The Implications of Osmosis Proposal 120 Passing

This article originally appeared on the Figment.io blog on January 18, 2022.

‍‍What is ION and Why Does It Exist?

From the start, $ION seemed to be a sort of “living fossil” leftover from the code of the Osmosis testnet, “an enigma embedded in the genesis file” which was included in the mainnet launch of Osmosis. Until this year, it didn’t seem like there was any indication of what the tokens or the project would be used for, if anything.

However, now the project has acquired real market value, and members of the Osmosis ecosystem see value in bringing it to life as a DAO project with real utility. In spite of the passed proposal creating the ION DAO and its native integration with Osmosis, it effectively remains a project in search of a use case.‍

The History of ION in the Osmosis Ecosystem

In the beginning, exactly 21,294 ION tokens were airdropped to users seemingly at random until the ION airdrop was reverse-engineered. The airdrop was based on the snapshot of Cosmos wallets taken on February 18, 2021 (which was originally intended for the OSMO airdrop). ION was given to wallets that either:

1. Voted in Cosmos governance (1 ION for each governance vote prior to the snapshot); or
2. Delegated to Sikka (1 ION for each wallet delegating to the Sikka validator at snapshot).

Unfortunately, it was determined that a good chunk of the airdrop went to addresses that had not participated in the Osmosis ecosystem at all, and a clawback specific to all unclaimed ION was added to Proposition 32 to bring it back to the community fund along with the clawback of unclaimed OSMO. As time went on, ION’s market cap grew to $125 million (now more than double), and the community of ION holders began debating the future of the protocol without a purpose.

The Ionize community started gathering steam after Proposal 54 passed, which implemented the clawback of unclaimed OSMO and ION into the community fund. In the case of OSMO, this clawback was simply an effective way to fund projects that use Osmosis to bootstrap their protocols. However, without further instruction from the community, ION would have sat in the Osmosis treasury as an asset without a unified community or even a clearly-defined use case. That all changed when Proposal 107 passed, which signaled the Osmosis community’s intent to integrate the CosmWasm smart contract operating system, which would allow DAOs to be built on Osmosis.

Given this upcoming functionality, Proposal 120 was suggested by the nascent ION community as a way for ION tokens to be combined into a DAO built on Osmosis, and to allocate ION from the community fund back into the treasury of the DAO itself. Rather than an outright distribution, this proposal merely signaled the community’s intent to commit to the proposed action before time, energy, or other resources were committed to building the DAO itself.‍

Potential Roadmap for Implementation

With Proposal 120 passed, the Osmosis community has signalled its desire to create ION DAO and has precommitted to releasing its 16,572 ION to the DAO once it has been created. Implementing this proposal will likely involve the following next steps:

1. Osmosis will need to fully integrate the CosmWasm smart contract operating system;
2. ION Community Members will need to use CosmWasm to build ION DAO’s smart contract, including a governance structure and treasury;
3. Another governance proposal will need to be posted and passed to actually transfer the Osmosis community fund’s ION to the DAO;
4. ION DAO should (ideally) airdrop tokens from its treasury to Osmosis community members who voted to release ION to the DAO from the community fund to compensate them for their donation and to prevent centralization; and
5. ION DAO will need to figure out in an ongoing way how to govern itself, its assets, and its use case (whatever it ends up being).

If all goes well, it could represent a bold new project on the already exciting Osmosis ecosystem. However, ongoing concerns about centralization and use case fragility should not be ignored.

‍The Future of ION and its Community

According to the ION Token’s page on Commonwealth, there is a wide range of potential use cases for the ION DAO that are still up for discussion. The most recent and well-developed of these is the Ionize Proposal, which seeks to establish the DAO as a market for synthetics (an artificial asset that tracks the price of an existing asset, but is not collateralized by the asset itself) that would function in a similar way to Terra’s algorithmically-controlled, synthetic US Dollar ($UST). Interestingly, Terra already has a native general synthetics market called Mirror ($MIR), but it does not utilize the same mint-and-burn method that Terra uses to maintain a stable peg to underlying assets.

In a similar way to Terra, the Ionize Proposal suggests using ION tokens to maintain a stable peg for any synthetics created and approved by the network. Due to the supply flexibility required of this token-based system, this proposal would also eliminate the current fixed-supply aspect of ION. Generally, this proposal and the creation of ION DAO have met with mixed reviews, including worries of a collateral death-spiral if the value of synthetics becomes volatile. However, the ION community has discussed the idea and found it to be worth pursuing as long as (1) ION holders betting on scarcity aren’t rugged, (2) the value of “Ionization” exceeds the value of the network’s mysterious backstory, and (3) “Ionization” brings more value to both Osmosis and ION.

Ultimately, the community has spoken, and Figment supports the boldness of this experiment. Projects like these hint at the massive potential of CosmWasm smart contract functionality in the IBC ecosystem, and with the passing of this proposal, the Osmosis community supported hitting the ground running with a new DAO and (potentially) a brand new synthetics protocol based on the core tenets of decentralization that has made Terra such a great success. If ION has commanded this much value even prior to an established use case, value will surely increase once they have a fully funded, decentralized community behind their efforts.