What Is Osmosis? How Does It Work? A Comprehensive Guide

What Is Osmosis?

Osmosis (OSMO) is a decentralized exchange (DEX) for the Cosmos ecosystem, a network of interconnected blockchains. It uses automated market makers (AMMs) to facilitate peer-to-peer crypto trading without order books. You can swap tokens, earn rewards for providing liquidity, and even vote on platform upgrades using the OSMO token.

Key Takeaways

  • Osmosis is a DEX and cross-chain AMM built for the Cosmos ecosystem.
  • The Osmosis AMM allows users to pool their tokens and provide liquidity to the network.
  • The OSMO token is used for voting, staking, and providing liquidity throughout the platform’s pools.

What Is The History Of Osmosis?

The seeds of Osmosis were sown in 2019 when Tendermint, the foundation behind Cosmos, launched the Inter-Blockchain Communication (IBC) protocol. This enabled seamless, trustless communication between independent blockchains.

In 2021, Osmosis bloomed as the brainchild of Tendermint co-founder Zarko Milosevic and blockchain developer Josh Lee1. Aiming to empower the Cosmos ecosystem with a native DEX, they launched Osmosis in June 2021. Its initial focus was on the Binance Chain, allowing Cosmos tokens to swap directly with BUSD.

Within months, Osmosis achieved its first major milestone by surpassing $1 billion in total value locked (TVL)2. In October 2021, it integrated IBC, opening the door to cross-chain swaps within the Cosmos ecosystem. This ignited massive growth, propelling Osmosis to become the leading DEX in Cosmos by early 2022.

Since then, Osmosis has continuously evolved, adopting innovative features like liquidity pools, governance proposals, and even its own blockchain, the Osmosis Network, launched in September 2023. This shift solidified Osmosis as a fully decentralized and community-owned platform.

How Does The Osmosis Market Maker (AMM) Work?

The Osmosis AMM is a decentralized exchange protocol that utilizes smart contracts to determine the price of digital assets and facilitate trades between users. It operates as an automated market maker (AMM) that prices crypto assets in liquidity pools3.

Users can contribute tokens to these pools to foster decentralized liquidity, which is then used to facilitate trades on the exchange. By participating as a liquidity provider (LP), users can earn both trading fees and newly minted LP tokens as incentives for participation.

One of the unique features of the Osmosis AMM is that it allows users to create their own liquidity pools or duplicate existing ones with their own unique parameters. Because Osmosis is built on the Cosmos ecosystem, users can natively trade assets from over 47 different chains within Cosmos.

While most AMMs today are efficient at providing liquidity in a decentralized manner, they still operate as service-based products where the platform creates pools that are free to join. In contrast, the Osmosis AMM was conceived as a “serviced infrastructure” that provides users the ability to tweak the values of tokens and the supply, thus lowering the barrier to creating custom-built AMMs.

The Osmosis protocol is driven by two primary concepts: sovereignty and heterogeneity. To that end, Osmosis makes use of self-governing liquidity pools. These liquidity pools are not hard-coded, and users can use the native Osmosis token (OSMO) to vote on pool parameters and protocols, provide liquidity, and stake4. Essentially, it allows holders of the token to decide the make-up of specific liquidity pools, in addition to playing a central role in wider Osmosis protocol governance.

What Is The Cosmos Ecosystem?

The Cosmos ecosystem is a network of blockchain networks that can connect with one another through the Inter-Blockchain Communication (IBC) Protocol. The Cosmos Hub is the mainchain that serves as the central ledger and primary blockchain protocol to connect with other blockchains in the Cosmos Network.

It is built using Proof-of-Stake (PoS) and uses ATOM as the native token for voting, staking, and transactions. The ecosystem provides a software development kit (SDK) to enable projects and teams to build on its network.

The Cosmos ecosystem’s goal is to build an “Internet of blockchains” where interoperable decentralized applications (dApps) on these various networks can communicate with each other and send tokens and data back and forth via IBC5. This allows for seamless interaction between different blockchains and provides a way to scale and improve the efficiency of blockchain networks.

Osmosis is a decentralized exchange (DEX) and automated market maker (AMM) protocol built on the Cosmos ecosystem. It specializes in the InterchainDeFi movement and enables the trading of any Cosmos SDK-based token with high liquidity. Osmosis is specifically built for Cosmos, with plans to expand to more blockchains in the future.

What Are The Tokenomics Of Osmosis (OSMO)?

OSMO is trading for $1.59 as of writing in December, and according to CoinGecko6, it has a market capitalization of $1 billion, placing it well within the top 100 cryptos. There are just over 630 million OSMO coins in circulation, out of a maximum of 1 billion. OSMO started trading in June 2021 and hit an all-time high of $11.25 in March 2022.

OSMO has struggled to recover after crashing from its $11 all-time high.
OSMO has struggled to recover after crashing from its $11 all-time high. Source: CoinGecko

How Has Osmosis (OSMO) Traded In 2023, And What Is The Osmosis Price Prediction?

Osmosis (OSMO) has rallied by 162% year to date, according to data from TradingView7. The crypto had traded fairly flat for most of 202, even though the rest of the market saw considerable gains. In November, OSMO began to catch up with the rest of the market, rising by well over 200% in a couple of months.

Coincodex8 has a maximum OSMO target of $3.17, which implies considerable returns. Their yearly low targets are around $3.5 between 2025-2027 with a maximum target of $12 which would mean a new all-time high.

Changelly9 is very bearish on Osmosis in the short term; they expect the crypto to crash by 30% before the end of 2024. However, in the long term, they’re optimistic about a recovery and expect a new all-time high before the end of the decade.

Remember that crypto prices are extremely volatile, and you should always do your own research before risking your capital. Nothing in this post should be considered as financial advice.

OSMO has rallied by over 160% in the past year.
OSMO has rallied by over 160% in the past year. Source: TradingView

Final Thoughts on Osmosis

The Osmosis team set out to create a DEX with automated market-making, self-governing liquidity protocols, and a community-led approach to development. Although the DEX has so far failed to carve out a market-leading chunk of trading volume, it has seen over 90 trading pairs listed, and its 24-hour trading volume is generally well above $25 million. The OSMO token has managed to recover from some of its losses after crashing from its $11 high and now has a $1 billion market capitalization.

Frequently Asked Questions

What Is Osmosis?

Osmosis is a decentralized exchange (DEX) built specifically for the Cosmos ecosystem, a network of interconnected blockchains. It allows users to trade cryptocurrencies directly with each other, without the need for a central authority. Unlike traditional exchanges, Osmosis uses automated market makers (AMMs) to set prices and facilitate trades. This means that anyone can add liquidity to the pools and earn rewards for doing so.

What Mechanisms Underpin the Osmosis Automated Market Maker (AMM)?

The Osmosis Automated Market Maker (AMM) is based on the Cosmos SDK and uses the Tendermint consensus algorithm. The AMM is designed to provide liquidity for a wide range of assets, including tokens from other blockchains. The AMM uses a bonding curve to determine the price of assets in the liquidity pool. The bonding curve ensures that the price of assets in the pool remains stable, even as the supply and demand for those assets changes.

How Does the Osmosis Platform Integrate with the Cosmos Ecosystem?

The Osmosis platform is built on the Cosmos SDK and is designed to be interoperable with other Cosmos-based blockchains. This means that assets from other blockchains, such as Ethereum or Bitcoin, can be traded on the Osmosis platform. The platform also supports cross-chain communication, which allows users to transfer assets between different blockchains. This interoperability makes it easier for developers to build decentralized applications that can work across multiple blockchains.

Peter Barker

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Peter Barker

Peter is an experienced crypto content writer and a DeFi enthusiast with more than 3+ years of experience in the space. Previously a journalist and news editor at a leading European news sourcing agency.

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