Launched in 2021, Osmosis is a specialized blockchain that functions as an automated market maker (AMM) protocol dedicated to the Cosmos ecosystem and its tokens. Its core vision is to become a fully customizable platform for seamless cryptocurrency swaps.
The blockchain was founded by two renowned Cosmos ecosystem engineers, Sunny Aggarwal and Josh Lee. Consequently, it is built using the Cosmos SDK (a developer-focused toolkit) and utilizes the Tendermint consensus mechanism. Osmosis is also the Cosmos blockchain that truly popularized Inter-Blockchain Communication (IBC) technology, enabling seamless data exchange between different compatible blockchains.
Initially, Osmosis was conceived as a blockchain where developers could build their own custom AMMs. However, at the time of writing, only a few parameters are customizable when creating a liquidity pool.
The Architecture of the Osmosis Blockchain
The architecture of the Osmosis network is notably simple. It is a proof-of-stake blockchain built using the Cosmos SDK and secured by an unmodified Tendermint consensus mechanism. As of this writing, there are 118 active validators out of a maximum of 219. A key difference from other Tendermint-based blockchains is its token distribution. New OSMO tokens from inflation are distributed to validators once per day, rather than continuously with each new block, as is commonly the case.
Both the Cosmos SDK and Tendermint were designed as solutions for creating simple blockchains that balance security, speed, and decentralization. Modifying these core technologies is only done out of necessity, which wasn't the case here. For Osmosis, the development of its platform for customizable AMMs is the central focus.
How the DEX Currently Operates
Similar to Uniswap or Sushiswap, Osmosis uses an automated market maker (AMM) protocol. This protocol can be modified according to user requirements. Currently, there are only two customization options when creating liquidity pools: the asset ratio and transaction fees.
The current version of the DEX uses an AMM model similar to Balancer. Unlike Uniswap, Sushiswap, or Pancakeswap, this model allows users to create liquidity pools with custom ratios. In classic AMMs, the only permitted ratio is 50/50 (e.g., a pool with 50% USDC and 50% ETH). This new model enables the creation of a liquidity pool tailored to specific needs. If a user prefers more exposure to ATOM than OSMO, they can create a pool with 80% ATOM and 20% OSMO.
On Osmosis, transaction fees are also adjustable. Each user can create their token pool and impose whatever fees they desire (the most common being 0.3% per transaction). For example, while the OSMO/ATOM pair imposes only 0.3% fees, the ATOM/ION pair imposes 0.8%.
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Future Customization Options for the DEX
Although current customization options seem limited, many more are coming in the near future. Indeed, all parameters of liquidity pools will eventually be modifiable.
Liquidity Pools with More Than 2 Tokens
The current Osmosis model isn't entirely identical to Balancer. The biggest difference is the number of tokens allowed per pool. On Balancer, a user can create a pool with up to 8 cryptocurrencies. This functionality, akin to creating an index like the S&P 500 for US stocks, is not yet available on the Osmosis DEX, which is currently limited to 2-asset pools.
Parametric Liquidity Curves
In the future, each liquidity pool will be able to follow its own liquidity curve, which will help reduce slippage. For example, Curve uses a modified liquidity curve to minimize slippage when exchanging two similar assets (USDC for DAI or WETH for sETH), a model called StableSwap.
The Osmosis Ecosystem
Key Participants in Osmosis
Osmosis is a blockchain entirely dedicated to its decentralized exchange platform. It features the three classic components of a proof-of-stake blockchain:
- Validators: Osmosis has a set of validators responsible for securing the network. They number 118 at the time of writing and can reach a maximum of 219. In accordance with the Tendermint consensus method, they are rewarded pro rata based on the amount of OSMO they hold.
- Delegators: Not everyone can be a validator due to the required amount of OSMO, the limited number of validator slots, and the complexity of setting up and maintaining a server. For these reasons, OSMO holders can delegate their tokens to validators and receive a portion of the network rewards.
- Governors: In a decentralized governance blockchain like Osmosis, OSMO holders can vote on important decisions.
Beyond these roles, there are also participants specific to decentralized exchange platforms:
- Traders are simply the application's users. They exchange tokens by interacting with liquidity pools.
- Liquidity Providers (LPs) delegate their assets to liquidity pools, enabling traders to use the application. To reward their delegation, they typically receive 0.3% of all transactions and can participate in farming.
Liquidity Mining
Like many decentralized exchange platforms, Osmosis allows liquidity providers to earn additional rewards. Users can delegate their liquidity pool tokens (which represent their share of the pool) in exchange for rewards in OSMO tokens, also known as liquidity mining. This helps the DEX increase its liquidity and, consequently, its performance.
Osmosis adds an additional component: the unbonding period for liquidity tokens. The user can choose from three periods: 1, 7, or 14 days. These unbonding days are applied when the user decides to withdraw their liquidity tokens. During this period, the funds are locked and unusable. Rewards increase as the unbonding period lengthens.
Liquidity Bootstrapping Pools (LBP)
Another feature of Osmosis is the Liquidity Bootstrapping Pool (LBP). These are liquidity pools where the ratio between the two tokens in the pair is variable. This model is often used for initial sales of cryptocurrencies.
Protocols looking to introduce their token via Osmosis can, for example, create a liquidity pool with an initial ratio of 90/10 in favor of OSMO. Over time, the ratio gradually moves toward 50/50, so the price automatically decreases. As the price drops, buyers intervene, and the token's value begins to stabilize around the equilibrium price. This method allows tokens to be sold at a market-chosen price.
In the example above, the initial price of this token's LBP was $1.60**, while the final price was set at **$0.24. However, the market seems to have chosen $1.20 as the acceptable price for this cryptocurrency.
Superfluid Staking
In February 2022, Osmosis launched its superfluid staking, a true revolution in the world of DeFi. To understand what "superfluid staking" is and appreciate its importance, a primer on liquid staking is necessary.
Liquid staking is developed on certain proof-of-stake blockchains like Polygon, Polkadot, or Terra. Unlike classic delegation, where delegated tokens are locked for a certain period, "liquid staking" allows delegated tokens to remain liquid. The delegated tokens can then be used on the network's DeFi applications.
Superfluid staking is essentially liquid staking in reverse. The OSMO locked in liquidity pools can be delegated to validators on the Osmosis network. This way, liquidity providers can benefit from rewards from the exchange platform, from farming, and also from those related to securing the network.
What Are the Roles of the OSMO Token?
The OSMO token is native to the Osmosis blockchain. It is what is known as a utility token, meaning a token purchased to access services. These services are multiple.
As Osmosis is a proof-of-stake blockchain, OSMO holders can delegate their tokens to validators to help secure the network. Today, Osmosis has 118 active validators, with a limit of 219. By delegating their tokens, the user secures the network while enjoying an annual yield (which was 70% at the time of writing). It is important to note that delegation and "superfluid staking" are different operations. The former is found on all proof-of-stake blockchains, while the latter functions as a boost applied during farming.
Like ETH on Ethereum or BTC on Bitcoin, OSMO is also used to pay transaction fees on the Osmosis blockchain. However, at the time of writing, fees are optional. This is explained by the nature of the protocol, which also collects fees from trades made on the platform. It is somewhat of a marketing operation aimed at attracting as many users as possible.
The governance of Osmosis is decentralized by design. Therefore, OSMO holders can vote on important decisions for the protocol.
OSMO is also a liquidity token. On the Osmosis decentralized exchange platform, tradable tokens are mostly paired with OSMO, much like WETH is the dominant token on the Uniswap platform. This liquidity dominance is due to the rewards given to users who provide liquidity on these pairs, notably in the form of OSMO (what is called liquidity mining).
The OSMO token is a highly inflationary cryptocurrency used to pay delegators, validators, and liquidity providers. However, OSMO emissions are reduced by one-third every year, limiting the total number of tokens to 1 billion units.
OSMO Token Distribution
The Osmosis Fairdrop
Decentralization is one of the most important concepts for the Osmosis team, especially from a governance perspective. This is why OSMO tokens were not sold in a traditional way through an Initial Exchange Offering (IEO) or an Initial Coin Offering (ICO).
However, in May 2021, they decided to conduct a fairdrop for ATOM holders. This derivative of an airdrop helps reduce the gap in tokens allocated between large and small wallets.
According to the official details of this fairdrop, the amount of OSMO received per address was proportional to the square root of the number of ATOM in its possession. Mathematically, a person with 2 times more ATOM will receive only 1.4 times more OSMO, thus reducing the advantage of large wallets. In total, 50 million OSMO were distributed this way, representing 50% of the tokens in circulation at the genesis of Osmosis.
Osmosis Fundraising
In 2021, as the value concentrated on the Osmosis blockchain exploded, the decentralized exchange platform attracted the attention of professional investors.
Initially reluctant to sell tokens, which are synonymous with governance, to investment funds, Osmosis Labs concluded its first private sale of OSMO to the venture capital fund Paradigm in October 2021, which remains the only sale to date. Osmosis raised over $21 million in this funding round.
Osmosis Team and Partners
The Team Behind Osmosis
The creation of Osmosis was announced in September 2020 by its two co-founders, Sunny Aggarwal and Josh Lee. In 2021, they founded Osmosis Labs, a non-profit structure responsible for the development of Osmosis.
Before dedicating themselves to developing Osmosis, the engineering duo both contributed for many years to the development of Tendermint, the famous consensus method used by blockchains like the Cosmos Hub, Binance Chain, and Terra.
Today, Osmosis Labs has 12 employees according to its official LinkedIn page. These employees are the most regular contributors to the Osmosis blockchain. The Osmosis team is also responsible for maintaining the Keplr digital wallet, a cornerstone of the Cosmos ecosystem.
Osmosis Partners
Osmosis is the Cosmos SDK-built blockchain that democratized IBC. It was the first to truly take advantage of this new technology. It is considered by many to be a pillar of IBC due to its utility and for bringing it to the forefront.
For these reasons, multiple other projects seek to partner with Osmosis. This is the case with the Keplr wallet. It is maintained by the same team of developers and is built around IBC, facilitating cryptocurrency transfers between different blockchains.
In 2021, Sunny Aggarwal joined the team of the delegation platform Citadel.one as a consultant. This partnership aims to provide a complete and ergonomic solution for Osmosis users, including wallet, governance, and delegation functionalities.
In January 2022, the decentralized leveraged exchange platform Injective announced a partnership with Osmosis. This alliance allows Injective to connect to the rest of the IBC-compatible blockchains. Osmosis then became the main bridge connecting Injective to the rest of the Cosmos ecosystem.
Osmosis integrated CosmWasm in early 2022. This allows all developers coding in the Wasm language to build DeFi applications on the Osmosis blockchain. This partnership shows Osmosis's desire to extend its scope beyond a simple exchange platform.
Frequently Asked Questions
What makes Osmosis different from other DEXs like Uniswap?
Osmosis is built specifically for the Cosmos ecosystem and leverages Inter-Blockchain Communication (IBC) for native multichain swaps. Its key differentiator is its focus on deep customization, allowing for adjustable swap fees and asset ratios in liquidity pools, with plans for more advanced features like multi-token pools and parametric curves.
How do I start using the Osmosis DEX?
To use Osmosis, you first need a Cosmos-compatible wallet like Keplr. Acquire ATOM from a centralized exchange, transfer it to your wallet, and then connect the wallet to the Osmosis web app. From there, you can deposit assets and begin swapping or providing liquidity to pools.
What is Superfluid Staking?
Superfluid Staking is an innovative feature unique to Osmosis. It allows users to stake the OSMO tokens that are already locked in liquidity pools. This means liquidity providers can earn rewards from trading fees, liquidity mining incentives, and staking yields simultaneously, maximizing capital efficiency.
Is the OSMO token inflationary?
Yes, the OSMO token has an inflationary model designed to reward network participants like validators, delegators, and liquidity providers. However, its emission rate is reduced by one-third each year, creating a predictable and declining inflation schedule until the maximum supply of 1 billion tokens is reached.
Can I buy OSMO on major centralized exchanges?
Osmosis is a strong proponent of decentralization, and consequently, OSMO is primarily available on its own decentralized platform and other DEXs within the Cosmos ecosystem. It is not typically listed on major centralized exchanges, by design. The primary way to acquire it is by swapping other IBC-enabled assets on the Osmosis app.
What is the future outlook for Osmosis?
The Osmosis roadmap includes expanding its feature set to compete effectively. Planned developments include a dedicated stablecoin exchange (similar to Curve), enhanced transaction privacy features to prevent market manipulation, and integration with MetaMask to attract users from the Ethereum ecosystem.