Merge Volume Splitting Groups by shared asset

Proposal Discussion Liquidity Incentives
1

This proposal would create new Volume Splitting Gauges encompassing a more comprehensive range of pools grouped by a shared asset.

Background

Over the last six months, Osmosis has seen a general trend towards Stable pairings, particularly USDC pairings, in more established tokens. Contrary to this, OSMO pairings have found a niche in more volatile pairings due to the reduced impermanent loss from pairing with an asset with increased market exposure.

Volume Splitting Groups are currently split into several main categories:

  • WBTC/OSMO
  • WBTC/STABLE
  • ETH/WBTC
  • ETH/OSMO
  • ETH/STABLE
  • ATOM/OSMO
  • ATOM/STABLE
  • TIA/OSMO
  • TIA/STABLE
  • OSMO/STABLE
  • STABLE/STABLE

Incentive Direction

The Incentive Algorithm’s trend in incentivization has been to increase the incentives allocated to Stable pairings and decrease those going to the OSMO pairings at the monthly adjustment. The exceptions to this rule have been the STABLE/STABLE and OSMO/STABLE pairings, which have both increased and the TIA pairings, which have increased due to insufficient liquidity overall.

This monthly adjustment has resulted in the ratio of incentives going to non-OSMO pools increasing as follows:
November 2023 - 7.8%
December 2023 - 8.5%
January 2024 - 10%
February 2024 - 12.6%
March 2024 - 22.9%

The forecast for April 2024 is currently 26.4%.

Incentivizing Non-OSMO pools

In the previous incentives Category system, Osmosis governance has shown reluctance to incentivize non-OSMO pools by capping these pools at 5% of total incentives.
Since the introduction of Supercharged liquidity and Taker fees to Osmosis, these pools have become more attractive to incentivize.

Supercharged liquidity pools are more user-friendly when denominated in Stable assets, and traders often wish to work to and from Stable assets, increasing the demand for liquidity in these pairings on chain.
With Taker Fees, the protocol earns a share of every trade performed on a chain. When obtained in non-OSMO assets, this share is either retained by the community pool (33%) or used to buy back OSMO before distribution to Stakers (67%), offsetting the inflationary emissions of incentivization.

This proposal would create new Volume Splitting Groups, which would group pools by a common asset. This would allow the market to more rapidly decide whether a Stable, OSMO, or alternative pairing is preferred for a specific asset, as Volume Splitting Groups adjust incentives daily rather than monthly.

Proposed Groupings

WBTC
Combining

  • WBTC/OSMO (1432, 1433, 1434)
    and
  • WBTC/STABLE (1435, 1436, 1437, 1438, 1439)

ETH
Combining

  • ETH/WBTC (1440, 1441)
    and
  • ETH/OSMO (704, 1134, 1281, 1477)
    and
  • ETH/STABLE (1264, 1278, 1279, 1280)

ATOM
combining

  • ATOM/OSMO (1, 1135, 1265, 1399, 1400)
    and
  • ATOM/STABLE (1078, 1079, 1251, 1282)

TIA
combining

  • TIA/OSMO (1248, 1249, 1347)
    and
  • TIA/STABLE (1247, 1321, 1322, 1348, 1478)

The proposed changes can be viewed on this spreadsheet

Based on volume, the adjustment at implementation would be around a 50% increase in the incentives allocated to non-OSMO pairings in these groups and a 10% decrease to those assigned to OSMO pairings.

Addendum

This proposal will also perform maintenance on the VSG for the OSMO/STABLE grouping intended to be created in the successful Proposal 740. Pool 1066 was omitted from the transaction in error and is currently unincentivised.

Target On-chain Date: 18th March 2024

3 Likes
2

Definitely a needed change.

Are we worried at all about excess OSMO being reintroduced into the supply due to out flows from the OSMO pools? A 10% initial decrease in incentives flowing to OSMO pools isn’t too bad, but what’s the anticipated outflow longer-term (if we know)?

Also, I can’t remember, but is the 20% monthly rate of change cap in incentives still active?

3

The rate of change cap just increased from 10% per month to 25% per month since the March proposal. The system has been in place for long enough to begin to reach equilibrium in some groups. However, this only impacts the total incentives provided to a group and not the change in the allocation within a VSG—this is uncapped.

Excess OSMO re-entering is a main issue here and likely a major reason for anyone to vote against this proposal.

In my opinion, the historical popular demand for incentives to be paid into only OSMO pools was mostly a driver to keep OSMO compounding into the same pools. Way back at the beginning of Osmosis, this attracted liquidity faster than inflation-caused dilution. This became less impactful as inflation decreased. Now the fees are a smaller part of the rewards for liquidity provision (LP Fee Subsidy stat). I think that liquidity is less likely to leave OSMO pools due to lower rewards than it is to actively pursue higher fee subsidies.

We can also see that much of the liquidity is stagnant and unlikely to be impacted by this. For example, pool 1 receives only around 1.5% APR from OSMO incentives but contains over a quarter of all OSMO liquidity.

If the higher fee subsidies are in the Stable paired pools, then there may be a net decrease in OSMO-paired liquidity. The aim is that the increased Taker Fees in non-OSMO assets from these pools would offset any newly excess OSMO - both in making Staking more attractive through increased trading volume, and in the mechanism that distributes these increased non-OSMO assets through continually swapping for OSMO.

We can’t predict how the market will react beyond that. If the current pattern continues, the VSG loop would increase liquidity and, therefore, volume routed through the USDC pools rather than a multihop via OSMO/USDC. I think this is very unlikely to skew excessively in the other direction though.

The other point against this happening is that the 3rd parameter of the incentives system aims to maintain sufficient OSMO liquidity for TWAP resilience.
This change would result in the incentives being skewed toward the OSMO/STABLE pool to avoid being impacted by the VSGs and make more of OSMO liquidity reliant on Stable assets rather than being linked to as many volatile assets.

1 Like
4

This change in and of itself feels like it’d make the proposal worthwhile to pursue. I would’ve hoped that yield on this pool would have compressed quite a bit more given the crazy swap volume that it sees (28.7% from fees alone, even with 1.8m in liquidity :exploding_head:). Hopefully allocating additional incentives here as activity picks up again pays dividends down the line.

Also think that with the OGP having deployed 4.5m of the 7m OSMO allocated for market making (blog post on this coming soon), we should be able to absorb any outflows a bit better than we would have previously.

2 Likes
5

Looking forwards to this :slight_smile:
Quite some news that around 65% of the funds have already been deployed so soon after it passed governance tbh.

To make sure I understand this correctly before diving into further details after a more thorough read; the OSMO/STABLE VSG will stay? Because that is now missing in this text for me.

6

Yes, OSMO/STABLE will stay, and STABLE/STABLE change is being proposed separately (Change STABLE/STABLE VSG to a Composability VSG)
They were listed in the first section for completeness

This just impacts Assets that currently have a STABLE VSG, an OSMO VSG, and in the case of ETH, a WBTC VSG.

1 Like
7

I think this is a good step. In the end a lot of people like to have LPs to be subject to just 1 volatile asset instead of 2.

Skewing the incentives towards the OSMO/STABLE category is in the long run also a good move imo, since it will remove the dependency on the volatile counterassets, but will bring OSMO in a league of its own and more subject to its own supply and demand.

I will gladly support this proposal when it goes on chain.