Osmosis $OSMO
“Osmosis is an advanced Automated Market Maker (AMM) protocol built using the Cosmos SDK that will allow developers to design, build, and deploy their own customised AMMs.”
This is a sentence I read a lot over the past months. I was curious but never really delved into the ecosystem until I got a nudge from someone well connected in the space that made me pay attention.
Before we go into what Osmosis is in more detail, it is imperative to have a basic understanding of Automated Market Makers (AMMs in short) to differentiate Osmosis from the rest of the AMMs in the market.
Automated Market Maker (AMM)
AMMs are a class of Decentralised Exchanges (DEX) that rely on a mathematical formula to determine the price of a digital asset and work with pairs of exchangeable assets. The protocols are based on smart contracts, that automatically set and offer an exchange price between two digital assets. These assets will be automatically exchanged based on an algorithm and not an order book as is the case in Traditional Finance. Therefore, the entities participating in the exchange interact only with that smart contract and not with each other. Simply put, instead of peer-to-peer we have peer-to-contract, no need for the middle man.
Typical Characteristics of AMMs are
- There is a single price for the exchange between two digital assets
- The Price is known and consistently visible to all exchange participants
- AMMs do not hold equity to facilitate trades but must store it from third parties that are considered participants in this consensus. The capital received is stored in Liquidity Pools (LPs).
- AMM are in some form hard coded.
Those who contribute to maintain these Liquidity Pools, by providing liquidity, receive a percentage of the trading fees charged by an AMM.
Who are the big boys in this segment?
- Uniswap ($UNI) which is completely open source, therefore anyone can use its code as foundation to their own Decentralised Exchange. Users can list their own tokens and have full control over the asset.
- Balancer ($BAL) which can integrate up to 8 tokens into an individual LP.
- Curve ($CRV) which is an AMM with low exchange fees and low slippage. This is possible due to creating pools that are made up of tokens that react very similarly.
So what is this Osmosis and why should you care for another AMM ?
As stated in my intro, Osmosis is build on Cosmos SDK, which allows developers to build, design and deploy their very own customised AMMs. Unlike its competitors, it is not hard coded and conceptualised that the most efficient solution is reachable through the process of experimentation and rapid iteration by leveraging the wisdom of the crowd. This is achieved by a deeply customisability offered to AMM designers, and a governance mechanism by which each AMM pool’s liquidity providers can govern and direct their pools.
Sovereign Ownership — Staked liquidity providers have sovereign ownership over their pools which they can adjust parameters to fit the current market condition and pool competitiveness. PL providers are able to vote to change any pool parameter such as swap fees, token rates and reward incentives. This aligns the interests of delegators, DAO members and liquidity pools.
Superfluid Staking — Osmosis also introduces Superfluid Staking (liquid staking). Token holders no longer need to make a trade off between providing liquidity into pools and staking. Osmosis allows to stake and provide liquidity simultaneously which offers maximal rewards for token holders.
Gravity Bridge — An Interchain connection, called Gravity Bridge connects Osmosis with Ethereum. At $378 billion in market capitalisation, there is a lot of value that can now easily move to Cosmos through Osmosis and potentially move liquidity from its competitors which are mostly build on Ethereum. Additionally, this also allows for a larger addressable market and less dependency on the growth of the Cosmos ecosystem.
Total Value Locked — At the time of writing Osmosis has approximately $1.4 billion Total Value Locked (TVL). This represents an increase of 14x from August 2021. An impressive gain to say the least.
UX/UI — I know, not the most important point to raise for many out there. However, users stay where the user experience is seamless, thought through and easy on the eye. It just makes it easier for the less technical advanced folk to get involved. Perhaps that is the reason behind the 7.8 million transaction in just the last 30 days on its chain.
Final thoughts
Without a doubt, Osmosis has had a fantastic run over the past 8 months. So far the token has been able to steadily grow in price. The usual dumping of free tokens from staking/liquidity pool rewards has largely not happened due to better incentives for token holders. June this year will see 300 million new tokens released into the ecosystem. This will be a test for how well this can be absorbed without having a big impact on the price and overall staking/liquidity pool rewards.
AMMs are no longer just a niche within Decentralised Finance, they are an integral part of the entire space.
Twitter: @Shaoye3000
