Osmosis Labs is excited to announce the release of v16.0.0 - Magnesium, a major upgrade that includes a number of new features and improvements like introduction of new modules, updates to existing APIs, and dependency updates. This upgrade aims to enhance capital efficiency by introducing Supercharged Liquidity, introduce custom liquidity pools backed by CosmWasm smart contracts, and improve overall functionality.
The upgrade is scheduled to take place at block height 10517000, which is estimated to occur on Thursday, July 13 at 16:00 UTC. Be advised that because block times are variable, the upgrade may take place up to a few hours before or after the scheduled time. You can view a real-time countdown to the upgrade height on Mintscan.
Note: During the upgrade, you will be unable to use the Osmosis DEX. Staking and governance features will also be unusable until the upgrade is complete. A full changelog of upgrade features can be found here.
The capstone feature of the v16 upgrade is Supercharged Liquidity, Osmosis’s custom implementation of concentrated liquidity - a novel AMM mechanism first introduced by Uniswap’s UNIv3 implementation. Using Supercharged Liquidity, Osmosis liquidity providers will experience, on average, a 200-300x increase in capital efficiency, resulting in substantially higher swap fees collected. At the same time, traders on Osmosis will notice significantly reduced price impact from their large trades, resulting in superior execution prices compared with Osmosis’s constant product pools.
The Current State of Osmosis Liquidity Provision
With traditional Osmosis constant product liquidity pools, LPs supply liquidity at a full range of exchange rates from 0 to infinity. This results in inefficient deployment of liquidity well outside of ranges in which trading would be expected. As an example, let’s examine a hypothetical USDC / USDT constant product pool on Osmosis. As these two assets are tightly correlated at the $1 range, we’d expect the vast majority (likely in excess of 99%) of trading activity to occur within the range of $0.99 to $1.01.
However, because liquidity is being supplied at every possible range in the pool, less than 1% of liquidity supplied to this hypothetical pool is actually accessible for trading within this high-volume range. The remaining liquidity is supplied outside of this range including, for example, at prices in the ranges of $0.005 or $1000 (highly unlikely price points for these assets). As a result, users trade against less than 1% of the liquidity in the pool at any given time, and liquidity providers earn fees against less than 1% of their supplied liquidity at any given time.
The Osmosis stableswap AMM invariant reduces this friction by concentrating more of the liquidity within a given pair’s expected trading range, but must still allow for sufficient liquidity provision outside of a pool’s likely expected ranges to account for large trades that might otherwise result in excessive price impact. These pools are also only usable for assets whose trading ranges are expected to be tightly correlated or predictable.
Custom Trading Ranges with Concentrated Liquidity
Supercharged Liquidity empowers liquidity providers to take full control over the earning potential of their positions by supplying liquidity at their own custom trading ranges in the pool. By supplying all of their liquidity in a range where more trading volume occurs, and none of it in a range where no trading volume occurs, a liquidity provider can increase the fees earned by that liquidity exponentially as long as the pair trades within that range.
If the trading price falls outside of the liquidity provider’s predefined range, the liquidity position stops earning fees entirely, and the entirety of the supplied liquidity is converted to the lower nominal value of the two supplied assets. To avoid this, liquidity providers can actively adjust the price range of their supplied liquidity to ensure that the trading price remains within their predefined range. The tighter the range, the higher the revenue, and the more likely that the range will need to be adjusted on a frequent basis.
Don’t want to adjust your range? You can still choose to supply liquidity passively at a broad range as with a constant product pool, but the earned fees will not be as significant. In the near future, actively-managed concentrated liquidity vaults will be deployed on Osmosis that can manage your positions for you, allowing you to remain passive while still maximizing your fee revenue potential.
For traders, consistent, actively managed liquidity results in a high concentration of liquidity at the current trading price, meaning that traders on Osmosis will experience far less price impact from their trades, resulting in better overall execution pricing.
Supercharged Liquidity as a Limit Order Engine
One unique feature of Supercharged Liquidity is the manner in which it can be used to place “ranged limit orders” that earn swap fees while your limit order is pending execution. For example, let’s assume you want to place a limit order to buy OSMO using DAI. You can open a concentrated liquidity position using DAI in the DAI / OSMO pool at a range below the current trading price.
As the price of OSMO falls and begins to enter your preselected range, your DAI position will begin to be converted to OSMO and you will begin to earn swap fees on the liquidity position. As the price of OSMO continues to fall such that it exits the range on the other side, your DAI will be fully converted to OSMO. The execution price will be the geometric average between the minimum and maximum price you set in your range.
CosmWasm Pool Module
The CosmWasm pool module enables the creation and management of liquidity pools backed by CosmWasm smart contracts. The feature enables developers to build and deploy custom smart contracts that can be integrated with the rest of the pool types on the Osmosis chain.
The advantage of smart contract pools is that, unlike traditional pools, they can be upgraded and iterated upon without the need for an Osmosis chain upgrade. The module allows for the creation of unique and innovative pool types. One of the first pools to be deployed using this module will be the upcoming transmuter pool (which will be discussed at more length in a future article).
Multi-Asset Fee Whitelisting
Osmosis supports the payment of transaction fees in any whitelisted asset. Currently, assets need to be added to the fee whitelist via governance individually, making it difficult to add or remove additional fee assets quickly.
Following the v16 upgrade, multiple fee assets can be whitelisted using a single governance proposal. Shortly after the upgrade, a governance proposal is expected on chain to whitelist a large number of additional fee denoms, improving the onboarding experience for Osmosis users.
As we prepare for the upcoming release of v16.0.0 - Magnesium, we, at Osmosis Labs, would like to express our appreciation for the continued trust and support of our valued users. This significant upgrade, marked by the introduction of Supercharged Liquidity, CosmWasm smart contracts for custom liquidity pools, and an enhanced system for multi-asset fee whitelisting, is expected to remarkably elevate the efficiency and functionality of our platform.
This article was written by Osmosis Contributor, RoboMcGobo