The peer-to-contract (P2C) Automated Market Maker or AMM exchange model has birthed some fantastic programs over the years. Notable examples include PancakeSwap and Uniswap – both of which are based on Binance Smart Chain and Ethereum respectively.
However, one AMM program stands out among its peers – Cosmos Ecosystem, otherwise referred to as Osmosis. Osmosis has become a game-changer over the years as the biggest and best AMM on the market, or so it claims. In a pool of AMMs, what makes Osmosis the shark? Let’s dive into its history and discover more.
With the inception of AMMs comes the dawn of a new era – a time of crypto-economic utility and bonding curve applications. Over time, AMMs, having substituted the P2P order book exchange model, have become an essential building block of the decentralised finance (DeFi) infrastructure.
That said, creating a new decentralised exchange (DEX) ecosystem based on the AMM trading model requires a system to exchange liquidity pools for maintaining basic token swaps as well as the creation of supplementary financial assets.
Therefore, Osmosis was announced in October 2020, and officially launched in June of 202. It is an AMM protocol project created with Cosmos SDK. Its development was spearheaded by Sunny Aggarwal, Josh Lee, and Dev Ojha. Osmosis states that its vision is straightforward.
Instead of doing the norm which involves creating a skeleton key to open the locked doors to AMMs strategies and their liquidity pools, it would focus on developing a sandbox for AMM development. This protocol allows the developers to iterate on new, unique AMM designs, using existing liquidity pools and modules already set up on the network.
What is Osmosis?
Osmosis is a proof-of-stake (PoS), Layer-1 blockchain built with Cosmos SDK with the primary goal to optimise its design for a sandbox for Automated Market Makers (AMMs.) The blockchain is ideal because it allows developers to design and create customised AMMs, using different leveraging Osmosis’s blockchain governance system and modules.
Being the first AMM protocol on Cosmos, Osmosis offered to trade and earn rewards through liquidity provision.
With OSMO, the Osmosis’ native token, users are granted the power to vote and make decisions about the network while earning rewards for helping to secure the platform. Osmosis also has an AMM app that uses OSMO and ATOM as its base trading pairs.
Osmosis was the first Cosmos-based chain to popularise Inter Blockchain Communication (IBC) transfers. IBC transfers had been available for several months before, but there was little actual demand from the connected chains. Therefore, the volume of IBC transfers was deficient.
How does Osmosis work?
Osmosis is designed with an Inter Blockchain Communication (IBC) built into the core, thereby connecting it to the entire Cosmos chain ecosystem. According to the developers, plans are to integrate non-IBC enabled chains into the system later in the year once native Cosmos assets have been incorporated.
Osmosis intends to modify the curve algorithm to match the same as Balancer. It allows its market users to find a balance point for bonding curves in several use-cases for liquidity pools.
By following the simple formula x*y = k (constant number), Uniswap defines a cure algorithm. Osmosis, on the other hand, uses the formula: x*y = z (changeable number) to achieve the same but even more efficiently.
Osmosis also allows third parties to easily add incentive mechanisms to specific liquidity pools, making it the perfect Liquidity Provider incentive. As the Cosmos ecosystem matures, Osmosis intends to consider adding a new feature that allows users to add more assets into liquidity pools.
Governance for Osmosis is done on its Telegram and Discord channels where anyone can make a suggestion/proposal. Users can make proposals on mintscan.io. However, it is not free. Each submission costs 2,500 OSMO, although there is an ongoing dialogue to reduce it to as low as 500 OSMO.
Token holders have a two week deposit period which is followed by a three day voting period. A majority is needed for a vote to pass.
After the vote, the developers will modify the code to implement the community’s decision on a specific subject. Regardless, the board of developers still reserve the right to refuse any poll they may deem detrimental.
The OSMO token serves as the governance token that allows holders to vote on Osmosis protocol and future modifications to the platform. OSMO is used for two primary purposes, but governance can decide to add or remove some in the future.
- Governance – OSMO token holders can make decisions in on-chain governance by creating proposals and/or voting for them.
- Staking – OSMO also serves as the staking token used by delegators and validators to verify transactions once consensus is reached.
The dev team and community have used OSMO tokens as part of the platform’s liquidity mining program. Users can make more OSMO tokens by crediting liquidity into Osmosis pools. It is a popular hack for incentivising liquidity and making AMMs a more attractive venture for traders.
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.