Below, I share a new deep dive research on an interesting protocol in DeFi. I introduce Osmosis: The Interchain DEX.
Osmosis is a very unique AMM and blockchain built within the Cosmos ecosystem. Below, we dive into how it works, project background, tokenomics and more!
What Is It?
Osmosis is a Proof of Stake (PoS) blockchain, automated market maker protocol created through the Cosmos SDK, which utilizes Inter-Blockchain Communication (IBC) to allow cross-chain trades. What sets Osmosis apart from other decentralized exchanges is its high level of customization: it provides the tools for market makers to adjust self-identifiable parameters.
OSMO is the native governance token that gives staked holders the power to dictate the future of the protocol by voting on protocol upgrades, allocating LP rewards, and setting the base fee. Through superfluid staking, a native process to Osmosis, users are able to stake OSMO to secure the chain, while also providing the token to liquidity pools.
Project Background?
Osmosis Labs was founded by Josh Lee, Tony Yun, Dev Ohja and Sunny Aggarwal. In Fall of 2020, while Aggarwal and Ohja were developing on-chain privacy features, Lee and Yun with Chainapsis, created the initial prototype of Osmosis during a hackathon project. In January 2021 the four co-fouders began to focus their efforts on building out the decentralized exchange (DEX).
Osmosis was created as a DEX because the founders saw an opportunity in the Cosmos ecosystem for improved interoperability. The project was launched on its own blockchain through Cosmos SDK on June 19, 2021 with the help of community funding. Today, Osmosis is the first major DEX in the Cosmos ecosystem to utilize IBC at scale. Currently it has over $210 million in TVL and connects 44 separate chains through IBC.
Centralized or Decentralized?
Osmosis (OSMO) is a fully decentralized protocol. It is a community-launched, community-led, decentralized exchange. The founders decided against listing OSMO on any centralized exchanges as it would compete directly with the Osmosis DEX. The genesis block for the Osmosis blockchain was June 19, 2021. Osmosis Labs (OSMOSIS LABS PTE. LTD.) is based out of Singapore.
Founders Background?
Prior to Osmosis Labs, Sunny Aggarwal and Dev Ojha co-founded Sikka Tech, a validator protocol, both contributed to the core developer team on Tendermint/Cosmos.
In addition, Sunny has been a host on Epicenter, a crypto-focused podcast, since 2018. In 2016, Sunny also started "Blockchain at Berkeley," the largest student blockchain group in the world.
Josh Lee has been researching the blockchain and contributing to the Tendermint/Cosmos core developer team since 2019. In 2020, along with Tony Yun he co-founded Chainapsis, which is responsible for building the Keplr wallet, the most versatile wallet in the Cosmos ecosystem.
Native Token?
$OSMO
Token Usage?
OSMO is used to secure the Osmosis chain through staking - staked holders can propose new ideas, vote on updates to the protocol, set the base fee for the network, and allocate rewards for liquidity pools.
There will be a total supply of 1B OSMO tokens. Initially, there was a genesis supply of 100M tokens, split 50-50 between the strategic reserve and fairdrop recipients. The strategic reserve funds are controlled by a multi-sig DAO which will be used to grow the protocol through grants and fundraising. The "fairdrop" was determined by a quadratic equation that allocates OSMO to those who held and/or staked ATOM in the Cosmos ecosystem prior to the snapshot taken on February 18, 2021.
How to Buy $OSMO?
OSMO can only be acquired by purchasing the native Cosmo token, ATOM, or another token that is compatible within the IBC ecosystem. The user will also need to download and setup a Keplr Wallet, the leading IBC-enabled crypto wallet, with ATOM or a compatible token transferred to the Keplr Wallet, users can connect their wallet to the Osmosis app, deposit the token into Osmosis, and trade the IBC-enabled currency for the asset OSMO.
Staking Features?
The Osmosis network has a staking mechanism and there is no minimum amount of OSMO needed. The user can stake $OSMO either through the Osmosis protocol or directly through the Keplr Wallet.
OSMO holders will need to delegate their staked token supply to a validator in order to complete the staking process. In exchange, the user will automatically start earning staking rewards minus the small validator fee. As soon as the staking transaction is confirmed, the rewards will automatically begin accumulating and can be claimed each epoch, or every 24 hours on a per-block basis.
The rewards are generated through the collection of transaction fees on the network. In order to unstake (unbond or undelegate) the OSMO tokens, there is a 14-day unstaking (locked) period. As of Tuesday, September, 7th, 2022, there are currently 135 validators requiring a minimum of 181.9k $OSMO.
OSMO can also be used as a method of “superfluid staking", which means the asset can be lended as liquidity within the protocol while being staked, earning rewards for both. Superfluid staking was developed and first implemented natively on the Osmosis chain.
Governance Process?
The network is 100% decentralized and run by the DAO. Over the last year, the DAO has voted on over 300 proposals put forth by the community. All staked OSMO holders are granted the ability to vote on and suggest new governance proposals. As of now, Osmosis supports 3 types of proposals: community pool spend, parameter change, or a text proposal (signaling mechanism).
Blockchain?
Osmosis is built on its own application-specific blockchain within the Cosmos ecosystem utilizing Cosmos SDK.
Project Funding?
On October 27, 2021, Osmosis closed a $21M token sale led by Paradigm as well as Nascent, Etheral, Figment, Robot Ventures, Terraform Labs CEO Do Kwon, and Bossanova Investimentos. It is Paradigm's first major investment outside of the Ethereum blockchain. The token price of OSMO on the date of sale was $5.47.
Token Issuance?
Token Issuance and Breakdown by category found here. Initially, there was a genesis supply 100M tokens, split 50-50 between the strategic reserve and fairdrop recipients.
The strategic reserve funds are controlled by a multi-sig DAO which will be used to grow the protocol through grants and fundraising.
The "fairdrop" is determinned by a quadratic equation that allocates OSMO to those who held and/or staked ATOM in the Cosmos ecosystem prior to the snapshot taken on February 18, 2021.
Additional Features in the Future?
On the horizon, developers at Osmosis are working on implementing an adaptive stableswap feature to accommodate liquid-staking assets, such as stATOM/ATOM.
They also plan on adding a volatility-aware feature to the AMM which allows LPs to automatically remove liquidity when there are moments of heightened volatility.
Previous Attacks/Hacks?
There was an attack on the Osmosis protocol on June 8th, 2022, due to a liquidity pool exploit. The attackers were able to steal roughly $5M in funds from the DEX. $2M was eventually returned by 2 of the attackers. The bug "involved an incorrect calculation of LP shares when adding and removing liquidity from pools" according to the Osmosis twitter account. Due to the bug, users asset values increased by 50% when users deposited into and removed assets from liquidity pools.
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Thank you for reading and please feel free to provide any feedback, comments or concerns!
REMINDER: This is in no way financial advice and always do your own research.