Founder of DeFiance Capital: Why I am optimistic about Osmosis?

Author: Arthur, Founder and CEO of DeFiance Capital

Compiled by: Jinse Finance 0xjs

Since returning from Cosmosverse in Istanbul, I have been optimistic about the Cosmos ecosystem and have been seriously considering the best ways to hold my positions.

After in-depth research, we found that Osmosis is one of the most exciting opportunities in Cosmos.

The reasons are as follows (subheadings added by the translator):

One-Sentence Summary

Osmosis is a DEX-centric application chain in Cosmos and serves as the de facto liquidity hub in the Cosmos ecosystem through the Inter-Blockchain Communication (IBC) protocol.

Latest Developments in Cosmos Projects

Circle

Recently, Circle launched native USDC on Cosmos through Noble. Any serious blockchain network should have a native version of a major stablecoin, which is a huge win for achieving liquidity in Cosmos through IBC. Of the $15 million issued in native USDC on Cosmos, $10 million is on the Osmosis chain.

dYdX Chain

The dYdX Chain launched last week and will soon enable trading features, making the Cosmos ecosystem home to the largest derivatives DEX, with a monthly trading volume exceeding $23 billion.

Other Top Projects (Celestia, Berachain, XDEFI, Akash, etc.)

We have also seen other top projects that have launched or are about to launch, such as Celestia and Berachain. Lido Finance has also launched wstETH.

Wallets centered around the Cosmos ecosystem, such as XDEFI, have recently seen significant growth in weekly active users.

The first decentralized cloud network capable of providing enterprise-level NVIDIA H100/A100 GPU chips, Akash, is also a Cosmos application chain.

Osmosis as the De Facto Liquidity Hub of Cosmos

As more projects, tokens, and users join the ecosystem, the trading volume of Cosmos application chain tokens will increase, providing significant momentum for OSMO.

The Osmosis application chain is currently the largest on-chain liquidity hub for Cosmos-based assets, with a TVL of $122 million, making it the de facto liquidity center of Cosmos.

About 70% of the activity in Osmosis is completed on OSMO's LP pairs, which has several implications: 1) It increases the utility of OSMO, and 2) Given that users typically need to go through OSMO pools to acquire the assets they want, it creates a multiplier effect on the trading volume on OSMO pools.

When liquidity returns alongside a bull market, this multiplier effect should be most pronounced. While Osmosis currently has a daily trading volume of about $20 million, it pales in comparison to the daily trading volume of over $200 million during bull markets.

Improvements in OSMO Token Economics

The community recently voted in favor of a series of proposals that greatly improve OSMO's token economics. In Q2 2023, the annual token issuance was cut by 50% to around 10%. Starting in 2025, this emission rate will decrease by one-third each year.

Just a few weeks ago, Osmosis implemented a 0.1% fee on all swaps. At current levels, this will generate over $4 million in revenue, most of which will be captured by OSMO stakers.

This new revenue source is expected to be ten times the current revenue figures, which mainly include trading fees and MEV revenue capture within the Osmosis protocol.

Interestingly, the portion of the fees charged in non-OSMO assets will be regularly converted into OSMO. At current levels, we estimate this will generate over $600,000 in OSMO buying pressure annually.

Osmosis also features superfluid staking, allowing users providing liquidity in certain pools to also stake to help secure the network, along with MEV capture, concentrated liquidity, etc. This essentially reduces both staking rewards and LP fees simultaneously.

Osmosis is Severely Undervalued and Ready to Capture Value from the Cosmos Ecosystem

Therefore, we believe Osmosis is ready to capture value from the growing Cosmos ecosystem. With the launch of TIA, daily trading volume has increased by 50-100%. We expect the launch of other tokens like DYDX and the growth of Noble USDC/WBTC to serve as further catalysts.

While Solana has been a standout token this year, it is often overlooked that some Cosmos application chain tokens like INJ and RUNE have outperformed SOL this year.

OSMO is also severely undervalued compared to other tokens. Thorchain, with a similar TVL, has a trading price corresponding to a $1.5 billion FDV, while Osmosis has a circulating market cap of only $300 million and an FDV of $600 million, far below the B round valuation led by Paradigm (which corresponds to a price of $1.60, fully unlocked).