Add 0.01% and 0% fee CL pools to the ATOM/OSMO volume splitting gauges

EDIT: As suggested I have added a 0.01% fee pool as well. Expected on chain date is 1.24.24

As has been demonstrated by the establishment of the lower fee variants of the “classic” pairs (ATOM, ETH, USDC), traders will vastly prefer the lower fee options and send most volume through them. It stands to reason that a pool with an even lower fee would attract even more volume. However, on the surface, it would appear that liquidity providers who supply to this pool would be guaranteed a loss.

Why would Osmosis want to provide incentives to a pool that will never be able to “sustain” itself through swap fees?

Consider the currently incentivized “high fee” 0.2% ATOM/OSMO LPs, pools 1 and 1135. Combined, their nominal swap fee return is usually somewhere around 2% - not enough to beat token inflation, by a long shot. Given the existence of a lower fee option to pull volume, there is no feasible way that this pool can become sustainable through swap fees. Yet, these pools continue to receive OSMO incentives. The nominal incentives returns are a bit higher than the swap fees, but even taking into account superfluid staking, the total theoretical return is only marginally higher than staking the assets separately. When considering losses that a liquidity provider will incur due to transaction fees, swap fees, taker fees, and impermanent loss, it is a reasonable assumption that many or most providers in these pools will break even or incur net losses.

What is the purpose of incentives?

The narrative around Osmosis incentives has historically revolved around bootstrapping or maintaining liquidity. The core of the idea as I understand it is that providing a certain level of incentivized return for a certain amount of time will create a base of liquidity that will allow for a high amount of swap volume and for the pool to remain sticky after the incentives are reduced or removed. I believe that this system has achieved partial success. A great deal of sticky liquidity has seemingly been achieved, however its quality and the stickiness of the volume itself leaves something to be desired. I would posit that the ongoing application of Osmosis incentives has exactly led to a situation as described above. The logical result is a large amount of inefficient passive liquidity being allocated appreciable incentives but offering practically no return. This situation is highly inefficient and likely to incur losses for both the LPs and for Osmosis.

How can we do it better?

0% swap fee LPs may be the way to fix this. But it’s not magic. This unexpected opportunity arises from Osmosis’s unique taker fee implementation The LP logic of the dex has been disrupted. Taken at face value, the taker fee could be considered hostile to LPs. Osmosis itself is beginning to derive much more return from trading than do the liquidity providers as volume inevitably moves to lower fee pools, redistributing an increased amount of revenue from LPs to the protocol. This is exacerbated by the shift to concentrated liquidity which necessitates that providers actively manage their position to maximize return, thus potentially incurring a large amount of taker fees themselves.

This is an environment that perpetuates the need for direct incentives in order for LPs to be sustainable. However, this doesn’t mean that incentive provision has to be unsustainable for the protocol. The final piece of the puzzle is volume splitting gauges. Because incentives can be distributed across multiple pools of the same asset pair strictly on “merit”, there is 0 upfront cost to the protocol to implement incentives to a 0% fee LP. Over time a balance can be struck between the incentives expenditure and incomes. Remember that currently 100% of incentives come from OSMO inflation, but as inflation decreases and taker fee revenue increases, this spending can be augmented or supplanted by taker fee return, eventually creating a self sustaining system. It is my view that the narrative around this system would essentially shift from bootstrapping liquidity to paying LPs to produce volume as efficiently as possible (by offering the best price with the lowest fees).

In tandem with my other pending proposal on taker fees, I think that we have a good start at reimagining the relationship between Osmosis and its liquidity providers, in a mutually beneficial way.


ATOM/OSMO is very much the poster VSG model. The movement of volume to the 0.05% pool has been incentivized successfully.

I was planning on proposing an additional 0.01% pool once the other major pools and the Stable/ATOM pairing had matured a bit… but they’re no real reason not to add both a 0.01% and 0% pool to this already and see how swap fees alone will find a market for these major routes.

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You sir, have spoken for the people. :pray:

0% may be a little too much, but something small could work. LPs not being compensated “fairly” hit the nail on the head.

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Thanks for the comments. Pools 1399 (0.01%) and 1400 (0%) have been created and funded.

I am very very curious if people will find their way to 0% pools.

I can understand the 0.2% being the best for liquidity providers, whereas traders will prefer the 0.05% pools due to lower fees. With enough volume going through the pool it may reach a break-even or even be more profitable.

I do wonder whether 0.01% will attrack enough liquidity to do a proper volume, since it will require a 5 times higher volume compared to the 0.05% pool and even 20 times higher volume compared to the 0.2% pool to be on the same level of profitability for liquidity providers.

And why would people go in the 0% pool as provider? Since providing liquidity here will be the worst investment you can do imo. With the risk of impermanent loss always present, this pool is worse than just holding your asssets liquid… And if there is no volume flowing through the pool, it also won’t attract OSMO-incentives if I’m correct. So there won’t be much reason to join the pool. But I could be wrong of course, so I am very curious for your line of reasoning on this one.

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This kind of pool isn’t for the retail liquidity providers. It’s for ATOM and OSMO whales who’ have large bags and want to offer cheap swaps to people coming into/out of the cosmos eco system.

Your logic isn’t wrong, but let the whales do what the whales are doing.

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Oh yeah, that is why I am also curious for the outcome.

Because the one thing I learned about people with money is that they want to make more money. The amount of “well-doers” with a lot of money without wanting anything in return is sadly very limited in the world. But I would be glad to stand corrected on this one :slight_smile:

Lot’s of air drops for other chains, ect…things like that.

The gauge needs to be created by the prop itself btw, this looks like it is a text prop right now!
If passing it will still need resubmitting - I’ll pull together the transaction!

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As this proposal passed as a text proposal, I have generated a new one to create the actual gauge.

The February incentives prop will be going up on the 5th which gives this time to finish.

In case any more of these are loaded, this is the format, additional groups can be made in the same prop by splitting the sets of pool numbers with a semicolon.
I don’t think this message is available on DAODAO if that was the submission method, have flagged this with them also :slight_smile:

osmosisd tx gov submit-legacy-proposal create-groups-proposal "1,1135,1265,1399,1400" --from=ADDRESS --deposit=1600000000uosmo --gas=auto --gas-prices 0.01uosmo --gas-adjustment 1.3 --title="TITLE" --summary="PROPOSAL TEXT"


this is great, much appreciated!

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Having added this gauge to the February incentives proposal, I am really curious as to how this will work!

The new pools have barely any liquidity and it isn’t optimised, but they are catering for a disproportionate amount of volume.

I’m slightly worried that this is all arbitrage volume and may end up being deep positions with no width during volatile times.

However, we also have pool 1 and 1135 which are being surprisingly sticky despite lower incentives because of VSG to 1265, and we also have the uptime parameter being worked on being enabled. Both of these should mitigate this risk.

Arbitrage volume would also still use the routing as prescribed/determined by the DEX, right?
Or do they define the desired routes themselves?

It is indeed curious that the people providing liquidity in the newer pools would get relatively nice APRs on their liquidity on the swap fees. But it is a nice experiment to see how it will work out. Good to see that you are monitoring it!

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I believe they find the routes themselves, I’ve had instances of setting up pools with a few dollars of liquidity that weren’t quite at the intended spot price, getting arbed away back to spot within seconds.

I mean that arbitrage against the global spot price requires very little liquidity since the pool just needs to be slightly higher than the total fee to trigger it. Actual trading requires more since the trade size will be larger.

For info, I have started a basic tracking sheet to see the impact of these changes ahead of the gauge shift:

Initial takeaways are that normalised Liquidity and Volume in the ATOM/OSMO pairing are both decreasing over time. This seems wrong at first since overall Osmosis volume has increased. However, I suspect it is a result of alternative deposit routes to Osmosis becoming available, such as USDC and OSMO deposit now being available on CEXs, so ATOM is no longer the main onboarding route.

Liquidity has flattened over the last month, whether this is the base level of liquidity that is either inactive or still bonded is uncertain.

Protocol Taker fee proportion has increased steadily from the initial third of fees generated, to two thirds, as would be expected if the majority of volume adjusted from using the 0.2% pool to the 0.05% pool. These gauges being active should see it rise to between 85 and 100%.

Protocol Fee Subsidy is what we want to see dropping below 100%, but it has steadily risen over the last month. This is mainly due to the decreasing volume in this pairing as well as a strong OSMO value and high incentives for ATOM/OSMO still. I will be proposing accelerating the rate of change of incentives within the next week to ensure that incentives are going to the places where we need liquidity the most. We are almost certainly over-incentivising the ATOM/OSMO pairing since it was maintained as a TWAP resilience measure, something that is now spread over all OSMO pools by the incentives algorithm.

What is the current rate of decrease for incentives?
Is it going to slow because we have shifted towards a monthly update instead a weekly one?

Yes - it is currently set to 10% a month.
We previously had it at 25% a week, but we had huge amounts of random pools then as well as not using the Volume Splitting Group system - which can change incentive freely within a group.

10% made sense while we tested the new procedure but it has been in for six months now and is running smoothly.

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Should we then also revise that part of the adjustment procedure while we are at it?

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