An overview of Osmosis (OSMO), the leading AMM protocol in the Cosmos IBC ecosystem

Most DEX exchanges in the decentralized finance (DeFi) are built on existing blockchains:

Uniswap on Ethereum,
PancakeSwap on BNB Smart Chain,
SUN on Tron,
Orca on Solana, and many others.

However, some developers have created their blockchain network and run the AMM protocol on it, providing users with many additional benefits. This is precisely what the Osmosis team did: launch its blockchain and DEX exchange. We will tell you more about them in this article.

What is Osmosis?

Osmosis is a Tier 1 blockchain part of the Cosmos IBC ecosystem. Osmosis DEX, a decentralized exchange of its own, has been developed based on this network. Thanks to the Inter-Blockchain Communication (IBC) protocol, the Osmosis network can interoperate with many other smart contract networks such as Ethereum, Avalanche, BNB Chain, etc.

Osmosis Labs is behind the creation of Osmosis, which includes members of the Cosmos Network team. The blockchain protocol itself was launched in early 2021, and its Osmosis DEX exchange is the leading exchange in the Cosmos Network ecosystem and provides users with self-managed liquidity pools.

Osmosis DEX

It is a decentralized exchange that interoperates with all blockchains in the Cosmos IBC ecosystem and operates as an Automated Market Maker (AMM) like Uniswap. Osmosis DEX has a deposit system and allows deposit/withdrawal of assets to various blockchain networks such as:

Cosmos,
Axelar,
Celestia,
Stargaze and many others.

The Osmosis DEX exchange allows trading (swapping) assets, providing liquidity in exchange for rewards, and depositing tokens into staking.

Osmosis DEX is among the ten largest decentralized exchanges in the DeFi segment regarding the number of assets locked in the protocol (TVL), which at the time of writing was $228 million. However, Osmosis DEX is significantly behind the largest DEX exchanges, such as PancakeSwap and Balancer, whose TVL exceeds $1 billion, not to mention the leading Uniswap.

One of the main differentiating features of Osmosis DEX from other decentralized exchanges is that holders of native tokens of the OSMO protocol can simultaneously provide liquidity and stake the cryptocurrency, earning increased returns on their assets.

Thanks to cross-chain protocol support, a large number of assets are available on Osmosis DEX for swaps and liquidity mining, such as:

WBTC,
ETH,
USDT,
USDC,
ATOM,
BNB,
DAI,
BUSD,
DOT,
AVAX,
MATIC and dozens of others.

Osmosis token

OSMO is a native Osmosis management token used to pay network commissions, payouts to liquidity providers on the DEX exchange, and delegators for staking. Also, liquidity providers on Osmosis DEX can additionally stack OSMO tokens to earn higher revenue.

The Osmosis protocol includes a deflationary mechanism that reduces the generation (issuance) rate of new OSMO tokens over time.

Initially, 100 million OSMOs were issued and distributed in an airdrop to Osmosis DEX liquidity providers (45%), stakers and delegates (25%), developers (25%), and the community (5%).

The maximum possible number of tokens is 1 billion OSMO, of which more than 492 million (49.2%) are already circulating in the crypto market. Regarding capitalization, which is $911 million, the OSMO token is ranked 72nd in the CoinMarketCap ranking. Since October 2023, this figure has grown almost 8 times amid the general rise of the crypto market.

The OSMO token exchange rate as of January 2024 is $1.85. The OSMO price reached its all-time high (ATH) in March 2022 at $11.2 — shortly before the crypto market collapse, and the Terra crash impacted the Osmosis ecosystem.

The OSMO exchange rate continued to decline until October 2023, when the price hit an all-time low of $0.22 but increased more than 8 times. Among the major crypto exchanges, the OSMO token is listed on Binance and Coinbase.

What happened to Osmosis, and what are its prospects?

In 2022, Osmosis was one of the top ten DeFi protocols regarding the number of blockchain assets (TVL), which at one point exceeded $1.8 billion, a figure that continued to grow despite the general correction in the crypto market.

In April of that year, Osmosis' TVL began to plummet and, within two months, had dropped to $162 million — a more than 10-fold drop. This happened for two reasons:

Investors began withdrawing assets en masse from DeFi protocols in April 2022 amid a correction in the crypto market;
The situation was exacerbated by the collapse of Terra and related tokens LUNA and UST. The lion's share of Osmosis DEX liquidity came from the UST stablecoin, and after the crash, the exchange lost a significant part of it.

The team has been developing the project, adding new features to Osmosis DEX, and making assets available for trading and mining liquidity. Osmosis DEX was and still is the leading decentralized exchange in the Cosmos ecosystem. Should Cosmos grow, it is likely to affect the Osmosis ecosystem and the exchange rate of the native token OSMO, which is its main asset.

According to forecasts, the trading volumes of DEX exchanges may reach a new high in 2024. Given that Osmosis DEX is among the leading DeFi protocols in this segment, it has the chance to increase its market share and considerable prospects for growth.

However, the OSMO token has some drawbacks as well. The main one is that the token is too closely tied to the exchange, and in case of its hacking or loss of liquidity, all this will negatively affect the price of OSMO. In addition, the OSMO token is still only in high demand within the Osmosis ecosystem. Nevertheless, it is essential to consider that Osmosis DEX receives liquidity from various networks, which means that it can "attract" investors of Bitcoin, Ethereum, Arbitrum, Avalanche, and other cryptocurrencies.