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Osmosis is the most popular decentralized exchange in Cosmos.

A friend asked me if it’s a good long-term investment. Here are some thoughts 👇

What it is

The first cross-chain DEX (decentralized exchange) in Cosmos ecosystem w/ IBC (Inter-Blockchain Communication protocol)* enabled.

*Think of IBC as a common language that allows Cosmos blockchains to talk to each other securely.

Problem it solves

25+ & growing layer 1 blockchains in Cosmos ecosystem (e.g. Terra, Juno, Secret), plus projects built on them, didn’t have a proper mkt place to trade tokens. It’s esp a challenge for smaller newer projects not listed on CEXs w/ thin liquidity.

Osmosis solves this by being the trading hub of Cosmos, pooling liquidity from entire ecosystem & giving tokens liquidity from day 1.

Team

Founders include former Cosmos core dev & former co-founder of Keplr wallet, the most popular wallet in Cosmos eco. Team are respected OG devs in Cosmos w/ solid network & name recognition, and a reputation for feature innovation & good UX.

Traction

Current TVL is around $1.5 bn. Since launching in June 2021, Trading volume & revenue have steadily grown…

 

…while price/revenue ratio continues dropping.

TVL growth rate is not crazy high but mostly organic & doesn’t have sudden start/stop like many protocols that draw in liquidity w/ short term incentives. Growth has “counter-trended” overall DeFi since December 2021, benefiting from surge in growth of Cosmos eco.

Moat / Competition

It’s hard for DEX/AMMs to build defendable moat since code is open source & easy to copy (Osmosis itself copied design of Balancer), while mercenary capitals are non-sticky & flow to wherever offering highest incentives.

Thus most DEXes will at best aspire to be cash-cow biz w/ steady revenue, rather than network-effect biz. They create positive externality for projects in their eco, but value capture of that externality is most likely by the underlining ecosystem rather than by DEX itself.

Although Osmosis is THE exchange in Cosmos right now, competition will be heating up.

E.g., Crescent Network, a reincarnation of former Gravity DEX on Cosmos Hub, is looking to serve as Cosmos DeFi hub w/ DEX, lending & derivative offerings. Kava, also IBC enabled, is building cross-chain DeFi connecting EVM chains w/ Cosmos.

That said, there’re bullish factors for Osmosis that could evolve into long term competitive edges.

1. Cross-chain apps are a growing market.

W/ multiple L1s & L2s gaining traction & app-specific chains begin to emerge, there’ll be large, if not exploding, demand for solutions that allow inter-chain communication & moving assets cross chain.

Osmosis is & will be benefiting from growing demand for cross-chain asset swap. Future integration of Ethereum/EVM ecosystem assets will supercharge growth even more.

2. Cosmos ecosystem continues to grow.

Growth of Cosmos eco chains lagged overall crypto industry in TVL & users for most part of current cycle, w/ select exceptions such as Terra.

In contrast, other ecosystems/L1s that got more traction were boosted by cheaper, faster transactions, higher incentives for devs & users, and/or compatibility w/ Ethereum dev tooling.

But growth prospect is turning up for Cosmos as IBC offers a solution to growing needs for cross-chain interoperability & Evmos aims to bridge Cosmos eco w/ Ethereum & EVM-compatible chains.

More liquidity flowing into Cosmos eco, more user activities & more chains that integrate IBC will all benefit the growth of Osmosis.

3. A focus on continuous innovation & robust UX.

Osmo team is building a reputation as innovators. E.g. they’re working on better preventing insiders from front-running user transactions (i.e. extracting MEV, or miner extracted value), by encrypting all txns before settlement.

They also recently integrated CosmWasm, a library for building cross-chain smart contracts, which opens door to building other DeFi products w/ complex logic onto the platform.

Osmosis user experience is one of the best in DeFi. It doesn’t happen by accident & team’s execution capability & attention to detail show through.

Downside risks

What could be some main risks of investing in Osmosis? (Aside from shared risks of DeFi.)

(BTW, like this so far? I write about ideas on investment, macro and human potential. Subscribe to my newsletter for updates.)

1. Low growth of Cosmos ecosystem.

A bet on Osmo is indirect bet on Cosmos. If latter fails to deliver on growth potential, prospect for former will be limited.

Other ecosystems, e.g. Avalanche, Near, Eth rollups, have alternative solutions for building interoperable chains that are cheap & fast. Who will capture more builders/users remain open question.

Potential mitigator: growth of blockchain industry as a whole could be high enough to accommodate multiple interoperability standards. It’s not necessarily winner takes all.

2. Emergence of stronger competitors

Imo high growth areas in DeFi going forward will follow barbell pattern— apps/protocols that grow a lot need to be either:

  1. a) super dumb, i.e. making DeFi products that are extremely accessible & friendly for mainstream users, or
  2. b) super sophisticated: i.e. making complex trading tools & derivative products for professional/institutional mkts.

Increasingly new DeFi projects are aiming for either a) or b). Vanila DEXes in their current state unlikely outperform. This applies to Osmosis to some extent.

Potential mitigator: Osmo could expand offerings & evolve in direction of either a) or b) & become much more than what it is now.

Valuation

Here’s a comparison of valuation ratios of Osmosis vs major DEXes & other DEXes w/ similar TVL. It’s clear that mkt is pricing Osmo higher than most of its peers rn.

If applying average mkt cap / TVL, or average FDV / TVL in peer list to Osmosis, it’d imply a token price of $3.6 or $5.6 respectively, compared to current price of around $7.5.

Why is mkt pricing Osmo at above average? One factor is as mentioned, since December last yr Cosmos eco growth including Osmo has “counter trended” despite total crypto activity going down. That inspired positive price action & upward reflexivity.

Recent counter trend was mostly due to one-off events unlikely to repeat. However as discussed earlier, there’re also factors that could set Osmo above average long term, e.g. rising demand for cross-chain solutions, Solid team / execution & positive outlook for Cosmos eco.

Verdict

Is Osmo a good long-term investment?

A few points. 1st, it depends on your investment style.

If you run a concentrated portfolio & only focus resources on bets w/ highest reward/risk rate, I wouldn’t touch any DEX. As discussed they’re tough biz of high competition, low defendability & positive externality that mostly accrues to the L0/L1/L2 they serve.

But if you run a diversified portfolio & want exposure to DEX/AMM sector, Osmosis would be a top candidate, due to

1) quality team & product

2) well positioned in growing Cosmos eco

3) capturing large & growing demand of cross-chain trading

4) potential to evolve beyond AMM into bigger DeFi hub

These factors could drive Osmosis to be a growth outperformer in DEX sector.

2nd, positive outlook aside, an undervalued bargain it is NOT. Mkt is actively pricing in an above-average growth outlook.

Given large recent price run up & peer comparison, I’d consider upper half of price range b/f recent run, i.e. $5-$6, to be reasonable buy zone.

 

9 Comments

  1. Remarkable! I have been studying Osmosis for a little over two weeks now, ever since it became a member in one of my favorite crypto Faucets. And not knowing much about this crypto currency I was hesitant to go for it, and I was up in the air with my decision to invest in it. But the facts mentioned in this article completes the pieces that were missing in my own research. Because of this I am confident that investing in this crypto currency it is the right decision for me.

    Thank you so much Tascha for all that you do for us!

  2. I’d love to hear your thoughts on Terra and the Anchor Protocol.
    Is it a Ponzi scam?
    Or is it the birth of a giant platform against Ethereum?
    No one knows, but I’m curious about your opinion on this.

  3. Tasha,
    Animoca was recently valued at 5.5$Billion after raising $350M. This is a very high evaluation. What do you think?

  4. Hi Tascha. Would you like to share your opinion how UST affected Osmosis ecosystem? Would love to hear your analysis

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