Osmosis Protocol

Osmosis Protocol

The Liquidity Hub of the Cosmos ecosystem

Disclosure: Members of Nansen may be participating or invested in some of the protocols mentioned below. This statement discloses any conflict of interest and is not a recommendation to purchase any token. This content is for informational purposes only and is not investment advice. Please exercise caution if you are participating with some of the protocols.

Key Points

  • An IBC enabled DEX within the Cosmos ecosystem that is designed for customizability and a rapid design space. It is the largest DEX and it is offering LPs liquidity incentives through its governance token $OSMO. LPs can permissionlessly create pools and design parameters to their needs because the protocol uses self-governing liquidity pools.

Osmosis Overview

Osmosis is an AMM protocol built on Cosmos that is IBC enabled. Some of the AMM design closely resembles the Balancer AMM model but reimplemented into the Cosmos SDK. Osmosis is a generalized AMM with flexibility, weights, multi asset pools, etc. It currently provides liquidity pools for most of the long tail assets on IBC enabled chains but does not have a highly liquid stablecoin pair. Most of the TVL stems from two assets - $OSMO and $ATOM. We expect to see a rise in volumes and TVL as the Terra Ecosystem enables IBC and with it, will flow a highly liquid stablecoin, Mirror assets, Anchor assets and the many other apps(tokens) launching on the Terra ecosystem.

The Cosmos ecosystem is focused on creating localized systems. Osmosis is its own independent chain with its own validators, staking token (OSMO) and security model. It was built using the Cosmos SDK and the Tendermint software stack. It was able to bootstrap its validator set by airdropping $OSMO to Atom Validators as well as the Cosmos Hub.

They currently offer 16 incentivized pools on their AMM with liquidity incentives using the $OSMO token. Osmosis is very customizable and is intended for experimentation. Users can create permission-less pools with two or more assets and custom weights - it all depends on the pool. The parameters of the pool are voted on through governance and can be customized.

  • Osmosis has been live for many months and has well over $400 million in liquidity and processes nearly $10 million in daily volumes.
  • The team is a combination of former Tendermint engineers and the team behind the Keplr Wallet.
  • Audits: Was not audited at launch but is undergoing multiple audits. The protocol has been tested for bugs by their own engineers.

Osmosis Roadmap

The Osmosis team has been exploring the AMM design place. They are currently optimizing amongst many different AMM designs such as concentrated liquidity. Some of the main features they are working on include the following:

Threshold encryption to help solve front running
  • Encrypts all txns in the mempool to a threshold key of all the validators
  • Once the validators commit and finalize the ordering of the block, then the txns will be decrypted and executed - can't frontrun/sandwich attacks
Batching system to create a more fair mechanism
  • Everyone gets the average price across all permutations of orderings within a block
Superfluid staking - the ability to stake your $OSMO while simultaneously liquidity providing - increases capital efficiency
  • Ex: You provide liquidity to a pool with $OSMO and another coin, then you can stake the LP share and it will be treated as the underlying $OSMO half of it.

Cosmos DEX Landscape

Osmosis is not the only DEX within the Cosmos ecosystem. There are other DEXs like THORChain, Secret Network and the Gravity Dex. THORChain is addressing a much different market than Osmosis at the moment such as Bitcoin and Ethereum, while Osmosis is focused more on IBC enabled chains. Osmosis will enable a cross chain swap feature later down the roadmap which can take advantage of protocols like Axelar Network who are bringing native bitcoin on to Cosmos.

Secret Network is more focused on a privacy centric model and the Gravity Dex is not fully live yet and does not offer liquidity mining rewards. For these reasons, we feel Osmosis is positioned to do well as the DEX landscape matures on Cosmos. Regardless of the winning DEXs, it looks to be a symbiotic relationship between some of them - Osmosis tokens can benefit from the privacy preserving Secret Token equivalents on the Secret Network and the Secret Network can benefit from the liquidity found on other IBC apps.

IBC

Inter-Blockchain Communication (IBC) is a generalized messaging protocol that can be used to build a wide range of cross-chain applications. Some uses include value transfer, interchange assets and services, and the ability to connect with other IBC enabled chains - without running into scaling issues.

Osmosis can communicate with other chains in the Cosmos ecosystem like the Cosmos Hub, Akash Network, Regen Network, Crypto(dot)com, Sentinel, Terra (soon), and many others that have IBC enabled

Track the activity of IBC Zones here

Tokenomics

Fair Launch - No VC Backing

Airdropped $OSMO through a quadratic airdrop to $ATOM stakers based on the amount of Atom tokens in his/her wallet.

  • Helped distribution be more decentralized - ensures Atom whales don't get majority of the $OSMO airdrop
$OSMO (Governance + Utility)

$OSMO is used as a governance token for the following:

  • Future roadmap and software upgrades
  • New AMMs
  • Other parameters in the system
  • Per pool governance - gives LPs more power over their own pools; Change parameters of the pool without splitting liquidity
  • Specify which pools can be used for superfluid staking
$ION - a secondary token
  • Meme coin
  • Smallest unit of $OSMO; Similar to WEI is to ETH
  • Huge community formed around $ION with active governance proposals
Socials

As at September 30, 2021:

  • Twitter: 25,300 Followers
  • Telegram: 7,573 members
  • Discord: 4,107 members
Financials - $OSMO

As at September 30, 2021:

  • TVL: US$412mm+
  • MCAP: US$958.1mm+
  • FDV: US$5.18bn+
  • MCAP/TVL: 2.36x
  • FDV/TVL: 12.77x
Possible strategies

16 active pools with liquidity incentives

  • Lowest APR was around ~88% - paid out in OSMO

If you are positioned in $OSMO or $ATOM, best returns for being an LP

  • All base pairs are either $OSMO or $ATOM
  • $ATOM and $OSMO are highly correlated
  • $OSMO is a higher beta play on $ATOM
  • Stake $OSMO for ~100%; 1 to 14 days to unbond; Yield is higher the longer you bond your LP pair; Reverse staking derivatives are on the roadmap

Catalysts

Terra successfully upgraded to Columbus-5

  • Brings a highly liquid stablecoin, Mirror assets, Anchor assets and the many other applications launching on it
  • Will significantly boost the TAM of Osmosis and will help grow a more diverse set of liquidity pairs

More chains adopting IBC and establishing connections with Osmosis and having their liquidity come over

  • Internal and external incentives for these pools
  • First time a lot of these long tail assets have liquidity

Axelar Network

  • Is aiming to connect many chains to IBC - native bitcoin, EVM chains, Polkadot and many more
  • It is currently in testnet and raised a round from large funds

Nansen’s Take

The protocol has seen tremendous growth since it first launched in July. It is important to note that this growth was done on the longer tail assets within Cosmos. We expect to see a significant increase in TVL, volumes and overall fees earned by Osmosis LPs as the Terra ecosystem brings in more liquidity. Specifically, a highly liquid stablecoin ($UST) which can be a major catalyst.

We feel that Osmosis is the best positioned DEX in the Cosmos ecosystem at the moment. We expect to see a mutually beneficial relationship between Osmosis and Terra - Osmosis gets a highly liquid stablecoin and Terra's $UST becomes more useful and value flows downstream to its native token $LUNA.

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