A Transformation in the Making

In the traditional decentralized finance landscape, liquidity providers (LPs) were often compelled to adopt a simplistic strategy that forced them to provide liquidity in infinite ranges. In the Classic pool model we can describe a liquidity position against OSMO as ranging from 0 to infinity, that liquidity is distributed across. This approach was not capital efficient, resulted in less than 5% of the liquidity being utilized in tightly paired assets, this led to less than 1% of the provided liquidity typically being used for trades and experiencing significant volume, therefore creating suboptimal fee generation for liquidity providers.

To solve this challenge, incentives were introduced to accommodate liquidity with volume to make the liquidity being used regularly as large as possible. The status quo, however, is on the cusp of significant change with the advent of Supercharged Liquidity and OSMO 2.0.

Supercharged Liquidity: A Game Changer

Supercharged Liquidity revolutionizes the concept of decentralized market making. It allows LPs to choose their preferred price range rather than sticking to the traditional full range (0 to infinity). This introduces an unprecedented level of capital efficiency - theoretically up to 4000x, but more practically estimated at a 100 to 300x increase.

The impact can be summed up by the increased efficiency it brings to the Osmosis DEX - we need 100x less liquidity to accommodate the same volume. If the same amount of liquidity was utilized in a newly revamped Supercharged Liquidity model, we experience a 100x increase in liquidity depth. Supercharged Liquidity is an upgrade to Uniswap's tick system. While the original system set minimum and maximum prices of a token based on the tick price before, Supercharged Liquidity sets its spot prices on specific, user friendly exponents of value. This step function allows for more granular liquidity provisioning and creates an experience much closer to that of an orderbook.

Uniswap V3 Concentrated Liquidity

Supercharged: Next-Generation Liquidity

Supercharged Liquidity also allows LPs to lock their positions across the full price range and continue to participate in Superfluid Staking pools with no interruption, this means liquidity providers can benefit from swap fees generated while utilizing their OSMO to earn staking rewards simultaneously. Liquidity providers will be able to migrate their bonded classic pool positions into the newly designed Supercharged system. This new mechanism will ensure that there will be no scenario where it would be more profitable for LPs to stay in the traditional pool, allowing even passive liquidity providers to participate in Supercharged pools with the Osmosis experience they are familiar with.

During the initial launch of Supercharged Liquidity, there will be a migration bonus of 5% to encourage users to transition to the new system. 

OSMO 2.0: A Leap Forward

Cosmos Ecosystem TVL 2022

The launch of the OSMO token gave birth to Cosmos DeFi, bootstrapping liquidity and battle testing a recently deployed IBC. The successful launch of Osmosis put the limelight on Cosmos Defi, and the value it could generate for users. It is no surprise the OSMO token is one of the most liquid and heavily traded tokens in the Cosmos Ecosystem today.

As Osmosis transitions into its next development phase, OSMO 2.0 presents an exciting evolution in tokenomics, sustainability, and governance as it reinforces its standing as the home of premium Cosmos DeFi applications.

 Key features of OSMO 2.0 include:

  • Reduced Inflation and Extended Emission Timeline: With a 50% reduction in inflation rate and an extended emission timeline, Osmosis strikes a balance between growth and stability, offering a smoother distribution of tokens over a more extended period.
  • Shifting Emissions to Stakers: Aligning with the platform's DeFi-centric focus, emissions are redirected from liquidity providers and the community pool to stakers, rewarding users who actively secure and govern the network.

In addition to the key OSMO 2.0 features, governance is discussing two additional proposals to further drive value to OSMO stakers in the form of deflationary mechanism and real yield.

  • Automated Internal Liquidity Arbitrage and Burn Mechanism: An innovative burn mechanism offsets part of the remaining inflation, potentially leading to a net deflationary model.
  • Fee Share Mechanism: This new mechanism empowers OSMO stakers to share in the swap fees generated by activity in Osmosis liquidity pools, fostering a vibrant, participatory community.

The Rollout and Beyond

The rollout of Supercharged Liquidity and OSMO 2.0 is underway with the DAI-OSMO pool due to the sheer complexity of these new mechanisms, currently consisting of over $2 million in TVL . Due to the projected increase in volume generated from the massive gains in capital efficiencies there will be less of a need for incentives as market-making fees will suffice to attract LPs. This will create a fly-wheel effect for Osmosis as these new initiatives serve to drive higher volume with fewer incentives.

This will result in more efficient fee generation which can then be shared with OSMO stakers as a result of the fee sharing mechanism to be implemented as part of the OSMO 2.0 redesign. The beginning of real yield generation paints a brighter future for Osmosis, with less dependence on incentives while generating more fees and reducing the capital requirement thresholds required to do so.

While the upgrades will result in a more profitable trading experience for market makers without the reliance on incentives, incentives will remain in place initially to help bootstrap the system and encourage transition to the new Supercharged pools.

In the future we can expect to see pair-specific incentives. For instance, if OSMO-USDC incentives are provided, the introduction of CL will allow these incentives to benefit both assets in the pair.

Supercharged Liquidity and OSMO 2.0 represent a significant leap forward in decentralized market making, promising increased capital efficiency, improved liquidity depth, and enhanced profitability for market makers and retail users alike. The journey towards the biggest upgrade Osmosis has seen since its launch in 2021 has begun, and we eagerly await the transformation it promises to bring to the ecosystem as a whole.