Stake and Provide LP Simultaneously on Osmosis Multichain DEX

A detailed research on Osmosis backed by market data, social media analytics and developer adoption tracker.

Stake and Provide LP Simultaneously on Osmosis Multichain DEX

Investment Disclaimer:

  • I am not a registered investment, legal, or tax adviser or a broker/dealer, and all opinions expressed by me are from my research for educational purposes only.
  • Past performance presented here is not an indicator of future performance.
  • This post expresses my own opinion about the cryptocurrency mentioned herein and is not an offer to buy or sell, or a solicitation of any offer to buy or sell the cryptocurrency mentioned in this post.
  • I do hold a long position in OSMO as a token holder.

1. Introduction to Osmosis

https://app.osmosis.zone

1.1. What is Osmosis?

Osmosis is the first Inter-Blockchain Communication Protocol (IBC)-native Automated Market Maker (AMM) built on the Cosmos ($ATOM) software development kit (SDK).

Osmosis is designed to be cross-chain native from day 1, where people could use Osmosis to swap over $10B of Cosmos native assets frictionless and easily across different blockchains, without needing any blockchain bridge.

Some of the popular Cosmos native assets which can be traded on Osmosis are $CRO, $UST and $LUNA

After integrating native Cosmos assets, Osmosis plans to also integrate with non-IBC enabled chains, including Ethereum-based ERC20s, a variety of chains including Bitcoin-like chains, and alternative smart contracting platforms.

Nothing about the underlying structure of AMMs is hard-coded. 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).

On top of native OSMO token incentives (see below), Osmosis allows third parties to easily add incentive mechanisms to particular liquidity pools. The incentives module allows rewards to be weighted towards LPs who timelock stake their LP tokens with longer unbonding periods.

1.2. Tokenomics of Osmosis Token ($OSMO)

The Osmo token is a governance token that provides a decentralized coordination method for token holders to decide the strategic direction and all future changes to the Osmosis protocol. It is anticipated that Osmo will be primarily used in the following functions (although governance may choose to add or remove some of the functions):

  • Voting on protocol upgrades
  • Allocating liquidity mining rewards for liquidity pools
  • Setting the base network swap fee

In the first year, there will be a total of 300 million tokens released. After every 365 days, this token supply will be cut by 1/3, and thus there will be a total of 200 million tokens released in Year 2. In Year 3, there will be a total of 133 million tokens released, and so on. This process will allow OSMO to reach an asymptotic maximum supply of 1 billion.

1.3. Osmosis Superfluid Staking

One of the biggest trade-offs in Decentralized Finance (DeFi) is to choose between staking or providing liquidity to the liquidity pool. However, with the superfluid staking concept pioneered by Osmosis, this changes the entire game as we could now stake and provide liquidity simultaneously without trade-off.

The concept of superfluid staking and interfluid staking are too much to be covered by this article alone. If you are interested to learn more, there is no better explanation than the Osmosis founder, Sunny Aggarwal could provide over here.

2. How Osmosis Performs Relative to Other Cryptos ?

Performance of All DEX Cryptos Under Quantdoge’s Watchlist since 2021 (Sorted by % Return)

OSMO has undergone 119.03% return from USD 4.6129 to USD 10.1036 since 28 Jun 2021 OSMO is the 8th best performing crypto assets among others here.

OSMO market cap has increased 852.77% from USD 335,52M to USD 3.20B since 08 Jul 2021. OSMO is the second best performing crypto asset by market cap growth among others here.

Judging from both performance measurements (Market Cap and Price), Osmosis Token (OSMO) is growing far beyond its potential as its growth in market cap exceeded its price performance within a period of short 6 months since its launch.

Osmosis, a DEX which has just launched 6 months ago is now the 2nd largest DEX by market cap, just $1 billion less than Uniswap ($UNI), the first Ethereum DEX that pioneered AMM concept successfully which was launched 4 years ago. Although Osmosis’ market cap exceeded Pancake Swap ($CAKE) by more than $1 billion, its liquidity and trading volume is nowhere near Pancake Swap yet.

Clearly, Osmosis is not a “value stock” here, it is trading like a “growth stock” at the moment where OSMO holders have been giving a high hope on this project. Is Osmosis’ current price sustainable then ?

Well, it boiled down to 2 main factors in my opinion.

Factor #1: Loyalty of OSMO holders when OSMO staking yield comes down

According to Keplr wallet, OSMO current staking APY is 73%, a very high APY that Osmosis has given to reward and incentivize its stakers. This could be one of the reasons why many crypto users buy and stake $OSMO, driving its demand high while its supply is being fixed at 300 million only for the first year.

There are a number of factors which could affect OSMO APY, and one of them is the number of OSMO tokens staked vs its circulating supply. Osmosis, as a proof-of-stake blockchain, would be more secured with a higher number of staked tokens. Hence, in order to encourage staking, OSMO APY may be increased to incentivize staking if the number of staked OSMO tokens are running low.

Based on Osmosis official document, 25% of token supplies would be distributed via staking reward each year. But as the total token supplies increase each year at a slower rate (i.e. 1/3 of the prior year distribution, refer to point #1.2 above), the staking APY could come down if the % of tokens staked remain the same. And there could be a big selling pressure that is adverse to OSMO’s price if many of the current OSMO stakes decided to cash out their OSMO whenever its APY decreases in the future.

Factor #2: Ability of Osmosis to integrate with both IBC and non-IBC enabled chains

Osmosis is by far, the only AMM that focuses on interchain operability and has delivered its promises well. If Osmosis could successfully integrate both IBC and non-IBC chains within a reasonably short amount of time, it would essentially open up a trillion dollar worth of opportunity to swap tokens seamlessly between all existing blockchains without needing any bridge. This is a real game-changer and an unprecedented amount of trading volume is expected to flow into Osmosis, especially it also provides superfluid staking mechanism that no other AMM or DEX is having.

I believe this trillion dollar flow is one of the future Osmosis expectations that many OSMO holders are betting on. However, should there be any roadblock or technical complexity where Osmosis would not be able to fulfill its plan, OSMO growth would be cut significantly in an adverse way.

3. Technical Analysis on Osmosis

3.1. Volume Weighted Average Price (VWAP)

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VWAP is a technical indicator used by a trader to gauge the overall trend of an asset price movement. VWAP line (orange line) represents the volume-weighted average price (average price here is defined as the average of high, low and close prices) while close price line (blue line) represents the price when OSMO is closed at the end of every single day.
Whenever blue line (close price) is above orange line (VWAP), it indicates that the asset is gaining momentum and being traded higher than its average price level. This would represent a 'buy' opportunity for short-term momentum trader whom task is to trade following the trend while a longer term mean-revision trader might take it as a 'sell' opportunity, anticipating that the price of OSMO (blue line) to fall to its average level (orange line).
Whenever blue line (close price) is below orange line (VWAP), it indicates that the asset is losing momentum and being traded lower than its average price level. This would represent a 'sell' opportunity for short-term momentum trader whom task is to trade following the trend while a longer term mean-revision trader might take it as a 'buy' opportunity, anticipating that the price of OSMO (blue line) to rise to its average level (orange line).

As of 10 Mar 2022, VWAP is suggesting that OSMO was losing momentum and was trading below its weekly volume-weighted average, but it was still trading above its monthly volume-weighted average.

3.2. Moving Average Convergence Divergence (MACD)

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MACD is often used by trader as a momentum indicator. There are 2 lines that form the above charts, namely MACD (12, 26) lines and Signal(9) line, while the histogram is calculated by subtracting Signal (9) from MACD (12,26). Histogram would fall to the negative territory whenever MACD (12, 26) is trending at a lower level than Signal (9) and rise to the positive territory whenever MACD (12,26) is trending at a higher level than Signal (9).
MACD (12, 26) is computed by subtracting the 26-day exponential moving average (EMA) of OSMO closing price from its 12-day EMA.  Signal (9) on the other hand is calculated as the 9-day EMA of MACD (12,26).
As MACD (12, 26) goes higher away from Signal (9), it signifies that OSMO is gaining momentum and whenever it goes trends at a lower level than Signal (9),it signifies that OSMO is losing momentum.

As of 10 Mar 2022, MACD is suggesting that OSMO is trading in a downward trend this week, reversing its upward trend in the prior week.

3.3. Bollinger Band

Bollinger band is often being used by mean-reversion trader as a gauge to assess how undervalued or overvalued an asset is. Its chart made up of 4 lines, namely:

  • SMA (20) (blue line), which is the 20-day simple moving average price of OSMO
  • Upper Band (orange line), which is computed by adding 2 standard deviations of OSMO on SMA (20)
  • Lower Band (red line) , which is computed by subtracting 2 standard deviations of OSMO from SMA (20)
  • Close (green line), which is the daily closing price of OSMO
Whenever close line (green) touches the lower band (red), it indicates that OSMO is corrected too much and is being traded at an undervalued level, representing a 'buy' opportunity. On the other hand, whenever close line (green) touches the upper band (orange), it indicates that OSMO is gaining too much momentum and is being traded at an overvalued level, thus indicating a 'sell' opportunity.

As of 10 Mar 2022, Bollinger Band is suggesting that OSMO is neither overbought nor oversold.

3.4. Relative Strength Index (RSI)

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Just like Bollinger Band, Relative Strength Index is often being used by mean-reversion trader as a gauge to assess how undervalued or overvalued an asset is.
There are 2 psychological levels, i.e. 30 and 70 in RSI. Whenever the RSI reaches 30, it indicates that OSMO is corrected too much and is being traded at an undervalued level, representing a 'buy' opportunity. On the other hand, whenever RSI reaches 70, it indicates that OSMO is gaining too much momentum and is being traded at an overvalued level, thus indicating a 'sell' opportunity.

As of 10 Mar 2022, RSI is suggesting that OSMO is neither overbought nor oversold.

3.5. Price and Volume Analysis

OSMO’s average daily active trading volume is consistent throughout the year, however, its average monthly price has been increasing month-on-month.

Based on the technical analysis presented above, Quantdoge is neutral on OSMO, but I could be wrong, hence please make your careful due diligence before making any financial decision.

4. Osmosis’ Risk Profile

According to Investopedia, Value-at-Risk is defined as:

A  statistic that quantifies the extent of possible financial losses within a firm, portfolio, or position over a specific time frame. This metric is most commonly used by investment and commercial banks to determine the extent and probabilities of potential losses in their institutional portfolios.

Based on the 100-day 95% historical Value-at-Risk (VaR) profile of Osmosis defined above, OSMO seems to trade at a lower risk level on 11 Mar 2022 as compared to 10 days before on 02 Mar 2022, with its biggest pullback being seen at -13.20% on a single day during the last 100 days. However, I could be wrong, hence please make your careful due diligence before making any financial decision.

Fatter tail was observed on OSMO’s probability distribution chart of daily returns as compared to 10 days ago, with a greater chance of losing more than 10% on any single day, but also having a higher chance of gaining more than 5% on any single day.

Osmosis blockchain reached its peak in Google Search on 2022-03-06 with a Google Score of 100 .

Over the last quarter, osmosis blockchain Google Score has increased 681.25 % from 12.8 to 100.  

Over the last 6 months, osmosis blockchain Google Score has increased 706.45 % from 12.4 to 100.

6. Developer Analytics

Fork

Fork refers to the amount of time where the Github repo of current cryptocurrency is being copied. Higher fork number could mean that this cryptocurrency project is getting more interest in the developers community who likes to explore more on the deep technical of this project.

Osmosis forks increased 486.96% from 23 to 135 in the past year.

Star

Star refers to the number of developers who bookmark the Github repo of current cryptocurrency. Higher star number could mean that this cryptocurrency project is getting more general interest in the developers community.

Osmosis stars increased 219.4% from 134 to 428 in the past year.

Pull Request

Pull request contributor refers to developer who has made a successful improvements/ modifications on the Github repo of this current cryptocurrency project. Higher number of pull request contributors could mean that there is a high number of commitment given by developers to this cryptocurrency project.

However, a low number also could mean that the developer community of this project applies a strict standard when it comes to code review, so only developers who have published a high quality code with highly impactful features got approved.

Osmosis pull request contributors increased 292.86% from 14 to 55 in the past year.

If you like my analysis and articles, please follow me at @quantdoge for daily updates.

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