The Osmosis eco-system was hit hard by the collapse of the Terra UST eco-system. A number of liquidity pools had UST pairings, and the OSMO/LUNA pool was one of the biggest prior to the crash.
As you can see from the above chart, the OSMO token had been in a steady decline since March. Along with most of the Cosmos eco-system assets, it had been on a steady downtrend from around $10 just 2 months ago, to around $4 recently. However, the LUNA collapse led to a further dump, down to its current price of $1.50 to $1.70. To come up to speed on haw LUNA/UST collapsed, this post by @melbourneswest covers it well.
Bonded LP's.
One of the key issues during this collapse has been that much of the liquidity in Osmosis is bonded for up to 14 days. So, when LUNA and UST started to unravel, liquidity providers could do nothing to pull their liquidity, exit their positions or prevent massive impermanent loss.
Osmosis LP's became a source of exit liquidity for many. As LUNA started to hyper-inflate, the LUNA/OSMO pool started to become drained of its OSMO, via massive amounts of LUNA tokens being swapped. Obviously much of this OSMO ended up being then sold to move out of the platform.
So, LP's where wiped out by massive IL, and Osmosis has no IL protection in its system. In hindsight, LP's would have likely been much better off on Thorchain. Thorchain LP's are not bonded, so alert LP's could have pulled liquidity and exited positions quickly. Alternatively positions could have been held till the 100 day timeframe to qualify for full IL coverage.
The reaction.
An emergency chain fork was rolled out, with the goal of allowing LP's to "un-pool" their positions in the UST pools, despite still being bonded. Problem is that most of the damage was done, with the LUNA pool completely destroyed, and UST pools being miles underwater. However, this did give people the chance to "lock in" too a certain extent the IL they had already suffered through UST's drop from $1 to sub $0.15. Stopping the complete wipe out of the OSMO or other side of the UST pairings was the goal, and that has happened to a degree.
Once a user took the "un-pool" option, their token balances were protected at that point. The tokens remain bonded until the users un-bonding period is over, but no further IL could be experienced.
The other step that has been taken, has been governance decisions to remove all incentives from these "rekt" pools, and move them to new pools based on bridged USDC and DAI. These bridged tokens had just been launched on Osmosis, utilizing Axelar as the primary canonical bridge service. Shifting the incentives rapidly from UST to these new pools provided an instant boost to the APR of these pools, incentivizing the rapid adoption of them.
Overall, Osmosis has had 10 different governance votes initiated in response to the LUNA/UST collapse. It has been heartening to see that governance has been able to react and move quickly to minimize the damage. Of course, the LUNA pool is destroyed completely, but the "un-pooling" option has allowed people to salvage something from the UST pools at least.
Where to now?
One key issue currently is that Osmosis LP's seem to have been completely ignored in the Terra airdrop proposals. Even a revised proposal, recently announced by the Terra twitter account contains nothing for Osmosis LP's. Personally, I have no interest in moving my tokens out (once they un-bond) to participate in any snapshot. As soon as I can, they will be sold.
The Gateway to Cosmos 2022 recently wrapped up, and in it a discussion with Sunny Agrawal, an Osmosis co-founder, was held. Below is the link to that conference live stream, set to start from the start of Sunny's segment. To come up to date with the fallout of the LUNA crash on Osmosis, and the path ahead, I'd highly recommend watching the last 40 minutes of this livestream.
Conclusion.
Osmosis was hard hit by the collapse of LUNA and UST. UST was the primary stablecoin on Osmosis, and the LUNA/OSMO pool was one of the largest on Osmosis. The price of OSMO has suffered in the process. It does, from the chart early in this post, appear that the downtrend for OSMO may have found its bottom, since this event. A two month trend, down from $10 seems to have ended, and maybe OSMO could be seen as a good buy for a recovery play. Obviously not financial advice, do your own research and all that.
Osmosis is still an important part of my portfolio, however it is a much smaller component than it was a few weeks ago, thanks to the LUNA crash.
Thanks for reading,
JK.
If you enjoyed this post, here are some more you may like: