Issue #2: Becoming the go-to decentralized exchange of the Cosmos ecosystem -

Summary

Osmosis Protocol is a blockchain providing a decentralized exchange (DEX) and Automated Market Maker (AMM) for the Cosmos ecosystem. Users can trade tokens, provide liquidity, and stake for rewards.
Sunny Aggarwal and Josh Lee, the co-founders, have significant experience in other successful projects.
By running on its own chain, providing customizable AMMs, and focusing on privacy, Osmosis serves as an innovative hub for Decentralized Finance (DeFi) experiments. Its focus on modularity helps other teams bring more value to Osmosis with integrations.
Osmosis has the potential to be the major protocol in its niche. However, CertiK’s audit of Osmosis’ is not yet complete, mass adoption of the Cosmos ecosystem is not guaranteed, and it hasn’t faced direct competitors yet.

Symbol	OSMO	Circulating Supply (estimated)	332,601,356
Rank (MCAP)	#53	Total Supply	325,000,000 (max 1,000,000,000)
Price (03/15/22)	$8.31	Market Capitalization	$2.76B

Complete historical OSMO price chart. Source: CoinGecko

What is the Osmosis Protocol?

Osmosis is a blockchain with a decentralized exchange (DEX) and Automated Market Maker (AMM) for the Cosmos ecosystem. Its focus is on privacy and modularity to drive innovation in Decentralized Finance (DeFi).

Gateway to the Cosmos ecosystem

Osmosis provides a way to enter the Cosmos ecosystem with your money.

Osmosis’ proof of stake (PoS) blockchain uses the open-source Cosmos SDK. Developers can use this SDK (reusable tools and code) to create their own blockchain faster and easier than writing all their code from scratch.

Using the Cosmos SDK, Osmosis can connect to other Cosmos-based blockchains with the Inter-Blockchain Communication Protocol (IBC). Instead of each blockchain being an island that needs to build its own infrastructure, IBC is like a bridge connecting the islands, allowing them to share data. These bridges help the linked blockchains grow faster and more efficiently.

This IBC connection lets users stake, swap, or provide liquidity for other tokens in the Cosmos ecosystem.

Decentralized exchange (DEX)

Similar to an exchange like Binance, users can swap between tokens listed on Osmosis’ DEX.

For example, you could swap your OSMO for ATOM or ATOM for LUNA. Any IBC-enabled chain can list their token on the Osmosis’ DEX.

Osmosis developers built it with features to reduce problems common to other DEXes.

For example, many DEXs have problems with frontrunning. Orders in a DEX are usually visible to everyone. This visibility allows bots to watch for orders placed in a block, then “front-run” the transaction to make a low-risk profit by inserting their orders before another user’s order. This technique results in the other user getting a worse deal.

To solve this problem, Osmosis uses shielded liquidity pools. By eliminating frontrunning, Osmosis’ DEX offers users less slippage (better prices).

As a bonus, Osmosis DEX (at the time of writing) has no fees for trades. Most exchanges charge a fee for each transaction, which reduces your profits.

Automated market maker (AMM)

A centralized exchange (CEX), such as Binance and Coinbase, requires a market maker to pair buy and sell orders. This market maker costs money and centralizes power, leading to higher fees and price manipulation.

Since a DEX also requires a market maker, Osmosis provides an Automated Market Maker (AMM). This AMM performs the CEX market maker’s job without the downsides of centralization. In this way, Osmosis’ DEX and AMM support the ideals of blockchain and decentralization.

Osmosis aims to be “the best AMM secured by the Cosmos ecosystem.” By allowing pool creators to customize the AMM, Osmosis enables the DeFi market to experiment in solving market inefficiencies.

Liquidity provision and staking

Osmosis’ AMM requires liquidity (deposited tokens) for its AMM to do the same job as a CEX’s market maker.

When traders place orders, the AMM buys and sells tokens from Osmosis’ liquidity pools to match these orders. Osmosis rewards users for depositing their tokens into these liquidity pools.

How are Osmosis’ tokens distributed and released?

Since its beginning, Osmosis tokenomics have shown fairness by including the community and avoiding tactics that can lead to investor “pump and dump” scenarios.

Osmosis released a “Genesis Supply” of 100 million tokens at launch, allocating half of these tokens to a strategic reserve. ATOM holders received the other half of these tokens as a “quadratic fairdrop,” which distributed a higher proportion of OSMO tokens to wallets with less ATOM.

By splitting distribution this way, smaller users could participate in OSMO. Meanwhile, larger players found it more difficult to game the system to gain a massive portion of the supply and manipulate the market.

The following chart shows the initial “Genesis Supply” and remaining supply distribution percentages.

OSMO supply distribution. Source: OSMO Token Distribution

Osmosis now distributes tokens in the following percentages:

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

Unlike some projects that release a large amount of its token supply at once, Osmosis gradually releases its tokens. These incremental releases prevent investors from selling many freshly released tokens at once and crashing the price.

The following graph illustrates Osmosis’ token release schedule. Emissions reduce by one-third each year, with the first “thirdening” occurring in June 2022.

OSMO token release schedule. Source: OSMO Token Distribution

Why could Osmosis be valuable in the future?

Gateway and hub for Cosmos

Blockchain ecosystems need a place for users to trade their tokens and farm yield.

Osmosis has positioned itself to be the major player fulfilling this role for the Cosmos ecosystem, which increases demand for OSMO.

Airdrop eligibility

Sometimes worth thousands of dollars, airdrops are common in the crypto space. OSMO holders will likely receive some of these airdrops.

This possibility encourages buyers to buy and hold OSMO.

Innovation

Osmosis’ focus on innovation can help it outperform competitors while attracting significant funds to its platform.

For example, Osmosis allows customization of its liquidity pools. This enables experimenting with assets like options, reducing impermanent loss, and adapting to high-volatility markets. These self-governing liquidity pools and other innovations can attract significant funds to Osmosis.

Superfluid staking

Superfluid staking allows users to generate more yield from the same tokens. This feature increases “capital efficiency” (the number of ways invested capital can generate a return), attracting investors to Osmosis.

In some projects, tokens can only be used in one place to generate yield. With superfluid staking, users can boost their profits through increased capital efficiency by earning yield from both LP liquidity pools and staking.

Experienced team

Some crypto projects have an anonymous team. This anonymity can encourage the team to “rug pull” (steal users’ funds). It also increases the difficulty of evaluating the team’s success in past projects.

Fortunately, the Osmosis team’s identities are public, and the two co-founders have a positive track record.

The first co-founder, Sunny Aggarwal, worked as a research scientist at Tendermint. He then founded the blockchain infrastructure company Sikka and operates a top-five validator on the Akash, Cosmos Hub, and Kava networks.

The second co-founder, Josh Lee, also worked at Tendermint. He then founded Chainapsis, which built the popular Keplr wallet for the Cosmos ecosystem.

The team has already proven their experience with wise design decisions – for example, outsourcing bridging so they can focus resources on their core product.

Funding and investors

Some projects’ funding comes in ways that allow early investors to gain many tokens at a low price. This strategy increases the chance of a price crash.

Venture capitalists (VCs) and parent companies can also hurt a project. VCs may drain the project of profits and make short-term profit-driven decisions that weaken or destroy the project in the long run. The corporate structure of parent companies sometimes reduces innovation – which can kill a project in a rapidly developing space like DeFi.

However, no initial VCs or a parent company funded Osmosis.

Osmosis did hold one ICO on October 27th, 2021. This ICO raised $21 million from six investors:

Paradigm (lead investor)
Robot Ventures
Nascent
Do Kwon
Figment
Ethereal Ventures

Interoperability trend

As DeFi innovation accelerates and hundreds of new projects launch, interoperability (allowing projects to interact and transfer funds) has become a powerful narrative.

Projects which can capitalize on this narrative, like Osmosis, are more likely to be winners.

Osmosis’ shows one example of its emphasis on interoperability by recently implementing CosmWasm. CosmWasm lets developers connect their apps to Osmosis, giving Osmosis more features such as lending and yield aggregators. These features then attract more investors to Osmosis, making it more valuable.

As more projects launch on the Cosmos ecosystem – even other DEXs – this interoperability allows the fresh liquidity to “trickle-down” into and benefit Osmosis.

Osmosis also plans to have significantly more tokens listed by the end of 2022, attracting new users from other DEXes and chains.

Governance and dynamic roadmap

Users vote with the OSMO token in protocol governance (voting on changes). Holders with more OSMO have more votes when deciding Osmosis’ future developments.

This dynamic encourages large players to continue buying and holding OSMO to strengthen their vote on critical decisions such as

optimizing their profits,
adapting to current market conditions,
and accelerating growth in ways funded by community pool spending.

These votes create a “dynamic roadmap.” In other words, it’s impossible to predict the exact future features or changes that the community will vote to add or integrate to Osmosis. However, profit potential incentivizes the community to create a roadmap that makes Osmosis more valuable.

What is the market saying about Osmosis?

Money continues to enter Osmosis

Investors trust Osmosis with over $1.6 billion of their funds. During February, they transacted a considerable $2.6 billion on Osmosis.

Total value locked (TVL) has been steadily climbing, which shows increased interest and trust in Osmosis.

Osmosis’ total value locked (TVL). Source: DeFi Llama

Despite many other projects seeing their token’s price downtrend during the current bear market, the OSMO price chart shows a steady long-term uptrend.

The community is growing

At the time of writing, Osmosis has a sizeable community of approximately:

Over 103,000 Twitter followers
Over 14,107 Discord members
Over 17,204 Telegram members
Over 10,216 SubReddit subscribers

When equating social followers to market cap, Osmosis has a smaller social following than somewhat-comparable older projects on other chains like Uniswap and SushiSwap.

Since Osmosis is new relative to these older projects, it’s not surprising that its social following is smaller (for now). This difference in social followers also suggests that Osmosis has significant attention to capture and room to grow.

Meanwhile, the community is growing exponentially. For example, this chart shows over 300% growth in Osmosis subreddit subscribers during the last six months:

OsmosisLab SubReddit subscriber growth. Source: subredditstats.com

Santiment also shows consistent and growing social engagement over the last six months, even during the current bear market:

Total social volume for Osmosis. Source: Santiment

What are the risks for Osmosis?

Audit not released (yet)

CertiK, a leading blockchain auditing firm, is currently conducting an audit for Osmosis.

It has not released the results yet, which could show a vulnerability. Depending on the severity, any discovered issues might lead to price fluctuations.

Even with an audit, hacks and bugs are always possible and could cause a price crash.

Future competitors

Osmosis doesn’t have significant direct competitors in the Cosmos ecosystem, despite the existence of other DEXes which fulfill different roles such as Gravity DEX, Sifchain, and Coinswap.

However, any direct competitors forming in the future could threaten Osmosis’ growth.

On the other hand, Osmosis may have an advantage over potential competitors by running on its own blockchain, which allows it to innovate faster. Another advantage is Osmosis’ emphasis on modularity and decentralization. This emphasis enables it to focus on its core mission while other teams add value.

As a first-mover, Osmosis also has the lead in gaining users’ trust and a recognizable brand name.

Time will decide how well Osmosis’ vision of modularity and innovation can sustain its lead and outperform future competitors.

Lack of adoption for the Cosmos ecosystem

The Cosmos ecosystem most likely has a bright future ahead, but technology and use cases evolve rapidly.

If the Cosmos ecosystem sees lackluster adoption, Osmosis’ use case diminishes. Less money in the ecosystem results in less money flowing through Osmosis, which decreases its value.

Bottom line

Osmosis is a blockchain, DEX, and AMM designed to allow innovation and integrate value from other projects. With an accomplished team, community-governed roadmap, and compelling live features, Osmosis is worth watching as it evolves toward dominating its niche.

What can I do from here?

Create your Keplr Wallet, become eligible for potential future airdrops by purchasing and holding OSMO, and swap listed IBC tokens on Osmosis. (Difficulty: Beginner)
Follow weekly updates on Osmosis’ YouTube. (Difficulty: Beginner)
Stake your OSMO (68% APR at the time of writing) and provide liquidity for rewards. (Difficulty: Intermediate)
Contribute to the dynamic roadmap through criticism and suggestions in the forum. (Difficulty: Advanced)

Who should I follow?

Osmosis’ Medium – Read official articles

Osmosis’ Discord, Telegram, and SubReddit – Discuss Osmosis with its community

Osmosis’ YouTube and Twitter – Follow updates on the protocol

Twitter Accounts for Sunny Aggarwal and Josh Lee – Read thoughts from the co-founders of Osmosis