Original Thread: Commonwealth
This proposal seeks to determine the disposition of all past and future revenues collected by the ProtoRev module (apart from those already allocated to the Skip Protocol developer wallet). The proposed distribution is as follows:
Non-OSMO tokens will be sent to the Community Pool.
Any OSMO will be burned.
The ProtoRev module came into use in v15 of Osmosis, providing a mechanism by which the protocol automatically rebalances arbitrage opportunities between liquidity pools, and the resultant revenue is stored in a holding account until governance decides the use.
For the last three months, ProtoRev has consistently been collecting approximately 1250 dollars worth of tokens per day.
ProtoRev value generation is currently proportioned as 3 OSMO to 1 Non-OSMO but may shift over time.
This proposal signals community consent for the following:
- Distribute all past and future non-OSMO revenues collected by the ProtoRev module to the Osmosis Community Pool
- Burn all past and future OSMO revenues collected by the ProtoRev module to implement a potential deflationary mechanism for Osmosis.
- Make future changes to the distribution of these revenues governance adjustable parameters.
Distributions of revenue to the Skip Protocol developer wallet are exempt from this proposal. The revenue share collected by Skip Protocol will continue to be distributed according to the fee structure outlined in Proposal 341.
Non-OSMO tokens are a premium asset for the Osmosis chain as they represent revenue divorced from OSMO inflation.
They also have greater flexibility in usage by the protocol compared to having a solely monolithic community pool, able to earn further yield, replace requirements for rental through protocol liquidity or perform community spending without the inflation concerns of using the native token. Therefore it would be best for Osmosis to retain these tokens in the community pool to diversify and facilitate such uses.
OSMO obtained via ProtoRev is effectively burned if it does not re-enter circulation. The potential to enter circulating supply is not a deflationary model, as the maximum supply remains at 1 billion.
Burning the OSMO remaining in the ProtoRev wallet confirms that it will not re-enter circulation and establishes a deflationary mechanism for Osmosis. This mechanism will likely take a long time to become net deflationary, relying on the thirdening of Osmosis inflation and increased levels of ProtoRev generated. However, it would grow in efficacy as the network matures and volume increases.
Why not send it to the community pool?
The community pool currently contains 85 million OSMO. It receives additional OSMO in the form of 5% of inflation and revenue from specialized transactions such as creating a pool or an external incentive gauge. Therefore the community pool has little use for this additionally collected OSMO, which instead can be used to provide a new and potentially escalating mechanism that feeds into the overall Osmosis tokenomic model.
Why not send to stakers?
This proposal argues that implementing a variable burn mechanism for Osmosis has more long-term potential for tokenomic impact than distributing it to stakers for a small APR relative to the planned share of Taker Fees assigned in Proposal 530.
ProtoRev is expected to yield 0.16% APR compared to the Taker fee of 3.95%.
Rather than boost the yield of stakers slightly, a novel mechanism should be explored.
A burn mechanism makes non-staking OSMO positions more attractive as it offsets inflation and cancels the inherent opportunity cost or impermanent loss incurred by these positions.
Pools may shift away from OSMO pairings after the deployment of Supercharged liquidity pools when swap fees again stable tokens will likely be sufficient to support liquidity. The changing ratio of liquidity pairings will likely impact the OSMO ratio of revenue that ProtoRev generates.
The development of a burn mechanism requiring OSMO pools to exist incentives the maintenance of OSMO pools from sources such as the Community Pool’s reserves in pairings with the non-OSMO tokens received from ProtoRev and Taker Fees. The larger these positions are, the more OSMO will continue to be generated from ProtoRev originating in these pools, causing the incentivized protocol liquidity and remaining OSMO held in the community pool to benefit from the deflationary system.
Comparison to Previous Burn Proposals
Proposal 516 asked that the non-OSMO assets used by the protocol be used to purchase and burn OSMO. While this provides buy pressure on supply, it is only around a quarter of the revenue collected through the ProtoRev module at the expense of assets that Osmosis currently has no other method of obtaining without arranging a token swap or purchase through intermediary multi sigs.
Proposal 519 also asked that non-OSMO assets are transferred to the community pool but also requested that a compensatory value of OSMO be burned. This additional burn mechanism may have eventually exceeded the income of the community pool in OSMO, and so needed later intervention or more complex mechanisms to ensure this was not excessive.
Implementation will take place during a future software upgrade.
As the Skip dev account takes its share every block as of v16, any leftover OSMO can be burned at the end of the transaction rather than deposited into the holding address. If the resulting asset is a non-OSMO denom, it will be sent to the community pool instead.
As part of this implementation, all existing assets in the holding address would be processed and burned or sent to the community pool according to their type.