QUESTIONS BOUNTY

What type of wallets provide liquidity on Osmosis? Is liquidity concentrated and owned by a small number of whales? Or, are there a diverse range of participants in the LP ecosystem? Do LP composition change based on TVL of the pools themselves?

What Is Osmosis (OSMO)?

Osmosis (OSMO) is an automated market maker protocol (AMM) for the ATOM ecosystem. Osmosis was inspired by Balancer and Uniswap and wants to provide tools that go beyond traditional token swaps and offer users DeFi functionality for a cross-chain world. For example, developers can build customized AMMs with sovereign liquidity pools and users can launch liquidity pools with unique parameters like bonding curves and multi-weighted asset pools. That means a liquidity pool does not always have to follow a 50:50 distribution between its assets but can be customized according to the wishes of the party setting up the pool.

Osmosis's vision is to build a cross-chain native DEX that connects to all Cosmos ecosystem chains. Later, it plans to expand to non-IBC chains like Ethereum and chains similar to Bitcoin. In this fashion, Osmosis will transfer its unique customizability like custom-curve AMMs, dynamic adjustments of swap fees, and multi-token liquidity pools beyond blockchains in the Cosmos ecosystem.

What Makes Osmosis Unique?

The Osmosis blockchain protocol has three key strengths that set it apart from other AMM money market protocols.

First, Osmosis has customizable liquidity pools. Unlike Uniswap, where LPs can provide liquidity only to a two-token pool with an equal ratio, Osmosis allows for providing liquidity to pools with several tokens and unequal ratios. Osmosis argues that agents in a maturing DeFi market like arbitrageurs and LPs need a more flexible solution that allows them to self-identify opportunities and react to them by adjusting parameters. Thus, on Osmosis LPs can adjust factors slippage, transaction fees, and more.

Coordination between stakeholders is of equal importance, which is why liquidity pool shares on Osmosis are not only used to calculate the fractional ownership of a liquidity pool, but also the right to participate in the strategic decision-making of the liquidity pool as well. This incentivizes long-term liquidity provision and prevents possible vampire attacks from other protocols. Thus, liquidity providers with more skin in the game get a bigger say in the strategic direction of the pool, which is in line with the bigger risk they're taking.

Finally, Osmosis introduces the idea of "AMMs as serviced infrastructure." With an increase in the amount and complexity of DeFi products, AMMs have had to:

• Compromise efficiency and trade on AMMs with non-optimal bonding curves.
• Take on the risk of building a custom AMM to maximize efficiency.

Osmosis wants to remedy that by providing AMM creators with an option to define the bonding curve value function and reuse the rest of the infrastructure using Osmosis' products.

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WHAT IS A LIQUIDITY POOL

A liquidity pool is a digital supply of cryptocurrency that is secured by a smart contract. As a result, liquidity is produced, allowing for quicker transactions. An important component of liquidity pools is automated market makers (AMMs). A liquidity pool helps to maintain liquidity on a network by rewarding users who contribute assets to the pool. These users receive liquid pool tokens as a reward, which are a portion of the fees from trades that occur within the pool

AMMs are typically pools of digital assets managed by a smart contract used to enable decentralized trading. The liquidity pools and smart contracts replace the order book system. liquidity providers lock their assets into the pool and earn fees when people trade in these pools.

For this, Firstly, I am going to express some definitions of different wallet types in my own way which will be used to analyze data in this dashboard:

1. Humpback Whale: The wallet addresses with more than 10M USD balance in their wallet.
2. Whale: The wallet addresses with 1M - 10M USD balance in their wallet.
3. Shark: The wallet addresses with 100k - 1M USD balance in their wallet.
4. Dolphin: The wallet addresses with 10k - 100k USD balance in their wallet.
5. Fish: The wallet addresses with 1k - 10k USD balance in their wallet.
6. Crab: The wallet addresses with 100 - 1k USD balance in their wallet.
7. Shrimp: The wallet addresses with less than 100 USD balance in their wallet

Based on the left charts, almost 85% of total Osmosis users (more than 375k unique wallets) are Shrimp (users with less than $100 balance in their wallet).

On the second rank, we have Crabs (users with $100 - $1k balance) with 11.5% share of total Osmosis users (more than 50k unique wallets.)

As it was predictable, the number of wallets with higher balances (Whales, Humpback Whales, Sharks and Dolphins) are less than other type of users.

SPECIAL THANKS

Finally, I wanted to thank my colleague alik110 for helping me to make this bounty and to get all this information.

Based on the above over-time charts, the share of Shrimps in providing liquidity actions on Osmosis is more than all other type of users in almost all days of the charts (in both terms of transactions and users count),

During first months of the chart, we have seen more share of other types such as Fishes, Dolphins, Crabs and etc but as time goes on especially during recent months, we can see increasing share of Shrimps in liquidity providing actions on Osmosis.

Totally, the Liquidity Providing activity on Osmosis was increasing dramatically till March 2022, But after this timespan till today, we can see quite decreasing trend over time.

FINAL CONCLUSIONS

• Based on my own classification of users by their wallet type, (details mentioned above in the methodology section), almost 85% of total Osmosis users (more than 375k unique wallets) are Shrimp (users with less than $100 balance in their wallet). the second rank belongs to the Crabs (users with $100 - $1k balance) with an 11.5% share of total Osmosis users (more than 50k unique wallets.), the number of wallets with higher balances (Whales, Humpback Whales, Sharks and Dolphins) are less than other types of wallets.
• more than 50% of liquidity-providing actions on Osmosis are done by Shrimp users.
• The share of Shrimps in providing liquidity on Osmosis is even increasing more and more over time while the other types' share is decreasing as time goes on.
• But, most volume of liquidity on Osmosis (more than 45%) is provided by Fish. The interesting thing is that Humpback Whales (wallets with more than 10M USD balance) are on the second rank and 3rd rank belongs to the Dolphins.
• So, we can not say the liquidity is concentrated and owned by a small number of whales because we have seen several groups of wallets participating in providing liquidity on Osmosis.
• In terms of volume, during the first days of the chart, there was an equal share of all users’ types in providing liquidity on Osmosis. After a while in October, There was a huge increasing share of Fish in providing liquidity on Osmosis pools. again after a while, there was an almost equal share of wallets types on LPing but during recent months especially after May 2022, There is a quite increasing share of Humpback whales and Dolphins on providing liquidity on Osmosis pools to the extent that in the current month, HumpBack whales have the significant share of LPing in Osmosis.
• There is a positive correlation between pools' TVL and the activity of users (number of users and transactions) on them Over time. (not all pools but most of them) We have seen their trend lines increasing and decreasing Simultaneously over time.