Deployment of stOSMO liquidity from stableswap into Locust vault

This proposal follows on from Proposal 769 to re-evaluate the stOSMO/OSMO liquidity held by the Osmosis Community Pool.
This proposal would diversify an additional 200k Stableswap stOSMO/OSMO liquidity as a trial deployment into a Locust vault.

About Locust

Locust is a market making and position management tool specifically designed for Concentrated Liquidity (CL) pools.

In CL pools liquidity is often provided at an inefficient ranges. This is largely due to the difficulty of active management coupled to a desire to ensure that a position remains in range as much as possible.

However, this approach is inefficient as:

  1. Optimising for remaining in-range reduces depth
  2. Ability for market participants to perform price discovery is diluted due passive LPing
  3. LPs often sell assets at a large discount
  4. Arbitrage back to market price can take large amounts of capital

Therefore Locust takes CL position management a step forward and ensures that assets are always being bought and sold at the correct prices for a specific LP.

Locust enables the creation of positions that track both the market price and a target price. Locust prevents the provision of liquidity between these prices ensuring:

  • Reduction in capital required to return to target price
  • Assets never sold at discount
  • Tighter spreads and deeper

Initial Use-Case LSTs

The initial use case for Locust is the provision of liquidity for LST pools. LST tokens, both rebasing and non-rebasing, centre around a Redemption Rate which moves only slowly with time.

Problem: Single LP Position

In a typical single position LP strategy liquidity will typically be placed at a wide range either side of the redemption price. However, to stay in range most of the time liquidity is supplied wide and thin which is capital inefficient.

In order to remain in range as much as possible LPers will buy and sell assets at the market price regardless of the discount with respect to the actual redemption price.

Not only does this cause liquidity to be thin but also means that LPers are likely to experience Impermanent Loss (IL). Not only this but for the redemption and market prices to be restored the same amount of liquidity will need to be traded in the opposite direction.

Furthermore, IL is not truly permanent as with the change in redemption rate a previously held “peg” may not be restored.

Locust does not take this approach, rather it utilises the limit-orderbook feature of CL pools and actively manages positions for LPers. The LST strategy takes the view that the assets held should be sold for the right price and not rely on pure arbitrage to return the peg if we can do better.

Solution: Locust LP Position

The Locust strategy can be simplified to “Buy low, sell high” as the strategy minimises the assets being sold at a discount. For example in Scenario A below the strategy removes all liquidity between the redemption rate and the market price.

The LP positions thus only buy for the cheaper price and sell for the higher. This has a number of consequences:

  • Reduction in amount of liquidity required to return to peg
  • Ability to deploy liquidity in a more capital efficient manner
  • Increased profitability

Further the Locust strategy listens to all pool events and reallocates assets, meaning that assets bought at the market price are then immediately redeployed to the higher price position.

This also enables liquidity to be provided concentrated and deep.

As there is much less liquidity between the redemption and market prices Scenario B will be achieved much more easily.

Worked Example

Given we wanted to create an LP position for the CL pool of lstASSET<>ASSET in market defined:

  • Market Price: 1.0
  • Redemption Price: 1.1

Position is fixed with 10%:

  • Position:
    • Lower Bound: 0.9
    • Upper Bound: 1.1
    • Asset 0: 100
    • Asset 1: 100

In this scenario, in order to return the market to the redemption price, you would need to sell 100 asset 1 at a clearing price of 1.05, thus incurring a 5% loss as compared to redeeming the assets directly.

Additionally the liquidity needed to return the price to the redemption price would be ~105 asset 1.

Now consider a Locust strategy as follows:

  • Strategy:
    • Spread: 2%
    • Discount 1%
  • Quote Position:
    • Lower Bound: 0.98
    • Upper Bound: 1.0
    • Asset 0: 0
    • Asset 1: 100
  • Base Position:
    • Lower Bound: 1.09
    • Upper Bound: 1.11
    • Asset 0: 100
    • Asset 1: 0

Thus in order to return the peg negigible assets are required. Furthermore, any liquidity sold would be done so at a maximum discount of 1%, which is a considerable saving over the fixed width vault strategy above.

Furthermore any liquidity sold at could then be placed into the base position and sold at a profit of ~9%.

Proposed Deployment

  • Strategy:
    • Spread: 1%
    • Discount 0.5%

For comparison purposes, this translates into an approximate starting deployment of

  • Quote Position:
    • Lower Bound: 1.220
    • Upper Bound: 1.232
    • Asset 0: 0
    • Asset 1: 100
  • Base Position:
    • Lower Bound: 1.226
    • Upper Bound: 1.239

Due to proximity, these merge into a single position of 1.220 - 1.239 which adjusts automatically based on the market price and redemption rate.

Current statistics of stOSMO are:

  • Current Redemption Rate: 1.245
  • Current Market Rate: 1.232
  • Current Effective Peg: 1.238
    • Redemption Rate * ((Staking APR / 365 * 17) + Liquidity Spread Factor)
    • 0.58% Depeg

Comparing this to the current deployment of stOSMO/OSMO concentrated liquidity, which operates from a static range of 1.2075 - 1.27, a 4.2% spread. Locust offers a 1.5% spread resulting in nearly 3 times the liquidity depth per OSMO deployed whilst minimizing the capital needed to restore larger depegs.


Locust Vaults are configurable to enable both a withdrawal fee and performance fee.

For the stOSMO/OSMO vault the fee schedule would be:

  • Withdrawal Fee: 0%
  • Performance Fee: 15%

Deployment Mechanism

This proposal would enable 200k OSMO of liquidity from the existing stableswap deployment of stOSMO/OSMO to be withdrawn from the pool and redeployed within a Locust vault on the stOSMO/OSMO concentrated liquidity pool. The tokens representing this liquidity position will then be returned to the Community Pool.

This deployment adjustment would be handled by the the Liquidity subDAO. A 4/6 multisig comprised of contributors to Osmosis and the wider Cosmos which can be viewed here.

This 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.

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Wow, such quiet!

Eitherway we will release some more docs on the strategy very soon and are otherwise very eager to answer questions.

Some high-level points:

  1. CL pools are much more like Orderbooks and we should not sell assets at a discount!
  2. Similarly we should not but at a premium
  3. Lastly we want to increase efficiency of making CL markets so that we don’t need 20x liquidity than volume :wink:
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I assume users earn fees off their investment deposits but who earns the fees charged to the users?

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The performance fees?
That would be the vault maintainer - which in this case is Margined :slight_smile:

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Yes @JohnnyWyles is correct, however the fees are transparent (15% of rewards) and competitive (i.e. lower) than similar products !

One thing which triggers me in this is why Osmosis should be the provider of these funds.

Keeping stOSMO nicely around the peg is first and foremost important for Stride as a project, since it creates a balance between minting and trading. Osmosis has an interest as well ofcourse, but not the primary. Also because I don’t think Osmosis (or we for that matter) wants to do this for all pairs on the exchange.

So, have there been talks with Stride on this subject?

There haven’t been any talks with Stride around this beyond mentioning that the existing funds were being proposed to be diversified and general discussion on LST limitations.

This is the current stOSMO/OSMO stableswap liquidity that will be used here. If this is successful - which will be measured in terms of both the return to the community pool in OSMO and the improved efficiency of the peg, which has already been significantly improved with the existing static positions - then a proposal will follow to expand this to alternative LSTs through the further migration of the remaining stableswap liquidity. Eventually, the OSMO allocated to the entire LST support program will be downsized to allow more organic liquidity to participate at reasonable yields.

I do think that Osmosis should be interested in making LST derivatives of OSMO the collateral of choice across defi within limits. stOSMO is chosen here just because the liquidity is already there to migrate directly.

If this goes well, I would also support deploying a portion of community pool liquidity in TIA, ATOM, or ETH to similar Locust LST vaults.

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Confirming that this liquidity was deployed and is visible as a narrower position here: