an osmo thesis
manifest destiny
First off, what exactly is Osmosis?
Currently, Osmosis is a cross-chain AMM built using the Cosmos SDK. It is IBC enabled, allowing users to exchange any Cosmos ecosystem assets with their app. Osmosis will eventually be connected to non-IBC enabled chains, which will allow assets like Ethereum ERC-20s to be traded on Osmosis. More importantly, Osmosis allows developers to design, build, and launch their own AMMs; allowing for more specific customization vs a one size fits all solution for pools. The need for this kind of customization can be seen with the rise of Curve’s StableSwap.
Curve’s StableSwap allowed for low slippage in high-volume transactions of similarly valued assets. Curve accomplishes this by combining x+y=c and xy=k, which creates a gentler price slope and lower slippage. For a much better, in-depth explanation of the Curve StableSwap formula, please read this article. I highly recommend reading this article if you are unfamiliar with AMMs, but the tldr; is that math enables the existence of pools and more complex math was used to create Curve. Obviously Curve was a brilliant idea, but Curve required a whole new set of AMM infrastructure be built to meet the needs of swapping two assets of similar value. Society has progressed past the need for brand new infrastructure just to change a price curve, as this consumes a non-trivial amount of time/effort/resources.
Osmosis unironically fixes this by allowing developers to edit existing curves without having to rebuild everything else from scratch. Other helpful features include customizable swap fees/token weights for individual pools, customizable TWAP (time weighted avg price) calculation, and a built in incentives module. Osmosis also includes a governance mechanism where each AMM’s pool stakeholders (liquidity providers) can govern and direct their own pools as they see fit. They can reweight token balances in a pool, change reward incentives, etc. The takeaway here is that Osmosis has a pretty flexible/customizable protocol by design, and this aspect forms a major selling point to developers and users.
Another very important part of the Osmosis value proposition is superfluid staking. Osmosis is an app-blockchain. This means that Osmosis is a defi protocol with its own dedicated blockchain. As a result, the OSMO token is used as both a base pair to provide liquidity with in pools, and as a staking token to secure the network. One of the biggest features of Osmosis is the upcoming existence of Superfluid staking, which will allow OSMO users to stake and provide liquidity at the same time, increasing your passive incooom. This is just one very elementary use case of superfluid staking- I believe in the future OSMO will generate value in much more than just two ways; the full potential of superfluid staking has yet to be tapped.
This idea strikes a stark contrast to the Cosmos Hub’s upcoming Gravity DEX. One OSMO can support both the Osmosis chain and the Osmosis DEX. Assuming ATOM becomes the Gravity DEX native token, one ATOM can only support either the Gravity DEX or the Cosmos Hub chain, it can not simultaneously support both. I believe that superfluid staking could very well have a major impact on DEX design, the same way that the OHM concept of protocol owned liquidity and ve models had on Ethereum defi. I think there is a non-trivial chance that DEXs will follow in Osmosis’ suit and attempt to migrate to a chain of their own or that brand new DEXs will pop up and copy the Osmosis formula. Perhaps both. As the originator of this idea, Osmosis has a massive head start on competitor DEXs in this area and will likely achieve significant network effect with little meaningful opposition.
Osmosis has also been a dominant force in the Cosmos ecosystem; here are some notable stats from the last 30 days of activity. Osmosis is the number one IBC blockchain for monthly active wallets with over 200,000. Terra and the Cosmos hub both trail behind with around 40,000 less wallets. Osmosis also dominated IBC relayer transfers with a whopping 2.38 million transactions. The Cosmos hub once again trails in second, and has yet to break 1 million. On a related note, the vast majority of the Cosmos hub transfers are wallets sending ATOM to the Osmosis DEX to be traded. Lastly, Osmosis saw 1.25 million transactions going into the protocol and saw 1.13 million going out, blowing away competition in both categories. Truly a powerhouse in multiple unique metrics.
So I’ve talked a lot about what OSMO can do, but what does an optimistic future for OSMO look like?
The Osmosis Citadel looks like this: an AMM as the entire chain, connecting to every other chain in existence, and OSMO is used for everything on the chain. Because the stakers securing the network and LPs are the same people, their incentives are aligned and defi bears witness to the first time what these two typically separate communities can accomplish as a unified whole. Osmosis holds steady as a titan in the Cosmos ecosystem. Superfluid staking’s incredible value accrual will cement OSMO as one of the most productive assets in crypto- valueless governance token holders will remain in disbelief. Due to lucrative rewards from OSMO’s superfluid staking, OSMO quickly becomes increasingly scarce as the percentage of bonded OSMO trends higher and higher, driving the price up. Major DEX protocols on various chains will continue to dominate their respective chains, but cross-chain volume growth will outpace singular chain volume growth- Osmosis will be the best positioned for this development and will cement itself as a market leader in this area. Users will be able to atomically swap assets cross-chain through Osmosis, and non-Cosmos assets start forming their own pools on Osmosis en masse. Applications begin to build on top of Osmosis, and giving Osmosis users access to more powerful tools and financial products. These applications airdrop to Osmosis stakers. Osmosis grows to a double digit percentage of total DEX TVL. Ethereum becomes IBC-compatible and Osmosis adds an additional double digit of DEX TVL within one year.
As the Cosmos ecosystem begins to truly come online, I believe that OSMO will be one of the easiest and best r/r plays in the space.
Not financial advice. I own OSMO. Do your own research.
-ct_zpy