With the recent increases in ProtoRev value I am bringing the previous ProtoRev Proposal back.
Source: Lenses
The previous proposal five months ago, linked on Keplr for Memo feedback was rejected for multiple reasons:
- The implementation was too early and the collection too small to decide a mechanic for.
- Both the OSMO and non-OSMO assets were bundled in the same proposal.
- Voters were unsure of burn vs distribute mechanic
As the ProtoRev module has now been in use for nine months and the collection has substantially increased over the last six weeks the first point has hopefully now been addressed.
In response to the second point, the usage of the OSMO and non-OSMO assets will be decided on in two proposals to minimize bundling.
The third issue should then be the core of the discussion.
The Road so Far
Proposal 516 was first raised in May 2023. This suggested that all assets collected by ProtoRev should be used to purchase OSMO and then burn the resulting OSMO. This ended up being withdrawn by the proposers after the discussion concluded that the non-OSMO assets likely had a better use than a relatively small burn mechanism.
Proposal 519 was a direct response to Proposal 516 with the suggestion that the OSMO portion of ProtoRev be burned, and the non-OSMO assets from ProtoRev be sent to the Community Pool in exchange for an equivalent amount of OSMO in the community pool being burned. This was aimed at increasing the diversity of the Community Pool whilst reducing the maximum supply of Osmo. This proposal also was rejected, with the majority of comments being around the still limited discussion as well as the imminent implementation of the OSMO 2.0 tokenomics proposals, causing uncertainty about the impact.
Proposal 567 came two months later, after the new tokenomics model had been in place for a month, and asked a similar question to Proposal 519. This proposal asked that all non-OSMO assets from ProtoRev be sent to the Osmosis Community Pool and that all OSMO should be burned. The feedback from this proposal was discussed earlier in this document.
Current Status of ProtoRev Assets
These assets are all in a governance-owned wallet, which can be accessed by governance proposal. While these are in a different wallet to the community pool, they are both only accessible by governance and out of circulation.
Non-OSMO
- Makes up the minority of ProtoRev return (18%)
- Currently denominated in ATOM and USDC
- Community pool has another revenue stream for this via Taker fees
- However, useful assets for the Community Pool to own as they diversify the holdings and are partially stable assets.
OSMO
- Makes up the majority of ProtoRev return (82%)
- Community pool has two other revenue streams for this via Inflation and Incentive redirection
- Community pool already has a large supply of OSMO (71 million)
- Is being removed from circulation already by this mechanism, but no guarantees of permanency.
Potential Usage of Non-OSMO
Use for a specific spend initiative now
As nothing has been identified in the last nine months and accessing these funds would be via the same mechanism as the community pool, one of the following options is available as an option.
Send to the main community pool
This will boost the community pool non-OSMO holdings and make accessing these funds easier for governance proposals. The revenue stream could always be redirected if a suitable target was found in the future.
Do nothing
This will leave the assets in control of governance but confirms that we want to use these for their own separate contract funding rather than treating them as community funds overall.
Buy back
This would cause the non-OSMO assets to be added to the OSMO assets. Whether this is burned or distributed is then a question for the OSMO portion. Treating them separately in this case overcomplicates the tokenomic model for new users.
I am in favor of the second option here; the community pool still has a very small non-OSMO supply, and increasing this to improve the pool flexibility and create other revenue loops should be a priority. There seemed to be little contention around this during the last vote, but these were bundled together so both types of asset usage failed.
Potential Usage of OSMO
With the community pool having large quantities of OSMO already and this being out of circulation, spending or saving this has minimal impact and so there are two main options.
Distribute to Stakers
Currently, the combined return from Taker Fees and Transaction fees form a return to stakers of ~4.2% (From Lenses data minus Mintscan Inflation only APR)
Adding the ProtoRev to this should yield an additional 1.2% APR for stakers in real yield based on the last week’s return.
Burn Mechanism
Currently, Osmosis has no real burn mechanism, relying on reducing inflation over time and max supply to control the supply.
Over the last week, ProtoRev has caused around 6,000 OSMO per day to leave circulation. Whilst not higher than the emissions rate overall, this is a sizable proportion of the current OSMO Incentive emissions of 21,563 and burning this would contribute to making the inflation that does exist to direct user flows even more sustainable by confirming an offset to emissions. As inflation continues to decrease, and Osmosis liquidity and pool complexity rise, this will eventually outpace the inflation of OSMO.
I still believe that a burn mechanic is valuable for both narrative and longevity of value. We already have one of the highest real yields in Cosmos for stakers. Albeit not displayed everywhere yet until more locations adopt the new APIs/endpoints, creating a burn mechanism enables value generation for more users than just OSMO stakers through inflation offset as well as being incredibly popular with users looking for their next favorite project.
While increasing the staking rate is also attractive, implementing a novel burn mechanism allows us to begin to tackle yield from both ends by both decreasing max supply through burning and relying on Taker Fees and Transaction Fees to be the primary yield generation mechanism for Stakers as inflation decreases. Without a burn mechanism in place, there is little reason for excitement around inflation decreasing over time as there is no visible differentiation of where a staker’s rewards are coming from. With a burn mechanism, net inflation becomes a much more dynamic indicator of chain activity, with high activity leading to lower net inflation and potential deflation.
Burn Mechanisms in other chains
Ethereum burns a portion of transaction fees, and the methodology there is that this will be a long-term scarcity mechanic to offset a consistent low level of inflation. Resulting in periods of inflation and periods of deflation depending on chain usage. This is referred to as Ultrasound Money
Injective’s burn mechanism utilizes an auction system and burns taker fees rather than arbitrage revenue. Osmosis distributes or democratizes its taker fees, but ProtoRev is available for a burn mechanism.
Avalanche is currently undergoing a heavy burn as inscriptions are minted on the network, AVAX also has a hard cap and is leaning into this as a form of scarcity.
Binance also burns a portion of BNB quarterly as a planned but variable burn to regulate supply as well as continually from transaction fees.
Having these burns visible as well as variable encourages users to share statistics on the burn and even sometimes encourages activity specifically to cause an increased burn over time.
In the longer term, at current ProtoRev activity levels, Osmosis may take several years to become truly deflationary. However, these revenues would rise as liquidity and activity increase, potentially accelerating that timeline substantially. This specifically rewards both stakers and those users using OSMO in areas such as Liquidity provision, lending collateral and leverage.
In the short term, this will lean more heavily into the power of narrative. Burn mechanisms are popular and exciting. To demonstrate the power of the burn narrative I would like to compare Osmosis to Injective directly.
Comparison to Injective’s Burn Mechanism
Injective’s burn mechanism is wildly popular across all socials. If you have spent any time on Cosmos Twitter, Telegram, or Reddit, then you will see people very excited about the burn mechanism and even sometimes joining Osmosis’ telegram to ask if we are going to implement a similar mechanism.
Injective is a token with a fixed 10% inflation and 78.47m supply. This translates to ~7.85m new tokens issued per year.
The burn mechanism has been running for around 30 months now, with an auction occurring every week.
This total burn is displayed on the auction site:
This means that Injective burned 5.8 million Injective in the same time that it generated around 19.5 million Injective and, despite the hype, is nowhere near deflationary.
Looking closer, 5 million of this 5.8 million was actually burned in a single auction.
This was promoted by the official Twitter, and, as such a large amount of burn for a token amount of compensation, it is likely that these were not circulating supply to begin with but were burned in order to inflate the figures.
Discounting these, Injective has actually burned 800k circulating INJ in the same period where ~19.6 million INJ was minted (4%).
Osmosis, based on the last month, has removed 155k OSMO from supply into the ProtoRev wallet, whilst emitting 5.5 million. (2.8%). These are surprisingly comparable in ratio. As a bonus, emissions are continually dropping on Osmosis thanks to the fixed max supply, while Injective has a fixed inflation. This means that Osmosis’ burn mechanism will grow over the next couple of years to be substantially more impactful than Injective’s.
Final Thoughts
This evaluation of ProtoRev usage comes at a time of increased ProtoRev value generation, prompting a reconsideration of its allocation and potential impact on the Osmosis ecosystem. The previous rejection’s valid concerns have been acknowledged, with this proposal providing a comprehensive overview of the historical proposals and their outcomes, as well as proposing the next steps and addressing the burn vs. distribute dilemma.
The current status of ProtoRev assets, divided between OSMO and non-OSMO and potential pathways for their utilization have been covered. This proposal advocates for sending non-OSMO assets to the community pool to enhance flexibility, while for OSMO, a burn mechanism is proposed to augment both the real yield for stakers as well as users of unstaked OSMO while contributing to Osmosis’ long-term sustainability.
Drawing parallels with burn mechanisms in other chains, the proposal highlights the popularity and narrative appeal of such mechanisms. By comparing Osmosis to Injective, the potential impact and efficiency of Osmosis’ burn mechanism over time is assessed. In summary, this proposal seeks to strike a balance between immediate narrative-based decisions and the overarching goal of ensuring Osmosis becomes truly deflationary in the long term, aligning with broader industry trends and user expectations.
Target on-chain date: 8th January 2024
