Osmosis

What is Osmosis (OSMO)?

Osmosis is often described as an “Interchain Liquidity Lab” that allows users to swap, earn, and build on their leading decentralized exchange (DEX) platform.

In fact, Osmosis is the largest interchain DEX on the market, with over $167 million in total value locked and thousands of transfers every day.

Osmosis is a vital part of the Cosmos ecosystem, which explains this level of interchain activity. The Cosmos IBC (Inter-Blockchain Communication) protocol allows easy cooperation between its “zones,” as all of them share certain vital similarities in their architecture.

However, Osmosis isn’t just another cookie-cutter DEX taking advantage of Cosmos’ interoperable ecosystem. It offers users and developers various tools and DeFi options that are not available elsewhere and even lets users launch bespoke liquidity pools.

Who are the Founders of Osmosis?

Osmosis was launched in mid-2021 by Indian blockchain entrepreneur Sunny Aggarwal.

Aggarwal was first introduced to blockchain and cryptocurrencies upon hearing about the Jamaican bobsled team for the 2014 Winter Olympics. Famously, the team was backed by Dogecoin fundraising.

This led to Agarwal educating himself on blockchain and teaching it to students at UC Berkeley. What followed was the creation of “Blockchain at Berkeley,” which has evolved from a simple university club to an award-winning consulting and development team.

Besides his duties at Osmosis, Aggarwal also runs Sikka, a blockchain infrastructure company. Sikka is a top-5 validator on the Cosmos Hub, which runs validators on the Kava mainnet and many other testnets.

Aggarwal also provides advisory services to select projects in the Cosmos ecosystem, including Kava and Akash Network.

How Does Osmosis Work?

Osmosis is an advanced AMM (Automated Market Maker) protocol built using the Cosmos SDK. As part of the Cosmos ecosystem, it utilizes IBC, which allows users to make cross-chain transactions.

Automated market makers provide decentralized finance with an alternative trading system to the traditional order book. An intermediary like a stock exchange hosts the order book, matching buyers with sellers and letting them trade with each other.

However, AMMs build liquidity pools. They incentivize users to deposit funds into these pools and then allow other users to trade against them. Thanks to this mechanism, there’s no need to try and match users or rely on users actively making bids and asks.

The incentivization of liquidity provision to these pools is also a key part of the AMM. Providing this liquidity for the use of others results in a liquidity provider (LP) reward.

Backing the management of liquidity pools on Osmosis is its pool governance feature. In Osmosis, liquidity pool shares aren’t just used to calculate fractional ownership of the pool. They also let pool funders govern the pool.

In a sense, this gives users who fund the different liquidity pools a share of the equity in the pool. Users who have more skin in the game when it comes to different pools have greater power to steer the pool, given that their assets are at risk.

What Makes Osmosis Unique?

One of the most novel features of Osmosis is that it allows full customization of its liquidity pools. Most other AMM platforms usually limit the changeable parameters of liquidity pools.

Uniswap, one of the leading DEX platforms in the blockchain industry, only allows users to create a two-token liquidity pool of tokens in an equal ratio. The swap fee is set at 0.3%.

However, Osmosis enables users to change all of this and more. It believes equilibrium can be reached through autonomous experiments and iterations rather than by enforcing static values for these parameters.

Thanks to this, you’ll see users setting up custom-curve AMMs, dynamic adjustments of swap fees, multi-token liquidity pools, and much more.

How is the Osmosis Network Secured?

Osmosis is a “Zone” on Cosmos. This allows Osmosis to communicate with other Zones and the Cosmos mainnet itself, but it has to handle security by itself. It does so using proof-of-stake.

Osmosis uses the Tendermint consensus engine for consensus. Used widely in the Cosmos ecosystem, Tendermint Core makes proof-of-stake or proof-of-authority blockchains Byzantine Fault Tolerant. That is, these networks can maintain consensus if even up to a third of the network’s validator nodes fail or misbehave.

Misbehavior by validators normally results in some sort of penalty. On Osmosis, validators are punished for misbehavior by being "jailed,” or excluded, from the validator set for a period of time.

Osmosis also features delegation, wherein it isn’t just the network’s validators who stake OSMO tokens to secure the network. Smallholders can also delegate tokens to validators and thereby earn a share of staking rewards.

What is the Use of OSMO?

The OSMO token is the governance token of the Osmosis platform. OSMO lets staked token holders have a say in the future direction of the platform, including every implementation detail.

On-chain governance of the Osmosis platform can change the utility of OSMO, which is a demonstration of how critical a function it plays. Active network participants are empowered by this and play a crucial role in proposing, vetting, and passing protocol upgrades.

OSMO is also minted and burned for Osmosis’ novel Superfluid Staking. When users stake and delegate a certain amount of liquidity pool tokens to validators, they receive an amount of OSMO representing this value. This results in the security guarantee of the consensus layer, which is also based on liquidity pool shares.

Who Controls Osmosis?

Osmosis is controlled via on-chain governance by OSMO holders who stake their tokens. Granting governance rights to stakers is a means of incentivizing token holders to play an active role in network security.

Besides proposing and voting on protocol upgrades, OSMO stakers can decide on the allocation of liquidity mining rewards and change the base network swap fee.

How Much OSMO is In Circulation?

Osmosis has a total supply of 1 billion OSMO tokens, 100 million of which were distributed between airdrop recipients and the strategic reserve at genesis.

OSMO tokens get released at the end of each epoch, but this emission rate is cut every year. As a matter of fact, this happens three times a year in a schedule dubbed “thirdening.”

Of the newly released OSMO tokens, 45% go to liquidity mining incentives, 25% to developer vesting, and 25% to stakers as rewards. The final 5% goes to the community pool.

How Do You Buy OSMO?

You can buy OSMO from many centralized exchange platforms, but the widest range of trading pairs is found on Osmosis itself!

On the Osmosis app, you can use stablecoins like USDC and DAI along with various Cosmos-based cryptocurrencies to buy OSMO. These include ATOM, WETH, WBTC, CRO, DOT, KAVA, INJ, and many more.

Is It Possible to Buy OSMO Instantly?

You can buy OSMO instantly on decentralized and centralized exchanges. The Cosmos ecosystem features extremely fast transactions thanks to its architecture, and DeFi on Cosmos is quick and easy.

A further advantage of using a decentralized exchange to buy OSMO is that you can use your tokens right away. Governance and DeFi require non-custodial wallets, which an exchange account certainly isn’t.

How Do You Store OSMO?

Keplr is one of the best wallets to store OSMO and use the Osmosis app with. It is a non-custodial wallet, meaning that you have full control over your private keys as well as the coins and tokens within your Keplr wallet.

Keplr is a Chrome wallet extension and one of the top IBC-enabled wallets for the Cosmos ecosystem. It allows you to connect to apps like Osmosis very easily, and you can even stake your OSMO right from the wallet.

If you want to set up a Keplr wallet, the Osmosis documentation page features an in-depth tutorial that’ll get you on the right track.

Osmosis Energy Consumption

Osmosis is a proof-of-stake blockchain network that uses the Tendermint Core consensus engine.

Proof-of-stake networks rely on economic incentives to ensure the proper behavior of network nodes. Validators are incentivized with staking rewards and “jailed” if they misbehave. This is a crypto-economic system that ensures network security.

As such, the network can be run by a limited number of actual computers. Some proof-of-stake networks do have hundreds or even thousands of validators, but this pales in comparison to proof-of-work (PoW).

In proof-of-work, the more machines taking part in network security, the better. This means hundreds or even thousands of times more machines are required to power the blockchain. As such, any PoS network can be considered to have far less of an energy drain than a comparable PoW network.

Ethereum, for example, reduced its energy consumption by 99.95% when it switched from PoW to PoS in September 2022.

Is OSMO a Good Investment?

OSMO is a compelling project with decentralized governance and a well-respected team, including an entrepreneurial founder with solid blockchain credentials.

The platform is a novel approach to DeFi, innovating quickly and taking an iterative approach to building in an industry that moves faster than any other.

The OSMO token itself is also an attractive proposition, given its capped supply and ever-reducing emissions. It has significant utility within the protocol, which appears well set to continue in its development.

Osmosis can also claim to be battle-tested despite being relatively new on the scene. The collapse of the Terra Luna protocol put a strain on Osmosis, which provided significant liquidity for the LUNA and UST tokens at the time.

However, Osmosis’ consensus, including the additional safety granted by “Superfluid Staking,” won out. If that was anything to go by, the protocol looks well set to overcome any other challenges that may come its way.