Deploy 20M OSMO to the stOSMO Pool

Proposal Discussion
1

Summary

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.

Change log

September 22 - Initial post

September 28 - Added multisig address, multisig signers

Justification

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.

Osmosis and Stride

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.

Multisig details

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.

Multisig address:

osmo1z8q568n9gsx3sp9rcd73jw590g0h4kfy69rq9nwf808zsugkpaxsxg2fep

Multisig members:

-John (Stride)
-Robo (community)
-Dilan (Imperator validator)
-Davide (Mars)
-Storm (Anagram)
-Cosmosation

Deployment

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.

Specific instructions

In order to be absolutely clear about what would happen, this proposal aims to give these specific instructions to the multisig members:

  1. 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.

  2. Once the entire 20M OSMO has been deployed, transfer the resultant LP tokens to the Osmosis community pool.

Final thoughts

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.

5 Likes
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Definitely supportive of this!

As i mentioned in another post, right now there’s far more liquidity in the community pool than can be absorbed by the available liquidity on Osmosis. It makes sense to put this liquidity to productive use as a fee revenue driver for the protocol.

Additionally, since the community pool osmo is being paired with a liquid staked version of itself, there’s very little risk of additional OSMO being introduced into circulation by virtue of the asset it is paired with falling in price relative to OSMO (short of a security incident on Stride, essentially).

When you factor in increased collateral usecases with Mars and Membrane, and the fact that we could pull the liquidity if we wanted / needed to for other purposes, this really seems like a no-brainer to drive additional value to Osmosis in multiple ways.

1 Like
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A definite no from me. Allocating 20M $OSMO in one go doesn’t make sense, especially with the centralization risks tied to a multisig wallet. As for stOSMO, why the VIP treatment? Let’s decide on that during our usual monthly Incentive Adjustment proposals. Keeping the ecosystem balanced should be the priority

2 Likes
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Hey. Let me quickly answer these questions.

According to the proposal, the multisig would only be temporary. Once the OSMO is deployed to the liquidity pool, the resultant LP tokens will be transferred to the community pool - giving Osmosis complete control of the liquidity position.

Regarding your comment about “VIP treatment,” I would reiterate that Stride’s stTokens are widely recognized as strategically important to Osmosis. No liquid staking provider contributes nearly as much to the Osmosis ecosystem as Stride does, nor does any provider come close to Stride in terms of security. Plus, stOSMO is the only OSMO LST that has achieved product-market-fit. Providing liquid to the stOSMO pool is in the strategic interest of Osmosis.

Finally, let me clarify that this proposal is not for OSMO incentives. Rather, it’s for OSMO protocol owned liquidity. Not a single OSMO would be spent (:

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Fully agreed on @SuperEra

We have a method in place to calculate how much liquidity we need in a pool and we are now proposing to just add another 20M OSMO in a pool to reduce emissions?

That still doesn’t solve the issue in the core that emissions are too high. I really want to stop doing patches left and right to solve an issue which can be solved by a better and more permanent solution.
If we also think our CP is too high, then we can burn a part of it.

And I also don’t like the “putting all eggs in one basket” approach this gives. I want diversification, not centralisation. Certainly a No from my side. I like Stride, but I like competition even more. And for me the risk this brings to Osmosis is simply to big.

1 Like
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Echo other’s comments. I’m against doubling the current stOsmo supply beyond what the market has determined. There is always a cost to deploying liquidity like this, even if its a small one, it is false to say this has no cost.

There is staking apr dilution, 10% inflation of this going to stride and the centralization aspect.

We have dedicated good amounts of money to decide on liquidity targets and have many people dedicated to decide adequate amounts of incentives. Let them do the work.

1 Like
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Thanks for providing feedback. I get where you’re coming from, but let me add a few points.

The liquidity optimization algorithm you mentioned produces a target liquidity level for the purpose of trading. But in the case of stOSMO, additional liquidity is needed to facilitate safe collateralization.

In order to determine the level of stOSMO liquidity to facilitate safe collateralization, a different algorithm was used - the Mars Risk Framework. And according to that algorithm, roughly 20M OSMO of liquidity is required for stOSMO collateralization with decent parameters.

OSMO incentives could be used to increase the pool to that level, but of course it makes more sense to use the idle OSMO liquidity in the community pool. That way, zero incentives will be required.

This is not just about increasing the TVL and volume of the stOSMO pool, but about increasing the options for Osmosis DeFi more broadly. Users on Mars and Membrane are going to want to use stOSMO as collateral. If they can’t, then these protocols will be less successful.

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Supportive of the concept, not supportive of the specifics.

Size
There are 8.25M stOSMO in existence right now; this proposal would hugely increase the amount of stOSMO in circulation beyond what the market supported.

While Mars’ risk framework is relatively comprehensive, you haven’t shared the actual numbers that would be put into this to reach the 20M figure, which makes it seem like the typical ballpark response we get of “10M” for liquidity needed to add to Mars.

Somehow, Umee, Ghost, and Shade have all added stOSMO to their collateral lists without this level of liquidity. Accepting stOSMO as collateral with a minimal deposit rate on Mars may trigger additional trading and increase the liquidity provided, further allowing it to grow organically.

I may favor a smaller spend of at most 8M, resulting in ~4M, or 50%, stOSMO extra, but this still seems arbitrary without the populated algorithm.

Pool Type
Stableswap pools are less efficient than Supercharged and require 50/50 of an asset.
The Shade curve does this well, recognizing that you don’t need equal liquidity on both sides of a depeg.

By using the Supercharged pool type, we can simulate this and reduce the amount of stOSMO we create from this while providing precisely the liquidation resistance that this aims to achieve.

With a minimum price of 1 OSMO = 1 stOSMO as a base and 1.26 OSMO = 1 stOSMO as a year-forward forecast at current inflation rates, we could match 100 OSMO with ~40 stOSMO. This wouldn’t need adjusting but would be set and forgotten by the multisig.

This is ATOM, but the ratios are very similar, and it had precisely the depeg scenario this would avoid this morning because of the liquidity being placed on the wrong side.

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The one downside is that Supercharged POL cannot be sent to the community pool as it has no token representative, which causes trust and potential legal issues - confirming this.

Concerns about stOSMO dominance
In terms of declaring Stride the winner, nearly a year on, I think it is time to face the reality that Stride is the only actively usable LST for OSMO right now and has put procedures in place to address security concerns as well as decentralization of the Liquid Staked Set.
Quicksilver still has a non-functional liquid staking product, which cannot maintain a peg by unbonding.
ampOSMO is new and may gain ground, but this does not lock them out.

3 Likes
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Re: the Mars deposit caps, I think it bears noting that Mars has been remarkably opaque in pretty much every dealing with Osmosis and other liquidity partners.

They not only don’t follow their own deposit cap rules when it suits them (AXL can be listed as collateral with how illiquid it is but stOSMO can’t? Lol) but Delphi actively use their own tokens to vote down proposals they dont like, and they control more voting power than the entire staked MARS amount.

This makes it extremely difficult to make any proposals to list collateral assets and has actively hamstrung Osmosis’s ability to grow its debt markets. I wouldnt be surprised if John hasnt been able to get a straight answer from the Delphi team on parameters sufficient to list stOSMO as collateral. I doubt very highly they are even following their own risk parameter formula here (as they dont seem to have done up to now)

3 Likes
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Glad to have your support, even if you’re still unsure about the specifics.

I love your suggestion about asymmetric liquidity positioning for an stOSMO/OSMO supercharged pool. That’s something I thought of as well. But I do think we should use the stableswap pool instead, because even if it isn’t the most efficient - it’s the simplest and safest. After Osmosis governance becomes more comfortable with POL, then maybe we can start experimenting with a superchanged pool.

Regarding the size of the OSMO POL being requested, it’s necessary for 1) safety and 2) good parameters.

While Stride has worked with other money markets to enable support for stOSMO, Mars has much higher standards. This is a good thing, in my view. Mars prioritizes safety over growth. And in order to be very safe, 20M OSMO in the stOSMO pool would be ideal.

But it’s also important that stOSMO has good parameters, such as the liquidation bonus, the LTV, and the deposit cap. The specific amount of OSMO in the proposal would result in decent parameters, which would make the stOSMO user experience on Mars much better than if a lower amount were used.

Ultimately, there’s 90M OSMO sitting in the community pool, so there would be zero opportunity cost to deploying 20M OSMO. Respectfully, I don’t understand why you’re not in favor of the proposed amount - seeing as there’s so much in the community pool. Having a deep stOSMO pool is a matter of safety and user experience - don’t want to compromise on those.

And at the end of the day, the community pool will still hold the amount of OSMO it has now. The only difference is, some of the OSMO will be the form of LP tokens.

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I think many would be in favor of this if Stride provided a STRD allocation to the community pool to counter the 10% fee on the stOsmo.

Stride gets bootstrapped stOsmo liquidity to make stOsmo viable in money markets.
Osmosis gets a premium and diversifies its community pool by providing liquidity.

This in my opinion makes it a win-win situation for both and further aligns Stride and Osmosis.

2 Likes
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If it’s support from Stride you want - you already have it (:

It’s hard to overstate the amount of direct, tangible support Stride has given to Osmosis. In fact, on a relative basis I think Stride has been more generous to Osmosis than any other single blockchain has to another single blockchain in history.

To reiterate from the original proposal, Stride has given Osmosis:

  • A 1M STRD airdrop (1% total supply)
  • Roughly 10M STRD worth of liquidity incentives (10% total supply)
  • And over $1M worth of stATOM and stOSMO incentives

This is absolutely massive. As a result of Stride’s support for Osmosis, stTokens now make up about 20% of Osmosis’ entire TVL. And since Cosmos Hub installed the LSM, volume for stTokens has been going exponential. When the fee switch is turned on this week, a large percentage of Osmosis revenue will derive from trades involving stTokens.

Can you name a blockchain that has been more generous to another blockchain than Stride has toward Osmosis?

In light of all the benefits of deep stOSMO liquidity - and the staggering generosity Stride has shown toward Osmosis - I think it’s strongly in Osmosis’ strategic interest to approve this proposal.

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And in order to be very safe, 20M OSMO in the stOSMO pool would be ideal.

Why not 25M? Surely that would be even safer? Where is the 20M figure from is my question.

When reading through the Mars Risk Framework I noticed that this has absolutely nothing to do with establishing Deposit Caps, but is used to set the allowable LTV. Do we know where these calculations are that establish allowable Deposit caps based on liquidity?

I also disagree that there is no opportunity cost to this - this takes 10M OSMO that are non-circulating and causes them to impact staked supply. Potentially causing an equivalent amount of freely circulating OSMO to unstake due to the reduction in staking rewards and re-enter liquidity circulation instead. I think this is relatively unlikely though since it is only a small percentage change in OSMO staked.

4 Likes
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I do understand, agree and respect what Stride did and is doing for Osmosis and LSM Ecosystem in Cosmos. But still the amount and the risk that comes with agreeing to it can’t be ignored

We have seen similar proposals by Wynd Dex on Juno for their wyJUNO and unfortunately that haven’t turned out as expected

1 Like
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The Mars team does very sophisticated debt modeling. Here’s the full elaboration of their current Deposit Cap Methodology. And here’s what it looks like when you apply it.

It is a bit complicated, but if you skim through their models - and you compare the lending parameters for stATOM given the current stATOM liquidity levels - then you arrive at roughly 20M OSMO as a good amount for safe collateralization and decent parameters. That is, parameters roughly compared with current stATOM parameters.

As you say, any opportunity cost this proposal may have is very likely to be negligible, especially compared with the very real benefits - not to mention the past and continuing support from Stride.

1 Like
16

Fully agree that many deals agreed to by various Cosmos chains have gone poorly. And I’m very pleased that Osmosis governance vets deals so thoroughly.

Fortunately, so far deals proposed by Stride always go as planned.

Consider the deal proposed to Cosmos Hub, where it deployed ~$4M of ATOM to an stATOM pool. Or the two deals (one and two) proposed to Juno.

In both cases, Stride fulfilled its objectives, and everything went according to plan. Stride has a pretty good track record (:

1 Like
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Aye, it is a very thorough model, thanks for the link.

While I’d love to see parameters similar to stATOM, we can’t deny that ATOM is a significantly more liquid and highly valued asset than OSMO, and so the dominant liquid staked asset really should have a higher deposit cap.

I find it more interesting that, as has been raised previously, AXL has a suggested max cap of $741,272 in that thread, I can only assume that this is because there is significant depth on CEXs as well as Osmosis.

Current lend listings elsewhere
UMEE: 2.26M stOSMO
Shade: 672,524 stOSMO

With the 2% change in depth in stOSMO/OSMO being about $150k (~420k stOSMO), this seems like a reasonable amount to start off the listing process and see how the Concentrated liquidity pool impacts that depth. I haven’t run the full model, but 30% on chain supply seems to be less of a factor for IBC-originating assets.

To me, the first step before this proposal should be to get stOSMO listed on Mars with a minimal deposit by pushing through the proposal process as stATOM was listed: [MRC-14] Mars Oracle Upgrade & stATOM Listing - MRC (Mars Request for Comment) - Mars Protocol which has a true 0 cost as this would need doing anyway regardless of this proposal passing.

3 Likes
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The liquidity optimization algorithm you mentioned produces a target liquidity level for the purpose of trading. But in the case of stOSMO, additional liquidity is needed to facilitate safe collateralization.

This is by far the worst comment I read here. The Stride protocol should contain safeguards in general for safe collateralization. It should not depend on liquidity on Osmosis… that is extremely risky for whatever happens to Osmosis.

Why are the safeguards on Stride itself not enough to have the safe level of collateralisation?

1 Like
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Personally, I am very curious how much liquidity Membrane and IST would require in the stOSMO/OSMO pool to have stOSMO listed as a collateral asset as the 20M OSMO is only what Mars would require. While Membrane probably isn’t set up quite yet to answer this question, and may not be for a while, it seems like IST can as it has partnered with Gauntlet to provide the IST community with independent analyses and risk parameter recommendations.

Gauntlet Recommendations for stATOM and DOT as IST collateral assets:

Stride also took it upon itself to do an analysis in proposing to onboard stATOM as an IST collateral asset. See: Liquid Staking Token Vaults (stATOM, stkATOM, qATOM, etc.) - #5 by RedRabbit - Discussion - Agoric Community Forum.

Also, if increasing liquidity in the stOSMO/OSMO pools is “about increasing the options for Osmosis DeFi more broadly”…

…I don’t know why IST was left off the list particularly given the depth of IST liquidity on Osmosis compared to other IBC native decentralized stablecoins and available usage throughout the interchain economy. It can be used on Umee for borrowing and lending; on three DEXs - Shade, Crescent, and Osmosis; pay for tx fees on three chains - Agoric, Crescent, and Osmosis; on OmniFlix to purchase NFTs; and if I am not mistaken, the ability to purchase cloud computing power on Akash using IST is in the works.

That being said, perhaps Stride would be willing to postpone putting this proposal on chain and provide some time to be able to to seek out an analysis from Gauntlet on risk parameters they would recommend for stOSMO being an IST collateral asset and if they have any recommendations on stOSMO/OSMO pool capitalization.

1 Like
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Glad to see you thoroughly going over the Mars material (:

But let me point out a few things.

AXL was listed on Mars due to its many CEX listings. Indeed, AXL, OSMO, ATOM, BTC, and ETH all use Pyth as their oracle, which pulls prices from CEXes. So for these tokens, onchain liquidity doesn’t matter as much.

But in case of stATOM, onchain liquidity matters greatly - because the Mars oracle price for stATOM is derived directly from onchain liquidity. stOSMO would likewise rely on onchain liquidity for its oracle price.

While a significant amount of stOSMO is collateralized on Shade and Umee, Mars has been reluctant to list stOSMO - due to Mars’ much more stringent risk framework.

In fact, it’s questionable whether MARS token holders would approve stOSMO at all given its current liquidity. Indeed, they recently rejected DOT as a collateral token, due to it not meeting their high standards.

But with OSMO POL deployed, Mars would certainly accept stOSMO as collateral. And while the deposit cap would certainly be much lower than for stATOM, I expect the LTV and liquidation bonus params would be similar to stATOM.

So when you take everything together - saving OSMO incentives, enabling safe stOSMO collateralization with decent parameters, increasing trade volume, and reciprocating some of the extraordinary support Stride has shown to Osmosis - I think the proposal is pretty good. Especially considering there would be negligible opportunity cost and the community pool would steward the liquidity position with no intermediary.

1 Like