Original Thread: Commonwealth
Note: This proposal is posted concurrently with a proposal to Burn the collected OSMO. Whichever proposal passes and receives the highest share of Yes votes will be considered the choice of governance regardless of the order of passing.
This proposal seeks to determine the disposition of all past and future revenues collected by the ProtoRev module (apart from those already being allocated to the Skip Protocol developer wallet). The proposed distribution is as follows:
- Non-OSMO revenues to be sent to the Osmosis Community Pool
- OSMO revenues to be distributed directly to OSMO stakers (subject to validator commission)
Background
Developed by Skip Protocol, the Osmosis Protocol Revenue Module, or ProtoRev for short, collects revenue for Osmosis by backrunning trades that create cyclic arbitrage opportunities, thereby capturing value for the protocol rather than seeing it extracted by arbitrage bots. ProtoRev has been live since the Osmosis v15 upgrade, which occurred on March 16, 2023 (101 days ago).
In that time, ProtoRev has generated an all-time revenue of approximately $108,000 for the protocol (Source: https://pinewolytics.de/osmosis/protorev/). Pursuant to a previous proposal, the collected revenues were required to accrue in a module account until at least June 01 (with the exception of Skip’s 20% revenue share, which is removed from the module on a periodic basis).
At the time of writing, the module account contains approximately 124,000 OSMO, 2,075 ATOM, and 3,010 axlUSDC. This proposal seeks to distribute this revenue, and all subsequently collected revenues, according to the parameters set forth below.
Proposal
This proposal signals community consent for the following:
- Distribute all past and future non-OSMO revenues collected by the ProtoRev module to the Osmosis Community Pool
- Distribute all past and future OSMO revenues collected by the ProtoRev module to OSMO stakers (subject to validator commissions)
- Make future changes to the distribution of these revenues governance adjustable parameters
Distributions of revenue to the Skip Protocol developer wallet are exempt from this proposal. The revenue share collected by Skip Protocol will continue to be distributed according to the fee structure outlined in Proposal 341.
Rationale
Non-OSMO revenues:
Allocating the non-OSMO revenues to the Community Pool will help the protocol begin to diversify its treasury. The benefits of treasury diversification have been well-documented and include:
- Allowing for a source of funding for protocol-level investments in growth beyond the native token, the sale of which often results in downward price pressure on the native token’s value
- The ability to execute buybacks of a protocol’s native token in periods of economic distress
- Allowing a protocol to remain liquid and spend funds on development costs or strategic partnerships even in prolonged bear markets.
However, the main barrier to being unable to diversify a protocol’s treasury effectively is that, in most cases, doing so requires the sale of the protocol’s native token, which negatively impacts that token’s price. For example, if Osmosis were to sell just 10% of its community pool (9M OSMO), this would tank the price of OSMO by 25%. This could be mitigated by an OTC sale of OSMO, but this leads to concerns around the ability for the DAO to contract with an external market maker as well as potential liability for individual members of the DAO that choose to sign such contracts.
The most effective protocols are those that are capable of diversifying their treasury via organic revenue collection mechanisms. Key examples of this are Lido, Compound, Aave, and MakerDAO. Using the organic revenue collection mechanism offered by the ProtoRev module, Osmosis can join these protocols as the treasury becomes more and more diversified over time. Non-OSMO revenues are currently small, but these are expected to increase as more volume is routed through stablecoin pools when concentrated liquidity becomes more prevalent in Osmosis.
OSMO revenues:
The rationale for distributing OSMO revenues to stakers of OSMO is rather simple. Real yield mechanisms are becoming an increasingly important part of value capture for DeFi protocol tokens. As Osmosis’s inflationary emissions continue to drop, transitioning slowly into a sustainable fee model for stakers will help keep the chain secure and drive value to the OSMO token well into the future. Let’s break this down with some numbers:
In the past 101 days, the ProtoRev module has collected 124,000 OSMO (not counting Skip’s share), which is the equivalent of 1,227.72 OSMO per day. Annualizing this revenue gives us 448,118.81 OSMO per year.
When divided by the number of staked OSMO, this gives OSMO stakers an APR of 0.16%. While small now, it bears remembering that these numbers are expected to increase substantially in a bull market, which will drive additional yield to stakers of OSMO as more new users gain interest in the protocol. Additionally, when added to the expected yield to be generated by the Protocol taker fee (approximately 3.95% if the proposal to divert the OSMO portion of this fee to stakers passes), this will result in a total real yield of 4.11% to OSMO stakers, which would make it one of the highest-yielding real yield protocols in the Cosmos Ecosystem.
Implementation
Note, if passed, this proposal will need to be implemented in a subsequent software upgrade and will not be implemented immediately.
