Community Spend: Match Kava Rise Rewards for three months

Proposal Discussion
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Community Spend: Match Kava Rise Rewards for three months

This proposal would allocate up to 800,000 OSMO from the Osmosis Community Pool to match Kava Rise Rewards, bootstrap USDT liquidity into the Cosmos, and establish Osmosis as the leading trading location for native USDT liquidity.

Background

Launched in 2014, Tether was the first stablecoin issued and remains the most prevalent stablecoin in use across the crypto ecosystem.

USDT is now available natively on IBC chains via Tether’s contract deployment on Kava.

With Proposal 574, Osmosis governance has recognized USDT via Kava as the canonical version of USDT, and initial pools are being created in Proposal 579.

This proposal asks for up to 800,000 OSMO from the Osmosis Community Pool to bootstrap liquidity of the first natively issued stablecoin in the Cosmos backed by non-crypto assets.

This community spend would match external incentives sourced from Osmosis’ allocation in the Kava Rise initiative over the next three months.

Kava Rise

Kava governance has voted to extend their Kava Rise initiative to incentivize USDT liquidity across the Cosmos by allocating 100k KAVA to Cosmos chains pro-rata to their USDT IBC deposits.

The Kava Rise program creates an exciting opportunity for leading Cosmos chains to bootstrap stablecoin liquidity within their ecosystem and earn a share of monthly KAVA rewards.

The monthly total allocation may increase to 200k through further Kava governance approval.

Kava will carry out a monthly assessment of USDT deposits across eligible chains and allocate a share of the Kava Rise incentives to a wallet on each chain that will then distribute the monthly Kava Rise rewards proportionately. The managing wallet on Osmosis will be the multi-sig DAO referenced in this proposal.

Using these Kava Rise rewards as external incentives, high USDT liquidity can be bootstrapped to Osmosis, maintaining a high pro-rata share going forward.

For more information about the Kava Rise: Cosmos USDT Incentive program, see the blog post here: Introducing Kava Rise: Cosmos USDt Incentive Program | by Kava_Chain | Jul, 2023 | Medium.

Funding Request

This proposal requests 800,000 OSMO from the previously redirected liquidity incentives in the community pool to match the value of deployments of Kava Rise funding within Osmosis.

This quantity of OSMO makes the assumptions that:

  • Month 1 of Kava Rise will be 100k KAVA.

  • Months 2 and 3 of Kava Rise will be 200k KAVA each.

  • Osmosis will gain 80% of this allocation as the liquidity hub of the Cosmos.

  • The value ratio of OSMO to KAVA will remain approximately constant.

Any OSMO remaining in the multi-sig DAO after matching three months of Kava Rise allocations will be returned to the community pool. This may take longer than three months due to layering of incentives.

Planned deployment of funds

Incentives are a way to overcome both the hurdle rate against alternative yield locations and the impermanent loss incurred by participating in a volatile pool to make the location desirable to deploy liquidity. The most efficient deployment method is in highly correlating pairs with minimal inflation.

The USDC/USDT pair should highly correlate as both assets are dollar-pegged stablecoins and have the same inflation as the US Dollar.

The OSMO/USDT pair will likely correlate less. However, the token’s volatility has been relatively low with the recent reductions in OSMO inflation. The multihop discount also allows this pool to facilitate trading between any asset on Osmosis and USDT with a low swap fee until further direct USDT pools are established.

While there are two pools for each pairing with different spread factors, these incentives will be provided solely to the lower spread factor pool as these are typically the most efficient at fee generation in alternative concentrated liquidity models. With the upcoming introduction of the Taker Fee proposed in Proposal 530, the lower spread factor will also minimize total fees for traders.

The multi-sig in this proposal will also be loading any Kava Rise allocation of Kava, allowing the value of the OSMO and Kava incentives to be matched at the time of loading external incentives.

The initial weighting of all incentives will be 50% to the USDC/USDT pair and 50% to the OSMO/USDT pair. All external incentives will be composed of equal values of Kava and OSMO.

Incentives will not be deployed evenly over time but will be layered to provide consistently attractive incentives as liquidity increases. Escalating incentivization will prevent the first participants from gaining excessive rewards above what would attract liquidity to a desirable pairing. Reasonably attractive rewards should also avoid liquidity draining from other Supercharged pools, minimizing extreme volatility in the newly created pools with no bonding period.

Incentives may be spread to any other Major/Stable pairing after the first month of matching once the initial liquidity of USDT has been established. USDT liquidity incentives would then be extended to other major pairings such as ATOM/USDT, ETH/USDT, and WBTC/USDT.

Limitations are that at least two-thirds of the incentives will be allocated to the USDC/USDT and OSMO/USDT pairings, pairings must consist of Major/USDT or Stable/USDT, and the pools must be Supercharged with a spread factor of 0.2% or lower.

Spreading incentives to new pools will take place via community feedback on the Osmosis forums and will not occur unless the following liquidity targets are met:
USDC/USDT Target TVL: $10,000,000

OSMO/USDT Target TVL: $5,000,000

Incentives may adjust from the initial 50/50 ratio to attain these goals.

Proposed Multisig

The multi-sig will utilize DAODAO on Osmosis for ease of transparency of actions and can be viewed at: USDT Rise

The current members are:

  • AllNodes (Osmosis and Kava Validator)
  • Johnny Wyles (Osmosis Labs)
  • WhiteMarlin (Osmosis Validator)
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Hmm, so we will provide native OSMO-incentives on the pools, they have Supercharged Liquidity and an incentive matching? That is unprecedented if you ask me. Over-incentivization is imo a real risk.

Also going for a possible $400k of rewards in 3 months sounds like a real lot of incentives. I guess our most liquid pools don’t even get that much?
Our OSMO/ATOM pool gets a rough $150k a month, but is deemed to much and according to the Chaos Labs dashboard should be reduced with 10%. That brings it to a rough $400k incentives for 3 months as well, BUT for a pool with 30 million liquidity.

We are here targetting half of that liquidity with the same external matched incentives. On top of that we will see the KAVA incentives (potentially the same) + the native OSMO incentives which adds another $150-$200k.

So we are looking at putting incentives of $950-$1000k on these pools for 3 months to bootstrap the liquidity. I am pretty sure these pools will surely be over-incentivized and will pull liquidity from other pools.

For me this OSMO spend is way too high and should be reduced with at least the amount we will expect to spend from the native incentive program.
But rather I would like to have it comply with the standard procedure either matching or native, but not both.

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The closest precedent to having a native stablecoin without on-chain collateral on Osmosis is UST which was matched fully in proposal 62 explicitly on top of normal incentives before we had external incentive caps in place.

The daily value then was significantly higher of course - this was in different market conditions with greater emissions, but if we are to be spending on incentives heavily, then the adoption of a new native stablecoin with a wide market appeal like USDT has to be the reason to do so.

The over-incentivization issue is why there is a paragraph about layered incentives.
What I expect to happen is for incentives to be loaded to the tune of around 30% APR, then when these reduce to twenty percent, layer more on top to maintain a consistently attractive APR but not beyond those reached by other pools. The Kava and Osmo does not need to be spent over the month but can be deployed more slowly depending on liquidity reaction. In fact I am going to change the phrasing slightly here - the OSMO would be returned after matching three months of Kava Rise allocations rather than after three months in general.

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Thanks for the answer. If the APR is comparable to other pools and not be exceptionally high I am ok with it. I seriously want to avoid that we over-incentivize a pool while we are already aware of the risk before we start with it.

I do agree that USDT is a very interesting asset, as long as we make sure that other stable-coins keep their healthy liquidity as counterbalance to avoid another UST scenario in case the stable fails.

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A few things:

  1. Since KAVA Rise rewards are based on a monthly assessment, doesn’t that mean that the multisig won’t have any liquid staked KAVA tokens (unless it is planning to swap them for KAVA tokens) to use as external incentives to match the OSMO it will be loading as external incentives for the first month of KAVA Rise and this matching program is really going to be loading external incentives to these pools after the first month of the KAVA RISE program? Or is someone or some group providing an advance/loan to the multisig so that it can upload the liquid staked KAVA/KAVA and OSMO external liquidity incentives sooner and which the multisig will be repaying as the liquid staked KAVA/KAVA rewards received come in?

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  1. If liquid staked KAVA is the token that the multisig will be receiving and using to provide external incentives to the pools that it has defined, why are we using OSMO instead of a OSMO LST? KAVA seems to have the right idea here as the KAVA LST is available only on KAVA and not on any large CEXs. This limits where KAVA Rise reward earners can use their rewards and allow KAVA to recapture some of the value that the KAVA token looses when reward earners swap/sell their rewards.

Using OSMO LSTs (stOSMO shouldn’t be the only OSMO LST used, qOSMO should be used to some extent as well, competition is healthy for the market) would allow Osmosis to recapture some of the value that the OSMO token looses when liquidity providers swap/sell their rewards.

  1. Why is the focus solely on these liquidity pools? Perhaps it is already being done, but if it isn’t why not provide some KAVA Rise Rewards to Mars to open up USDT borrowing lending on their Osmosis outpost.

  2. KAVA Rise is intended to bootstrap stablecoin liquidity, or more precisely USDT liquidity in the Cosmos. Liquidity is necessary but insufficient to bootstrap a new or struggling economy. There has to be demand for that liquidity. As such, doesn’t it make sense to provide reward to those that will create demand for liquidity such as Mars for a USDT borrow-lend pool, ION DAO for ICBX minting with USDT, Bitsong for Sinfonia NFT purchases using USDT, reimbursing Calc.FI users for USDT DCA strategy transactions, or even a KAVA LST/OSMO rebate to those that can show they bought REGEN using USDT to buy and retire eco credits on REGEN or bought NCT using USDT and retired on REGEN?

  3. Why is the chosen strategy here to double down on liquidity incentives for a endogenous liquidity providers? Why aren’t any going to incentivize endogenous liquidity providers to become non-endogenous liquidity providers?

  4. How were the $10 million and $5 million targets determined? Loading incentives to the tune of 30% APR for the first month? Why not just ask to immediately enable SFS for the OSMO/USDT pool to help reach that 30% APR? If the pool achieves the amount of volume that the OSMO/USDC pool currently has, which also has almost 2x more than the OSMO/USDT target, so that less resources needs to be spent on that pool?

If $10 million is the target for the USDC/USDT pool, why not end incentives for the composability pools and increase the share of regular incentives that stable-stable pools receive?

A $5million TVL target for the USDC/USDT pool seems much more achievable and sustainable with initial incentives starting at a 15-20% APR for the first month. In my professional opinion, using resources to achieve a 30% APR and $10 million TVL target when there isn’t even $10 million in USDC liquidity currently on Osmosis. If the longer term goal (beyond 3 months) is to have $5 million TVL in the USDC/USDT pool and expect that half of the $10 million in liquidity is going to migrate to a Major/Stable pool once incentives are shifted to them, why not simply add a Major/Stable pool so that there are three pools that endogenous liquidity providers have the option to take advantage of rather than just two, like DOT/USDT at a lower TVL target like $2.5 million for example as it appears a loan being provided from the DOT treasury to launch a Centauri bridged DOT/OSMO pool on Osmosis as the DOT governance proposal language suggests the liquidity incentives that Osmosis provides will be sold on a weekly basis to help ensure the loan can be repaid. It seems like Osmosis would be much more successful in utilizing DOT to attract USDT liquidity and DOT investors/traders if there was Centauri bridged KSM availability as well.

  1. I am not so much concerned about the over incentivization here but the over concentration of incentives. My main concern is starting with just two pools and not expanding till they reach $10 and $5 million TVL targets respectively. I fell @Govmos also raised similar concerns in the Create USDT Supercharged Pools thread.

  2. Can a dollar of USDT liquidity be obtained at a lower cost by opening up USDT paired pools for mid and small cap low volume native IBC tokens that where volume and capture a greater share of volume and new users from CEXs? It seems like Osmosis can more efficiently and effectively compete against CEXs in the mid and small cap token market and has to pay a premium for large cap token liquidity. Is it perhaps worth testing by opening up a lightly incentivized BAND/USDT pool for example as the BAND/OSMO pool no longer receives incentives and has under $50K in TVL. Current BAND/OSMO liquidity providers would have the option to enter both a incentivized BAND/USDT and OSMO/USDT pool, or if the option is available, convert to a staked position. I am very curious to see how successful a USDT pool strategy would work in terms of being able to gain a greater share of a mid and or small cap token volume from a CEX versus a SFS strategy.

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1/2: Liquid staking isn’t involved here at all? Liquid tokens are just tokens in circulation.

  1. Mars lending relies on liquidity to liquidate into, if that liquidity exists then they will open markets. Can’t bootstrap deposits without this.

  2. It does, but we need liquidity for that to happen. You can’t incentivise pure usage to start with, but usage originating from liquidity existing can make the liquidity maintain without incentives which is why this is a more limited time event.

  3. I don’t get what you mean here.

  4. OSMO/USDC is currently 9.5 million. 5 million seems a reasonable target in comparison to this.
    A stable/stable pool should be easier to obtain as the equivalent rate elsewhere should be lower so a target was set. These targets aren’t specifically worked out but without them then the working group could choose to start incentivising other pools before a solid liquidity base is formed. We could enable SFS immediately, however historically we haven’t enabled SFS on new assets for several months.

In general it is easier and more useful for stable liquidity for implementation in other apps to incentivise a lower number of pools during the growth phase.

  1. There will be more USDT pools - posts to go up in the next day or two, but these will likely not get incentives as quickly.
    Osmosis governance has typically not approved of incentives to non-OSMO pools and so the switch to incentivizing a large range of non-OSMO pools due to the taker fee implementation should be a measured one.
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Some really great feedback/comments here.

I am in favour of aggressively incentivising native USDT on Osmosis in order to capture a large portion of the USDT liquidity market share in Cosmos and therefore the majority of USDT <> Altcoin trading.

Osmosis liquidity has been slowly declining throughout the bear market, largely due to the significant decline in prices of volatile tokens traded on Osmosis. Currently TVL sits at ~99.5m, declining from $250m in Nov 2022, $200m in Feb 2023 and 150m in May 2023. This is to be expected somewhat, but liquidity needs to be attracted to Osmosis and subsequently trading volume.

Establishing USDT liquidity for USDT/USDC and USDT/OSMO with a target of $15m across the two pools with $10m in the stablecoin pool will mark a significant increase in TVL and with the majority of the liquidity in stabletokens which will not decay in value over time in the event of a continued bear market.

There are additional benefits to having deep USDT liquidity on Osmosis compared with other exchanges in Cosmos. Having deep USDT liquidity will theoretically result in increased USDT trading on Osmosis, between USDT and other tokens on the exchange. For tokens looking to bootstrap liquidity on Osmosis, seeing that USDT is actively traded there will encourage tokens to build liquidity with their own USDT pairs. Native USDT can provide capital inflow for their tokens. On the side of users, native USDT on Osmosis with deep liquidity allows users to hold USDT or route through USDT on Osmosis into volatile assets, the USDT/OSMO pool will facilitate this through multihop routing.

The kava rise program means that Osmosis is able to access additional non-osmo capital to incentive liquidity. Osmosis therefore does not have to spend 800k OSMO incentivising liquidity on it’s own. Instead additional KAVA can be deployed to incentivise pools - adding more value for money spent building native USDT liquidity - which is likely one of the most important tokens to build liquidity for on Osmosis, alongside OSMO, ATOM and native USDC once deployed in Cosmos.

I like that we are considering whether the value gained from spending 800k OSMO is sufficient as well as considering whether the target liquidity of $15m is well considered and whether the expected amount of kava will be distributed by KAVA rise and when that distribution will happen relative to the time of the 800k OSMO spend.

One point is that incentives could be over concentrated however I believe that building deep liquidity for USDC and OSMO pairings of native USDT will set a precedent to build USDT liquidity on Osmosis for a range of assets in the future both internally and externally. I see the concentration of incentives to these pools as an aggressive short term strategy to build as much USDT liquidity on Osmosis as possible and set the foundations for Osmosis to be the main hub for USDT trading and liquidity which overall adds significant amount of value to Osmosis

That’s just my 2osmo :slight_smile: Thanks for reading and thanks @JohnnyWyles for putting up this draft proposal

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@JohnnyWyles

Regarding my fifth point:

Let me rephrase…

Why are liquidity incentives going only to large cap-high volume token paired USDT pools, and only under the condition that TVL targets are met for two pools? Why not release extra liquidity incentives upon modest TVL targets being achieved and maintained for a few mid/low cap - low volume ecosystem tokens paired USDT pools, particularly those with tokens found on CEXs like CTK, CUDOS, and BAND, for example?

Essentially, why not ‘bribe’ ATOM/USDT, wBTC/USDT, and ETH/USDT liquidity providers to bootstrap a few IBC native token paired USDT pools for us?

For example, why not allocate some of the resources to “bribe” ATOM/USDT, ETH/USDT, and wBTC/USDT liquidity providers to bootstrap a BAND/USDT, CTK/USDT, and CUDOS/USDT pool for us and for maintaining a modest minimum amount of liquidity in each (e.g $25K TVL in each pool) rather than making it all contingent upon achieving TVL targets for the USDC/USDT and OSMO/USDT pools?

Also, if the purpose of KAVA Rise is to bootstrap stablecoin liquidity in the Cosmos, I feel that some of these resources should be going to ecosystem token paired USDT pools besides just ATOM/USDT. If not for for medium/small cap tokens with low volume on Osmosis that are found on CEX like BAND, CTK, and CUDOS, than perhaps at least small cap tokens with a decent amount of volume on Osmosis like DVPN and MED since there is more liquidity as measured by TVL dollar value in their ATOM paired pool than in their OSMO incentivized pools: DVPN/ATOM pool ($~272K) v. DVPN/OSMO pool (~$154K); MED/ATOM pool (~$326K) v. MED/OSMO pool (~$236K).

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Because this is really not in the scope of a group of volunteers to micromanage.
We build the two largest token pairings which should most easily get liquidity.
Then move to things like ATOM, ETH and WBTC or tokens approved of by governance.
If you’re saying we should give small incentives to all Cosmos pairings - including those that currently do not receive incentives on the OSMO pairing then this becomes an excessive amount of management as well as being relatively inefficient when the presence of USDT supercharged pools alone will likely attract sufficient liquidity from any interested liquidity providers.

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OMG, seriously?

In here we discussed to have the APR comparable to other pools. And now we are at over 100% APR, meaning that yield farmers will leave other pools to get their shares in here. And they will just as easily move away later again.

How can we get this in line ASAP? Can the managing group change stuff like we agreed in here to be more in line with the rest of the pools?

At this stage I am sure I will not support this kind of proposals anymore, until better safeguards and procedures are in place BEFORE we actually do stuff. We need to fix to often imo.

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Because there has been incredibly slow uptake of this pool compared to what was expected.
The aim was to have an initial high APR, which quickly tapers off once liquidity is available on Cosmos.
This is the tracking sheet we have been using, really not high levels of spend for bootstrapping the first Native stablecoin into Cosmos.

Used only 4% of the spend, 17% of the way through the lifespan of the program.

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Do we also know if the liquidity in the pool is coming from outside the existing Osmoverse? In other words; are we doing a good job on attracting new liquidity to this pool? Or are we just recycling?

I am a bit afraid of the answer tbh, since to attract new liquidity we need to user interfaces for it + the marketing and spreading awareness. And I think that on both fields there is still a lot of room to improve. The tech is not going to sell itself in the end…
I also don’t have the magic wand, but if Kava is working with Tether, then there should be enough options to spotlight the USDT on Kava as well.

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Confirming that the Kava Rise Matching program has now been completed.

External APRs were tapered towards the end to ensure that the reward rates remained relatively consistent and sustainable in KAVA alone.

OSMO Refund

208,000 OSMO of the originally allocated 800,000 OSMO have been returned to the Community pool as unspent.

The multi-sig has retained 2,600 OSMO to cover any further Gauge creations of purely Kava incentives - these return to the community pool as spent and, in the event of the Kava Rise program ending, would be fully returned.

Impact of program

Overall, the incentive matching program was a moderate success, with USDT liquidity becoming the second stablecoin of choice behind established USDC/USDC.axl liquidity and continuing to increase in both liquidity and volume.

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Learning points

Issues encountered along the way included:

  • The migration of the incentives and liquidity from the axlUSDC pairing to the USDT pairing. Due to the lack of bonding in Supercharged pools, this only required a 9-day overlap in incentives on the two pools despite a longer overlap being originally planned. This demonstrated the flexibility of liquidity in Supercharged pools to quickly move to new locations.

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  • A sudden drop in liquidity during this migration due to narrow liquidity being set and not being resilient to large global price movements or large on/offboarding. This has balanced as liquidity has increased but will be made more resilient with the introduction of uptime-based incentives to increase the width of positions.
  • Display errors with the APRs on pools, this resulted in early incentives being not visible at all to users. These are now more visible, but an improved method of displaying these APRs is being worked on to improve the efficiency of external incentive spending.

Future of Kava Rise

Going forward, the multisig will continue spending any Kava Rise payments on a longer cadence every 4 weeks. The program has also expanded to include an ETH/USDT pool and will likely expand in order to use Kava spends to establish USDT as a competing stablecoin on Osmosis.

Ongoing budget tracking as posted above:

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Thanks for the update!

Does this mean that the Osmosis-side of the incentives is now stopped, but the Kava-side of the incentives will continue for a while if I read it correctly?

Do we know if the USDT being pooled has an origin outside the ecosystem and is thus attracting new users/traders?

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That is right, although I just found out today that the Kava portion will also be stopping at this month’s payment:

The multisig has funds for around 6 weeks of incentives, after which USDT will have to self-sustain. I think this is likely to cause a movement towards the 0.05% spread factor pool in the medium term.

Unsure about the origin of USDT liquidity, however, having usable liquidity for the largest stablecoin as a potential on-ramp is the valuable aspect here.
Most DeFi users tend to use USDC which means that USDT liquidity is more of a gateway to CEXs than DEXs and I suspect that not many new people explore DeFi without something else to prompt them such as a new listing only available on Osmosis.

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