Osmosis is a decentralized exchange serving projects that are connected through the Inter-blockchain Communication Protocol (IBC). This is a breakthrough AMM (Automated Market Making) protocol that was created with the assistance of Cosmos SDK, enabling developers to create and then deploy their own customized AMMs. As a decentralized P2P blockchain, it is used for creating liquidity and token trading.
Osmosis employs a proof-of-stake protocol for its DeFi exchange application to enable trading, swapping, and staking on various blockchains across the Cosmos ecosystem. Initially invented as a module on the CosmosHub, the concept shifted to the creation of a chain of the same hub. At this, Osmosis is often referred to as a Hub AMM.
The project conducted an ICO in October 2021. The token sale led by Paradigm Ventures helped the project to raise 21 million USD. The value of its native token OSMO considerably increased at the beginning of 2022 thanks to an intensified focus on brokering cross-chain compatibility with other blockchains. As a result, it entailed a surge in trading volume, a rapid growth of TVL (total value locked), and the release of the cross-chain bridges connecting the Cosmos ecosystem to Ethereum-based networks.
Osmosis specialists are responsible for the development of the initial code while the project itself is run by a set of decentralized validators. The Osmosis community votes for the protocol upgrades and modifications.
As mentioned earlier, Cosmos represents an essential technological basis for Osmosis. This is an Internet of Blockchains where developers can create interoperable dApps. At the time of writing, Cosmos has to resort to the IBC for seamless communication with other chains and the transfer of tokens at a low cost. However, it also plans to embrace Ethereum-based and BNB Chain-based apps in the future.
As stated above, IBC is an Inter-Blockchain Communication protocol created to connect Tendermint‐based blockchains. The system employs Tendermint Core, a Byzantine-Fault Tolerant engine for building blockchains enabling developers to create their apps using any language they wish. What’s more, the technology enables instant transactions confirmation getting them finalized right after being included in blocks. The system also relies on AMM DEX algorithms to set up prices for cryptocurrencies and tokens in liquidity pools, thus standing in place of a centralized market maker.
Cosmos declares heterogeneity and sovereignty as its key principles. As Osmosis relies on these values, too, it goes further and extends them in its own automated market maker protocol. It doesn’t treat AMM and liquidity pools equally but develops a different method relying on experiments and fast iterations that take advantage of the crowd’s wisdom. The functionality provided to AMM designers allows them to adjust the mechanism to their needs. Thus, liquidity providers in the AMM pools can adapt the governance mechanism and improve their pools the way they want.
The Osmosis protocol was designed to be cross-chain compatible with the possibility to link the whole ecosystem of Cosmos chains and to offer deep liquidity with the total value of assets exceeding 10 billion USD. Having connected with Cosmos assets, the project moves on with integrating other chains, for instance, those that were built on Ethereum. It is possible thanks to Althea gravity bridge. Thus, Osmosis can be called an EVM-compatible blockchain taking into account the introduction of cross-chain bridges and tokens from EVM-compatible networks. Also, the protocol can connect to chains similar to Bitcoin and alternative smart contracting platforms by means of leveraging custom pegs.
The Osmosis approach is really unique in its own way. Simple AMMs don’t cater to the needs of the DeFi market with its increasing complexity which requires their further development. For instance, Curve Finance has come up with the innovative technology of StableSwap to meet the demand for swapping stable assets which resulted in the creation of a whole infrastructure. Osmosis, on the contrary, is devoid of an underlying hard code. It enables customizing the key parameters such as swap fees, token weights, etc. for each liquidity pool in a convenient manner. Thus, the protocol allows generating new curves on the fly.
The platform is fueled by the native governance token OSMO. The initial supply equals 100M OSMO as it is divided evenly between airdrop recipients and strategic reserve. Apart from voting on protocol upgrades, the token enables its holders to get liquidity mining rewards and to set the base network swapping fee. At the same time, it can be used for staking.
Though staking traditionally represents a yield-generating activity that is different from providing liquidity, Osmosis utilizes a different approach. It has introduced the feature of Superfluid Staking where OSMO is used for both activities, thus maximizing the profits for its holders without making tradeoffs.
LPs can add liquidity to the pools and earn swap fees which are established by the pools’ owners. As a rule, the fee equals about 0.3%. Users can bond LP tokens received after that for 1, 7, or 14 days. OSMO staking, as well as voting, is performed through Keplr wallet, which has been designed specifically for the Cosmos ecosystem.
The company standing behind the platform is Osmosis Labs Pte. Ltd., which is often referred to as Osmosis Labs. The project was founded by Josh Lee and Sunny Aggarwal. Josh Lee has the background of an Editor at Blockchain Research that was ranked #1 among Korean blockchain media outlets in the first 6 months of its activity by Alexa. Previously, he was a project manager at Lunamint where he curated the process of creating Lunagram, the first native crypto wallet within Telegram messenger. Also, he worked as an ecosystem development analyst at Tendermint.
Sunny Aggarwal previously worked as a research scientist at Tendermint and a core developer of the Cosmos SDK and Gaia blockchain. He was a Co-Host at Epicenter, a weekly podcast about Blockchain, Ethereum, Bitcoin, and Distributed Technologies, and a Co-Founder of Sikka, a company that works on DeFi protocols and networks. It also operates as a top validator on the Cosmos Hub, Kava, and Akash networks.