This proposal removes the allocation of inflationary OSMO for pool incentives.
These incentives now account for only a small portion of rewards and are no longer a primary driver of liquidity. Redirecting all emissions to the community pool instead will reduce circulating supply, simplify the system, and lower the effective inflation rate of OSMO.
Current Status
In principle, 20% of inflation is allocated to Pool Incentives. Of this, 80% (16% of the emissions) are redirected to the community pool, with only 20% (4% of the emissions) being used for incentives.
The actual emissions translate to a spend of 4,834 OSMO per day on pool incentives, which are distributed as follows:
- OSMO/STABLE pools - 52.7%
- ATOM/STABLE pools - 15.7%
- BTC pools - 9.7%
- TIA pools - 9.4%
- ETH pools - 6.9%
- LST pools - 3.8%
- USDC/USDT - 1.8%
These incentives are the minority of rewards obtained by liquidity providers for all pools of significant size, as shown in the chart below, meaning that OSMO emissions are no longer the primary reason for LPs to participate in pools.
Chart 1: Percentage of value earned by LP providers in OSMO incentives of total revenue.
This chart shows that the only incentives that still make up the majority of rewards are the OSMO Stable pairings and the Stable/Stable pairings. The stable/stable pairing is a relatively small spend and reflects the lack of adoption of USDT on Osmosis, resulting in minimal swap fees being generated.
For OSMO/Stable liquidity, the emissions act as an offset of inflation rather than offsetting impermanent loss.
With inflation decreasing due to the recent thirdening, resulting in a headline inflation rate of 6%, OSMO liquidity should be sustainable against the lower rate from swap fees alone. Reducing these emissions further reduces the inflation itself.
The impact of incentives in the OSMO/USDC pool has been relatively minor, with liquidity remaining quite consistent in terms of OSMO token liquidity, despite an overall high payment to liquidity providers of 458,553 OSMO over the 180 days illustrated in the chart below. The recent increase in May 2025 is attributed to deployments following Proposal 932, which renewed the OGP Market Making Initiative.
Chart 2: Liquidity of OSMO/USDC over the last 180 days, denominated in OSMO
Proposed Change
This proposal requests that the allocation from pool incentives in the daily distribution be transferred entirely to the community pool, rather than being redirected after allocation.
Any further incentive programs should utilize community spends; however, previously redirected OSMO has typically not been used, and it is expected that this OSMO will primarily remain in the community pool, out of circulation, or be fully burned by further governance proposals. This change in bootstrapping strategy is primarily because incentives have typically resulted in short-lived, mercenary liquidity. Protocol liquidity, using non-OSMO community revenue, is now more frequently established with a temporary taker fee reduction as a more permanent option.
This change to the distribution ratio simplifies the current mechanism, in which pool incentives are redirected to the community pool’s gauge, thereby obscuring the emissions ratios. This can be misleading to those unfamiliar with the full redirection flow, as it displays high liquidity incentive emissions that are not utilized. As OSMO emitted to the community pool remains out of circulation, the effective inflation of the OSMO token is lowered to 4.6% by this proposal.
Inflation displays will be modified in the future to treat the Community Pool as a soft burn, as inflation is not emitted or committed to be burned, but instead deferred by allocations to the community pool.
Target Onchain Date: 3rd July 2025