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Osmosis

Osmosis (OSMO)

Osmosis (OSMO) is a decentralized exchange (DEX) and automated market maker (AMM) protocol designed for the Cosmos ecosystem. It is a multi-chain AMM that provides interoperability between blockchains using the Inter-blockchain Communication Protocol (IBC) and Axelar. The platform is supported by the OSMO token.

History

Osmosis is an AMM protocol developed by Osmosis Labs using the Cosmos SDK. The project was announced in October 2020 and officially launched on June 19, 2021. Key figures in its development include Sunny Aggarwal, Josh Lee, and Dev Ojha. In October 2021, Osmosis raised $21 million through a token sale led by Paradigm. Osmosis Labs Pte. Ltd. was primarily responsible for the initial code development, and the project is governed by a decentralized validator set. Changes to the protocol are voted on and implemented by the Osmosis community through the OSMO governance token.

Ticker OSMO
Category Decentralized Exchange (DEX)
Website https://osmosis.zone/
Twitter @osmosiszone
Telegram osmosis_chat
Contract Addresses
osmosis uosmo
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Overview

Osmosis serves as an AMM protocol for interchain assets, facilitating the creation and management of a self-balancing, non-custodial, interchain token index. It operates as a decentralized exchange platform for swapping, earning, and building on the Cosmos network. Smart contracts are used to determine digital asset prices, produce liquidity through peer-to-peer (P2P) methods, and execute trades between users. The platform offers a variety of tools for asset and liquidity analysis, governance participation, and the development of interchain-native applications. Osmosis emphasizes customizability, allowing users to adjust swap fees, create custom-curve AMMs, and form multi-token liquidity pools.

Osmosis also supports non-IBC assets bridged from the Ethereum and Polkadot ecosystems. As an appchain DEX, it offers more control over the blockchain stack compared to DEXs that rely on a parent chain's code. This control has enabled innovations like Superfluid Staking, enhancing Proof-of-Stake security. Superfluid staking allows the OSMO in a liquidity pool to contribute to chain security and earn staking rewards. The platform also features a transaction mempool shielded with threshold encryption, significantly reducing harmful Miner Extractable Value (MEV) on Osmosis.

Architecture

Osmosis is an AMM protocol designed to support the creation of customized AMMs with independent liquidity pools. Built on the Cosmos SDK, it utilizes Inter-Blockchain Communication (IBC) to enable cross-chain transactions.

Automated market makers (AMM)

Automated market makers (AMMs) are decentralized finance protocols that facilitate asset swaps without a central intermediary. They use smart contracts instead of traditional trading desks and order books to execute trades. Users create liquidity pools by depositing assets, becoming liquidity providers (LPs). Pool creators can customize transaction and exit fees.

Token weights

Liquidity pools comprise tokens with predefined weights, indicating their proportion of the pool's total value. These weights can vary, allowing different distributions like 90-10, and pools can contain more than two assets. In Osmosis, pool creators choose the tokens and weights, which remain fixed. Other users can create separate pools with different configurations.

Pricing

Fixed token weights allow AMMs to establish deterministic pricing. Token weights reflect their relative value, maintaining consistency even as token quantities change. Prices adjust to preserve the relative value between tokens.

Market maker functions

AMMs use mathematical formulas for asset pricing within pools. A constant function ensures consistent trading rules, regardless of trade size or asset. The Constant Product Market Maker is the most common, but other functions are used as well.

LP tokens

When assets are deposited into a liquidity pool, users receive LP tokens representing their ownership stake. For instance, depositing OSMO and ATOM in Pool #1 results in receiving Pool1 share tokens. When withdrawing liquidity, users receive a proportionate share of the total liquidity, which may differ from the initial deposit due to trading activities.

Liquidity mining

Liquidity mining, or yield farming, allows users to earn tokens by providing liquidity to a DeFi protocol. This offsets impermanent loss for LPs and offers incentives beyond transaction fees. It is valuable for new protocols, boosting liquidity, usage, and LP fees.

Impermanent loss

Liquidity providers earn through fees and rewards but may face impermanent loss, where holding assets is more profitable than providing liquidity. This loss occurs when asset prices within a pool change at different rates, affecting LPs' asset holdings.

Long-term liquidity

Liquidity mining rewards can attract short-term "mercenary farmers" who frequently switch protocols for high yields. While they boost activity, their exit can cause liquidity fluctuations. Long-term liquidity is crucial for AMM success. Osmosis encourages this through exit fees and bonded liquidity gauges.

Inter-blockchain communication protocol (IBC)

IBC facilitates communication between independent blockchains, enabling cross-chain applications like token transfers, swaps, multi-chain contracts, and data sharding. Osmosis initially uses IBC for token transfers, with plans to integrate more features.

OSMO token

The OSMO token is native to the Osmosis network, serving as a governance token that allows holders to vote on protocol decisions. Its primary uses include voting on protocol upgrades, setting base network swap fees, and allocating liquidity pool mining rewards. Governance aims to select pools for rewards, with third parties potentially adding incentives to certain pools.

Tokenomics

OSMO has a total supply of 1 billion tokens. At genesis, 100 million tokens were distributed between airdrop recipients and a strategic reserve. Token issuance follows a "thirdening" schedule, reducing issuance three times a year. Distribution includes:

  • Staking Rewards: 25%
  • Developer Vesting: 25%
  • Liquidity Mining Incentives: 45%
  • Community Pool: 5%

Overall distribution is:

  • Liquidity Reward Mining: 40.5%
  • Developer Vesting: 22.5%
  • Staking Reward: 22.5%
  • Community Pool: 4.5%
  • Strategic Reserve: 5%
  • Airdrop: 5%

Use cases

OSMO tokens have several use cases:

  • Voting: Stakeholders propose, evaluate, and approve protocol upgrades, selecting pools for rewards.
  • Transaction Fees: Users pay fees for transactions, distributed among OSMO stakers. Validators choose fee assets, converted to OSMO for distribution.
  • ProtoRev: Facilitates on-chain arbitrage, ensuring balanced prices.
  • Taker Fees: A small fee on trades, distributed to stakers and the Community Pool.
  • Superfluid Staking: Enhances security by staking liquidity pool tokens, applicable in pools with OSMO.

Osmocon

Osmocon is an annual event organized by Osmosis, featuring speakers, announcements, and related activities. The 2023 event was held on July 21st in Paris, France, with speakers like Sunny Aggarwal and Josh Lee. The 2022 event took place on June 9th in Austin, Texas, with participants from Membrane Protocol and Andromeda Protocol.