Osmosis (OSMO): The DEX With Customizable Liquidity Pools

Decentralized finance, or DeFi, has expanded tremendously over the last few years. It offers exciting opportunities through decentralized lending, borrowing assets, yield farming and more. Decentralized exchanges (DEXs) are at the core of these developments and innovations.

Until recently, DEXs have experienced certain limitations to the capabilities of their blockchains. A next-generation, multi-chain DEX known as Osmosis is now available. It offers far more functionality than established single-blockchain DEXs.

What Is Osmosis?

Osmosis is a decentralized exchange (DEX) that uses the Cosmos SDK for optimized functionality with other blockchains. Its automated market makers set it apart, allowing enhanced market responsiveness for liquidity providers.

Osmosis is a multi-chain DEX specifically built to function with other blockchains in the Cosmos ecosystem. Communication with these other blockchains is achieved via its Inter-Blockchain Communication protocol (IBC). Because Osmosis is linked to other Tendermint blockchains, providing smooth, fast trades.

Furthermore, IBC enables customizable automated market makers, or AMMs. Uniquely, Osmosis liquidity providers can set their own parameters based on current market conditions. This customization provides increased responsiveness to changing market conditions for optimized results. In addition, token holders can earn staking rewards, participatory rewards, liquidity mining rewards and transaction fees when they delegate tokens to validators.

What Is an Automated Market Maker (AMM)?

An AMM, or automated market maker, is a system of autonomous liquidity providers that determines digital asset pair pricing using smart contracts. By doing so, AMMs provide liquidity for peer-to-peer (P2P) trading. As opposed to traditional finance systems that can manipulate prices and charge high fees, AMMs offer automated, permissionless trading of digital assets. Osmosis stands out among other smart contract AMMs because it utilizes Cosmos SDK’s open-source ecosystem.

What Is a Liquidity Pool?

An automated market maker is structured with liquidity pools, collections of tokens shared by many users. Using a DAO-like structure, each liquidity pool stands on its own and has unique rules established by its liquidity providers. Osmosis users can create their own liquidity pools for liquidity providers to contribute to, and users trade against the pools. 

Liquidity providers profit from their contributions by earning liquidity mining rewards and fees. The customization of these pools means that their fee structure is created based on a variety of factors that include market volatility. This is in contrast to other platforms’ liquidity pools, which may only take into account token pair rarity. Across all of the Osmosis liquidity pools, the total value locked is roughly $204 million.

History of Osmosis

Osmosis Labs, originally founded by Josh Lee and Sunny Aggarwal, created the majority of the Osmosis protocol’s initial code. During an October 2021 token sale headed up by Paradigm, $21 million was raised for the platform’s development. Since the start of 2022, Osmosis’ popularity has skyrocketed, with its TVL increasing drastically and crossing the $1 billion mark.

Osmosis is a decentralized project, so no single person or entity is responsible for running it. Instead, governance is through OSMO token holders, referred to as the Osmosis community. This group votes on modifications and upgrades to the Osmosis protocol.

What Does Osmosis Aim to Achieve?

While decentralized exchanges have dramatically expanded the opportunities available with DeFi, popular DEXs like Curve, PancakeSwap, Uniswap and others have specific shortcomings that Osmosis aims to overcome. The functionality of these single-blockchain exchanges is limited to the tokens native to their networks. The Osmosis DEX, however, is a multi-chain exchange that allows the staking of many tokens on other blockchains. Its AMM is linked to numerous other Tendermint blockchains, so Osmosis can support its users’ cross-chain trades. 

Osmosis also aims to support customization in liquidity pools via the platform’s governance processes. OSMO, the native Osmosis token, is used to pay transaction fees and to support governance.

How Does Osmosis Work?

Since Osmosis was built using Cosmos SDK, it’s interoperable with other blockchains in the Cosmos ecosystem. As noted, its unique multi-chain blockchain uses Cosmos’ IBC for communication. Because of this unique design, OSMO token holders can complete swaps and trades with non-native token pairs. By staking tokens and being a liquidity provider, token holders can earn transactions and staking rewards. In addition, holding OSMO tokens comes with governance voting rights and the ability to help steer upgrades and new developments.

Features of Osmosis

The Osmosis DEX’s innovative features give it key advantages over some of the other DEXs that are currently available. Let’s look at some of them.

Customizable Liquidity Pools

The customization capabilities of Osmosis’ liquidity pools provides a more flexible fee structure than those of other platforms, who exclusively take token pair rarity into account. Liquidity providers can optimize earnings from fees and staking rewards by compensating for market volatility and other factors.

Self-Governing Liquidity Pools

Osmosis liquidity pools are also self-governing, meaning users can vote on changes to a pool’s protocol. In doing so, they can adjust TWAP calculations, swap fees, curve algorithms, rewards and incentive models. The platform’s liquidity pool governance feature supports diversity in the pools, so that users’ strategies and risk tolerance can more fully be represented. 

To encourage longer-term commitments to the pools, those who make such commitments gain more liquidity mining rewards and have greater voting power. And those who have a greater financial investment in the platform have more say in the direction their pools take.

Superfluid Staking

Osmosis is the first platform to offer enhanced staking rewards, which it calls Superfluid Staking. When users stake OSMO tokens, they can also contribute to a liquidity pool. This allows them to receive two types of rewards at the same time, including earning a proportional amount of transaction fees from the liquidity pool and earning staking rewards. Other platforms that offer liquidity mining incentives only allow one of these earning options at a time. 

Currently, token distribution is weighted heavily on liquidity mining incentives and staking rewards to promote the growth of the platform.

MEV Resistance

MEV (maximal extractable value) resistance is assured through Osmosis’ use of threshold encryption. Thus, pools are private and cannot be manipulated by bots and other malicious forces. Often, bots and other forces use a sandwiching technique to profit while causing other users to suffer a loss. 

Sandwiching involves bots raising the price through large buy orders and quickly selling their holdings. MEV resistance makes it impossible for malicious forces to identify such trading opportunities, which protects users against losses from nefarious actions.

Osmosis Thirdening

Osmosis thirdening is a model adopted to create scarcity for the OSMO token and increase its price. Every year, Osmosis will release a set number of tokens. However, the amount of tokens released will decrease by a third with every “thirdening.” 

Osmosis thirdening occurs in June. While it may increase the token’s price, it also results in a decrease in staking and liquidity pool rewards. 

Advantages of Using Osmosis

From the ground up, Osmosis has been built to deliver an improved experience to its users. From multi-chain blockchain and interoperability with non-native tokens to advanced reward mechanisms, customization options and more, Osmosis is a next-generation DEX. Let’s look at some of the specific advantages that it provides.

Enhanced Incentives and Rewards

Other platforms enable users to stake their tokens to earn rewards or to contribute to a liquidity pool. Osmosis, however, offers Superfluid Staking to enhance users’ ability to profit from their OSMO token holdings. OSMO token holders can create their own customized liquidity pool, or provide liquidity to an established pool. While they earn transaction fees from the liquidity pool, they can also stake those same OSMO tokens to earn reward incentives. In this way, users of the Osmosis platform can enjoy increased returns.

Through customization, profitability to liquidity providers can be optimized through a more competitive fee structure. These are self-governed pools, so each provider has voting privileges. By voting, users can influence the management of a pool’s strategy, fee structure and exposure to risk. In addition, liquidity pool providers who commit their tokens for a longer period of time have both greater voting power and liquidity mining incentives.

Greater Trading Opportunities

The many single-blockchain platforms in use today only permit native token trades, which places significant restrictions on users’ activities. As a multi-chain DEX, Osmosis works with other blockchains via the IBC protocol, dramatically increasing trading opportunities for Osmosis users.

Protection Against MEV

Maximal extractable value has resulted in significant financial losses for users of other DEXs. Sandwiching and other strategies used by bots and live actors artificially manipulate prices. Osmosis’ threshold encryption makes pools private and prevents others from seeing opportunities to manipulate prices, which directly protects users against MEV losses related to sandwiching and other actions.

Osmosis Road Map

Osmosis launched in July 2021 after considerable development by the team at Osmosis Labs. In October of that year, Paradigm led the charge on a token sale, producing $21 million in funds for the platform. Many developments have been made to the platform since the launch. For example, Superfluid Staking debuted in February 2022.

Looking forward, Osmosis intends to integrate with Bitcoin, Ethereum and other non-IBC blockchains to expand its functionality. In addition, there are plans for the platform to match external incentives and to offer more incentives for strategic pools.

OSMO Tokenomics

As the native token of Osmosis, OSMO is used for a variety of critical purposes, including governance, rewarding liquidity providers and paying swap fees. At Osmosis’ launch, 100 million OSMO tokens were made available out of a total supply of 1 billion. The current circulating supply is almost 282.5 million. OSMO is an inflationary token, and the number of tokens made available will decline by Osmosis’ thirdening model. Put differently, the number of new tokens issued will reduce by a third each year.

The OSMO token allocation of upcoming token releases is strongly weighted toward liquidity reward mining at 45%. Both developer vesting and staking rewards receive individual allocations of 25%. The remaining 5% of the supply is used for the community pool.

OSMO Price Prediction

When Osmosis launched in October 2021, the OSMO token price was $5.12. Its price peaked in January 2022 at $10.71, at which time the crypto bear market took hold. OSMO hit an all-time high of $11.21 on March 4, 2022, but later significantly declined to $5.81 in April. Additional declines continued to leave their mark in 2022, as OSMO’s price hit an all-time low of $0.6869 on June 18, 2022. However, the price has slowly been trending upward since that time. As of November 14, 2022, OSMO’s price is $1.15.

DigitalCoinPrice’s prediction for OSMO looks promising. In 2023, the token’s price may reach $2.12. This is projected to increase to $3.27 in 2025 and $3.88 in 2027. In 2029, the predicted price is between $4.92 and $5.40, while the forecast for 2031 ranges from $7.67 to $8.15.

Is OSMO a Good Investment?

Osmosis stands alone as a multi-chain blockchain DEX that’s built within the Cosmos ecosystem. More than that, it’s a customizable AMM protocol that gives users control over swap fees, TWAP calculations and curve algorithms. Osmosis’ design and self-governed liquidity pools offer more trading pairs. All of these features distinguish Osmosis in a somewhat crowded environment. With these features and Superfluid Staking, users have considerable leeway to optimize gains while also managing their exposure to risk. Furthermore, these beneficial features have resulted in a considerable increase in the use of the platform since its launch, with activity expected to increase.

In addition to these features, the value of OSMO tokens is expected to progressively trend upward until at least 2031. In fact, the price of OSMO is expected to increase by more than $6 by that time. This presents long-term token holders with another opportunity to realize gains. However, token holders should expect significant price volatility on a short-term basis.

Closing Thoughts

While there are many DEXs in existence today, Osmosis is truly a next-generation DEX, specifically addressing some of the challenges and limitations of other single-chain blockchains with its multi-chain design and exceptional features. With improved opportunities for trading, liquidity pools and more, Osmosis is a DEX that’s already improving the user experience for many crypto enthusiasts.