Create and Incentivise Volume Splitting Incentive Gauges

Proposal Discussion
1

This forum post includes three proposals:

  1. Creates Volume Splitting Gauges that expand the currently incentivized pairings to include more pools with lower spread factors and volume split incentives between them.
  2. Creates Volume Splitting Gauges that expand these groupings further. Establishing gauges such as ETH/STABLE and OSMO/STABLE rather than differentiating between different incentivized stablecoins at the higher level.
  3. Moves the current OSMO incentives to the correlated newly created gauges.

Proposal 1: Create Volume Splitting Gauges for Pairings

This proposal would create new incentive gauges for groupings of pools with the same pairings but different swap fee parameters.

Background

Volume Splitting Incentives gauges were introduced in V20 as a mechanism to divide incentives between pools in proportion to the trades they facilitate. These gauges have been used since to divide incentives between Supercharged pools and the migration-linked Classic pools.

Unlike normal gauges, which only have one destination pool, Volume Splitting Incentive gauges cover a group of pools. Incentives are allocated to this grouping rather than the previous method of allocating to single pool gauges.

The proportion of incentives that go to each pool in the grouping is recalculated every epoch according to the volume that occurred in the pools over the previous day. This allows pools that are generating the most volume per unit of liquidity to increase incentives day on day without waiting for a new incentive proposal to pass.

Volume can be expected to be higher per unit of liquidity in lower fee pools due to lower costs for traders as well as an increased number of times that profitable arbitrage opportunities occur. These gauges will encourage liquidity in high-traffic routes to move to lower-fee pools within the grouping.

As liquidity moves to these pools, the fee per trade is lowered, making Osmosis a more attractive exchange to perform trades on. It also changes the ratio of fee collection between what Liquidity Providers receive and what the protocol receives through the Taker fee…

Example

In a default OSMO/ATOM pool with 0.2% Spread Factor and the default 0.1% Taker fee there is a total swap fee of 0.3%. The Liquidity Providers receive two-thirds of the fees accumulated by that pool, and the Protocol receives a third.

If liquidity migrates to a 0.05% Spread Factor pool, then the total swap fee will be lowered to 0.15%, with Liquidity providers receiving a third of the fees and the protocol receiving two-thirds.

The lower fee pool will have more volume from increased arbitrage opportunities as well as a lower overall fee, helping to attract more traders. This causes the fee generation per unit of liquidity on Osmosis to increase.

Despite this, Liquidity Providers may receive fewer swap fees overall compared to a higher fee pool, so Osmosis Incentives will help cover this gap to encourage liquidity to move to lower fee pools that provide better returns for the protocol itself.

If trading in a pool is limited, as may be the case with most tail assets, there may be little incentive for liquidity providers to accept the lower ratio of fees, and so the volume and incentives will remain in the higher spread factor pool. In the event of a sudden increase in volume then the lower fee pool will adjust at the next epoch to attract more liquidity and make Osmosis a more attractive trading location for the asset pairing.

Proposed Groupings

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Target on-chain date: 19th November 2023

Proposal 2: Create Stable Agnostic Volume Splitting Gauges

This proposal would create new gauges for groupings of pools that do not differentiate between which incentivized stable token is present in the pairing.

Background

This proposal expands on the proposal to create volume-splitting incentives for all pairings that differ only by spread factor by creating stable token agnostic gauges.

This allows the market to decide which Stable token from those included in a gauge is preferable to establish liquidity by matching incentive share to actual usage.

Unlike normal gauges, which only have one destination pool, Volume Splitting Incentive gauges cover a group of pools. Incentives are allocated to this grouping rather than the previous method of allocating to single pool gauges.

The proportion of incentives that go to each pool in the grouping is recalculated every epoch according to the volume that occurred in the pools over the previous day. This allows pools that are generating the most volume per unit of liquidity to increase incentives day on day without waiting for a new incentive proposal to pass.

A Stable agnostic volume splitting gauge allows Osmosis incentives to adjust towards the pools using the most popular Stable token and away from those with less adoption. This will ensure that incentives go toward the most popular stable token for use without the protocol forcing dominance of any one of those included in the grouping.

Target on-chain date: 19th November 2023

Proposal 3

This proposal would move Osmosis incentives from the currently incentivized gauges to those created in the previous gauge creation proposals.

Gauge mapping

Target on-chain date: 24th November 2023

2

Just to be sure; we would load the incentives to the proposed groupings instead on direct pool IDs, right?

So the pools within a grouping will compete against eachother for their share of the incentives of that grouping? But it is still capped at the loaded incentives to that grouping?

3

Yes, exactly, the net incentive emissions are not changed at all by these proposals.

The emissions to the grouping are what is adjusted monthly rather than that to each specific pool.

Put this together to show the layout a bit more intuitively with a few examples. Might include in the proposal text.

image
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4

I like this picture ^^

One question which comes up though; why would we first go for the proposal for volume splitting gauges for pairings if we want Agnostic Voume Splitting Gauges?
Or is the in-between step a pre-requisite for step 2?

5

I split it because in my opinion they ask two questions.

  1. Do we want to split by pools with the same pairing?
  2. Do we want to split by pools with the same type of asset?

I believe #1 is a very easy yes, but #2 may have some concerns by people as it potentially makes liquidity providers need to switch which Stable they use to follow incentives. Although I believe the pros outweigh the cons. #2 might even make it viable to onboard a wider range of stables to the incentives system again as the Cosmos native ones establish.

6

Is it planned to split by all pairings? Eg all atom incentives will be split to atom/osmo supercharged, atom/osmo regular, atom/usdt, atom/usdc, etc? Compared to the gigantic atom/osmo pools, the smaller stablecoin pairings have much higher volume per $ liquidity, so I think this makes sense…?

7

We’re still working out the overall incentives on a pairing basis, targeting token liquidity itself could be something to explore in future!

8

I guess it will be relevant for xxxx/ASSET (the quote asset if I’m correct) pairings?

So when choosing for ATOM as a category a pool ATOM/XXXX is not automatically added, but XXXX/ATOM is relevant for the category. That would at least make sense imo, since then you can really pit pools against eachother, competing for the same set of incentives.

9

This seems like it makes the most sense. If we’re looking at tokens as the net liquidity behind the token in general, all the pairs for a single asset should be pooled (all spread factors, ATOM/OSMO, ATOM/USDC, ATOM/USDT, for example). I don’t see a reason why different stablecoins should be grouped differently to each other, or why crypto/osmo pools should be separate either. It’s also much easier to stay in range on crypto/stable pairs for a human, rather than crypto/osmo, and trying to be less dependent on thin bot-provided liquidity has been discussed prior on this forum…