BTC Liquidity Deployment into Locust Vault

Proposal Discussion
1

This proposal approves the deployment of BTC previously purchased in Proposal 859 and additional USDC and BTC variants to form a second protocol liquidity position in BTC/USDC.

Current Liquidity performance

The initial protocol BTC/USDC liquidity position of $458k is deployed in a static range of 72,500 to 108,750, which is close to being out of bounds with the recent BTC rally.

This liquidity position is now valued at $462k and has generated approximately $7k in liquidity fees, catering to 7 million in volume this month. This, in turn, has generated $7k in taker fees for the protocol.

Requested Deployment

  • 1.07 BTC to be deployed from the community pool, sourced from:
    • 0.486 BTC, returned to the Osmosis Community Pool as an excess after the execution of Proposal 860
    • 0.37 WBTC previously collected from taker fees to be added to the alloy
    • 0.214 WBTC.eth.axl previously collected from taker fees to be added to the alloy
  • 60,000 USDC to be deployed from the community pool to provide buy-side inventory for the vault position. This is approximately a 2:1 BTC/USDC liquidity ratio.

Deploy BTC into the Locust Vault for BTC/USDC via the Osmosis Liquidity subDAO

Locust Vault Parameters

  • Target Pool 1943 (BTC/USDC, 0.01%)
  • Spread -2.5%/5%
  • Reposition trigger 0.25%
  • Performance Fee of 15%

This deployment should be approximately four times as concentrated as the current static deployment. It will also be deployed within a lower LP fee pool, offering better execution prices for traders.

The receipt token for the vault deposits and any excess BTC or USDC will be transferred back to the Osmosis Community Pool.

Risk Analysis

  • Community pool exposure to Bitcoin

    • Initial Bitcoin exposure remains the same as there are no new purchases of BTC with this proposal.
    • Risk: Bitcoin’s value could decrease from current levels, leading to a loss of up to 60k USDC previously accumulated by the Osmosis community pool.
      • Mitigation: Compared to the static position, the Locust vault repositions liquidity to retain inventory, so a much larger price movement would be required to lose the same proportion of USDC while providing deeper liquidity.

  • Liquidity position upside capture

    • Rather than retaining the community pool Bitcoin, the liquidity position would involve selling some of the existing Bitcoin holdings because it actively provides liquidity.
      • Mitigation: The Locust vaults’ repositioning strategy means that the community pool will hold BTC inventory for a far greater range than a static position.

  • Community pool exposure to USDC would increase if the BTC price increases.

  • Community pool exposure to Alloyed Bitcoin

    • Risk: There is an increased risk compared to holding the natively issued WBTC due to increased exposure to multiple sources of Bitcoin.
      • Mitigation: Inter-chain and intra-alloy rate limits. In the event of a security issue involving the BTC Alloy the Community Pool should include this position’s Bitcoin holding in any resolution proposal to make users whole.
      • Mitigation: Adding WBTC and WBTC.eth.axl to the alloy supports Alloyed BTC liquidity, allowing more liquidity to enter and exit the alloy more easily.

  • Community Pool asset exposure to smart contracts

    • Mitigation: Margined smart contracts have recently completed audit.
    • Mitigation: Locust uses the same mechanism for repositioning liquidity in volatile deployments for the previous LST support deployments, the difference being that there is no target price for the pairing.
    • Mitigation: The BTC/USDC pool has been live for approximately three weeks to test functionality.

  • Community Pool asset exposure within liquidity pools

    • Mitigation: While adding liquidity to pools adds a layer of risk compared to native asset deployment, the Osmosis Concentrated Liquidity pools have been live with no security events for over a year.

  • Use of Multisig for execution

    • Mitigation: This 4/6 multisig has previously been used to deploy liquidity in other proposals, acting as an intermediary to perform multi-stage or time-dependant transactions, such as adding liquidity to a pool with a ratio of assets that will vary before a five-day Osmosis governance proposal is completed.

Success Metrics

  • Volume facilitated through position
  • Fees earned (LP + taker)
  • Slippage reduction during volatile periods
  • Market share of Bitcoin trading volume

Target Onchain Date: 1st January 2025