How to provide liquidity on Osmosis
As you know, Osmosis is an AMM that has built a strong position as a central actor for exchanging Cosmos based assets.
What do I need?
To be able to enter the beautiful world of DeFi in the Cosmos ecosystem, you need to follow the 4 steps below:
- Download the Keplr plugin available here.
- Create or import a wallet on your Keplr plugin
3. Add the Ki asset on Keplr by visiting this page
Now you’re technically all set to dive into the Osmosis universe!
Choose your pool
The Osmosis AMM offers many pools from different assets. In this article we will focus on the XKI base pools.
When you decide which pool to add liquidity to, you need to be able to bring to it 50% in value of $XKI and 50% in the other asset (UST, OSMO, JUNO).
Ideally you would choose a pool made of 2 assets that you believe in as you would be holding either one of them in different proportions over time.
Transfer your assets on Osmosis
Osmosis is an IBC enabled sovereign chain. Which means you can bring to it native assets of other IBC chains to trade them or use them in liquidity pool.
This being said it is way more easier than it sounds as the user interface is very simple to deal with. Let’s say I have some XKI on my Ki wallet and I want to bring it on Osmosis. It can be done in 2 simples steps.
Add liquidity and choose your incentives
Once you have decided which pool to join, after making sure you have deposited enough of each asset on your Osmosis wallet, you can click on your chosen pool.
Where does the incentives come from?
You’re certainly telling yourself:
Wow this is magic, at this rate I can quit my job and live off my LP rewards! LOL!! WAGMI!
Well don’t send your resignation letter just yet! These incentives are not here forever as they are usually offered by the project’s founding team for a certain period of time. It helps boostrap the pools and cover for any potential Impermanent Losses.
What’s an impermanent loss?
See I read your mind. An impermanent loss usually happens when 2 assets of a pool are not tightly correlated and one assets overperforms another in an efficient and liquid market, you will end up with less of the overperforming asset and more from the underperforming one.
This (long) article explains it brilliantly!
Now that you’re all set about the most important point….
How do I choose which pool to join?
Obviously there are 2 parameters to take into account before joining any pool:
- The Liquidity Mining APY
- Which Pair Assets it is
So you’ll have to choose the highest APY (taking into account the external incentives too), and also define which asset (other than $XKI) you target to keep over the long term.
