Burn 50% of OSMO Taker Fees

Proposal Discussion
1

This proposal seeks to modify the distribution of taker fees collected in OSMO on the Osmosis protocol. Currently, all OSMO taker fees are distributed to stakers. This proposal introduces a burn mechanism, allocating 50% of collected OSMO to a burn address instead of solely distributing it as staking rewards.

Background

A protocol taker fee on all swaps on the Osmosis DEX was initially proposed in Proposal 530. These consist of a taker fee charged on the input value of swaps above the liquidity spread factor.

The distribution of non-OSMO taker fees was recently changed in Proposal 881 to 45% for stakers. This is converted to OSMO and added to any OSMO collected from the protocol fees before onward distribution.

This OSMO was approved to be distributed entirely to stakers in Proposal 549. This proposal seeks to reallocate this portion of the taker fee to support long-term sustainability.

Proposed Change

This proposal suggests that this distribution of OSMO collected from taker fees should be altered as follows:

  • 50% of collected OSMO will continue to be distributed to OSMO stakeholders on a pro-rata basis, subject to validator commission rewards.
  • 50% of collected OSMO will be permanently removed from circulation by sending it to the null address, reducing the total supply.

Rationale

This proposed change seeks to achieve the following:

  • Benefit to Stakers

    • Many stakers must sell a portion of their rewards for tax compliance, increasing sell pressure on OSMO. A partial burn retains value within the ecosystem, reducing the need for forced selling and benefiting long-term stakers.

  • Benefit to Holding

    • Staking is currently the foremost way to outpace Osmosis inflation. While other opportunities exist within the Osmosis ecosystem, Staking is the most trusted mechanism as it is common across all Cosmos chains. Holders have a built-in hurdle rate to beat inflation and must either stake or chase alternative opportunities. Reducing net inflation through a burn makes holding more passive positions more rewarding.

  • Supplement ProtoRev burn

    • The amount of OSMO burned through ProtoRev has declined due to the OSMO decoupling initiative, which has reduced liquidity paired with OSMO. Introducing a direct taker fee burn ensures a more reliable burn mechanism that supplements ProtoRev’s decreasing contribution to the burn.
    • As a result of this shift, ProtoRev is increasingly generating BTC and USDC for the community pool, rather than contributing significantly to OSMO burns

  • Deflationary Impact on OSMO

    • This proposal contributes to a long-term deflationary trajectory for OSMO by introducing a continuous burn mechanism that scales with all trading volume. As inflation is reduced through regular thirdening events and other initiatives, OSMO will become deflationary much more rapidly than initially predicted.

Implementation

This proposal will adjust the OSMO taker fee distribution to allocate 50% to stakers and 50% to the community pool. While the community pool does not circulate, temporarily holding OSMO there reduces active supply until it is permanently removed. A monthly governance proposal will be submitted to confirm the burn of accumulated OSMO until an automated solution is implemented in a future software update to burn this portion of the taker fees directly.

Target Onchain Date: 12th February 2025

3 Likes