Osmosis Liquidity Depth Index (OLDI) // Interchain Index (OICI)

[waspcartel]

ICI (Interchain Index)

There is a notable absence of indices to trade in the Cosmos ecosystem. There are no indices to trade, for example the Interchain Index (ICI) for Cosmos-based chains, or an Osmosis Liquidity Depth Index (OLDI)

The lack of such indices in crypto markets is likely missed and would no doubt see significant trading volume were someone to invent them. An easy starting point would be to use an oracle like Band Protocol or just the data within Osmosis to build an Interchain Index (ICI) to represent the combined market cap of all Cosmos-based IBC projects and list it on the Osmosis (OICI) and JunoSwap (JISI) DEXs, as well as others.

The index would work on a points system, with each point representing $10,000,000 of value. For example, if the combined market cap of all IBC projects was $18bn, then the index would be 1,800 points, with each point representing $1 of price. Thus OICI contracts would trade at $1,800.

LDI (Liquidity Depth Index)

The Liquidity Depth Index is an index that represents the total combined liquidity in all pools on a given exchange. A CFD will be structured to allow traders to go long or short on the TVL (total value locked) across all active liquidity pools on the exchange. Each DEX will have to have its own unique product - Like Osmosis LDI (OLDI), Juno LDI (JLDI), etc.

The reason for this is that each LDI is a whitelisted product on an exchange - it doesn’t actually hold any value in and of itself, it’s just a statistic. The futures contracts traded over the LDI is where all the value lies.

Indexes in global markets

Most stock markets have indices available to trade via Contracts for Difference (CFDs). The buyer can open a long or short position, allowing the buyer to profit from increases or decreases in the value of the assets underlying the index.

The buyer opens a long position if he thinks the index will increase in value, or a short position if he thinks it will decrease in value.

There are two types of CFDs to trade indices:

1. Index futures: gives you the right and obligation to sell the futures contract at a pre-agreed upon date for a pre-agreed upon price.
2. Cash indices: Traded at the current spot price of the underlying asset.

You can’t trade the index price - it’s simply a statistic. You trade CFDs linked to the index. So, in order to trade the ICI index on Osmosis (OICI), for example, derivatives will have to become involved.

Buyers going long or short will be paired with one another in a P2P manner, so that Osmosis will not have to put down any capital itself to start the process up.

How would these contracts work?

John and Allen want to trade the OLDI (Osmosis Liquidity Depth Index):

• The combined liquidity in all pools on the Osmosis DEX is $1bn.
• Each point of the index is worth $10m - so the total index is 100 points. Each point is $1.
• Thus the OLDI is trading at $100.
• John and Allen enter into a cash indices contract - John goes long and Allen goes short. Each puts in $10,000.
• The contract opens at $100 and is agreed to be settled 10 days into the future.
• Some exciting news about an IBC project causes a surge in liquidity in several pools on Osmosis DEX. The total LP value increases to $1.4bn, meaning the OLDI is now $140.
• The contract closes and John (long) is up 40%, while Allen (short) is down 40%.
• The money that John earns has come from Allen making this is a zero sum game.
• Osmosis DEX also took a small fee (0.5%) from each party to enter into the contract.

Leverage

Notice that leveraging has not been mentioned in this issue so far. Leveraging allows traders to multiply their positions, thus multiplying their potential gains and losses substantially. This makes the process more complex, adding more layers - the design and implementation of which go beyond my scope of understanding at this time. It may well be the case that leveraged trading is not desirable in the IBC ecosystem. I won't dwell on this now.