Osmosis, an advanced automated market maker (AMM) protocol that allows developers to build customized AMMs with sovereign liquidity pools. Built using the Cosmos SDK, Osmosis utilizes Inter-Blockchain Communication (IBC) to enable cross-chain transactions.
Osmosis was founded by Osmosis Labs founders Sunny Aggarwal and Josh Lee. Upon raising $21 million in an October 2021 token sale, Osmosis has generated a loyal core of users and established itself as a core feature within the Cosmos ecosystem.
On customizability of liquidity pools
Most major AMMs limit the changeable parameters of liquidity pools. For example, Uniswap only allows the creation of a two-token pool of equal ratio with the swap fee of 0.3%. The simplicity of Uniswap protocol allowed quick onboarding of the average user that previously had little to no experience in market making.
The tools Osmosis provides allow the market participants to self-identify opportunities and allow them to react by adjusting the various parameters. An optimal equilibrium between fee and liquidity can be reached through autonomous experiments and iterations, rather than setting a centrally planned 'most acceptable compromise' value. This extends the addressable market for AMMs and bonding curves beyond simple token swaps, as a limitation on the customizability of liquidity pools may have been the inhibiting factor for more experimental use-cases of AMMs.
Self-governing liquidity pools
In Osmosis, the liquidity pool shares are not only used to calculate the fractional ownership of a liquidity pool, but also the right to participate in the strategic decision making of the liquidity pool as well. To incentivize long-term liquidity commitment, shares must be locked up for an extended period. Longer-term commitments are awarded by additional voting power / additional liquidity mining revenue. The long-term liquidity commitment by the liquidity providers prevents the impact of potential vampire attacks, where ownership of the shares is delegated and potentially used to migrate liquidity to an external AMM. This provides equity of power amongst liquidity providers, where those with greater skin in the game are given their rightful power to steer the strategic direction of its pool in proportion to the risk they are taking with their assets.
AMM as serviced infrastructure
The number and complexity of decentralized financial products are consistently increasing. Instruments such as pegged assets, derivatives, options, and tokenized leveraged positions each have their own characteristics that produce optimal market efficiency when paired with the correct bonding curve. That being said, the traditional notion of AMMs has evolved around putting the AMM first, and the financial product being traded second.
As AMMs substantially increase the market accessibility for these instruments, assets with diverse characteristics either had to:
- Compromise efficiency and trade on existing AMMs with non-optimal bonding curves
- Take on the massive task of building one's own AMM that is able to maximize efficiency
To solve this issue, Osmosis introduces the idea of an 'AMM as a serviced infrastructure'. Fairly often, adjustment of the value function and a few additional parameters are all that's needed to provide a highly-efficient, highly-accessible AMM for the majority of decentralized financial instruments. By providing the ability for the creator of the pool to simply define the bonding curve value function and reuse the majority of the key AMM infrastructure, the barrier to creating a tailor-made and efficient automated market maker can be reduced
The OSMO token is a governance token that allows staked token holders to decide the future of the protocol, including every implementation detail. OSMO will initially be used for the following (although governance is free to add or remove these functions):
- Voting on protocol upgrades
- Allocating liquidity mining rewards for bonded liquidity gauges
- Setting the base network swap fee
Governance is the critical component of how Osmosis evolves. Active stakeholders of the network will be responsible for proposing, vetting, and passing protocol upgrades.
The pools eligible for liquidity rewards will be selected by OSMO governance participants, allowing the stakeholders to formulate an incentivization strategy that best aligns with the long-term interests of the protocol.
While OSMO will initially function as both a governance token and a staking token, Osmosis intends to transition into a Cosmos Hub shared security zone as soon as the feature is ready.