The emergence of Decentralized Finance (DeFi) introduced a groundbreaking concept in the financial sector that provided access to previously excluded individuals. The idea aims to achieve financial inclusivity by eliminating intermediaries from transactions. In this decentralized finance model, private wallets are used to access a range of financial instruments, without the need for centralized exchanges or exposing private keys to third parties. This vision for a decentralized financial system could potentially transform the traditional finance sector and provide financial access to a wider range of individuals.

The rise of DeFi has given birth to numerous innovations, such as automated market makers (AMMs), which have revolutionized token trading. AMMs have become a staple element of DeFi infrastructure, facilitating basic token swaps and the creation of supplementary financial products. As the DeFi ecosystem expands, the demand for highly scalable and efficient exchanges with deep liquidity pools has also grown.

This is where Osmosis (OSMO) comes in. Built on the Cosmos blockchain, Osmosis is a decentralized exchange that leverages the power of AMMs to enable users to trade any Cosmos SDK-based token with high liquidity and low fees.

What Is Osmosis (OSMO)?

Osmosis was launched in June 2021. It was founded by Sunny Aggarwal and Dev Ojha from Sikka Validator and Tendermint, and Josh Lee and Tony Yun from Keplr.

The Osmosis Foundation raised $21 million in an Initial Coin Offering in October 2021, with investors such as Paradigm, Coinbase co-founder Fred Ehrsam’s fund, and Nascent. The project has also received funding from Ethereal Ventures, Figment, Robot Ventures, and scout fund of Robert Leshner.

Osmosis has several partners, including chains from the Cosmos Ecosystem, such as Cosmos Hub, Axelar, Evmos, Juno, Konstellation, and Sifchain, as well as companies like Sikka and Chainapsis. It aims to provide a decentralized exchange for the Cosmos ecosystem that provides an efficient and secure way to trade cryptocurrencies.

The project’s vision is to create a sandbox for AMM development rather than a one-size-fits-all approach to liquidity pools. In addition, Osmosis aims to empower communities to build and customize their own liquidity pools. This approach is intended to foster innovation and experimentation in the DeFi space, allowing for the creation of specialized liquidity pools that meet specific needs and use cases.

By leveraging the interoperability provided by the Cosmos ecosystem, Osmosis hopes to facilitate seamless cross-chain liquidity and enable users to access a wide range of financial products and services.

How Does Osmosis Work? AMM Model, Liquidity Pools, and LP Governance

As already mentioned, Osmosis is an Automated Market Maker (AMM) protocol that enables the creation of customizable liquidity pools, which are used to facilitate trades between digital assets. Osmosis operates on the Cosmos SDK and utilizes the Inter-Blockchain Communication (IBC) protocol, allowing for cross-chain swaps between different blockchains.

Osmosis utilizes the constant-product market-making algorithm, which is the same algorithm used by Uniswap and other AMMs. This algorithm relies on a pricing mechanism that automatically adjusts the ratio of tokens in a liquidity pool based on the demand for each token. Unlike other AMMs, which restrict LPs to two-token pools with an equal ratio, Osmosis permits LPs to supply liquidity to pools with multiple tokens and uneven ratios. This allows for efficient price discovery and the ability to trade assets that do not have a deep order book. In exchange for providing liquidity, users receive Liquidity Provider (LP) tokens, which represent their share of the pool’s assets.

LP tokens can be staked on Osmosis to earn OSMO rewards. This incentivizes users to provide liquidity to the network and keep the liquidity pools balanced. Additionally, LP tokens also represent voting power in the Osmosis governance system. This means that LPs have a say in the decision-making process for the network, such as proposals for new features, changes to the protocol, or the allocation of funds from the Osmosis treasury.

Osmosis employs a unique LP governance system, where LPs can vote on proposals using their LP tokens. The system utilizes a quadratic voting mechanism, which aims to give smaller LPs more influence while preventing larger LPs from dominating the decision-making process. This helps to ensure a fair and decentralized governance system, where all LPs have a voice in the network’s development.

In summary, Osmosis is an innovative AMM protocol that utilizes the Cosmos SDK and IBC protocol to create liquidity pools for cross-chain swaps. By incentivizing LPs to provide liquidity and participate in governance decisions, Osmosis aims to create a decentralized and sustainable ecosystem for AMMs.

What Is the Inter-Blockchain Communication (IBC) Protocol?

The Inter-Blockchain Communication Protocol (IBC) is a standard protocol for communication between independent blockchains within the Cosmos ecosystem. IBC enables the transfer of digital assets and data between interconnected blockchains without the need for a centralized exchange or custodian. This protocol provides a secure and trustless way for different blockchains to communicate and exchange value, enabling cross-chain interoperability. The IBC protocol also allows for creating decentralized applications (DApps) that can utilize data and assets from multiple blockchains. IBC has become an essential component of the Cosmos ecosystem, enabling a vast array of interoperable blockchains and financial applications to be built on top of it.

What Is the OSMO Token?

The OSMO token is the native utility token of the Osmosis protocol, and it serves as fuel for the ecosystem. Its maximum supply is 1 billion units, of which 492,5 million (49%) are already in circulation (April 2023). OSMO tokens are used for a variety of functions within the protocol, including governance, staking, liquidity provision, and transaction fees.

As a governance token, OSMO holders can vote on proposals that determine the direction of the protocol. The community’s collective decision-making ability ensures that the protocol’s development remains decentralized and fair.

OSMO holders can also stake their tokens to earn rewards in the form of OSMO tokens, as well as transaction fees. The more OSMO tokens a user stakes, the greater their influence in the ecosystem’s governance decisions.

Another use case for OSMO tokens is liquidity provision. Osmosis employs an Automated Market Maker (AMM) model, which requires liquidity pools to facilitate trades between different assets. Liquidity providers receive a share of trading fees and, in return, deposit assets into these pools. These pools are denominated in OSMO tokens, and as a result, users must use OSMO tokens to add liquidity to the pools.

Overall, the OSMO token plays a vital role in the Osmosis ecosystem, incentivizing users to participate in governance, staking, and liquidity provision while also serving as the primary currency for transactions on the platform.

OSMO is set to be highly inflationary in the beginning. Over time, the initial released supply of OSMO will only account for a small percentage of the total supply.

Source: Osmosis Lab

The OSMO token allocation of upcoming token releases is strongly weighted toward liquidity reward mining at 45%. The total token distribution is as follows:

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

Osmosis Ecosystem

Osmosis has an expanding ecosystem that includes a variety of wallets, decentralized applications, and projects. Here are some examples:

• Keplr Wallet: An interchain wallet that supports a variety of blockchains, including Osmosis. It allows users to manage their assets, access DApps, and more. With Keplr, users can easily stake their OSMO tokens and participate in governance proposals.
• Osmosis DEX: A decentralized exchange built on the Cosmos SDK that enables users to swap digital assets with low fees and high speed, using automated market maker (AMM) technology. It also provides liquidity incentives and LP governance for users to stake and earn rewards.
• Mars Protocol: A decentralized stablecoin swap protocol that operates on the Osmosis network. It aims to provide users with a more efficient way of swapping stablecoins without requiring collateralization or relying on centralized exchanges.
• Axelar: A cross-chain communication network that allows secure, trustless, and scalable interoperability between different blockchain networks. By enabling seamless communication between various decentralized networks, Axelar aims to unlock the full potential of the decentralized web. \

In addition, Osmosis has a range of analytics tools that allow users to track liquidity pool metrics, trading volume, and other key indicators to help inform their investment decisions.

Overall, the Osmosis ecosystem is rapidly growing and attracting a diverse range of projects and users. With its unique AMM model, liquidity pools, and focus on interoperability with other blockchains, Osmosis is positioning itself as a key player in the rapidly expanding DeFi space.

Is OSMO a Good Investment?

It is worth noting that Osmosis has gained significant attention and adoption in the DeFi space. The platform has demonstrated its ability to provide a high-quality and solid application with a user-friendly interface.

Moreover, the OSMO token is essential for utilizing the Dapp, meaning that anyone who wishes to interact with Osmosis must acquire the OSMO token. The token is used for various purposes, including liquidity provision, transaction fees, and governance participation. With Osmosis’s growing ecosystem and increasing adoption, the demand for OSMO tokens may increase, potentially leading to an increase in value.

However, as with any investment, there are inherent risks and investors should always do their own research and seek professional financial advice before making any decisions.

How to Own OSMO?

To own OSMO, you can use the services of a centralized crypto exchange. Start by creating a Gate.io account, and get it verified and funded. Then you are ready to go through the steps to buy OSMO.

News on Osmosis

In March 2023, it was reported that Osmosis released version 15.0.0, also known as the Sodium upgrade, which brings several new features and improvements to the platform. The upgrade introduces the governance module, which allows token holders to vote on proposals and make decisions about the future of the platform. Other notable additions include the ability to list any Cosmos SDK-based chain on Osmosis, the ability to add and trade any ERC20 token on Osmosis through the IBC bridge, and the introduction of liquidity mining rewards for specific pools. In addition, the Sodium upgrade brings several improvements to the user interface, including a revamped mobile app, a new trading interface, and improved visibility of pool details. Overall, the upgrade is expected to improve the functionality and user experience of the Osmosis platform, making it a more competitive player in the decentralized exchange space.

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The article is original and has been checked for accuracy. If the article is accepted, the article is copyrighted by Gate.io.

Mauro Farina, 17/04/23