Deploy ETH/BTC Liquidity and Reduce incentives on ETH

Proposal Discussion
1

Deploy ETH/BTC Liquidity

This proposal would deploy ETH and BTC from the community pool into a Margined liquidity strategy.

Current Liquidity

ETH Liquidity on Osmosis is currently limited. The main ETH/USDC pool has $320k in liquidity, while ETH/BTC has only $18k. Both are incentivized but are failing to attract additional liquidity.

The current emissions to the Volume Splitting Group (VSG) of ETH/BTC and ETH/USDC are 1,956 OSMO per day, a 200%+ subsidy to the swap fees. This is currently the only volatile VSG to which Osmosis emits incentives to at a greater rate than the protocol revenue generated by the grouping.

The lack of ETH liquidity on Osmosis has a subsequent impact on liquidity only connected to ETH, such as the protocol-owned ERC-20 token liquidity, established in Proposal 802, and wstETH liquidity, a premium collateral asset which is currently at cap on Mars.

Requested Deployment

This proposal asks for:

  • 16.47 ETH, in the form of
    • 13.75 ETH
    • 2.72 ETH.axl
  • 0.47 BTC

Both sets of assets have been accumulated through Osmosis taker fees.

This liquidity, valued at approximately $99,000, will substantially increase the ETH/BTC liquidity available on Osmosis. This will allow the ETH market to develop further while generating yield for the community pool.

This liquidity would be deployed into a newly created Locust Vault for ETH/BTC via the Osmosis Liquidity subDAO

Locust Vault Parameters

  • Target Pool 1982 (ETH/BTC, 0.01%)
  • Spread -2.5%/-2.5%
  • Reposition trigger 0.5%
  • Performance Fee of 15%

The receipt token for the vault deposits and any excess BTC or ETH will be transferred back to the Osmosis Community Pool.

Risk Analysis

  • Community pool exposure to Bitcoin and ETH
    • Initial exposure remains the same as this proposal has no new purchases.
    • Risk: Value ratios could increase or decrease significantly from current levels, leading to a loss of up to 16.47 ETH or 0.47 BTC previously accumulated by the Osmosis community pool.
      • Mitigation: The Locust vault repositions liquidity to retain inventory, so a large ratio movement would be required to lose the all inventory of one side.
  • Community pool exposure to Alloyed Ethereum
    • Risk: There is an increased risk to the 2.72 ETH.axl due to increased exposure to multiple sources of Ethereum.
      • Mitigation: Inter-chain and intra-alloy rate limits. In the event of a security issue involving the ETH Alloy the Community Pool should include this position’s ETH holding in any resolution proposal to make users whole.
      • Mitigation: Adding ETH.axl to the alloy supports Alloyed BTC liquidity, allowing more varied liquidity to enter and exit the alloy more easily.
  • Community Pool asset exposure to smart contracts
    • Mitigation: Margined smart contracts have recently completed audit.
    • Mitigation: Locust uses the same mechanism for repositioning liquidity in volatile deployments for the previous LST support deployments, the difference being that there is no target price for the pairing.
  • Community Pool asset exposure within liquidity pools
    • Mitigation: While adding liquidity to pools adds a layer of risk compared to native asset deployment, the Osmosis Concentrated Liquidity pools have been live with no security events for over a year.
  • Use of Multisig for execution
    • Mitigation: This 4/6 multisig has previously been used to deploy liquidity in other proposals, acting as an intermediary to perform multi-stage or time-dependant transactions, such as adding liquidity to a pool with a ratio of assets that will vary before a five-day Osmosis governance proposal is completed.

Success Metrics

  • Volume facilitated through position
  • Fees earned (LP + taker)
  • Slippage reduction during volatile periods
  • Market share of Ethereum trading volume

Target Onchain Date: 8th January 2025

Reduce incentives on ETH

This proposal would reduce the incentive emissions allocated to ETH.

Current Liquidity

ETH Liquidity on Osmosis is currently limited. The main ETH/USDC pool has $320k in liquidity, while ETH/BTC has only $18k. Both are incentivized but are failing to attract additional liquidity.

The current emissions to the Volume Splitting Group (VSG) of ETH/BTC and ETH/USDC are 1,956 OSMO per day, a 200%+ subsidy to the swap fees. This is currently the only volatile VSG to which Osmosis emits incentives to at a greater rate than the protocol revenue generated by the grouping.

The lack of ETH liquidity on Osmosis has a subsequent impact on liquidity only connected to ETH, such as the protocol-owned ERC-20 token liquidity, established in Proposal 802, and wstETH liquidity, a premium collateral asset which is currently at cap on Mars.

Requested Incentive Adjustment

Incentives will remain on ETH pairings at a reduced rate of 500/day, an LP fee subsidy level similar to BTC/STABLE of 50%. This will make this Volume Splitting Group break even regarding Protocol Fees generated compared to emissions.

Target Onchain Date: 8th January 2025

6 Likes
2

This proposal presents a well-reasoned strategy to leverage untapped liquidity while delivering meaningful protocol improvements. We fully support this initiative and will cast a Yes vote on behalf of the PRO Delegators’ validator.

We believe this deployment aligns with the community’s best interests and represents a valuable step forward for the ecosystem.

Thank you,
Govmos.

pro-delegators-sign

1 Like
3

I am ok with deploying for now, but I think it also would be good to set some kind of metrics to see if the liquidity actually attracts volume and / or more liquidity.

If unsuccessful, we might need to reconsider to have it deployed at other more needed locations.

1 Like