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Osmosis Protocol Usage Report Q2 2023

Jul 21, 2023 ⋅  10 min read

Key Insights

  • Reduced emissions and a subdued market continue to weigh on volumes and users, each down over 25% in Q2.
  • The bright spot in the second quarter was IBC transfers, which yielded nearly half a billion dollars in inflows to Osmosis.
  • Governance and development remained active, highlighted by the unveiling of OSMO 2.0. The revised tokenomics for the network will reduce inflation and extend the emissions timeline, while also introducing burn and fee switch mechanisms.

Primer on Osmosis

Osmosis is a sovereign decentralized exchange (DEX)-focused app-chain in the Cosmos ecosystem, meaning it simultaneously serves as a blockchain and an application. The application operates similarly to other automated market making (AMM) functioning DEXs – liquidity providers (LPs), which are responsible for supplying liquidity to asset pools where traders can make trades from. It’s the same model for Uniswap or Balancer, though more similar to the latter as Osmosis places a high priority on offering asset pool customization. Tweaks to market-maker functions, swap costs, token weighting, and more are all parameters that can be changed within the DEX. Additionally, Osmosis has introduced new features such as superfluid staking that allows users who provided liquidity in certain pools to also stake to help secure the network. In the future, Osmosis will also offer maximal extractable value (MEV) mitigation and capture, stable pools, and more.


Key Metrics

Protocol Usage

DEX Metrics

After an increase in volume in Q1, partially brought on by the spike around the USDC depeg, second quarter volumes fell 43% QoQ. The makeup of volumes has been changing, with ATOM volumes falling to 15% of total volume in Q2, its lowest share since ever. USDC made up 14.9% of volume in Q2, its lowest in the last four quarters, which will likely change when native USDC is introduced to the Cosmos network.

Despite the increase in the end-of-period liquidity provided on Osmosis Q1, the average daily liquidity has been trending lower since Q1’22. The trend accelerated in Q2’23, with average daily liquidity falling 17.9% from the previous quarter. Depositors remained patient in Q2, as average daily yield from trading fees fell to 3.8% (daily fees per unit of TVL, compounding daily) from 5.6% in Q1. Liquidity providers also earn fees from incentives, which are not included in this yield calculation.



Network Metrics

Transaction counts of every type fell in Q2 but by very different margins. After a busy Q1, governance-related activity saw the largest QoQ decline. Voting and Osmosis staking transactions were down 71% and 55%, respectively, accounting for nearly a third of the fall in transactions counts in the quarter. The smallest percentage decreases were in transactions related to the core product, with IBC transfers and swaps falling only 21% and 23%, respectively.

After nearly a year of subdued value flows, over $466 million was transferred to Osmosis via the IBC network. Total IBC transfer volume on Osmosis actually fell 4% from the previous quarter to $2.1 billion transferred. April and May were the largest net transfer months for the protocol since the LUNA collapse in May 2022.


Notable Events

Osmosis Proposals

  • April 17, 2023, Lengthen OSMO Emission Schedule — Osmosis Proposal 484 aimed to lengthen the OSMO emission schedule to maintain a maximum supply close to the original tokenomic design. [Implemented]
  • April 17, 2023, Adjust the Ratio of Emissions — Osmosis Proposal 485 aimed to solve issues related to net yield from staking rewards and larger liquidity pools by adjusting the emission proportions received by each. [Implemented]
  • April 17, 2023, Decrease the Superfluid Risk Factor to 25% — Osmosis Proposal 486 aimed to decrease the Superfluid Risk Factor to 25%, allowing 75% of OSMO in Superfluid pools to be staked. [Implemented]
  • May 14, 2023, Allow IBCX Contracts to be Uploaded — Osmosis Proposal 504 seeks to allow ION DAO to upload contracts relating to the IBCX project. The proposal includes deploying contract codes for the minting, burning, and rebalancing of IBCX, governed by the ION DAO. IBCX is designed to benchmark the performance of leading Cosmos tokens, and its price is dynamically calculated based on the spot prices of its selected components. [Implemented]
  • May 18, 2023, Mesh Security — The Osmosis Grants Program collaborated with Axelar, Akash Network, and others to develop and implement Mesh Security across the Cosmos ecosystem, providing chains increased security. [Pending]
  • May 19, 2023, Suitdrop Commonwealth Proposal — Osmosis Proposal 512 aimed to introduce two new primitives to the Osmosis mainnet for physical merchandise redemption, set to place Osmosis as the preferred AMM for suitdrops/unisocks of any appchain. [Implemented]
  • May 24, 2023, Allow CronCat Contracts to be Uploaded — Osmosis Proposal 513 seeks to grant a multisig address administered by the CronCat cofounders the ability to upload CosmWasm contracts to Osmosis without further governance approval. [Implemented]
  • May 25, 2023, Signaling Proposal For Use of ProtoRev Funds — Osmosis Proposal 516 suggested the distribution of the accumulated OSMO to stakers as daily rewards, intending to use the ProtoRev funds. [Rejected]
  • May 26, 2023, Alternative Signaling Proposal for Use of ProtoRev Funds — Osmosis Proposal 519 put forward an alternative use for the ProtoRev funds by proposing a deflationary burn mechanism, which aimed to reduce OSMO re-entering circulation. [Rejected]
  • May 28, 2023, Allow Calculated Finance Contracts to be Uploaded — Osmosis Proposal 515 seeks to grant an address managed by the core contributors of the Calculated Finance protocol the ability to upload CosmWasm contracts to Osmosis without requiring further governance approval for each upload. [Implemented]
  • May 30, 2023, Liquid Staked Token Incentive Category — Osmosis Proposal 522 proposed a new Incentives Category for pools containing liquid staking tokens, dedicating 5% of Osmosis incentives to this category. [Implemented]
  • June 12, 2023, Introduce a Protocol Taker Fee for Osmosis Swaps — Osmosis Proposal 530 proposed introducing a flat rate taker fee of 0.15% for all pools, chargeable on the input value of swaps. The proposal also accounted for future fee reduction mechanisms and suggested a system for redistributing collected fees. [Implemented]
  • June 13, 2023, Reset Community Pool Allocation to 0 — Osmosis Proposal 531 sought to implement Part 2 of Proposal 485, which led to the tangible impact on emissions on June 19, 2023. It set the incentives gauge, currently going to the community pool, to zero. [Implemented]
  • June 14, 2023, Supercharged Liquidity Pools Rollout — Osmosis Proposal 532 introduced the implementation of Supercharged Liquidity Pools on the Osmosis network. The action was set to transition existing liquidity from Bonded Classic pools to Supercharged Full Range Pools. [Implemented]
  • June 14, 2023, Supercharged Incentives Model — Osmosis Proposal 533 aimed to approve a new incentive structure for Supercharged Liquidity Pools on Osmosis, incentivizing users to concentrate their liquidity. [Implemented]
  • June 14, 2023, Implement Halvening, New Emission Ratios, and Reduce Superfluid Discount Rate — Osmosis Proposal 534 sought to adjust the Thirdening effect and provide certainty to the emissions reductions, introduce new Emission Ratios and lower the Superfluid Risk Factor. [Implemented]
  • June 14, 2023, Lengthen Thirdening and Restore Thirdening Impact — Osmosis Proposal 535 aimed to restore and lengthen the Thirdening period, moving away from reliance on unpredictable upgrade dates. [Implemented]
  • June 20, 2023, Migrate OSMO Incentives from ION/OSMO Pool #2 to ION/OSMO Pool #1013 — Osmosis Proposal 538 aimed to streamline the Osmosis Incentives program. The proposal was to centralize OSMO incentives from the 80:20 ION/OSMO pool #2 to the 50:50 ION/OSMO pool #1013. The migration, once completed, would lead to the removal of pool #2, simplifying the impending Osmosis Concentrate Liquidity migration. [Implemented]
  • June 20, 2023, Expedited Proposal: Thirdening Implementation — Osmosis Proposal 539 aimed to implement the planned Halvening and Thirdening combination as a parameter change due to a prior error with the timing of these two proposals. The approved proposal addressed discrepancies and misalignments that led to an increase in the maximum supply of OSMO. [Implemented]

Network Releases

  • March 10, 2023, Osmosis V15 Series — The release of Osmosis V15.0.0 associated with the V15 upgrade and included new modules such as ProtoRev, Validator Set Preference, and Pool Manage. In Q2, pursuant version releases on April 20, May 25, and June 28 bringing the release to V15.2.0.
  • June 11, 2023, Proposal 526: Allow Squid Contracts to Be Uploaded — The proposal intends to allow an address managed by Squid to upload CosmWasm contracts to Osmosis.
  • June 14, 2023, Proposal 527: Upload Suitdrop Redeem Contract — The proposal is set to facilitate the redemption of Cosmos tokens for merchandise.
  • June 14, 2023, Proposal 532: Supercharged Liquidity Pools Rollout — An approved proposal aimed at implementing and rolling out Supercharged Liquidity Pools on the Osmosis network.
  • June 19, 2023, Proposal 533: Supercharged Incentives Model — A proposal developed to approve the incentive structure for Supercharged Liquidity Pools on Osmosis.
  • July 7, 2023, Osmosis V16 Series — The release of Osmosis V16.0.0 version corresponding to the upcoming V16 Magnesium upgrade, incorporating modules similar to the V16 Magnesium Upgrade such as SuperCharged Liquidity, CosmWasm Pool, and ProtoRev Changes.
  • July 13, 2023, Proposal 556: Osmosis V16 Magnesium Upgrade — A proposal of upgrading the Osmosis Network to V16 at block height 10,517,000.
  • July 13, 2023, V16 Magnesium Upgrade — The implementation of Osmosis V16 upgrade introducing modules like SuperCharged Liquidity, CosmWasm Pool, ProtoRev Changes, Exit Fee disabled on pool creation, Multi-Asset Fee Whitelisting, Route Splitting Impact protection, and others.


OSMO 2.0

On June 19, Osmosis shared details regarding its next development phase, with the release of an updated tokenomics model, OSMO 2.0. The model aims to improve the sustainability of the protocol and better align incentives.

Reduced Inflation and Extended Emission Timeline

Osmosis governance has voted to cut the inflation rate by half and lengthen the emission timeline beyond the initially planned mid-June timeframe, alongside the protocol's regular "Thirdening" inflation reduction event. The new schedule aims to enable a "smoother distribution of tokens over an extended period of time."

Revised Token Emission Allocation

The protocol will also shift its emission allocation to incentivize long-term stakers. Previously, Osmosis focused on rewarding liquidity providers to stimulate the growth of liquidity. However, the protocol's community has decided to redirect emissions from liquidity providers and the community pool to stakers. This shift is part of Osmosis' strategy to become a "DeFi-centric blockchain," supported by the Supercharged Liquidity feature.

Protocol Revenue Burn Mechanism

In January, Osmosis introduced an automated internal liquidity arbitrage mechanism and held the revenue collected from this module in a monitoring wallet. Governance has been considering options for using the generated revenue, including diversifying the Community Pool's holdings, incentivizing more staking, or initiating a burn mechanism.

Fee Share Mechanism

Currently, Osmosis allocates 45% of incentives to liquidity providers, while stakers receive 25% of the emissions. To rebalance these allocations, Osmosis governance is considering implementing a fee switch for liquidity pools. The update would allow OSMO stakers to share in the swap fees generated by activity in Osmosis liquidity pools.


Closing Summary

The second quarter saw a decline in volume, liquidity, and fees on the Osmosis network. IBC transfers and swap transactions fell the least in percentage terms, and net IBC transfers were over $400 million. In terms of proposals and network releases, Osmosis took numerous steps to not only improve its ecosystem and tokenomic design but also to incentivize users and increase security. The introduction of OSMO 2.0 demonstrates an ongoing commitment to sustainability and better alignment of incentives through measures such as a reduced inflation rate, extended emission timeline, revised token emission allocation, a protocol revenue burn mechanism, and a fee share mechanism. Despite the decrease in key metrics, the network continues to adapt and implement new strategies for its growth.

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This report was commissioned by Osmosis Grant Foundation. All content was produced independently by the author(s) and does not necessarily reflect the opinions of Messari, Inc. or the organization that requested the report. The commissioning organization does not influence editorial decision or content. Author(s) may hold cryptocurrencies named in this report. This report is meant for informational purposes only. It is not meant to serve as investment advice. You should conduct your own research, and consult an independent financial, tax, or legal advisor before making any investment decisions. Past performance of any asset is not indicative of future results. Please see our Terms of Service for more information.

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Before joining Messari as a Senior Research Analyst, John worked in Equity Derivatives on the buy-side and sell-side for over five years. He studied macroeconomics and markets for almost a decade. Now, John spends time thinking about token design, DeFi protocols, and governance.

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About the author

Before joining Messari as a Senior Research Analyst, John worked in Equity Derivatives on the buy-side and sell-side for over five years. He studied macroeconomics and markets for almost a decade. Now, John spends time thinking about token design, DeFi protocols, and governance.

Mentioned in this report