This proposal aims to deploy 20M OSMO to the stOSMO/OSMO stableswap pool (#833).
Doing so would eliminate the need to spend internal OSMO incentives for stOSMO liquidity, reducing OSMO emissions. Furthermore, this would create deep stOSMO liquidity, enabling Mars to safely approve stOSMO as collateral.
The OSMO would be sent to a DAODAO multisig controlled by trusted community members. The multisig would provide the OSMO as liquidity, and then transfer the resultant LP tokens to the Osmosis community pool.
So instead of the 20M OSMO sitting idle in the community pool, it would be sitting in the stOSMO/OSMO pool, facilitating efficient stOSMO trading and generating fee revenue for OSMO stakers. And by holding the LP tokens, Osmosis governance would have complete control of the liquidity position.
September 22 - Initial post
September 28 - Added multisig address, multisig signers
There are many ways Osmosis would benefit from deep and reliable stOSMO trading liquidity.
First, it would decrease OSMO emissions. Osmosis currently spends OSMO to incentivize stOSMO liquidity. With the pool filled with protocol-owned-liquidity (POL), this OSMO expenditure would no longer be necessary, reducing overall OSMO emissions.
Second, it would enable stOSMO to be used as collateral by Mars and Membrane. So far, the stOSMO pool has not attracted sufficient liquidity for stOSMO to be approved as collateral for Mars. But with OSMO POL, the pool would be deep enough. So users would be able to borrow against stOSMO on Mars - and this would be especially useful for Mars V2! Likewise, this OSMO POL would enable users to use stOSMO for the upcoming Membrane stablecoin protocol.
Third, it would increase Osmosis volume and fee revenue. Increased liquidity depth would make users more comfortable trading stOSMO, leading to more volume. And increased stOSMO usage - on Mars and Membrane - would likewise increase trading. With the default 0.1% taker fee set to be implemented shortly, revenue from the stOSMO pool would contribute to the OSMO staking reward.
But perhaps most importantly, by showing a willingness to deploy OSMO POL Osmosis would improve the likelihood of receiving ATOM POL from Cosmos Hub. Cosmos Hub currently has 450K ATOM deployed on Astroport Neutron, and an expected upcoming Cosmos Hub governance proposal will request ATOM POL for Osmosis. However, Osmosis governance itself has never deployed a large amount of OSMO POL. Thus, Cosmos Hub may feel uncomfortable doing something for Osmosis which Osmosis is unwilling to do itself. So by first deploying a significant amount of its own POL, Osmosis would thus increase the likelihood of receiving POL from Cosmos Hub.
Why 20M OSMO?
Regarding the specific amount of OSMO being proposed, it was calculated by using Mars’ Risk Framework and considering how much OSMO is available in the community pool.
Given the Risk Framework, this amount of OSMO liquidity would enable stOSMO to be approved as collateral with parameters comparable to stATOM (although the deposit cap would be lower). If Osmosis governance were to provide a smaller amount of OSMO POL, stOSMO may still be eligible as collateral - but the LTV and liquidation bonus parameters may be much less favorable. So ultimately, this amount of OSMO POL is being proposed to ensure a good user experience when using stOSMO on Mars or Membrane.
Ultimately, this proposal only aims to deploy roughly 20% of the community pool. And keep in mind that the community pool will directly control the LP tokens that represent the OSMO liquidity position.
Ever since Stride launched, Osmosis and Stride have had a very close and mutually beneficial relationship. And given the increased importance of LSTs for Cosmos DeFi, Stride’s stTokens are now vital to the success of Osmosis. Indeed, Sunny recently listed Stride’s stATOM and stOSMO on a short list of the most strategically important tokens for Osmosis.
Fortunately, ever since launching a year ago, Stride has dedicated roughly 80% of its liquidity incentives to Osmosis - a total of roughly 10M STRD plus $1M worth of stATOM and stOSMO from the Stride incentive pool. Stride’s huge investment in Osmosis has turned Osmosis into the LST hub of Cosmos, helping Osmosis to retain users as other Cosmos DeFi chains have become more competitive.
Also, it bears mentioning that Stride airdropped 1M STRD (1% of total supply) to OSMO stakers, which to date was the most valuable airdrop for OSMO. Thanks to Stride’s generous airdrop design, none of this 1M STRD was clawed back and all will be actively claimed by users.
Notably, the Stride DAO recently completed the Host-chain Validator Selection Process for Osmosis, which has greatly improved the way Stride delegates its ~10M staked OSMO. Results can be viewed here. The rebalancing from the old validator set to the new validator set will be complete within the next two weeks. The new Stride Osmosis validator set consists of thirty-two Osmosis validators who all contribute technically and socially to Osmosis. And these validators were chosen from across the overall Osmosis validator set, which distributes vote power more evenly and increases the decentralization of Osmosis.
And of course, Stride continues to prioritize security over all else. The Stride blockchain is secured by interchain security from Cosmos Hub, which gives it higher economic security than any other LST provider in the Cosmos. The Stride code-base has been fully audited by three security firms and has been closely inspected by several prominent Cosmos development companies; Informal Systems has been retained to audit all code upgrades. And the Stride blockchain implements a minimalist design philosophy - similar to the Cosmos Hub - so that the chain has a minimized attack surface. Should something go wrong, Stride blockchain has IBC rate-limiting, which would mitigate the impact.
The 20M OSMO would be released to a DAODAO multisig comprised of trusted community members. Suitable members are currently being sought out, and will be listed here when ready.
The multisig would use a 4/6 signature scheme.
-Dilan (Imperator validator)
The OSMO would be deployed to the existing stOSMO/OSMO stableswap pool.
There are several reasons for using this pool type. Unlike an xyk pool, a stableswap pool concentrates liquidity, and is thus more efficient. Unlike a supercharged pool, a stableswap pool does not require active management. So you could say a stableswap pool is the best of both worlds.
Considering the legal, technical, and trust dynamics involved in providing a large amount of OSMO POL - the stableswap pool type is the best option. Multisig members won’t have to steward the OSMO liquidity position, and can instead return it to the community pool. In addition, neither will multisig members have to adjust the liquidity range nor will a third-party vault be necessary.
Using the stableswap pool would be the simplest and safest thing to do, and would allow Osmosis governance to have complete control of the liquidity position by holding the LP tokens.
In the future Osmosis governance may or may not wish to redeploy this OSMO POL liquidity directly to a supercharged stOSMO/OSMO pool or to a Quasar vault built on top of a supercharged pool. But for Osmosis’ first experiment in providing a large amount of OSMO POL, doing so in the simplest and safest way would be best.
In order to be absolutely clear about what would happen, this proposal aims to give these specific instructions to the multisig members:
Upon receiving the 20M OSMO, begin the process of deploying it to the stOSMO/OSMO stableswap pool (#833). This will require liquid staking approximately half the OSMO with Stride protocol.
Once the entire 20M OSMO has been deployed, transfer the resultant LP tokens to the Osmosis community pool.
In recent months, major Cosmos chains have embraced the practice of deploying community pool tokens to support their respective DeFi ecosystems, including: Terra, Kujira, Evmos, Juno, and of course Cosmos Hub.
By deploying tokens from its own community pool, Osmosis would increase its competitiveness. And as discussed above, it would increase the likelihood of Osmosis receiving ATOM POL from Cosmos Hub.
And of course, no OSMO would be spent to create this OSMO liquidity position. In fact, OSMO would be saved, by reducing the need for OSMO incentives.
Target onchain date: Friday, September 29th
But in the meantime, please add any comments or ask any questions you may have.