Reduce Staking Subsidy to below Taker Fee Burn Rate

[JohnnyWyles]

This proposal reduces the inflationary subsidy of the revenue-based staking rewards to the point where emissions are fully offset by taker fee burns, marking a key milestone of fully sustainable and deflationary OSMO.

Current Status

This proposal forms part of the phased transition outlined in the Tokenomics Roadmap, ultimately targeting a Minimal Viable Emissions model where staking rewards are primarily sourced from real yield.

This proposal follows on from Proposal 957, which reduced the staking reward subsidy by half, followed by a monitoring period of at least 21 days. As expected by the nature of the change, over this monitoring period, there was an initial increase in OSMO that unstaked, reducing the amount of stake securing the chain from 45.3% to 43.7%. Since then, unstaking activity has stabilized, returning to the typical churn of 3–6 million OSMO bonded and unbonded per 14-day unstaking period.

Chart 1: % OSMO Supply Staked after Proposal 957. Source: SmartStake

The decline in the staked percentage was more modest than expected, indicating that Osmosis is still rewarding stakers sufficiently even under the lower subsidy rate.

This proposal continues the process of determining the optimal level of revenue subsidy necessary to ensure the security that Osmosis requires through incremental reductions in emissions.

It takes the critical step of reducing OSMO inflationary minting to be lower than the sustained burn rate from taker fees, with the thesis that a lower but sustainable APR, combined with a deflationary trajectory, may prove more attractive to long-term holders than unsustainable high yields from inflation.

For a full analysis of this methodology, security impacts, and risks, see the initial staking subsidy reduction proposal text.

Proposed Change

The proposed change is as follows:

• Reduce the token distribution allocated to Staking Rewards from 25% to 8%
• These diverted tokens are redirected to the Community Pool and remain out of circulation unless actively spent via governance, functioning as a soft burn while preserving the one billion OSMO cap.
• Governance can choose to fully burn these tokens through a spend proposal to the null address if no alternative use becomes apparent, and this accumulation is viewed as detrimental.

This reduction would result in 10,000 OSMO being minted for security each day, consistently lower than the reliable OSMO burn rate from taker fees of ~11,500 per day since parameters were adjusted. This results in OSMO being deflationary every day from taker fees alone.

Additional burns, such as those from ProtoRev and Top of Block auctions, are then bonus deflation beyond this. ProtoRev has an average daily burn of 2,500 in the last 90 days, and Top of Block burns, such as Proposal 960, total around 850 OSMO/day in USDC. Together with the excess taker fee above that used for the offset results in a typical 3,350 OSMO/day of net deflation.

While the reduction in inflationary emissions is significant, the resulting decrease in staking APR is relatively modest, as more rewards now come from actual protocol revenue. Current staking APR is ~6%, with this proposal reducing it to ~3.7%, comprising ~2.6% from protocol revenue and ~1.1% from emissions.

This headline APR is still comparable to typical government bond yields. While bond rates apply to fiat currencies, they serve as a valuable benchmark for “risk-free” returns. Assuming stakers view OSMO as a value-preserving asset, this rate remains competitive for long-term holders.

Should this cut trigger significant unbonding, the resulting higher share of rewards for remaining stakers will re-equilibrate staking incentives, and governance can revisit parameters if needed.

By pairing sustainable staking returns with a reliably deflationary supply, Osmosis strengthens its long-term value proposition for stakers, holders, and liquidity providers.

Chart 2: Osmosis Staking APR composition, past and projected

Summary of Metrics

Metric	Value
Current daily minted emissions	30,000 OSMO
New daily minted emissions	10,000 OSMO
Avg daily burn (Taker Fees)	11,500 OSMO
Avg daily burn (ProtoRev)	2,500 OSMO
Top-of-Block potential burn (Avg)	~850 OSMO/day
Current Staking APR	~6%
Projected Staking APR	~3.7%

Target Onchain Date: 14th August 2025

[tac0turtle]

I dont think this is the correct representation, osmosis is still going to be heavily inflationary. The staking APY is going down but the total minted per block stays the same. Is there are a reason to keep the total minted the same?

The community pool has 83,464,365.71 osmo. If we expect that with buybacks there is potential that the price of osmo will rise then this should be sufficient for most future spend, being that it will continue to rise as well.

If possible id propose we lower total emissions to only double the daily average burn, it seems this is 11_500 which would mean we only produce 23_000 a day and lower the assumed projected yield to a flat 3% based off the current staking ratio.

[Seppmos_Cito]

I like the direction this prop is going, further decreasing daily emissions and rewarding stakers with real yield generated from the protocol itself.

However, I fully agree with Marko, this does not fundamentally change the inflationary nature of OSMO. Lots of OSMO are still being emitted on a daily basis, just that these tokens now end up in the community pool rather than going to stakers.

If we can’t, for whatever reason, move away from the 1B OSMO cap, why don’t we send these redirected coins directly to the burn address instead of the CP?

The CP is already massive, with >83M $OSMO in it, that’s more than 10% of the circulating supply. It makes little sense at this point to further bloat the CP with OSMO.
So why don’t we directly burn these tokens?

This would also be a major accelerator for the OSMO burn.

[LeonoorsCryptoman]

I fully agree with @tac0turtle and @Seppmos_Cito here. Why do we keep on clinging to the 1 billion OSMO in general? Just get rid of that target if you want to be deflationairy.

In essence this move doesn’t make OSMO deflationairy, it is just redirected. It is time to make the bold moves. We are already down 98% or so from the ATH. If we want to get at least some share back, we have to stop doing the same thing over and over.

There have been a lot of talks in the past already that our CP was big enough and it is only growing at a fast pace and will only grow faster with this proposal.

Do note that with a burn of approx 4.5k OSMO per day it goes to 100k a month (roughly). That means that on yearly basis we burn 1.5 million, which means we need a rough 6-7 years to get to 1% of the total supply. So the statement “deflationairy” is not really catching on, since it takes such a long time to be any meaningfull value. Let’s not grow our CP more, but work towards real deflation and make that stick.

[JohnnyWyles]

There’s inflation into the circulating supply and inflation out of the circulating supply. Non-circulating supply has no impact on buy/sell pressure, liquidity, or stake. Inflation into circulation is the only inflation that has any economic impact.

The main concern, as I see it, is that you have the potential for non-circulating to become circulating at some point, which I see as inflation at that time, but others may see as inflation at the point of mint.

The 1 billion OSMO issuance is also maintained partially because of the design of vesting unlocks at genesis. These OSMO are minted but locked and linked to the same mechanism. Separating this would require significant effort to unravel, compared to simply maintaining the planned emission target and sending them to non-circulating. The alternative would be to adjust the parameters to allocate a significantly higher share of emissions to vesting, thereby reducing the total emissions. This approach would maintain the vesting rate while eliminating the need to redirect OSMO at all.

There is also no ability to direct emissions directly to burn by setting a parameter here; instead, the workaround would involve transferring to the community pool, creating a burn proposal, or modifying our Cosmos SDK to add such a parameter in the future.

All options have some level of complexity, and the main reason I want to avoid adding these to the burn proposals is that it would make the proposals look less realistic.
We now buy back and mark for burn ~11,500 OSMO daily from taker fees, resulting in ~350,000 OSMO per month removed from circulating supply. If we burn this redirection, too, then that number leaps to 950k. However, most of that never existed on the market, so it looks like padding the numbers.