Deploy Protocol Owned Liquidity of AXL/OSMO via Astroport PCL

This proposal would send 500k AXL and 650k OSMO to the Osmosis Liquidity subDAO for deployment into an Astroport AXL/OSMO PCL pool and return to the community pool.

Background

The Osmosis Community Pool owns 1.09M AXL, mainly from the loan repayment for the Axelar Loan Swap (Proposal 332).

This AXL has been sitting unused in the community pool for two years. While inflation has impacted the proportion of Axelar supply that this represents, the AXL repayment was initially valued at approximately 1 million USD and is now worth 1.77 million USD, representing a considerable success for the Loan Swap mechanism.

About Axelar

Axelar delivers secure cross-chain communication for Web3. Its infrastructure enables dApp users to interact with any asset or application on any chain with one click.

The Osmosis community voted Axelar the first canonical Ethereum bridge service provider in Proposal 206. Axelar currently facilitates most ETH liquidity on Osmosis and is a source of WBTC, USDC, and DAI, as well as connections to other ecosystems such as Polygon and Arbitrum.

Around 42.5M USD of tokens used within the Osmosis ecosystem have arrived via the Axelar bridge.

State of Liquidity

Axelar liquidity on Osmosis is present primarily as the Classic pool AXL/OSMO and a Supercharged pool AXL/OSMO. The Supercharged liquidity is mainly deployed in a full-range position rather than taking advantage of the capital efficiency available in Supercharged pools.

This has been reflected in reduced trading volumes compared to other trading locations despite large amounts of liquidity being available on Osmosis and Axelar being a Cosmos SDK-based chain.

Source: Coingecko Markets

The ratio of Volume to Liquidity is typical for Classic and Full-Range positions. Ideally, the Supercharged Liquidity pool would concentrate on a more aggressive position. However, since Osmosis has both tokens available in the community pool, it is possible to deploy them into a position that will facilitate a more significant share of Axelar volume on Osmosis. This will also earn additional protocol revenue on these inactive assets.

Quantity

This proposal asks for 500k AXL and 650k OSMO, valued at approximately 1.6 million USD. This is around 46% of the AXL in the Community Pool, leaving the remainder available for future deployments such as Liquid Staking, expansion of this deployment, or alternative vault deployment.

Axelar and Osmosis have similar market caps. In previous forum discussions, a swap of around 300k OSMO was suggested for similar situations. However, as Osmosis already owns both halves of the liquidity that is currently unutilized, a larger quantity is being requested for deployment. This larger quantity is equivalent to the original loan swap and ensures that Osmosis will retain the majority of AXL for future usage while receiving the trading benefits of more capital-efficient liquidity for AXL. Furthermore, it will enable Osmosis to begin acquiring protocol revenue on dormant community pool assets.

Mechanism

Liquidity would be deployed into an Astroport PCL pool with the standard fee range on Osmosis of 0.05%-0.2%.

Astroport PCL pools are more suitable for unmanaged liquidity positions than Osmosis Supercharged liquidity positions as they adjust both position and fees automatically without input from the liquidity provider. These properties make them ideal for Protocol Owned Liquidity deployments of volatile assets where a chain’s governance does not have the agility to maintain narrow liquidity positions.

Astroport pools have a variable fee depending on volatility. Currently, trading through this pool would be split as follows:

  • 0.1% Taker Fee to Osmosis
  • 0.05%-0.2% adaptable PCL fee, one quarter to Astroport, three quarters as returns to this position.

The subDAO will then transfer the tokens representing this liquidity position back to the community pool, along with any excess OSMO or AXL that cannot be deposited.

Liquidity subDAO

The Liquidity subDAO can be viewed here and is a 4/6 multisig comprised of

This multisig has previously been used in Proposal 715 to deploy liquidity to stSTARS/STARS and acts 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.

Target On-chain date: 19th March 2024

7 Likes

Sounds great! I think most of the liquidity in the classic pool is also owned by the Axelar foundation. Can we have them shift towards PCL as well?

1 Like

This is one of the best use cases for PCL, putting POLs to work more efficiently. Excited for it!

And it also ensures that the LP is trully trustless.

3 Likes

I am a bit lost on the need for this.
We have an Incentives program to make sure pools are incentivized to get the liquidity they need for trading with low slippage.

I see we have a pool with $1.13 million liquidity and a trading volume which is a rough 9-10% of the liquidity. Gut feeling tells me that this should be sufficient to play according to the rules we apply for the incentives and the desired slippage.

Now why would we go deploy liquidity ourselves? Because the people providing liquidity are using full range positions instead of concentrated ones? Then the solution would not be to deploy liquidity ourselves imo, but make people aware of the benefits of other positions or the PCL solution.

If we go for “let the market decide and cater with incentives”, then we should apply that principle everywhere imo.

We don’t incentivise AXL/OSMO any longer.

I totally agree that the market should be stepping in the provide a more efficient position here, but for some reason, perhaps the imposing size of the pool, it has not.

Since we have both assets to hand this deployment would allow us to both bypass waiting for this to happen as well as begin to earn additional revenue on currently stagnant assets.

1 Like

As an Astroport contributor I might have a slight bias, however, what afsardo mentioned is true.

PCL is great for deploying liquidity that can’t be managed effectively in CL pools and Protocol Owned Liquidity is a prime example of that.

The big question which looms is whether is what kind of interesting use-cases this would bring.

As a project I could choose to airdrop an X amount to the Osmosis CP, let it be stagnant for a bit and then request to be deployed as POL since it would otherwise be stagnant.
And before we know it we have found a new route to take a large part of funds out of the CP.

I know some people already addressed it, but are large CPs not just a systemic risk in general?

I guess so, but the risk would be that the Osmosis community pool could propose to sell those assets.
I don’t think we should be afraid of selling reasonable quantities of other assets we have collected for other purposes, or dumping obvious exploitative attempts.

2 Likes

Hahaha, point taken :slight_smile:

In the end we still have the governance part to cover where abuse can be punished.

But, the initial point still stands; let’s suppose this pool would be incentivized (yeah, I know it isn’t). Would it be eligible for incentives? Or would the current liquidity already be able to cater the volume?
In other words, if we apply the same principle to this pool (ignoring the fact that we have funds in the CP), would we even be required to add liquidity in this pool?

Confirming on behalf of the Liquidity subDAO that this has been deployed and returned to the community pool.

1 Like