By Aidan Kalish | Crescent City Capital Market Analyst Intern
Osmosis is a decentralized exchange (DEX) and automated market maker (AMM) for the Cosmos ecosystem. The Osmosis AMM is unique because it allows users to create their own liquidity pools or to duplicate existing ones with their own parameters. While most AMMs are efficient at providing liquidity in a decentralized manner, they still operate as service-based products as the platform creates pools that are free to join. The Osmosis AMM was conceived as a “serviced infrastructure” that lowers the barrier of entry to creating custom AMMs by providing users the ability to tweak the values of tokens and the supply. Osmosis also makes use of self-governing liquidity pools. Users can use OSMO, the native Osmosis token, to vote on the parameters and protocols of the liquidity pools. This allows the holders of the token to decide what specific liquidity pools consist of, in addition to playing a central role in the governance of the Osmosis protocol on a wider scale.
Since Osmosis is built on the Cosmos ecosystem, users are able to natively trade assets from more than 47 different chains within the ecosystem. According to Cosmos, Osmosis is the eighth blockchain on the network to enable Inter-Blockchain Communication (IBC) and the sixth blockchain that connects to the Cosmos Hub. IBC enables applications based on Tendermint, the core consensus algorithm of Cosmos, to interact with each other, enabling Osmosis to operate between chains. Users can provide liquidity with ATOM, the native token for Cosmos, and buy tokens that are in the ecosystem.
Another key component of the Osmosis network is superfluid staking which allows users to stake tokens while simultaneously using them to provide assets to a liquidity pool. This means that users are rewarded for helping to secure the blockchain while staking and also receive reward fees associated with liquidity pool transactions. The end result is that superfluid staking not only increases the capital of users but also contributes to the security of other blockchains within the Cosmos ecosystem.
OSMO was released with an initial supply of 100 million tokens that were allocated evenly between ATOM holders and a strategic reserve. The tokens run on a “thirdening” schedule which is similar to Bitcoin’s halving. This means that the number of new tokens issued will be reduced by a third every year. According to the Osmosis Labs blog:
“In the first year, there will be a total of 300 million tokens released. After 365 days, this will be cut by a third, and thus there will be a total of 200 million tokens released in year two. In year three there will be a total of 133 million tokens released. And so on. This thirdening process will allow OSMO to reach an asymptotic maximum supply of one billion.”
At the time of writing Osmosis has a market cap of $313.37 million and a fully diluted market cap of $1.1 billion, making it the 89th largest cryptocurrency. Osmosis is currently the 14th largest protocol in terms of Total Value Locked (TVL) which stands at around $205.22 million according to data from DeFi Llama. Osmosis began 2022 trading at $6.38 and has fallen to a current price of $1.12.
Osmosis is a protocol that allows users to create custom AMMs while also providing a core DEX and an extra layer of security for the Cosmos ecosystem. When evaluating the risk involved with investing in OSMO, it is important to note that the strength of the Cosmos ecosystem plays a direct role in the future of Osmosis. An investor looking into an investment in OSMO may want to make a final decision only after evaluating their risk tolerance for both Osmosis and Cosmos.
Disclaimer: Please note that the contents of this article are not financial or investing advice. The information provided in this article is the author’s opinion only and should not be considered as offering trading or investing recommendations. Please conduct your own due diligence before making any investment decisions.