Osmosis has seen many iterations on the tokenomics of OSMO since its inception. This blog post aims to give a primer on the current state of the ever-evolving tokenomics as we enter a new year.
At its heart, OSMO follows a methodology similar to that of Bitcoin. Bitcoin has a maximum supply of 21 million, with emissions reduced through a regular Halvening event every four years. OSMO has a maximum supply of 1 billion with emissions reduced through emission reduction events. Initially, this was a reduction by a third every year, but in 2023 this was reduced by two-thirds and the interval increased to two years.
With inflation due to fall to 6% in June 2025, OSMO is rapidly entering another stage of its tokenomics where the main aim is confirming the sustainability of spending levels compared to revenue. Over the past year, Osmosis has established a wide variety of revenue streams, some of which have settled into a role, and others that have yet to find a key purpose.
During this phase, inflation has gone from a distribution mechanism, through an incentivization mechanism to acting as additional support while we discover appropriate spending levels for:
- Security
- Validator Operations
- Liquidity Incentives
- Community Initiatives
By the end of this article, the current state and a general direction for the future should be clear. A table of contents has been included as a reference for future discussions.
Table of Contents
- Osmosis’ Approach to Transaction fees
- Protocol Revenue
- Liquidity Incentives
- Community Pool Initatives
Osmosis’ Approach to Transaction Fees
Transaction fees are something that all chains have for a transaction to purchase block space and are often relied on as the primary source of sustainable revenue.
Osmosis’ approach to transaction fees differs from that of most chains as they are inconvenient to most users and should ideally be entirely invisible.
By making fees low, payable in almost any asset, increasing block speed, and allowing the automatic approval of transactions via Smart Accounts, we can almost entirely abstract away the presence of a chain when trading on Osmosis while gaining the security and decentralization benefits.
EIP-1559 style fee market
A year ago, Osmosis had a standard Cosmos SDK chain mempool that processed transactions in a first-in, first-in-first-out manner.
As competition for block space increased and users began filling all the mempools to secure arbitrage opportunities, improvements became necessary for regular users to be able to pass a transaction in a reasonable time.
Enter an EIP 1559 style fee market that increases the cost of block space based on the previous block’s demand.
This new fee market quickly yielded large amounts of income for the chain and solved congestion issues. However, transaction fees are inconvenient to users who may not be performing an action that directly results in a compensatory value being generated by the transaction.
The revenue generated from transaction fees quickly tapered off due to both market conditions and constant incremental improvements to the chain’s throughput.
Source: Data Lenses - 470 day
However, despite this increased capacity, the fee market is still constantly being required due to increased transaction volume, resulting in increasing fee generation for consensus participants and confidence that the chain is highly resistant to spam transactions.
Source: Data Lenses - 120 days
Block speed and capacity
Over the last year, block speed on Osmosis has dropped from 6 seconds to 1.4 seconds.
This transition plan was laid out in this forum post and we are now at the stage where transactions on Osmosis feel almost instant to a human user.
Despite this, work continues to lower the block time by increasing the efficiency of consensus, and a potentially significant improvement is enabled with the upgrade to Cosmos SDK 0.50, optimistic execution, which is undergoing testing before activation.
Parameter changes such as Proposal 705 have also expanded the capacity of a block by 2.5x and software upgrade proposals have made messages within the chain even more efficient.
Overall this means that Osmosis’ throughput capacity is over 10x what it was at this time last year resulting in far less need for the fee market to increase prices and allowing essential messages to be very cheap under regular chain operation.
Top of Block Auction
The Top of Block auction is a modification to the block construction mechanism on Osmosis that allows a bidder to ensure that their transaction goes first in the block. This mechanism enables Osmosis to tap into cross-chain, or CEX<>DEX arbitrage transactions while allowing competition for block space not to impact most users’ experience.
Source: Osmosis MEV Lane | Playwo | Flipside
The USDC earned by the protocol is currently stored in a specific module address and has no allocated use so far beyond the 5% that is awarded to the block producer.
To read more about the Top of Block auction, check out the blog post
Fee Abstraction
While cheap gas fees make Osmosis easy for a user to transact on, gas fees must still be paid so they would continue to be visible to users. Most chains only accept fees in a single denomination, requiring that some be kept in reserve at all times.
Osmosis allows fees to be paid in 160 different assets at the time of writing, a number which is ever-increasing.
These allow a user to seamlessly trade on Osmosis in their asset of choice, with all fees collected being swapped back to OSMO each day to retain this revenue source and minimize the accumulation of dust rewards.
Next Steps
- As chain throughput continues to increase, fees will continue to be almost entirely abstracted away for users.
- The BlockSDK that provides the Top of Block Auctions could offer a limited number of free transactions to ensure that users can always acquire fees without getting stranded.
- Fee tokens could be expanded to accept any fee with liquidity on Osmosis rather than the current restriction of requiring an OSMO-paired pool.
Protocol Revenue
Taker Fees
Osmosis’s primary revenue source is a Protocol Fee levied on all trades onchain, which was enabled in Proposal 651 at 0.1% and has since been diversified to become more adaptive based on typical swap fee levels for asset pairings.
Current exceptions include a reduction in fees for similar pairings - such as USDC/USDT and stATOM/ATOM being 0.02%, an increase in fees for OSMO paired pools to encourage the adoption of alternative routing assets, and no fees when switching between variants within an Alloyed Asset.
Taker Fees have just surpassed $10 million collected since activation and have been increasing again recently.
Source: Data Lenses
Taker Fees collected in non-OSMO assets are split 67/33between allocation to stakers and the community pool. Taker fees collected in OSMO are allocated entirely to stakers.
Staking Allocation
67% of all non-OSMO taker fees collected are swapped to OSMO before being added to any OSMO taker fees collected and distributed to stakers.
This buy-back and distribute mechanism is the primary sustainable yield mechanism on top of the base inflation allocation to pay for the chain’s security.
With inflationary rewards at around 10%, taker fees are currently generating a 4% bonus.
Source: Numia
As inflation decreases over time, with the next significant decrease planned for June 2025 of ~9% → ~6%, taker fees will form a more substantial part of staking rewards.
Community Pool Revenue
The other 33% of non-OSMO revenue is sent to the Community Pool for use as determined by Governance.
If an asset is whitelisted, it is sent as is, if it is not, then it is swapped to a target denomination before transfer, currently USDC.
The Community Pool is now gaining an increasing balance of non-OSMO assets, which governance can use to fund initiatives on Osmosis.
Osmosis currently has around $1.4m in stable assets and $3m in non-OSMO volatile assets. Much of this is now utilized around the Osmosis ecosystem as detailed below.
ProtoRev
ProtoRev arbitrages all pools within Osmosis, collecting revenue in a base asset.
Osmosis currently arbitrages pools that loop through OSMO, BTC, USDC, ATOM, and USDC.eth.axl.
All non-OSMO assets are sent directly to the community pool for further use.
The majority of this collection is in OSMO, which is burned by sending to the null address.
Source: Playwo
While this burn is relatively small currently, over 2 million OSMO have been burned so far.
Source : Data Lenses
Osmosis has a fixed maximum supply of 1 billion OSMO and regular inflation reduction events to implement this, so this burn will eventually form a deflationary model for the chain.
Source: Tokenomist
Next Steps
- As inflation falls, staking rewards will become more reliant on sustainable revenue sources such as Taker Fees, so ensuring these are consistent should be a primary goal. The fluctuation can be seen in historical data, and protocol fees will need to be fine-tuned to ensure that they are appropriate for each pairing.
- Inflation could be cut more rapidly as taker fees are maintained while maintaining the 1 billion maximum issuance.
- Community pool revenue will accelerate as revenue is re-deployed to foster the growth of the Osmosis ecosystem.
- Some of these deployments could be automated by using the same technique as the auto-conversion to OSMO and USDC within the protocol revenue distribution mechanism.
Liquidity Incentives
Liquidity Incentives have changed drastically since launch.
Initially requiring a bonding period of 14 days, they were the main reason for users to provide liquidity and acquire OSMO as rewards.
As the bear market persisted, liquidity incentives were drastically cut to a maintenance level and to target core pools only.
At this point, the only pools with incentives are Stablecoins, BTC, ETH, ATOM, TIA, and OSMO pairings, with a small allocation going to Liquid Staking Token pairings.
Road to Sustainable Incentives
With the launch of Supercharged liquidity, incentives are no longer the main attraction of a pool. Still, they are a subsidy that encourages liquidity providers to move to a new pool to establish a market or lower a spread factor for more competitive trading and increase the proportion of fees that go to the protocol.
This chart shows that the incentives paid out by Osmosis have been dropping over time compared to the fee generation from trading within pools.
The visible spike at the end of 2023 is the bootstrapping emissions for DYDX and TIA liquidity.
As Supercharged Pools gained liquidity, and incentives continued to taper each month, incentives became a less influential part of liquidity provider choice.
This increase in liquidity efficiency generated more fees per unit of liquidity, pushing incentives below the 1:1 subsidy rate. In other words, Osmosis now earns more from the liquidity that is deployed than it spends on incentives.
Next Steps
Sustainability in incentivization should be maintained, and incentives should be used to increase protocol revenue by either:
- Establishing new markets
- Encouraging LPs to move to lower spread factor pools which in turn:
- Increases volume through Osmosis
- Increases the share of this volume that Osmosis earns in fees
Through the Osmosis Grants Program, work has been completed to deploy an informed bootstrapping model that is currently looking to cut overall incentive emissions while targetting new markets for Osmosis to attract liquidity.
Community Pool Initiatives
Community pool deployments aimed at sustainable yield outside of Protocol revenue are an increasingly prominent part of governance.
As inflation tapers off, the protocol will increasingly rely on Community Pool funds collected from the above sources to continue growing.
Therefore, it is vital to compound these earnings to maximize the Osmosis treasury while minimizing risk and deploying them in a way that benefits the Osmosis ecosystem.
Current initiatives include:
-
BTC/USDC - $470k
- Providing liquidity during Bitcoin volatility
- Providing liquidity within the Alloyed Bitcoin
- Profitability on stagnant USDC as long as Bitcoin remains above $90,490
- Currently earning ~19% APR as a liquidity position
-
ERC20/ETH - $650k
- Providing initial liquidity for 5 major ERC20 markets
- PEPE
- SHIB
- ARB
- OP
- LINK
- Providing initial liquidity for 5 major ERC20 markets
-
Redemption Rate Arbitrage of TIA and ATOM - $600k
- Revenue earned in base asse terms based on existing deposit, approximately 30% APY
- Improved peg for LSTs
- Increased volume through LST pools, attracting more liquidity
-
USDT/USDC - $170k
- Providing liquidity for abnormal USDC/USDT variations, which typical LPs do not provide.
- Currently earning 1% APR
-
Liquid Staking Support