Increase Uptime Incentives default to one minute

Proposal Discussion Liquidity Incentives
1

This proposal activates the default global uptime incentives parameter for Supercharged pools to be one minute.

This increases the breadth of liquidity in Supercharged pools by requiring that positions remain in place for one minute before receiving Osmosis incentives or External incentives with no uptime previously specified. The tradeoff for increased liquidity resilience to volatility is that capital efficiency is lowered.

What are Uptime Incentives

For an overview of Uptime Incentives, see Proposal 737.

Choice of Default Duration

Incentives have previously been emitted with a hard-coded 1ns uptime. Any effective uptime must be more than one block, currently ~5s, in duration, as this is the shortest period of on-chain action.

Market-making bots constantly reposition to the narrowest possible liquidity positions on many incentivized pools. These provide excellent depth of liquidity at the active tick range; however, there is almost no breadth provided by these bots. If a bot’s position leaves range, it can withdraw liquidity and redeploy within the new tick range with a minimal disadvantage compared to the incentives received.

If this position is not replaced, then liquidity must be provided by the positions that previously had liquidity that was not entirely in range. Due to the high capital efficiency of these bots, these less efficient positions receive a much smaller share of both swap fees and Osmosis incentives.

As Osmosis incentives act as a fee subsidy, the withdrawal of these narrow positions before the uptime has passed will cause the retroactive incentives earned to be redistributed to those positions that have met the uptime requirement, resulting in wider positions being potentially more profitable, when comparing incentive accumulation alone, than a narrow position which is repositioned frequently during times of volatility.

Moving Osmosis incentives to an uptime model will likely cause these active liquidity providers to split into two types.

  • Those that ignore the Osmosis incentives and target the narrow tick range to provide depth with little breadth while receiving swap fees only.
  • Those that compete to be in the narrowest tick range that still reliably receive Osmosis incentives for a multiple of the uptime. These will receive slightly lower swap fees than the narrowest range but higher incentives than previously.

A higher uptime should, therefore, cause a flatter liquidity curve. Supercharged pools lose capital efficiency in exchange for more reliable liquidity during periods of volatility. Uptime should be as low as possible to provide an incentive to stay in the pool and provide liquidity to a broader spread while not reducing capital efficiency excessively.

This proposal would directly implement an initial uptime of one minute, ensuring a minimum breadth of liquidity available while minimally impacting the capital efficiency of Supercharged pools.

Further proposals may experiment with adding incentives via the external incentive gauge creation mechanism, which can add custom uptimes per pool to see the impact on the liquidity curve of higher uptimes.

Target On-Chain Date: 19th March 2024

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Just a quick point of clarification

according to the cl module incentives that are forfeited go to the community pool, not back to other lp positions directly. Is there some other mechanism that would then lead them to be redistributed?

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On further investigation, you are correct here.
Good catch.

The original scope was that these would be redistributed to the users that remained in positions. It was dropped as uptime incentives were cut from the original CL release, but then this workaround was not picked up when the wiring of the main mechanic was finished.
With this current implementation, uptime incentives would reduce the profitability of single tick positions while not increasing those of wider tick positions.

Whether this is enough to cause single tick position actors to move to broader tick ranges is uncertain. If the majority of active liquidity providers follow the first type above

  • Those that ignore the Osmosis incentives and target the narrow tick range to provide depth with little breadth while receiving swap fees only.

Then we see reduced performance of the pools from incentives but lower emissions.

The second type is not incentivized in this method.

This should be a benefit over the current system; still, however, seems detrimental to external providers who would suddenly find their incentives being sent in part to the Osmosis community pool.

We are going to defer proposing a global default until this is implemented according to the original scope and redistributed to existing positions.

New external providers are able to use the uptimes being authorized in 737 if they accept the potential performance increase traded off against distribution to the Osmosis community pool rather than just LPs.

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4

A month on from this, we have had several liquidity providers using both 1 hour and 1 day. The amount of forfeited incentives to the Community pool has been negligible

Levana has distributed 40,000 LVN to two pools with 1-day uptime, and only 1146 have been forfeited (3%).

Stride has seen even less; 94 out of 7,083 forfeited (1.3%) while using 1 one-hour uptime.

I am going to move ahead with proposing this parameter change on the 19th of March at 1 minute.

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