Allocate 7m OSMO to the OGP Multisig to Fund Market Making Operations for 12 Months

Proposal Discussion
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This is a proposal to allocate 7 million OSMO tokens from the community pool to the Osmosis Grants Program Multisig wallet (osmo1vpmwzt4mt6cfnnwtrpv79tn09yx2r3s56chpln
). The funds will be used to retain two market makers with the goal of market making for the OSMO token on multiple centralized exchanges.

Per community feedback, this proposal has been separated from the OGPv3 renewal proposal, which will be going on chain concurrently with this proposal. If this proposal passes and the renewal proposal does not, this proposal will be considered failed and the funds will be promptly returned to the community pool.

How Can Market Makers Help Osmosis?

A market maker deploys capital across exchanges with the goal of tightening up the spread (the difference between the best bid and ask prices) and adding liquidity to the orderbook (or depth). Market makers don’t have any impact on volume or price. Instead, we can look at orderbook spreads and depths to determine whether a market maker would be helpful. At the time of writing, we see the following spreads and ±2% depth respectively from Coingecko:

OSMO-USDT 3 (Binance): 4 bps and $168k

OSMO-USD (Coinbase): 6 bps and $19k

OSMO-USDT 1 (MEXC): 1 bps and $93k

By working with a market maker, Osmosis can improve these stats to increase orderbook depth and provide consistently tighter spreads. We expect this to reduce volatility in the market as orders are more easily absorbed into market maker liquidity. It also improves execution for any market participants.

Given the role of OSMO as a value of liquidity for pools, security for the protocol, and resource for community members, the protocol would benefit from lowering volatility and improving the overall health of OSMO orderbooks.

One question folks may have is - why does it make sense for the OGP to work with market-makers, as opposed to market-makers interacting directly with the DAO? The reason is - market makers are contracted through agreements that clearly define the loan structure, and hold them accountable to performance. The OGP is well suited to take on that counterparty role for the community, and can also hold any market maker accountable more efficiently.

Historically, Osmosis has not actively worked with market-makers. But with the growth of Cosmos in recent months, we think it’s an advantageous time for Osmosis to bring on additional partners with different value adds.

So how will this work?

Broadly speaking, market-makers require an inventory of tokens to make markets with. Of the 7M OSMO allocated to market-maker initiative, we anticipate much of it would be used as inventory for the market-makers, with a small amount bucketed as potential compensation for their services. Importantly, the OSMO used as inventory by market-makers is structured as a loan - after the agreement terminates, the OGP would receive either the original OSMO amount loaned, or USDC proceeds from the sale of OSMO at the agreed option price. Thus, only a portion of the 7M OSMO will actually be spent as compensation to market-makers.

Market-makers also receive compensation, typically in the form of a retainer or options. Under the retainer model, market-makers are paid depending on how many pairs they’re active in. Under the option model, market-makers may receive an option to purchase the OSMO at an agreed price.

The Grants Program plans to conduct an analysis into which market-makers to work with. Discussions are ongoing, and we will update the Osmosis community with details once ready. We plan to share the market-makers’ identities and the size of the inventory involved.

Multisig Composition

As a reminder, OGP v3’s Reviewer Committee will include:

  1. Cosmostation
  2. Figment Capital
  3. Brandon Curtis
  4. Polkachu
  5. Schultzie
  6. Juri Maibaum
  7. Andrew Allen
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I am ok with the OGP leading this initiative, but I still miss a critical aspect as discussed in the other chat.

Where 3 things are required to be clarified:

  • what is the expected cost vs benefit of the market makers? In essence having different exchanges with different depths/spreads also fuels arbitrage trading which can be done by the community
  • @floppybanana already indicated there are already wallets exactly doing this. Why would we go to fund an initiative of something which we already have?
  • I still seriously miss a tollgate where a deliverable is set where the requirements and outline of the MM search is documented. We are now discussing a blank cheque of a whopping 7 million (!!!) dollar without exactly knowing what we will get in return. I am certainly not up for that, we seriously need to do better on spending our funds. Become more professional, which comes with documentation and clear requirements.
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I distinctly remember Sonny saying if cexes wanted osmo they can buy it themselves. Why are we now handing osmo over to them at cost. I’d propose if anything otc deals maybe being made or an actual loan where 100% of osmos are returned plus a premium too be dertimined

Just a community member

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Market making and arbitrage are not the same thing in this case. Market making places limit orders on books to increase the spreads, which allows for larger traders to swap in size.

This is to prevent things like this from happening:

https://twitter.com/WillbBTC/status/1742931446954914089?t=Sq_Ifra9kh5qZabZmIfxug&s=19

See the massive wicks on those charts? Each of those represents one or more large traders getting rekt on Binance. Likely this means we’ve lost those whales’ liquidity permanently (who wants to trade on thin books after all).

This is the exact thing market making would have helped to prevent.

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Can you blame a CEX for not wanting to buy their own OSMO tokens to be their own MM? Hundreds upon hundreds of different tokens on exchanges and some of you expect the CEX to front up some of their assets in exchange for OSMO. If you want great things, asking someone to do it for you or help you will get you ‘maybe’ somewhere. Doing market-making ourselves is guaranteed to help the order books and lessen the impact of some whales regretting the decision to buy up OSMO. While I would love a CEX to buy up some OSMO so that they have some ownership and skin in the game, it’s just not going to happen anytime in the foreseeable future.

I would like to see this proposal again but with a more detailed report on where and who is getting what. Cowboy days of governance is coming to a close and I’m expecting more than a hot link to the forums (its rare that common voters read the forums) to find out what is being sent where & who is the oversight and what are the expectations for both MM and the community as far as returned funds or tangible assets. I like the idea but the prop needs more clarity, especially MM compensation.

Thank you for all that you do for Osmosis

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Unfortunately the governance mechanism changed in v21 to only allow 255 characters in an on-chain proposal text as part of the SDK47 unfork.

This means that all proposals need to have details hosted elsewhere which is less than ideal but not at all a fault of this proposal.

This should be getting rectified in v22 by having this parameter extended back to 10,200 characters.

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Thank you for the positive feedback on the proposal @XoXo_BubbleButt !

As @JohnnyWyles mentioned, the only reason we had to make the proposal text so short on chain is because of a character limitation that was introduced as part of v21.

Trust me, not being able to add the full text into the body of the on-chain proposal drives me crazy, and I don’t think governance should be done that way either :sweat_smile: Imo, it’s not much better than offchain governance to do it this way.

But until this is fixed in the next release we have to work with the limitations we’ve been given in the chain logic unfortunately.

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7M Osmo will be in the right hands, trust me. Proposals like this that don’t specify exactly where the money’s going and who stands to benefit are a straight road to nepotism and corruption.

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Are large traders on Binance really that dumb though?

I really struggle to imagine a whale blindly yeeting a massive buy without checking market depth.

Just thinking adversarial here, if I was going to be asking for a $7M blank check and needed some justification maybe I’d make a couple dumbass trades on Binance to produce some “data” that my blank check was necessary. :man_shrugging:

Again, with a skeptics eye, this line reads like setup for sandbagging
make the proposal appear better by sounding like it’ll be transparent
but then after passing it wouldn’t surprise me to have OGP turn around and claim they can’t name the MM’s due to contracts or whatever.

This :point_up:

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There needs to be a clear explanation and transaprent structure of interactions with MM: why 7 mln for MM (say why not 3 mln), fees amount, how long will this amount be provided to it, what happens if MM uses the funds not according to expectations. There certainly needs to be a contract with MM, but there is no mentioning of this contract, which osmo entity will be responsible for overseeing the process and in case of abuse legally deal with the MM.

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I don’t like weighing in on grant discussions but figure I should here. I’ve worked in this industry for over 8 years now (whew) in marketing, growth and business dev roles, including for several projects that have at one point or another been in the top 50.

Market making has always been an essential component of their business operations. Moreover, due to how strategic in nature market making is, I can appreciate the OP not providing much more detail. These are public forums and while transparency is of the essence, we have to be smart to some extent as to how much strategic information is shared here. I would go as far as disagreeing with Rob on disclosing who the chosen market makers will be. Literally no one does that.

At some point we have to also learn to trust the stewards. At first I was against this prop but once I read what they have accomplished over the last year, I struggle to understand why anyone would be, these guys are kickass and OGP is lucky to have them.

I wasn’t here for this but if Sunny ever did say this, I wholly disagree with him because he is wrong.

Projects don’t rely on exchanges for that. They engage market makers. Sometimes these market makers work for the exchanges, but not always.

Market making isn’t supposed to disincentivize people from using Osmosis the DEX, it’s an avenue for liquidity provision and stabilizing price and trade volume, all of which would help attract new users and retain existing ones.

Let’s learn to cautiously trust people, in this case, I have no reason to think this is a grift by OGP.

I do want to caution though against demanding for strategic information that literally every other project keeps to themselves, be disclosed on a public forum.

That’s not prudent imo.

I’m in a Cosmos BD group btw. I’m not leaking as this is a very public group. But even here, you can see that MM’s are not cheap, and that they are very needed. Admittedly this is for dex integrations, but osmo doesn’t really need that, as it does on the cexes.

That’s the CEO of EclipseFi:

IMG_7091
IMG_70911284×2778 667 KB

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That being said, I’m strongly in support of this prop. I hope it passes.

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I believe that the proposal to allocate 7 million OSMO for a market-making program on centralized exchanges looks justified and strategically important for Osmosis. Collaborating with market makers can help improve liquidity and reduce OSMO token volatility on various platforms. It’s crucial that the process of selecting and analyzing market makers is transparent and thoroughly discussed with the community. I support the idea of partnering with such entities to enhance overall stability and efficiency of the Osmosis protocol.

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It should not be and literally no project does this. Why would you announce to the public (which includes your competitors) who is making your markets? That could create some vulnerabilities.

There’s over 2,000,000 cryptocurrencies that exist in the world today. Name just one project out of the top 300 of them that thoroughly discusses its operations with Market Makers and I promise I’ll shut up.

But you won’t.

Because there’s none.

No one does that.

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Tron and Wintermute?

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Do you know anything about Justin Sun? Not exactly sure Osmosis should be emulating Tron.

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Hello all and happy new year :slight_smile:

Could this lead to CEXs running validator nodes in the near future? Or no direct relation between the two ? Seems like one of the biggest concern the community has so far.

Sorry if the question looks dumb

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Just pointing out a data point that fits your qualifiers.

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I’m ok with not disclosing the name of the Market Maker or the exact contractual agreements made.

But for now we are just handing out a cheque of more than 10 million USD without any boundaries when we deem this spend successful. Literally no boundaries, requirements, goals or whatever are documented or agreed upon.

When I do spend in my own life with my own funds I always note what I expect to be done for my money. Bringing that essence to funds which are not my own I would like to see that here as well.

I can imagine MM is useful, but not giving 10 million USD with a blanc piece of paper as collateral. Hell, even if they give it to some random person who won’t do MM then it still will be justified. Because we have never specified when we deem the spend to be ok.

Funny to see that the majority of validators is against, but because the VP distribution is skewed it is moving towards passing:

image
image696×361 17.1 KB

Including at least 2 validators from the Reviewer Committee (which is kinda confusing, since at least one of them chose to Abstain from funding the OGP in general due to a potential conflict of interest. Why then vote Yes on a similar thread?)

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Trust me, I’m really not a fan of this either ( :joy:) as I believe in transparency, but for this particular situation, transparency could compromise Osmosis, so we may need to trust the stewards and give them the benefit of doubt. Imo they’ve been delivering on the BD front so far so I have no issues trusting them.

Screen Shot 2024-01-08 at 2.49.50 AM

Just looked at Mintscan rn and it’s starting to look a little more even in terms of number of validators btw. 14:17

I think this shouldn’t be a concern tbh. I also think that if it’s that much of a community concern, @RoboMcGobo and the OGP folks can include a clause in the contract that bars them from doing so with MM funds.

Validators shouldn’t need to worry about this, imo.

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