Osmosis — The Interchain AMM
The introduction of automated market makers (AMMs) ushered in a new era of crypto-economic utility and bonding curve applications. AMMs have become such a vital element of blockchain’s use-case that it’s difficult to picture the crypto industry without them.
Decentralized exchanges via automated market makers (AMM), which originated with Bancor and was popularized by Uniswap, have gone through multiple stages of evolution, and are currently being expanded by Curve, Balancer, and other new protocols. However, the customizability provided by such protocols falls short of their promise to open up the market to a broader spectrum of decentralized assets.
What is Osmosis
Osmosis is a sophisticated AMM protocol designed using the Cosmos SDK that enables developers to design, construct, and deploy their own bespoke AMMs.
Heterogeneity and sovereignty are two essential aspects of the Cosmos ecosystem, and Osmosis expands these two ideals into basic features of this AMM protocol. Rather than aiming for a one-size-fits-all homogenous strategy for AMMs and their liquidity pools, Osmosis is structured in such a way that the most efficient solution is achievable through the process of experimentation and quick iteration by harnessing community knowledge. It does this by providing AMM designers with extensive customizability as well as a governance system via which each AMM pool’s stakeholders (i.e. liquidity providers) may control and direct their pools.
Designed for Cross-chain Assets
Osmosis is intended to be a natural cross-chain protocol. It will have IBC built in from the start, allowing it to link to the full Cosmos ecosystem and its $10 billion in local assets. Following the integration of native Cosmos assets, Osmosis will interact with non-IBC capable chains, including as Ethereum-based ERC20s (through the Althea gravity bridge), a variety of chains, including Bitcoin-like chains, and other smart contracting platforms via bespoke pegs.
Customizable curves, fees, and other parameters
While simple AMMs have showed early product-market fit, they will need to evolve in tandem with the expanding complexities of the DeFi sector.
For example, when the demand for swapping similarly valued assets (e.g. stablecoins) expanded, Curve Finance developed StableSwap to minimize large slippage for high-volume transactions. However, in order to handle the new functionality, a completely new set of AMM infrastructure has to be constructed outside of Uniswap.
Nothing regarding the fundamental structure of AMMs is hard-coded in Osmosis. Not only are essential factors like swap costs and token weights parameterizable for each liquidity pool, but whole components like the curve method and TWAP computation are as well. Pool makers are not limited to merely constant product and constant sum, but can also include their own creative mathematical expressions. On the fly, new curves may be produced. By exploiting data points such as time dependencies, volatility indexes, and off-chain oracles as inputs, such novel curves can be far more powerful than traditional AMM models, which only accept token balance values. The parameterizable inputs of Osmosis enable the construction of innovative DeFi asset types such as options, dynamic fee markets that adapt to high volatility, and aim to avoid unwanted consequences such as temporary loss for liquidity providers (LP)
Rather than developing a new AMM protocol for each AMM model upgrade, curve developers may quickly deploy new curves on Osmosis, leveraging the Osmosis ecosystem’s existing wallet integrations, IBC connections, orderflow, and liquidity.
LP Governance
The majority of AMM protocols provide universal settings for all liquidity pools inside the AMM. While this simplifies the construction of the AMM, it limits the amount of decision-making power that LPs have over the pools they care about. Because AMMs are such novel protocols, initiatives in the design space are continually iterating on creating better models for them. Pools must keep up with cutting-edge advancements by improving curve design, fee structures, and other aspects to remain relevant. Furthermore, pools must be able to adjust pool weights to reflect LP portfolio preferences, as well as add and remove assets on the fly to satisfy market needs (such as adding new stablecoins to a stableswap pool).
Governance must be a first-class procedure in AMM architecture to prevent liquidity from being forked away with each update. To defend LP from hostile governance assaults, safety mechanisms such as rage-quit functionality inspired by MolochDao are added.
Liquidity Provider Incentives
The most significant stakeholders in any AMM protocol are the liquidity providers of an AMM. Because the effectiveness and use of AMMs are heavily reliant on the availability of assets and liquidity, it is critical that there be sufficient incentive for liquidity suppliers to continue to lock their assets into new pools.
Osmosis allows third parties to simply add incentive mechanisms to specific liquidity pools, in addition to native OSMO token incentives (see OSMO section). If the Cosmos Hub Community Pool, for example, wants to incentivise liquidity for an ATOM/stablecoin pair, they could utilize Osmosis’ built-in incentives module to award $ATOM rewards to LPs that stake their LP tokens. Incentives providers frequently seek to encourage long-term liquidity rather than simply mercenary farmers. The ‘incentives’ module allows rewards to be weighted toward LPs who timelock stake their LP tokens with longer unbonding periods, essentially committing to providing liquidity to the pool for a longer period of time, lowering liquidity volatility and providing a dependable and consistent experience for traders.
OSMO Allocation
Investors and Partners
Coming soon on Osmosis
These are something to be anticipated for the following next months, better stay tuned!
- CosmWasm
- Superfluid Staking
- LBP 2.0
- Ethereum Integration
- Stableswap
Why Osmosis?
Osmosis is the first decentralized exchange (DEX) to service projects connected via the Interblockchain Communication Protocol (IBC), and according to Cointelegraph Markets Pro, the OSMO price has risen 123 percent from a low of $4.05 on December 17 to a new all-time high of $9.24 on January 7.
