Why Cosmos DeFi Hub Osmosis Is Launching a Bitcoin L2

Osmosis, a Cosmos-based blockchain known for its decentralized exchange, is entering the Bitcoin layer 2 race. It’s the latest indicator of burgeoning Bitcoin developer activity. 

Osmosis next month is set to roll out “alloyed bitcoin,” the latest in a number of in-house products designed to simplify trading tickers and inject additional liquidity. Alloyed bitcoin is a tradable asset that functions as a derivative representation of a bitcoin liquidity pool. 

Sunny Aggarwal, co-founder of Osmosis Labs, told Unchained that alloyed bitcoin is a novel product, consisting of “basically a basket of variants of BTC from throughout the ecosystem.” For Osmosis, it lumps together for liquidity the likes of nBTC issued by Nomic, wBTC issued on Ethereum, and Osmosis’ native wBTC.  

The solution takes a page out of the centralized exchange book, with the likes of Coinbase classifying all ether (ETH) on its platform as ether — irrespective of its origin or bridging across other chains. For Osmosis, alloyed bitcoin is the latest in a number of similar products, including alloyed ether. 

Read More: Bitcoin Layer 2s Aim to Attract Ethereum-Like Dapps. Will They Succeed?

Alloyed Bitcoin Could Secure Osmosis

Alloyed bitcoin could prove a key component to Osmosis’ security model once its smart contracts are in place. But first governance members, made up of OSMO token holders, have to vote on including alloyed bitcoin in the security model. OSMO is the native token of the Comsos DeFi hub. 

Osmosis security now stems from validators powered by staked OSMO. But alloyed bitcoin would add the asset as a staking possibility in addition to OSMO. If the community approves the addition, BTC could become the primary asset for DeFi on Cosmos, according to Aggarwal.

“How this is received by Osmosis governance I think will depend on the terms of the individual proposal,” wrote the lead at the Osmosis Grants Program, who goes by RoboMcGobo, to Unchained on Telegram. “Osmosis will have to direct a portion of its security budget (currently allocated only to OSMO stakers) to staked BTC. While I think most will be in favor of this, the quantity of staking rewards diverted to staked BTC might be a point of contention.”

If governance permits BTC staking, “staked BTC will earn a portion of the OSMO staking rewards, which will slightly reduce staking rewards for OSMO stakers depending on how many BTC are staked,” RoboMcGobo added.

With a total locked value (TVL) of $177.45 million, Osmosis is the fifth largest blockchain network within the Cosmos ecosystem, with a seven-day trading volume of $175.57 million, per DefiLlama. 

Staking BTC on Osmosis increases security and brings in more liquidity to Osmosis and Cosmos at large, because “staking brings an [annual percentage return] that encourages people to bridge over that BTC,” Aggarwal said.

Osmosis’ plans come as Bitcoin experimentation has surged. From the January 2023 rollout of Ordinals, which brought non-fungible tokens to Bitcoin, to the more recent rise of the Runes protocol, use cases on the original blockchain have been steadily building. 

Read more: What Are Runes? A Guide to the New Fungible Token Protocol on Bitcoin

Innovations have been evident in projects aiming to create Bitcoin layer 2 networks, such as Citrea and Merlin Chain. Build on Bitcoin, a layer 2 focused on decentralized finance, released its mainnet on Wednesday, highlighting Bitcoin’s resurgence in activity, with developers coming back to the oldest blockchain. 

The price of BTC has increased 4.4% in the past 24 hours to trade around $61,800, data from CoinGecko shows.