Osmosis: The First AMM on Cosmos is Live!

Hello HODLers,

Today I'd like to talk you about the first Automated Market Maker (AMM) on Cosmos (ATOM): Osmosis (OSMO).

Osmosis is an automated market maker (AMM) protocol built for liquidity providers. Therefore, it should be governed and owned by liquidity providers. Over time, the largest allocation of OSMO tokens is set aside for liquidity incentives to reward liquidity providers for their contributions and give them an ownership stake in the future of the protocol.

What is Osmosis (OSMO)?

Osmosis is an advanced AMM protocol built using the Cosmos SDK that will allow developers to design, build, and deploy their own customized AMMs.Heterogeneity and sovereignty are two core tenets of the Cosmos ecosystem, and Osmosis takes these two values and extends them into core characteristics of this AMM protocol. Rather than aim for a one-size-fits-all homogeneous approach for AMMs and its liquidity pools, Osmosis is designed such that the most efficient solution is reachable through the process of experimentation and rapid iteration by leveraging the wisdom of the crowd. It achieves this by offering deep customizability to AMM designers, and a governance mechanism by which each AMM pool’s stakeholders (i.e. liquidity providers) can govern and direct their pools.

How it works

Designed for Cross-chain Assets

Osmosis is designed to be cross-chain native. It will have IBC built-in from day 1, allowing it to connect to the entire ecosystem of Cosmos chains and their over $10B of native assets. After integrating native Cosmos assets, Osmosis will integrate with non-IBC enabled chains, including Ethereum-based ERC20s (using the Althea gravity bridge), a variety of chains including Bitcoin-like chains, and alternative smart contracting platforms by leveraging custom pegs.

Customizable curves, fees, and other parameters

Simple AMMs, while having demonstrated early product-market-fit, will need to evolve alongside the growing complexities of the DeFi market.

For example, as demand for swapping similarly valued assets (e.g. stablecoins) increased, the invention of StableSwap by Curve Finance was needed to avoid high slippage for high-volume transactions. But this also meant that a whole new set of AMM infrastructure had to be built outside of Uniswap to accommodate the new feature.

In Osmosis, nothing about the underlying structure of AMMs is hard-coded. Not only are key parameters such as swap fees or token weights parameterizable for each liquidity pool, but entire components such as the curve algorithm and TWAP calculation are also fully-customizable as well. Pool creators don’t have to decide between just constant product and constant sum, but can instead input their own novel mathematical expressions. New curves can be generated on the fly. Such new curves can be much more powerful than existing AMM models, which only accept token balance quantities, by leveraging data points such as time dependencies, volatility indexes, and off-chain oracles as inputs. Osmosis’ parameterizable inputs enable the creation of newer DeFi asset types like options, dynamic fee markets that adapt to moments of high volatility, work to mitigate undesirable outcomes like impermanent loss for liquidity providers (LP)

Rather than going through the process of launching a new AMM protocol for each AMM model upgrade, curve developers can easily deploy new curves on Osmosis, taking advantage of the existing wallet integrations, IBC connections, orderflow, and liquidity within the Osmosis ecosystem.

LP Governance

Most AMM protocols set global parameters for all liquidity pools within the AMM. While this significantly simplifies the design of the AMM, it reduces the decision-making that LPs are able to make for the pools they care about. Given that AMMs are such novel protocols, projects competing in the design space are constantly iterating on making better models for them. To stay relevant, pools must keep up with cutting-edge innovations by upgrading curve design, fee models, and more. Furthermore, pools need to be able to change pool weights in order to reflect LP portfolio preferences as well as add and remove assets on-the-go in order to meet market demands (such as adding new stablecoins to a stableswap pool). Governance must be a first-class process in AMM design so that liquidity is not forked away at the advent of every upgrade. Safety procedures such as rage-quit functionality inspired by MolochDao are included in order to provide LP protection against malicious governance attacks.

Liquidity Provider Incentives

The liquidity providers of an AMM are the most important stakeholders of any AMM protocol. As the success and utilization of AMMs largely depend on the range of assets and liquidity that are available, it is crucial that there is sufficient incentive for liquidity providers to continue to lock their assets into new pools.

On top of native OSMO token incentives (see OSMO section), Osmosis allows third parties to easily add incentive mechanisms to particular liquidity pools. For example, if the Cosmos Hub Community Pool wanted to incentivize liquidity for an ATOM/stablecoin pair, they could use Osmosis’s built-in incentives module to distribute $ATOM rewards to LPs who stake their LP tokens.

Often, incentive providers want to reward long-term liquidity, not just short-term mercenary farmers. The incentives module allows rewards to be weighted towards LPs who timelock stake their LP tokens with longer unbonding periods, essentially committing to providing liquidity to the pool for a longer amount of time, decreasing liquidity volatility of the pools and providing a dependable and consistent experience for traders.

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