cosmos. Has there been pushback from Interchain Security advocates? It’s my understanding they believe Interchain Security would provide further utility to ATOM and help position the coin as a reserve currency for the entire ecosystem.

SA: Yeah, but I think any pushback has just been a knee-jerk reaction, like, “Oh, this is competition against Interchain Security.” If you ask the people who are actually building Interchain Security, they’re like, “Oh, yeah, this is great, this is obvious.” 

All Mesh Security is saying is that we need a free market for Interchain Security. There’s not going to be one hub-and-spoke system, right? We always knew there were going to be multiple security providers. We will always want people to be able to choose between them. You don’t actually have to pick just one provider; there’s no reason you can’t get security from multiple providers. So Mesh Security will enable a better free market for security.

And why not run this bi-directionally as well? There are different markets. You have your bigger chains, let’s say your Osmosis and Axelar—already very high-value blockchains—and they both want to make sure the other chain is secure, and they want to have more security themselves because it would suck for Osmosis if Axelar got hacked, and it would suck for Axelar if Osmosis got hacked. So there are natural economic relationships between these chains that are going to want to forge security alliances.

I also think Interchain Security is going for a very different market, which is the bootstrapping of new chains. It’s more for, like, “I don’t want to launch a chain, I don’t want to have a validator set, I just want to launch fast.” I think that’s what the Interchain Security market is going after. I think these are two very different markets. I think Mesh Security coupled with Interchain Security will make a freer market. So yes, the Hub will provide security, but Osmosis will maybe also provide security, Juno will provide some, and Saga, etc.

There are a lot of projects today launching on top of Osmosis, but we eventually want them to spin off onto their own appchains. Mars is starting like this. Mars is launching on Osmosis and spinning off onto its own blockchain. We want to be able to do Mesh Security with this ecosystem of projects that are spinning out of the Osmosis chain.

CB: The staking APR of OSMO tokens is at 22.69%. From my understanding, this solely comes from token emissions. Liquidity providers also receive vast liquidity mining rewards. Is there any plan in the works for Osmosis to detach itself from emissions and rely more on actual sources of revenue? 

SA: Yeah, definitely. That’s something we are working on right now. The Skip team put up a proposal [in the Osmosis governance forum] to build more MEV-capture tools into the protocol. I think that would be a big source of revenue. And anyone can make a proposal to turn on a fee switch. For a while, the protocol wasn’t charging any fees on swaps—that was a growth tactic. If the community feels that now’s a good time to turn fees on, that’s a pretty reasonable thing to do. 

Our view has always been that generalized blockchains don’t have actual revenue sources. Transaction fees are never going to be a meaningful source of revenue. So what are possible sources of revenue? I think either app fees (which, in our case, are swap fees) or MEV capture. Those are the two things that will eventually replace emissions. But the goal right now is to keep building up more volume. Both the swap fees and the MEV capture are dependent on the amount of volume in the system. So the number one goal right now is to do whatever we can to drive up volume rather than thinking short-term.

CB: I was going to ask you about Skip. The satellite looks pretty cool. How do you think distribution will work? Will the MEV-captured value be distributed among OSMO holders, DEX users, LPs? Or all of them?

SA: It will obviously be up for governance. But for me, it makes sense that a lot of it goes towards OSMO stakers and then into the community pool. Yeah, probably a split between the two.

CB: What have been some of the challenges for Osmosis during the bear market?

SA: I mean, the value of OSMO emissions has gone down. Which means we have to be a little bit more conservative, especially with our grants and stuff. There’s a grant program that started off with a much bigger treasury than what it has right now. So we have to be a little bit more conservative with that. 

Actually, I honestly think the biggest impact for us was the Terra crash. Just the impact that Terra had on Osmosis specifically and the Cosmos ecosystem as a whole. That was probably the biggest thing for us personally. But there’s been good and bad sides to it. The bad side is obvious, right? But it’s been very interesting to see a new inflow of developer activity on Osmosis and in Cosmos from Terra. I tell people that Terra was like a supernova: it exploded, but it sent stardust throughout the cosmos. Now, all of these developers from the Terra ecosystem, which was quite large—I’d say the vast majority of them have stayed within Cosmos and are building new appchains. And some are building on Mars, or on top of Osmosis. So I think that’s been one of the things that triggered new growth and excitement around Cosmos. 

CB: That’s fascinating, because after Terra collapsed we saw a lot of chains, like Polygon and Algorand, trying to poach Terra developers. 

SA: Yeah, you had all these projects that were dangling these giant bounties in front of people. But I think all the high quality developers really resonated with Cosmos. I mean, they went to Terra because they believed in this appchain idea, right? Terra was an appchain. It was maybe a bad choice of how to design an appchain, but you know, I think a lot of them believed in this idea and wanted to stick around in this ecosystem. They knew the stack well, and they really aligned with the philosophy. Even before the crash, Osmosis was the biggest DEX for UST, so there was already quite a bit of community overlap, as it was. 

CB: Would you mind going into detail about how the Terra crash impacted Osmosis?

SA: I’m actually working on a blog post on this right now, I’m going to publish on the six month anniversary of the crash. Look, half of the liquidity on Osmosis was made up of UST and LUNA at some point. Maybe slightly less than half. And the way that Osmosis is structured is that, as these two tokens crashed, people sold out of those assets into OSMO, then sold OSMO into ATOM, and then sold ATOM onto centralized exchanges. So the crash had a price impact on OSMO as well, and a lot of our TVL was wiped out—half of it just went to zero. 

But generally, in crypto at large, my hottest take is that Terra’s mechanism was interesting. I think they got greedy and the Anchor scam basically killed the goose. I don’t know, I think it’s a setback. One of the reasons I really believe in crypto, that I really like working in crypto, is that I like experimenting with algorithmic monetary policy. And I think that Terra just set that back a lot.

CB: Does Osmosis have plans beyond the IBC ecosystem? Are you looking to build on LayerZero, or Celestia? 

SA: So we already use Axelar as our primary bridge for connecting to non-IBC chains. We made the decision to choose just one bridge provider, so we can focus on building much deeper integrations, much better UX. So if you go on the Osmosis website today, if you try to deposit ETH, it’s integrated really seamlessly into the website. You don’t even have to leave our website. I think that’s the UX that people want and have come to expect. 

Eventually, the goal is to become more than just an IBC DEX. We want to make it so that, if you have AVAX on Avalanche and you want to swap it for ETH on Ethereum, you should be able to do it in a single click. We’ll be bigger than just the Cosmos DEX.

One fun fact is Osmosis is currently the second biggest DEX for DOT. We’re slowly going to be adding more of the native assets of other ecosystems, starting with ones that don’t have very well developed internal DeFi ecosystems, like Polkadot.

CB: I remember you mentioning that Osmosis was the biggest market for EVMOS and other large IBC chains, even including centralized exchanges.

SA: Yeah. I don’t know what it is right now, but when I checked a few months ago—I was looking up which crypto assets in the Top 100 by market cap had a DEX as their primary market. Even Uniswap, the UNI token, its primary market is a centralized exchange (Editor’s note: Binance). So out of the assets in the Top 100, not including stablecoins, only OSMO and—at that time it was JUNO, now it’s EVMOS—those are the only two assets in the Top 100 for which the primary market is [a decentralized exchange,] Osmosis. I mean, we’re trying to compete with centralized exchanges here and, like, if you’re not even the biggest market for your own asset, and you’re not competing with them on trading volumes, then… you know?

CB: You call yourself an undercover Bitcoin maximalist in your Twitter profile. Explain that to me?

SA: [Laughs] I mean, I always liked the idea of Bitcoin as this core store value, digital gold asset. I think that Bitcoin has the most obvious thesis of all of the top crypto assets. I believe in either appchains or going for this “moneyness” sort of thing. Appchains have obvious ways of capturing value. But if you’re going for being “money,” I think Bitcoin is the only one that has an actual product market fit right now. ETH is making its way, but I think it still doesn’t know what it wants to be when it grows up. But Bitcoin is very clear. There’s no goal, we’re not going to try to do anything else. We’re just focusing on being money. 

One reason I started working on Cosmos is because I wanted to build the application layer for Bitcoin. I was like, “Hey, Bitcoin is an appchain; it’s just for payments and we’re issuing this asset, right?” But we still need to build this economy around it. So we need to get BTC off of the Bitcoin blockchain and use it as the reserve asset—as a reserve asset, because I don’t think there’s any such thing as a single reserve asset—as a reserve asset within this larger crypto economy. So that’s why I call myself a little bit of a Bitcoin maxi. 

And I think the story is so interesting. Like, I don’t have any tattoos, but if you told me today to get a crypto tattoo, I probably wouldn’t get an Osmosis tattoo. The only tattoo I’d be willing to get would be a Bitcoin one. Even if crypto dies tomorrow and we all go find other jobs and go back to normal life… Bitcoin is still the symbol that represents these 10 years of my life, this era, this thing we were building towards. I think that symbolism is important.

CB: Would you like to see Bitcoin as an IBC chain?

SA: Yeah! Definitely. What is IBC? IBC is a type of standardization around secure bridging. I don’t see Bitcoin switching to Proof-of-Stake anytime soon, at least not within the next 20 to 30 years. But you can build secure bridges to Bitcoin.

There are levels of things you want to be able to do. First, basic bridging into Bitcoin. Relying on wBTC like this is silly. That’s crazy. One company holds the key. So let’s move it to a more decentralized, multi-sig style bridge using Axelar or Nomic. The next thing is this functionality in Bitcoin that was supposed to be built called “covenants” which will make the bridging process much more secure. The multi-sig operators can’t steal the BTC.

The next thing is something called “drivechains.” Drivechains is this idea of the miners controlling the bridge. So it’s quite similar to IBC itself in terms of security. Drivechains are like the Proof-of-Work version of IBC. It will take a while to get there with Bitcoin just because of its glacial speed of development, but I definitely imagine a more secure bridging system—whether you want to call that IBC or not—will be live on Bitcoin within five years.

I’m a big fan of Jeremy Rubin. He’s a Bitcoin core developer, he’s the one who’s been pushing a lot of the covenant stuff recently. He’s like, this idea of Bitcoin progressivism, you know, “I still believe in Bitcoin.” There’s a group that wants Bitcoin to move faster. A lot of people have given up on Bitcoin. We just haven’t given up on it yet.

Disclaimer: At the time of writing, the author of this piece owned OSMO, ATOM, BTC, ETH, JUNO, and several other crypto assets.

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