The State of Osmosis-October 21, 2022

The flow of liquidity within Osmosis was designed to benefit the Liquidity Providers of the ecosystem. This has resulted in the ability to capture valuable swap fees generated from both upwards and downwards volatility in the market.

This volatility can also have an impact on the token composition of the Osmosis’ TVL . This week I wanted to follow up on activity surrounding USDC liquidity changes, the impact it had for Osmosis, the token and its liquidity composition.

I also wanted to touch on the recent NFT mania which has sparked some changes in the token liquidity of STARS on Osmosis, and the impact it had on Osmosis liquidity providers, as this pool has grown significantly.

Whale Games

On last week’s State of Osmosis I reported a drop in the total liquidity growth of USDC, which dropped -30.55% as a result of a single wallet unbonding a significant amount.

This action caused ripple effects throughout Osmosis. Most OSMO pools are in a 1–1 ratio, which is what causes OSMO liquidity within Osmosis to be so significantly skewed towards the OSMO token.

Prior to the unbonding event from pool 678, Osmosis liquidity had been trending higher. This is a result of the continued addition of new 1:1 asset pools on Osmosis.

The more pools that are are launched, the higher the ratio of OSMO as a percentage of TVL, leading to a lower correlation of the OSMO token’s behavior in relation to its TVL basket of tokens.

The result?

• OSMO liquidity dropped as a total of the TVL composition

This leads to a general rule that if the TVL of non-OSMO tokens increases and the number of OSMO tokens in Osmosis liquidity pools decreases or stays the same, then the value of the OSMO as token should respond positively.

NFT and Volume on Osmosis

Over the past week the NFT hype generated by Stargaze has carried over into Osmosis. Why would this be occurring? What are the implications of this explosion in volume being generated by Stargaze?

The recent volatility has led to rapid increases in the price of the STARS token. This volatility directly impacts Osmosis as it is responsible for over 90% of its trading volume and liquidity.

As a result of the increase in price and the use case for the STARS token, we can clearly see STARS liquidity has continued to drop over time.

This is in contrast with the increase in price over the same period. Though price has increased over 20%, the number of STARS within Osmosis has dropped by 14.5% over the same time period.

STARS is the 9th largest token on Osmosis by TVL outside the OSMO token and has the 10th largest pool currently as a result of the price appreciation. A look into the GAMM composition of the Pool tells another story.

Price appreciation has pushed the STARS / OSMO pool to 9th by TVL with liquidity actually leaving the pool. However, it is important to keep in mind the position Osmosis plays as a DEX and the role liquidity providers play.

Even though STARS liquidity has been leaving Osmosis over the last month, this has actually been a net positive for liquidity providers.

Take a look at the buy and sell activity over the last 2 weeks, which largely correlates to the price activity we have seen.

Now take a look at the same time frame for the swap fees associated with STARS pool 604.

STARS doing well is a positive for liquidity providers as they are able to capitalize on this in the form of not only owning the underlying asset but the increased swap fees generated for the pool.

Ultimately Osmosis succeeds by having a variety of tokens with sufficient liquidity for users to access. Volatility does not necessarily equate to having a negative impact on the health of the ecosystem, rather,it creates opportunities which can benefit liquidity providers.

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