Introduction of a balancing mechanism for the community pool [?]

General
1

TL;DR

  • The Osmosis community pool holds 64 000 000 OSMO, the value of which has roughly varied between $15m and $150m of paper-value in the past year.
  • In 6 months, the Pool has spent roughly 1 835 000 OSMO, of which the majority seems essential.
  • In 6 months, the Pool has used 11 320 000 OSMO to provide liquidity on the DEX and on CEXes
  • The value of the pool seems high once compared to what is annually and actually needed.
  • Single votes that move around millions of OSMO create further risks for the Pool.
  • The current 5% of daily emissions going to the Pool already covers basic spending.
  • Therefore, risk mitigation is needed and I estimate that the Pool’s size should be compressed over time.

During the first half of 2024:

Treasury Spending (1 835 000 OSMO):

Mintscan 52k OSMO as liquidity incentives

Mintscan 3.2k OSMO as liquidity incentives

Mintscan 305k OSMO for 1 year of support labs

Mintscan 1475k OSMO for 1 year of grants program

Without looking granularly at how specific amounts have been spent in both grants and support DAOs, the total amounts seem reasonable and sustainable for the long-term. Amounts provided as extra liquidity incentives have been mostly inconsequential.

Treasury Asset Management (11 320 000 OSMO):

Mintscan 650k OSMO as LP shares co-owned by the community with Axelar

Mintscan 170k OSMO as LP shares co-owned by the community with Neutron

Mintscan 7000k OSMO as a 1-year loan to CEX market-makers

Mintscan 6300K STARS as LP shares owned by the community

Mintscan 3500k OSMO loaned (?) to SAIL DAO to provide liquidity as they please. It is important to note that the SAIL governance token now has a marketcap of $150k.

This is where it hurts. While I estimate that voters have done a very good job at spending, it seems they are much bigger risk-takers when funds are not directly spent. I think providing extra liquidity on the DEX by doing partnerships with other projects while co-owning LP shares is great and should be done more often, while loaning millions of OSMOs to DAOs to do as they please should be severely limited. The fact that the Pool is always 1 proposal away from loaning millions of OSMO seems to be a serious risk factor to consider.

Mitigating Risk

I estimate the size of the Pool to be too large for what is needed and this large size brings more risks than opportunities. I propose to discuss ways to bring back the pool to a scale it should have been: to the size of community-rooted initiatives. I estimate that this re-balancing act can be a low-risk affair, as the current rate of 5% of daily emissions covers the cost for both grants and support DAOs, even after the recent daily emission reduction.

If I’m not mistaken, the pool will grow by 5% * 182,648 OSMO * 365 days = 3 333 326 OSMO in the coming year. This leaves 1.5 million OSMO to be spent for other purposes before registering a deficit.

On paper, the Pool could be burned in its entirety without endangering the livelihood of needed infrastructure. However, I dislike this idea as just like I said, being 1 vote away from committing a mistake sucks.

Periodic Burns

I propose a mechanism similar to what has been occurring on Binance, the Pool could practice monthly burns on its own treasury (exclusively on the native asset) based on the DEX activity. The more fees are paid, the more the Pool burns. The less fees are paid, the more the Pool is allowed to stabilize or grow in size. This way, the Pool retains or grows its economic power if onchain activity is weak, and lessens in power if things are going well. I estimate that the burning mechanism should be aggressive, as the amount in the pool is also aggressively large for its purpose.

The burn can be based of various factors and metrics, such as taker fees, swap fees, gas fees, protorev burn etc.

Eg : Community Pool Monthly Burn = 1 * swap fees + 1 * gas fees…

I’ll let discussion go on from here.

PS: This requires no code change, only voters’ consensus like the liquidity incentive progam.

2 Likes
2

I am generally indifferent to this since it doesn’t impact circulating supply at all, and the community pool is indeed huge, so it doesn’t threaten its spending power.
Particularly now the community pool has a reliable income from other sources.

If this were to happen, I think the quantity should be based on the daily fees * daily price rather than monthly fees * the spot price at the proposal.

For context, based on the last 30 days this mechanism would signal 272,550 OSMO from swap fees and transaction fees. Protorev already directly correlates with a burn and taker fees being added is effectively a multiplier of this scaling.

3

I am quite ok with reducing the size of the community pool. I have seen raids on the CP to often, while also not always seeing the benefits provided to Osmosis if you are critical.

I am not sure about the need of periodic burns. Those work in bullmarkets as a catalyst, but are not doing anything in bearmarkets. In my opinion it is either going big or going home.

Do note that it could be beneficial to combine this with a real burning mechanism where the supply is actually reduced. In that case the effect would stack since also the inflation would be affected (a bit) since being linked to the actual supply.