Halve Staking Inflation to Reduce the Revenue Subsidy (3x to 1.5x)

[JohnnyWyles]

This proposal reduces the inflationary subsidy of the revenue-based staking rewards from 3x to 1.5x, redirecting emitted OSMO tokens to the out-of-circulation community pool for optionality.

This change aims to shift Osmosis staking rewards another step towards being entirely reliant on real yield from sources such as taker fees and transaction fees while increasing the impact of burn mechanisms on net inflation, resulting in a sustainable and deflationary OSMO.

Current Status

Inflationary OSMO emissions have historically supplemented Osmosis staking rewards. This approach may have been suitable in the early growth and distribution phases but is now widely recognized as unsustainable.

As Osmosis changes phases from the OSMO distribution phase of inflation to participants and enters the sustainability phase, emissions should be reevaluated.

Inflation works well for distributing the token among participants who contribute to the blockchain. However, as inflation decreases, it becomes increasingly apparent as a subsidy for the real revenue that must eventually be the sole source of rewards for a token with a fixed maximum supply, such as Osmosis.

Osmosis is currently subsidizing this revenue output to staking rewards by 3x, a recent cut from 4x with the Thirdening in mid-June.

Staking rewards are primarily designed to ensure the continued security of the blockchain; however, the level of security required and the corresponding level of payment required for this are under question. Other Proof of Stake chains are grappling with this same issue:

• Celestia is debating moving to Proof of Governance to reduce inflation to 0.25%
• NEAR is debating cutting from 5% inflation to 2.5%
• SOL narrowly failed to pass an incremental inflation reduction due to the Supermajority requirement, and alternative versions are being redrafted.

This proposal initiates the process of determining the optimal level of revenue subsidy necessary to ensure the security that Osmosis requires through incremental reductions in emissions.

Security

To date, there have been no major security events recorded with Proof of Stake governance systems that have a relatively small liquidity level compared to the staking quantities required for a 51% attack.

The more significant theorized attacks are Long Range Attacks, which Osmosis aims to improve safeguards against by becoming a Bitcoin Secured Network, and vote centralization risks, which Osmosis opposes through having one of the most decentralized validator sets across the Cosmos ecosystem as well a high staking rate (45%) compared to liquidity (~3% across all exchanges).

Payment for security

Osmosis currently emits around 60,000 OSMO per day for security, valued at around $8,400 per day.

This value being transferred from non-stakers to stakers via inflation is likely too high for the security requirements of the Osmosis blockchain. These requirements are primarily designed to ensure that staking levels do not come too close to liquidity levels, which could facilitate consensus attacks through the purchase of OSMO on the market - a phenomenon that occurred with LUNA during the Terra collapse. Additionally, a diverse group of validators must control at least 67% of the voting power, which is indirectly incentivized by attracting a variety of stakers with differing validator preferences through an attractive headline APR and net yield.

Inflationary staking rewards primarily transfer value from users who have not staked to those who are willing to put their assets at risk during a bonding period and are subject to slashing. The users who remain unbonded must generate value to offset this value flow. This staking reward rate is often referred to as the opportunity cost or hurdle rate of not staking, and it is something that Liquid Staking protocols have attempted to mitigate by allowing users to access both staking rewards and DeFi uses simultaneously. When the value being transferred by inflation is too high compared to the value being generated by the unbonded stake, the unbonded stake has no incentive to remain in the system, resulting in lower value generation for the remaining unbonded stake, which perpetuates the effect.

Stakers face penalties from inflation, as staking rewards may carry tax implications. Consequently, the value staked does not retain its worth against inflation, even in a system where 100% of inflation benefits stakers. Therefore, it may be preferable not to inflate a token once the distribution phase is over, and to ensure that most rewards stem from the value appreciation of a fixed supply, giving stakers the option to avoid incurring a taxable event if relevant in their jurisdiction.

In addition to inflation, Osmosis currently generates an average of 2% in staking rewards per day, equivalent to approximately $2,800 from taker fees (30% of OSMO collected or bought back) and transaction fees. This payment is likely sufficient for its purpose alone, as evidenced by the many Cosmos blockchains that remain operational despite validators receiving lower payments exclusively from inflation.

Despite this, sudden changes to security allowances carry a risk. Therefore, this proposal represents the first step in an incremental reduction to measure the impact of reducing inflationary staking rewards on the level of OSMO staked for security, aiming to find a sustainable level of inflationary reward against revenue.

Proposed Change

Staking rewards today represent the single largest recurring issuance of OSMO. Halving these rewards by redirecting the emissions to the out-of-circulation community pool helps:

• Maintain the staking rewards’ net yield after accounting for inflation.
• Reduce overall inflation, thereby preserving the value of staked OSMO and enhancing the staking experience.
• Preserve optionality for governance to decide the future use of these tokens.

The proposed change is as follows:

• Reduce the token distribution allocated to Staking Rewards from 50% to 25% by redirecting to the Community Pool.
• These tokens do not enter circulation unless accessed through a further governance proposal. They can, therefore, be considered a soft burn, as they are held outside the circulating supply while maintaining the one billion OSMO minting cap, as expected by holders.
• Governance can choose to complete the burn of these tokens, for example, if the community pool is too large relative to OSMO liquidity.

Impact of inflation reduction

This reduction to the incentive allocation effectively reduces the revenue subsidy of staking from around 3x to around 1.5x. The recent Thirdening event reduced this from 4x in mid-June, and the impact on staked OSMO to the active set has been minimal. Recent unbondings have either been typical or resulted from unbondings of delegations to jailed validators.

Chart 1: Osmosis Staking APR composition by day with projected change

Chart 2: % OSMO Supply Staked. Source: SmartStake

Risks & Considerations:

Headline APRs

Some validators or stakers may view this as a reduction in passive income. However, the resulting reduction in inflation may offset this by improving OSMO’s price dynamics. An 8% APR is poor when compared to a 70% loss in deposit value over the year, with OSMO’s inflation currently outpacing the burn being cited as a tokenomics issue to address.

As this change is performed by modifying the distribution parameters of Osmosis, it can be easily reverted in part or entirely if security levels drop excessively.

Other Cosmos chains, such as the Cosmos Hub and Kava, have already reduced or eliminated inflation without experiencing security issues. The Hub, for example, capped inflation at 10%, resulting in a drop of staked ATOM from 66% to a low of 54.5%. Kava has transitioned to a 0% inflation with the subsidy paid via the community pool instead. Kava’s staking rate is a lower 11.2%, but a large portion of their supply (35%) is in the community pool, resulting in lower liquidity levels as well.

Both remain stable and well-functioning. Osmosis can take a similar, cautious path.

This change will be monitored by tracking the % of OSMO staked over a minimum of 21 days following this proposal before any further reductions are proposed. With the current 45% staked, there is little risk of a security event. If adverse effects are observed, such as rapid unbonding, governance can revisit or adjust the distribution parameters accordingly.

Community Pool OSMO

Care must be taken not to treat the redirected emissions as free capital for low-impact initiatives. Having large amounts of OSMO in the community pool should not be a reason to allocate this frivolously. The community pool currently holds approximately 82 million OSMO or 10% of the total supply. Governance has already shown discretion in not allocating this without much discussion, and these redirected emissions should be treated with the same level of thought. OSMO emissions should only be deployed where they are expected to result in an offsetting level of deflationary pressure, either through a new use case or an increase in taker fee generation.

Target Onchain Date: 10th July 2025

While this proposal makes a large change - it was initially mentioned in the Tokenomics Roadmap.
There will also be a X Space today around the tokenomics changes: https://x.com/i/spaces/1MnxnwdOVwwKO/peek

[yusungsang]

I think it’s a very good proposal. You’re the best.

[ValarDragon]

Great, very much looking forward to this. This significantly reduces the protocol cost, and I’m looking forward to the further reduction as well

[LeonoorsCryptoman]

The main elephant in the room is the costs people are expected to make to keep the network up. I know it is not a popular subject, but there are a ton of validators already running at a loss on Osmosis, especially with the current price dynamics. I sincerely do not believe this will change on a very short run when inflation parameters are changed, UNLESS it is accompanied with a very solid plan how value accrual for Osmosis is being achieved via another route.

You already mention that on the Hub the staking ratio went down. We also see that the price action on $ATOM is quite sh*t and lagging compared to other assets. That can also be expected for Osmosis in the end, because people might be more tempted to sell when the rewards for locking their assets goes down.

That way validators will be hurt twice; one via the reduction in inflation rewards (and thus commission) AND via a declining token value. That will only cause more validators to run at a loss in the end.

I know there is nog magical solution for this (although it has to be noted that VP distribution is still skewed), but we should not forget that people also should buy and hold OSMO to counter the declining value we see nowadays…

[JohnnyWyles]

I agree that this is probably the main reason against this, but the status quo doesn’t seem to be working.

If we have validators running at a loss, then their hypothesis must be that their holdings or earnings should increase to offset this in the long term, which these tokenomics reforms aim to address.

If validators are running at a break-even point, then there are alternatives to just continuing to inflate to pay them. One easy one would be raising the floor level of commission. We have somehow settled at 5%, but if this were 20% at a protocol level, validators would have the same income at zero inflation with no bias towards validators higher in the set and no inflation for holders.

The other question is whether we need to pay for 120 validators, and so the total revenue can be split between fewer participants - something that came up in the last set reduction discussion.
Decentralization is important, but it is also somewhat of a luxury beyond a certain point. With 36 validators owning the top 67% of stake right now, we should incrementally cut the set if validators begin dropping out due to unprofitability.
That does have benefits too - Dev mentioned on the tokenomics space on Monday that we dropped far more in block time than expected from the 150 → 120 cut, plus it has a few more benefits when it comes to integrating Osmosis more fully with Polaris.

You already mention that on the Hub the staking ratio went down. We also see that the price action on $ATOM is quite sh*t and lagging compared to other assets. That can also be expected for Osmosis in the end, because people might be more tempted to sell when the rewards for locking their assets goes down.

Unpopular opinion here too, but personally, I think that ATOM’s price lags because they issue $500,000 in staking rewards per day (10% of 1.9b cap over the year) while only have a revenue of ~$2k/day. Some of that will sustain from compounding + revenue offset from trading a high cap asset, but Osmosis changes stem from the common tokenomic concerns around emitting ~$18,000 in inflation before these changes while having a revenue stream of approximately half that. As emissions decrease, we become sustainable even at low volume levels, creating a much better environment for any Polaris collaborations or associated volume increases to build upon. Keeping a high headline APR past the point of distribution usefulness, solely to convince people to hold onto/stake a token and not sell is the very definition of a Ponzi scheme.

[LeonoorsCryptoman]

I totally agree that sustaining the current inflation to have people hold their assets is not sustainable for the long run. However, I do think it is best to replace things. People don’t like uncertainty what they get in the future while being impacted immediately. If cutting inflation would help, then our thirdening would stop tokenprice going down. If cutting inflation would help, then the change a long time ago to radically cut inflation would have stopped devaluation. But it hasn’t… so the big question arises whether inflation is the issue here.

As you said in another thread, there is no sight yet on the product market fit for Polaris and potential revenue streams for that. So we really should not count with revenue coming from that side, because we don’t know what kind of revenue, how it will look like, how big it will be and if it will come at all (playing devils advocate, since I have seen this conversation a couple of times already and no progress seems to be made).

The interesting part when comparing $ATOM vs $OSMO is that the argument you give doesn’t hold. You just have to look at the price action to see that $ATOM is outperforming $OSMO when looking at a month (-24.6% for OSMO vs -3.1% for ATOM) to even a year timeframe (-68.3% for OSMO vs -27.9% for ATOM). So arguing that the ratio revenue vs inflation is better just doesn’t stick, because OSMO has a better ratio but is hurting way way harder.

People are always calling out inflation as the guilty player in terms of token devaluation, whilst forgetting that the problem is bigger than that. People sell if they don’t believe in the long term success of an asset. The fact that a lot of development power is put into Polaris, but it is completely unclear how this will benefit OSMO is hurting. The fact that people have asked for certain features on Osmosis, which are unanswered for a long time in favor of Polaris, is hurting OSMO.

I would really really like to see that the core issues are addressed instead of always targetting inflation as the sole perpetrator. Might not be what is the most popular argument to be heard, because it is way harder to fix… but I am not here to be popular, but to do the right thing for Osmosis as a project.

[LeonoorsCryptoman]

And as addition:

Maximizing Saga Protocol Revenue with DeFi Velocity

SAGA has just published how they want to move away from inflation-based-rewards. No clue if it will hold and be successful, but there is a communicated plan.

We need that for OSMO as well. People need to know what they can expect, they simply won’t buy an asset which downtrend otherwise.

[JohnnyWyles]

SAGA has just published how they want to move away from inflation-based-rewards. No clue if it will hold and be successful, but there is a communicated plan.

Is the tokenomics roadmap post not a communicated plan of moving away from inflationary rewards and towards revenue?

People are always calling out inflation as the guilty player in terms of token devaluation, whilst forgetting that the problem is bigger than that. People sell if they don’t believe in the long term success of an asset.

However, people don’t believe in the long-term success mainly because of inflation. It is the number one criticism of tokenomics that I see across social media.

The fact that a lot of development power is put into Polaris, but it is completely unclear how this will benefit OSMO is hurting. The fact that people have asked for certain features on Osmosis, which are unanswered for a long time in favor of Polaris, is hurting OSMO.

I thought our messaging was pretty clear here:

• The Cosmos ecosystem is seeing a loss in popularity
• A true interchain DEX should be cross-chain, not just IBC
• We could build features siloed on Osmosis, but they wouldn’t get any users. Look at the huge variety of DEXs in the Cosmos right now who are just fragmenting Cosmos natives further.
• Polaris is how we create a cross-chain DEX that also exposes Osmosis liquidity to wider crypto DeFi when most aggregators are ecosystem-specific.
• Beyond that, there will be some method of revenue sharing back to OSMO. But we can’t specify what because there are multiple revenue streams being explored and it entirely depends on what type of user Polaris attracts.
  • Is it a swap fee on trades, an API charge to other interfaces, a subscription for premium features, fees for particular actions that may be more advanced, advertising on the site, Dexscreener made $50m on charging for token listings. There’s no way to confirm what will be the most suitable as Polaris evolves until we get to that point.

There is no Polaris token, Polaris is Osmosis expanded to all ecosystems and the home chain will increasingly play a role in Polaris as development matures.

[LeonoorsCryptoman]

@JohnnyWyles

However, people don’t believe in the long-term success mainly because of inflation. It is the number one criticism of tokenomics that I see across social media.

Do note that what people see is not always the reason why things are happening. We are now talking about cures for symptoms, without solving the underlying reasons of these symptoms. In the end you have to fix the root cause, otherwise we will spend eternity with applying the wrong patches. Do note that all previous inflation reductions have not stopped OSMO-devaluation, so I really really don’t see a reason to cut it even further.

Even Ethereum had a much much higher issuance in previous bullruns, but still went up dramatically along the way. And why? Because it was used, the message was clear what they could do with it and believed in it.

OSMO needs that as well. It doesn’t need another inflation reduction, they simply don’t solve stuff. We need a better story to sell to people why they need OSMO. Note that for the DEX we don’t need OSMO anymore. We are working towards majors and stables as pairings. We are accepting a load of assets as transaction fees. Why do we need OSMO at this very stage? That story needs to be stronger and better.

@JohnnyWyles

• Beyond that, there will be some method of revenue sharing back to OSMO. But we can’t specify what because there are multiple revenue streams being explored and it entirely depends on what type of user Polaris attracts.
  • Is it a swap fee on trades, an API charge to other interfaces, a subscription for premium features, fees for particular actions that may be more advanced, advertising on the site, Dexscreener made $50m on charging for token listings. There’s no way to confirm what will be the most suitable as Polaris evolves until we get to that point.

There is no Polaris token, Polaris is Osmosis expanded to all ecosystems and the home chain will increasingly play a role in Polaris as development matures.

And this is the problem. A load of time is put into it, but it is totally unclear in what way it will benefit Osmosis or OSMO. I can imagine that it might not be entirely clear, but I also see no-one talking about possible routes in which Polaris can add value for OSMO as an asset. The story just doesn’t break, so people also don’t buy OSMO in anticipation for Polaris to reach the point in which it will generate revenue.

Ask yourself; how much assets would you buy which say: ‘we are building something cool, but we are totally unsure how and if it will benefit the asset’.

[Chatel]

Isn’t this the same kind of debate as ATOM’s proposal 848 which led to the ATOM ONE fork? Yes, we’ve suffered major losses due to the token’s drop, but further lowering the APR will drive away many investors, as staking compensates and rewards long-term commitment and trust. So I don’t think it’s a good idea.

As I mentioned, the platform should present a less gaming-style image — no avatars — and a more professional trading interface.

Also, tokens that are listed, like BCH, PEPE, etc., should have liquidity in the pools. Once a token is listed, everything should work properly, for example withdrawals on native chains should function correctly so investors don’t get trapped.

IN CONCLUSION, what matters most is that OSMOSIS becomes a TRUE Multichain DEX with a highly professional image.

[gnomblesson_tiahou]

(post deleted by author)

[JohnnyWyles]

This is the headline APR vs real yield debate.
Lowering the headline APR will likely deter some people who would otherwise stake, but the question is whether we need that stake to provide sufficient security.
If this has a low impact in terms of the amount of stake, then we don’t need to inflate the token as much, which has positive impacts in other ways. Since we’re basing staking revenue off of the protocol revenue share, if people do unstake slightly, the real yield staking APR increases for remaining stake.

I agree that there should be liquidity in those pools, that’s been the reason for initiatives such as DOGE, XRP, and indeed PEPE.

Liquidity for tokens like BCH will likely follow if these continue to establish the markets, until then, third party liquidity providers can create these markets if they think the demand is likely to be worth their personal risk of impermanent loss.

[LeonoorsCryptoman]

The proposal has passed, now we just need to see what it will do with the APR (over time, not to fast) and the real yield APR vs the onchain security through staked assets.

[Chatel]

I’m an investor, not a developer. For an investor, changes to the APR are confusing — when I decided to invest, OSMO’s APR was around 20%, and now it’s down to 6%, which completely changes the situation. It makes me want to move my funds to places where the APR is stronger and the token holds up better during market downturns — which isn’t the case with OSMO. If we look at the current unstaking activity, it’s clear that the recent governance proposal wasn’t well received… Many investors are simply waiting for the APR to recover before exiting without losses. This staking instability is very damaging. OSMO is not performing where it should be within DeFi

[LeonoorsCryptoman]

There is quite a peak to be seen indeed:

The question is whether it was unexpected or unintended. As I recall it was mentioned earlier that losing a bit of staking is not seen as a problem.

[JohnnyWyles]

This is above regular churn - which is more like 3-6m, but isn’t outrageously high since it is offset by new stake.
There also tends to be jumps during price increases so this may not be entirely APR related.
The % staked chart is generally more useful for what we need to evaluate here since we want to ensure comparative value of security to liquidity. % stake has dropped from 44.5% to 44% from this, which is why there is a review period in the proposal.

So far the APR looks healthier than expected too:

Edit: 25th July 2025, updated charts