Osmosis Labs, the developer of the Cosmos-based decentralized exchange (DEX) Osmosis (OSMO), has introduced a new feature called “concentrated liquidity.” This feature allows liquidity providers (LPs) to specify a minimum and maximum price range for buying or selling cryptocurrencies. If the price falls outside their chosen range, the LPs will not earn fees; however, when the price remains within the specified range, they will receive higher fees compared to not setting any limits.
The Cosmos ecosystem comprises interconnected blockchain networks that utilize the Cosmos Software Development Kit (SDK) and are linked through the Inter-Blockchain Communication (IBC) protocol. Osmosis is one of the prominent DEXs within this ecosystem, processing approximately $120 million in daily trading volume, as reported by DeFiLlama.
By implementing concentrated liquidity, Osmosis LPs significantly enhance capital efficiency, achieving a 100x to 300x increase. This means that pools can maintain much lower liquidity while handling the same volume without negatively impacting traders through slippage.
While the concentrated liquidity concept was initially introduced through Uniswap V3 and has gained prominence in the Web3 world, it has been relatively uncommon in the Cosmos ecosystem until now.
According to Alpin Yukseloglu, a protocol engineer at Osmosis Labs, the new feature goes beyond Uniswap’s original version. While Uniswap allowed LPs to set minimums and maximums only at specific price intervals called “ticks,” Osmosis offers more granular control by including multiple ticks within each price range. This adds flexibility for LPs to define finely-tuned minimum and maximum prices, potentially reducing user frustration.
Yukseloglu further revealed that Osmosis plans to implement an on-chain order book in the future. This feature is currently in the implementation-level specification stage, without a confirmed timeline for completion. Osmosis aims to provide liquidity providers with more options, including concentrated liquidity and an order book.
In the broader Cosmos ecosystem, dYdX, a crypto futures exchange, is also developing an on-chain order book as part of its transition to Cosmos.
Sunny Aggarwal, co-founder of Osmosis, has expressed confidence in the security of the Cosmos IBC (Inter-Blockchain Communication) protocol for cross-chain bridges. He considers it the safest bridging protocol available. Although a critical vulnerability was identified in IBC in October, prompt action was taken to patch the issue the following day.
Overall, Osmosis’ concentrated liquidity feature empowers LPs on the Cosmos-based DEX by allowing them to choose specific price ranges, enhancing capital efficiency, and offering higher fees within those ranges. This move aligns with Osmosis’ goal of providing liquidity providers with more flexibility and options for managing liquidity effectively within the decentralized finance (DeFi) space.