Conversation: OSMO decoupling

Proposal Discussion
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What is this thread about?

Osmosis price has been hurting for quite a while now.

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OSMO price over the past year

To strengthen OSMO and make it more resilient, this thread proposes to decouple OSMO from all services on-chain and bring back OSMO-exposure to a bare minimum of tools. The leading assets on the DEX should become major assets like BTC and ETH, which will also strengthen Osmosis as being the interchain and even inter-ecosystem DEX.

What is happening with the OSMO price?

The decline in the value of OSMO has various reasons. We can’t ignore that this is part due being positioned in the Cosmos ecosystem, since a leading asset like ATOM has been hurting in price for a long time as well and has set a new low for this bear / bull cycle.

However, there are other reasons behind OSMO-hurting as well. For example, we have seen lending against OSMO which went wrong and large amounts of OSMO were liquidited on the open market, hurting the price of OSMO.

But also successful streams like the one for LAB which generated a huge amount of OSMO is not good for the price. Teams behind projects need to liquidate assets to be able to pay for expenses (and they are totally right; salaries need to be paid as well. So they are not in the wrong ^^), which means that a successful stream essentially is a playbook for sell-pressure on OSMO.

What also needs to be noticed is that OSMO is the main asset in which a lot of the long-tail assets are paired with. So the price of (more) obscure assets is determined by the price movements of OSMO, which means that when OSMO grows in value, the long-tail assets grow in value as well. This causes people to sell their long-tail assets towards OSMO and liquidate that OSMO into large assets they want to hold. OSMO is at this point in time a “gamble” asset for people to jump into risky assets, wait for a rise in value, get out and liquidate the OSMO. This is also causing every growth of OSMO in value to be followed by increased sell-pressure which in turn makes that OSMO decreases in value again.

These developments have been going on for a while now, which asks for measures to be taken to protect the OSMO-value from hurting more and turn into a more bullish momentum with respect to the token.

Decoupling OSMO from Osmosis tools

The drastic measure proposed via this thread is that OSMO should be decoupled from a lot of the major services and from most of the pairings on the DEX. As stated earlier, the major assets should become ETH and BTC (and maybe a few more), while OSMO becomes the yield-bearing investment vehicle of the DEX.

Decoupling from decentralized apps like Levana and others is quite hard to do, so although my personal preference would be to kill lending against OSMO altogether, I don’t think that it is realistic to ask (change my mind, please do ^^).

There are some fields where we can achieve a decoupling though. We could request StreamSwap to be held against for example the major assets only to limit OSMO exposure on that field. Start.cooking works with OSMO, but the liquidity should be (and is already?) placed in the pool created for that specific new asset.

Pools should be disabled to be created against OSMO on a free-for-all basis and should only be created on a permissioned basis. All pools should be paired against the category we one called MAJOR, but with very clear boundaries with assets we deem MAJOR. I could imagine that it would go for BTC, ETH, SOL with a successful connection, DOT with a successful connection, TON with a successful connection and more. Assets which are now in their own ecosystem with their own exchanges and where Osmosis can be positioned as THE DEX which makes creating your own ecosystem-DEX unnecessary.

How are other exchanges doing it?

If we look to a couple of competitors like Binance, UniSwap, PanCakeSwap and Bybit we see that the own asset (like BNB, UNI, CAKE) is also not the main used asset. We see assets like BTC, USDT, ETH and others being used as primary pairing for most assets traded on the exchange.

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UniSwap is paired against ETH as default asset

What are the changes?

The first proposal to push users to use major assets only is the proposal for removing the incentives on the OSMO-paired pools to be found in proposal 824 (Mintscan).

So, to make a long story short;

  • Decide which assets are to be placed in a MAJOR category
  • Change StreamSwap to create streams with MAJOR assets only
  • Change Osmosis that pools can be created against MAJOR and STABLE assets only
  • Investigate if we can migrate liquidity from OSMO-paired pools to MAJOR-paired pools
  • Decide which group can create pools with OSMO-pairing against the MAJOR category
  • …

And now it is open for discussion, questions and conversation. Fire away!

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The drastic measure proposed via this thread is that OSMO should be decoupled from a lot of the major services and from most of the pairings on the DEX. As stated earlier, the major assets should become ETH and BTC (and maybe a few more), while OSMO becomes the yield-bearing investment vehicle of the DEX.

Very much agree here. We tried the usage of OSMO as a routing token, and, while that worked when we were more isolated, it also linked the entire ecosystem together rather than letting each project be purely valued on its own merits.
The other impact that is emerging now is that it makes routing across multiple chains less competitive.
If a user is trading in a stable as is frequent and wants to buy AKT for example, then they enter Osmosis with it and have to swap to OSMO at a fee of 0.11%+ plus any slippage, before they can then use the AKT liquidity.
If the AKT liquidity was predominantly stable based, then they enter with a stable, swap to the primary pairing through a 0.03%, likely highly correlated pool, and then swap to AKT, resulting in much lower execution cost and so more volume passing through Osmosis when comparing with other interchain routes.

I don’t think this kind of usage is such an issue—if the market requires the deposit of OSMO, succeeds based on OSMO’s performance or utilization, and rewards/withdraws in OSMO, then it is independent of other markets. If Levana did something like Deposit OSMO to leverage against TIA, then I would agree, but they do this with USDC instead.
I also don’t really think Start.cooking is an issue since it is entirely circular thanks to the fair launch mechanism. One change could be that the fee for creation is paid in USDC, but the actual deposits shouldn’t make a huge difference.
I fully agree with Streamswap, however. LAB may have been the most successful swap, but it would have still been negative to OSMO valuation due to the salary requirement. Also, I am not blaming the team at all there! I just think that something like USDC should be used as a bid asset.

This moves away from the more permissionless nature of Osmosis that has been popularised in Proposals such as Removing Quote Listing asset requirement for Supercharged Pools.
While I think this is probably beneficial for Osmosis to do, I think there are other levers that we can, and are, pulling. Namely the trial increase of taker fees on OSMO/ATOM compared to OSMO/USDC and ATOM/USDC approved yesterday.. If successful, then OSMO pairings could become less efficient for LPs compared to making alternative routes. I do think that some “MAJOR” pairings such as BTC and ETH should be exempt from this increase since they have substantial liquidity outside the Cosmos ecosystem.
However, what I really want us to avoid as a community is trying to decide what “Major” is. I just remembered yesterday our huge argument with the old incentives system and Evmos attempting to be promoted to a Major asset. High market cap isn’t a guarantee of stability or something that we want OSMO to become intrinsically linked to.

In summary, I think that we are already on this road with encouraging non-OSMO pairings.
Apps like Streamswap and Start.cooking are self-governing and so governance wouldn’t have a say in which fees are used - although could signal this intention going forward to indicate a preference.
Apart from this, I think we could signal, after the results of the ATOM/OSMO taker fee experiment, exceptions to any blanket increases if those are the result. These exceptions would be the Major asset pairings, and we should have a methodology for picking them at the BTC/ETH/SOL level rather than expanding downwards to assets like ATOM and TIA as previously, as these are more closely linked with OSMO through IBC already.

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I think it’'ll be a good idea to be even more aggressive on this. If ATOM goes to a near-0 price, OSMO is likely to go really low too.

BNB is trading at a great marketcap even if the main liquidity pairings on Binance are stablecoins, I think it’s generally a good direction for Osmosis.

edit: Or tie OSMO with BTC as RUNE is doing.

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Glad to see this conversation being sparked!
All thoughts I’m writing below are my own and not representative of the Osmosis Foundation or any other teams

Some thoughts on sections of your post

  • Agree - Pairings on the DEX should be as you mention, BTC + ETH, but also USDC of course. Likely also SOL, but unsure if SOL should be emphasized as a major pairing or simply have SOL/BTC SOL/ETH SOL/USDC pairs with sufficient liquidity and let the router logic handle it from there.
  • Agree - Streamswap, similar to the notion above… I think these should definitely be USDC, BTC, ETH, SOL, maybe even ATOM denominated. But not OSMO. This will not only help long tail assets have a more logical pairing for the long term, but also not have them be at the whim of OSMO action, which many assets on the dex (thus the cosmos) have been at the whim of.
  • Agree - Pool creation being limited to Major assets (USDC, allUSDT, allBTC, allETH, allSOL) and potentially more as you mention. Aside from the obvious reasons, this also contributes to the consolidation and de-fragmentation efforts, which contribute to a better UX, which contributes to the ecosystem growing and enticing more users.

One thing is clear, OSMO action is definitely tied to many things, while many things are also tied to OSMO action. It’s a web.
imo, the right direction (as is slowly being taken) is to clean up everything tied to OSMO, make the product as multi-chain clean as possible, which should also clear the way for the most growth > bringing value add back to Osmosis.

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Is there a nice method to start sparking this conversation amongst validators and the rest of the community? I think it is important to get as many insights as possible on this subject to prepare Osmosis for the future, but also to make sure the community has the feeling that they can contribute to the success of their investment.

With respect to the previous responses;

  • we can indeed only signal to for example StreamSwap, but I know people like Sistla are also fans of Osmosis and should most likely be open for conversation and input regarding how StreamSwap can be used most effectively for Osmosis.
  • the taker fee experiment might end up in a completely other topic which is still somewhere on my list with respect to simulating how we could explore some sort of dynamic taker fee based on the popularity of a pool (where long tail assets might be subject to a higher taker fee for example)
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The big question here remains, should we speed things up or are things slowly moving in the right direction?

For example, should we contact StreamSwap to start investigating the possibilities?

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Spoke to the Streamswap team directly already - it generally comes down to the deployer preferences even if their team indicate that other tokens are preferred.

While OSMO is very liquid and the routing token of the DEX it makes sense for deployers to use it as their token of choice and the main reason it is picked.

As we move to the routing tokens being things such as USDC, USDT, BTC, ETH and SOL then it would make more sense for the deployers to pick these.

The only thing I think we could do to accelerate this is to remove OSMO from the quote asset list, but that wouldn’t stop this usage even - it would just mean it would be instantly swapped to another quote asset at stream end.

The ATOM/OSMO taker fee experiment has really good initial results, showing that this can be used to encourage far more volume to use the Stable pairing.

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We should expand this to more pairings to encourage the formation and liquidity migration to more stable pairings.

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This is already really cool to see. StreamSwap could /should be able to just block streams in OSMO alltogether, that would still meet it :wink:
And then it doesn’t come down to stream-creator-preferences, since it is not possible to choose OSMO ^^