Proposal of Loan Swap of OSMO to NOM

Proposal Discussion
1

Proposal of Loan Swap of OSMO to NOM

Summary

Nomic DAO Foundation requests ~$800k worth of OSMO in the form of a loan to help bring Cosmos-native Bitcoin to Osmosis. The loan will be repaid in NOM with a 20% discount at the rate of the next private token sale or the rate one month after NOM becomes transferable.

By voting Yes on this proposal, Osmosis stakers voice their support for a loan of OSMO to Nomic.

Background

Nomic offers a decentralized, non-custodial Bitcoin bridge to IBC-enabled chains like Osmosis. nBTC, the Bitcoin-backed asset provided by Nomic, is live on Osmosis today along with Interchain Deposits, a feature that allows Osmosis users to deposit BTC directly within the Osmosis app to receive nBTC.

Osmosis and Nomic are deeply aligned protocols, with the majority of existing nBTC currently escrowed in Osmosis, and Osmosis moving toward increased usage of Bitcoin as collateral in the form of an eventual Bitcoin alloy asset. Nomic’s native staking token, NOM, was airdropped to OSMO holders, and the two communities share an affinity for Bitcoin.

Nomic aims to provide the seamless on-ramp for native Bitcoin liquidity that Osmosis desires. However, Nomic has yet to complete auditing by third-party security firms. Until the software has been audited, Nomic implements a capacity limit of 21 BTC, a deposit fee of 1%, and an IBC transfer fee of 0.5%, to disincentivize a premature inflow of liquidity.

Nomic DAO Foundation is proposing a loan of ~$800k worth of OSMO, to be paid back in NOM with a discount, to accelerate the completion of auditing. Upon successful completion of auditing, the Nomic Governance Upgrade can allow Nomic’s governance to select appropriate deposit and transfer fees (estimated to be closer to market rates, e.g. at or below 0.3%), remove the nBTC capacity limit and allow the transferability of the NOM token. These steps will lead to the flourishing of a more native form of Bitcoin within Osmosis, and help Cosmos to truly become the application layer for Bitcoin.

Details

NOM/OSMO will be a concentrated liquidity pool on Osmosis, with a 0.2% swap fee and no exit fee. Nomic DAO Foundation is requesting ~$800k worth of OSMO at the time of this proposal’s passing to be delivered to an address controlled by Nomic DAO Foundation. These loaned funds will be used primarily to fund security auditing of the Nomic codebase and dependencies and for other engineering work associated with the integration of nBTC into Osmosis, such as enabling direct Bitcoin deposits and withdrawals via the Osmosis frontend. Nomic DAO Foundation will work to minimize price impact with OTC sales and selling only as needed.

Osmosis is not the only project to benefit from this work, which is why this proposal is structured as a loan, not a grant. As mentioned previously, however, the majority of existing nBTC is in fact escrowed within Osmosis. For this reason, a proposal which enhances the safety of BTC within Osmosis, lowers deposit fees, and increases Osmosis’s BTC liquidity seems well-aligned with the interests of the Osmosis DAO – especially in the form of a loan to be paid back with a premium.

Upon approval of this proposal, the OSMO tokens will be sent to the Nomic DAO Foundation address.

In the event of a private token sale of NOM from Nomic DAO Foundation prior to NOM becoming fully transferable, the loan will be repaid in NOM at a 20% discount of the sale price upon the close of the sale and once NOM is enabled to be transferred over IBC.

In the event no private token sale occurs, 30 days after the creation of the NOM/USDC pool, NOM tokens will be sent to the Osmosis community address. The price of the NOM token will be calculated using the trailing 24h TWAP of this pool at the time of repayment, and the loan will be repaid in NOM at a 20% discount of this price.

No restrictions or lockups will be imposed on the NOM repayment tokens, unless repaid prior to governance making NOM fully transferable. The Osmosis community is free to decide how to best utilize the funds. For example, the funds may be used to provide protocol owned liquidity on NOM/OSMO, LP incentives, or be distributed to the Osmosis community.

Nomic DAO Foundation reserves the right to pay back the loan with a flat 5.25 million NOM, which is half of the network’s initial Strategic Reserve allocation, and more than half of Nomic DAO Foundation’s current holdings.

The OSMO funds loaned in this proposal will be distributed as needed to cover expenses and used to provide liquidity in nBTC-related pools in the interim. In the event that the event of an OSMO surplus in Nomic DAO Foundation’s custody after the NOM-based loan repayment, Nomic DAO Foundation will continue to provide liquidity in nBTC pools.

Additionally, to bootstrap nBTC liquidity, the Nomic DAO Foundation requests the Osmosis Foundation deposit $100k worth of Bitcoin via Nomic at the time of this proposal’s acceptance, incurring the current 1% deposit and 0.5% transfer fee, a ~$1,500 total cost, and provide $98.5k of nBTC and $98.5k of WBTC to the nBTC/WBTC concentrated liquidity pool. The discount upon loan repayment should be considered to reflect compensation for the provided WBTC liquidity, as well as the post-fee nBTC liquidity. This additional step will help Osmosis move toward a more native Bitcoin collateralization profile, immediately sowing the seeds for a less custodial Bitcoin alloy asset in the protocol’s future.

3 Likes
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I’m sorry but… this is a joke right?

Let me break this down:

  • You want to borrow $800k from the Osmosis community pool to pay for your own audit costs and to pay for your own team’s expenses, dumping the community’s OSMO in the process

  • Some of the funds will be used to provide NOM or nBTC liquidity, but not all of that liquidity will be provided on Osmosis (???), presumably this entails more dumping of the community’s OSMO.

  • You’ll pay it back at some undisclosed future point that’s dependent on the launch of the NOM token, at a price that’s dependent on some unknown private sale price point at a 20% discount?!

I’m sorry if i’m coming off as harsh here, but this might quite possibly be the most tone-deaf proposal i’ve ever seen put up on these forums, and we’ve had some wild ones. The Osmosis community pool is not the Nomic team’s personal piggy bank to pay for salaries and audit costs and deploying liquidity on competing dexes (and certainly not at a 20% discount).

Reading between the lines here, it seems as though the team isn’t adequately capitalized to pay for these expenses yourselves, which puts the launch of the NOM token in question (thus increasing the risk of this loan never being repaid).

I’d understand a loan swap to bootstrap liquidity of the nom token or something similar (as Levana is doing) but this proposal is an extremely inappropriate use of community funds.

Also, as an aside, Osmosis governance has no right to dictate what the Osmosis foundation does with its funds. Gov proposals are not the way to ask them for $200k in liquidity. I’d suggest reaching out to them directly for this.

I would strongly encourage the Nomic team to rethink essentially every aspect of this proposal and potentially even delete this from the forums for the sake of my NOM bags and of our industry as a whole.

TLDR: I’m a very strong no on on this proposal.

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The proposal is just phrased poorly - the “20% discount” means Osmosis gets the advantage, obtaining NOM at a better rate than investors or the market. This means Osmosis makes 20% on this no matter what the price is.

It would indeed be crazy to try to pay back less in value, the proposal should be reworded so it doesn’t come off that way.

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Appreciate the clarity, and that’s good to hear, but the other points i noted above still stand.

Osmosis’s community pool isn’t meant to be tapped to pay for your internal costs, or to pay for high-risk bootstrapping proposals like this one.

Would encourage you guys to seek alternative sources of funding (potentially via one or more of the ecosystem’s many grants programs or a fundraise).

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I think many of Robo’s concerns are valid. A lot of these don’t make sense for the Osmosis community to support and in general this type of ask is something that should go through the OGP, not governance.

Main concerns I have are

  • Nomic should be covering its own costs in these scenarios. If runway is tight, this may be resorting to using $NOM instead of USD to cover audit costs, or raising and using that new capital. I understand audit costs may be high and climates may be rough to raise in, but this is Nomic’s duty and not the Osmosis Community Pool’s (OCP) duty.
  • The ask is a ‘loan’ however, as Robo indicates, this is a highly risky loan that has no guarantees or safeguards in place. This is why these asks should go through the OGP.
  • $800k comes off arbitrary and I share the sentiment that the OCP is not meant to cover internal costs of an external team, especially an entirely separate chain. Though, if there are logical reasons, again > through the OGP and they would negotiate/evaluate on behalf of Osmosis.
  • The OCP has no control over the Osmosis Foundation’s Bitcoin holdings.
  • The Nomic team should be bootstrapping the nBTC pools (at least the nBTC half), I don’t understand why the Osmosis Foundation is not only being asked to deposit both halves of nBTC/wBTC ($197k), but also being charged $1500 to help support the Nomic team.

I think a reasonable ask would would be for Osmosis to assist in creating the BTC pool. Nomic should provide its half of nBTC and the Osmosis Foundation or the OCP could source the funds to provide wBTC to pair.

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I very much second Robo’s comments here.

There is a lot of potential downside for Osmosis here, especially since this is effectively a pure sale into the market by the sounds of it, and not a huge amount of upside since it sounds exceptionally risky if there is no runway to pay for audits at this point and seemingly no confidence from the proposer that the tokens getting in return would be worth the loan amount.

The 20% swing being the other way, as clarified (premium rather than discount), makes far more sense than originally worded. However, the flat repayment being in NOM does not. Surely, Nomic would just pay back whichever was lower in that case. Previous flat repayments have been denominated in USDC, leaving the risk around OSMO’s price fluctuations over the period. If the Nomic DAO Foundation’s holdings were insufficient to pay back the loan, then this could be restructured somehow in terms of revenue share until paid off or refunding any OSMO being used for liquidity.

The whole paragraph about the foundation funding should be removed - Osmosis Governance cannot dictate this at all and it would be a private arrangement.

There is also the line about

NOM/OSMO will be a concentrated liquidity pool on Osmosis, with a 0.2% swap fee and no exit fee.

I assume this is left over from copying previous loan swap proposals since it is then not referenced anywhere else but a NOM/USDC pool being created is referenced instead.

Why is the transferability of the NOM token is linked to governance when the transferability of nBTC isn’t?
This seems like a perfect use of something like Streamswap to directly sell NOM tokens to the community in exchange for USDC to pay for auditing in.

Or, as Robo says, a grant for the audit. $800k seems rather steep for an audit, going by the numbers I have seen in the past. Going off the last Osmosis grant’s purchase would be enough for six months of auditing time with Oak. Obviously, that was a deal + other companies may charge more, but still, it seems excessive if just audit payments need completing.

Also, I am just going to throw in my comment from Levana’s loan swap, too. I think that repayment costs should be over a longer (7+ day) TWAP period at least 50 days after the token has liquidity to minimise price discovery/manipulation impact.

3 Likes
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I think Johnny’s idea of simply using streamswap makes the most sense in the case that Nomic is unable to raise. Quasar and many others have used Streamswap.

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The loan will be used to assist with auditing costs, arrangements will be made to minimize price impact with OTC sales and selling only as needed.

The funds used for NOM liquidity will be provided on Osmosis.

The 20% discount is applied to the price of NOM, meaning the NOM repaid is paid with a premium benefiting the Osmosis community.

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Speaking as someone who was unable to get his hands on NOM tokens for quite a long time, I would definitely echo Johnny and Aaron on using Streamswap to directly sell NOM to the community as a good way to raise funds.

There are a lot of people waiting to buy NOM, and this could potentially be one of the more successful Streamswaps that Osmosis has had.

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Unfortunately, the auditors we have spoken to have been unable to accept tokens instead of USD. We agree this is not a cost the Osmosis community should have to incur which is why this is structured as a loan swap to be repaid.

The loan allows us to repay the Osmosis community, we do not feel this is a cost the Osmosis community should incur which is why we did not apply for a grant.

The amount of the loan is meant to assure we can complete auditing and release the Governance Upgrade. This ensures we can deliver upon the promises laid out in this proposal.

The request for Bitcoin liquidity was shared in the proposal as a separate request, and has already been discussed directly with the Osmosis Foundation.

As nBTC is a token backed by Bitcoin, we do not have Bitcoin liquidity to deposit to bootstrap the pool. We can do this for NOM, our native token, but not for Bitcoin.

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The loan will be used for a lot more than auditing costs though. Audits will cost $50-$60k on average, at most $100k in an absolutely absurd and complex situation (which Nomic may well be given what the project is taking on)

You mention it’ll also be used for “engineering costs” and liquidity provision.

Don’t you think Nomic should pay its own engineers? This feels a lot like simply covering your runway until you’re able to launch. And yes, while this is a loan, as I mentioned above, if Nomic’s team is out of funds, this is an extremely high-risk loan and it can’t be taken for granted that it will be repaid.

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If the community desires, the proposal can be updated to make repayment in USDC.

1 Like
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I think a raise via streamswap would be best here. It is a bit more deliberate, less downside for the osmo token, and benefits those that want to purchase nom. I would love to purchase more nom and think many others would as well to fund the audit. Any shortfall could be done via grants in a more manageable way.

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Nomic may be more complex than the projects you’re comparing against. We have approximately $400k minimum of audit costs currently scoped and quoted.

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I imagine one reason auditors would refuse $NOM is because it has no valuation atm. Back to the streamswap and price discovery idea, it would make sense to have $NOM valued and then see if Auditors would be willing to negotiate then.

The OGP has negotiated deals where revenue is shared with Osmosis, or could negotiate for tokens. They would be better fit to review a loan agreement in a situation like this.

Understood, however it should still not be the Osmosis Community funding these assurances.

Many of the tokens seen in pools on Osmosis are at least partially bootstrapped by the projects behind them. This is something Nomic should have prepared in advance, ensuring $98,500 was set aside for an nBTC pool. The pool is a clear ‘must have’ for launch.

Circling back to routes other projects have taken, I still think a raise via streamswap makes the most sense. Streamswap works, it will allow the community to personally get into NOM, and this will also help get the ball rolling and once valuations are organically found, Nomic is in a much better place to raise more with investors.

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Disclaimer to start with: I validate on both Nomic as well as Osmosis.

Regarding the ask; the temperature in the room tends to point to a massive rewrite of the proposal. Wording should be improved, but also the “what is in it for Osmosis” part is severely lacking. Osmosis governance is not perse hostile against doing loans as has been shown in the past and looking at the Levana proposal being on the forum at this very moment.

The other point regarding Streamswap also holds true. It is a great route to obtain more funds and start liquidity at the market. The time seems right for it right now.
Regarding the risk; is there also an added risk if the IBC-ability of NOM is activated before the audit? Are there any risks expected, maybe due to the custom coding?
Until now all tokens are airdropped or minted, maybe time to get to the point where investors can get in as well. Are there balances reserved for that purpose as well?

5 Likes
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That is a no-brainer!
The Nomic team has constantly delivered a product with great ux, that every degen can use and lots of degens got attracted to. That´s exactly where we should steer. 800K OSMO for obtaining NOM to a such a discount is a steal and will roi the OSMOSIS community either way.
A totally hard yes! This will greatly boost OSMOSIS´ usecase as a liquidity hub and finally bring in Bitcoin in a way that it´s supposed to be: permissionless.

What I would like the Nomic foundation to do, is additionally giving the OSMOSIS community the option to do a streamswap afterwards, if this deal gets sealed :point_up:

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Why not the other way around? Do a Streamswap and see what is needed afterwards?

Why is the CP needed for that?
I keep struggling with the way people just seem to see the CP as a bottomless pit of money to throw out to every project, while there are also perfectly other ways to do the same thing, without falling back on the CP time after time again.

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I expected a revision of this proposal days ago to be honest. Obviously as others have stated this as written is a definite no.

I echo @LeonoorsCryptoman suggestion to use streamswap to raise the funds, this would require the team to enable NOM to be sent for one of their addresses I imagine allowing for NOM to circulate outside of their chain.

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I guess that enabling IBC before the audit is particularly not being an option on the first hand, because of uncertainty about how this might affect the whole Networks security. It´s prolly feared, that the economical weight of certain NOM holder´s voting power might compromise the networks security and a more weighted and decentralized way of coin distribution has been looked for.
I may be not thinking correctly and in that case I hope that the core team will prove my point wrong. And I hope that I am.

The last airdrop has to be done specially careful to ensure that most coin distribution is done to those, who interacted with the protocol and contributed the most, instead of incentivizing sibyls.

That´s why a Stream swap should be done only after the deal with Osmosis or not be done at all imo. We don´t want malicious actors having the most power over the protocol, as it´s usually the case in Cosmos protocols like the Hub, Osmosis etc. (see voting manipulation of prop 848 on cosmos hub)