This is proposal to remove incentives from all pools that contain assets that are not one of the following:
- USDC
- USDT
- DAI
- WBTC
- ETH
- ATOM
- OSMO
- stETH
- stATOM
- stOSMO
- IBCX
Background
Currently, there are ~35,500 OSMO budgeted for LP incentives on a daily basis. ~3,900 is redirected to the Community Pool, leaving ~32,600 for incentives. Most of these incentives are directed toward strategic pools that require higher liquidity due to volume/liquidation considerations.
However, there are currently a lot of other pools that receive a small amount of incentives that do not have the same considerations, and while small individually, add up in aggregate, and also require a high level of effort to track and maintain. The removed pools should be able to maintain sufficient levels of liquidity without OSMO incentives with concentrated liquidity. This would also represent a strategic shift in Osmosis with recommending communities that are unable to obtain sufficient liquidity levels to pay their own external incentives to gain sufficient liquidity.
The removed incentives would be redirected to the community pool. The overall incentives would be ratcheted down, and when new strategic pools become available, the incentives would be redistributed from existing pools. There may also be future mechanisms in place to aid in bootstrapping pools before governance passes assets into the incentive redistribution program.
Impact
This change would reduce the current list from 60 pools to 14 pools and reduce daily Osmo incentives from ~32,700 OSMO to ~24,500 OSMO. It would eliminate 46 pools and ~8,200 OSMO Incentives.
The 14 remaining pools would be as follows:
These pools remain because they are strategically important to Osmosis, and the community should be hyper-focused on building the liquidity in these pairs.
We reviewed the pools that have been eliminated from incentives and confirmed that there are no other strategic pools that should be incentivized. The 46 removed pools have an average daily Osmo Incentives of ~180 OSMO per day or ~$60 per day. At first glance, it is highly unlikely that LPers are drawn to $60 of revenue per day. It is more likely that they are incentivized by the fees generated from these pools and general support for the coin (see chart below for comparison of APR with and without Osmosis Incentives). Due to the low levels of required incentives, it is likely that the individual communities will be more effective in managing their liquidity requirements through external gauges.
The eliminated pools have a range of issuing 2 OSMO per day (<$1) to 1,300 OSMO per day ($442). Only 5 pools receive more than 400 OSMO per day ($136). They are:
AKT/OSMO (1,304 OSMO), INJ/OSMO (840 OSMO), AXL/OSMO (843 OSMO), SCRT/OSMO (678 OSMO), EVMOS/OSMO (456 OSMO).
These 5 pools make up the largest portion of the removed incentives, with ~4,100 OSMO per day or roughly half of the ~8,200 incentives. As these 5 pools make the largest portion of the eliminated pools, we performed an analysis of these pools:
Even with removing incentives from these pools, we should maintain 10%+ APR on these pools at current liquidity levels, which is competitive compared to staking rates provided by each chain. Also, it is important to note that with concentrated liquidity, liquidity providers can actively manage their position and earn higher APR for doing so. Providing tighter positions will increase their ROI and reduce slippage for users on Osmosis.
We also reviewed the slippage of current liquidity levels to handle 95% of all users’ swaps, excluding Arbitrage swaps. The chart below shows the dollar value 95% of users swaps are at or below. For example, 95% of user swaps in pool 722 are for $350 or less. If we swapped at the high end of this range, we would have 0.10% price impact.
Source: https://api.flipsidecrypto.com/api/v2/queries/a2163794-4a3b-41fd-8250-f09335d501be/data/latest
Historically, there’s an inelastic relationship between an LP’s incentives and its liquidity. Reducing an LP’s incentives by 10% will not reduce its liquidity by 10%. You can observe this by looking at historical GAMM levels of LPs over the last year of incentive cuts. 1% slippage is the default shown on the site when calculating minAmountOut. All pools would have slippage under this threshold for 95% of users swaps. Further, the APR generated from swap fees continues to be at a high enough rate to attract more liquidity as users migrate their liquidity to concentrated liquidity positions.
The remaining 41 pools have an average of 100 OSMO (~$34) in daily incentives split between their liquidity providers. It is likely they follow a similar trend as the 5 aforementioned pools, perhaps even less impacted by incentives since they are incentivized at a lower clip and we will pass further review. These pools will be more effectively managed by their own respective communities who can track their own individual liquidity needs and incentivize through external gauges.
I plan to continue to monitor these pools in the coming months and impacts on liquidity but also other factors such as Taker Fees. This can monitored by the community here: Remove Incentives - Google Sheets
Mechanisms for Bootstrapping Future Pools
The Osmosis Protocol in the future may create programs to bootstrap future pools. An example of what this may look like is having a sub-dao with discretionary budget to bootstrap strategic pools on Osmosis before governance adds them to the recurrent incentives redistribution process. This mechanism will be subject to a future proposal.
Target On-chain Date: Monday, September 25th.
