Remove OSMO Pairing Incentives except OSMO/STABLE

Proposal Discussion Liquidity Incentives
1

This proposal indicates that OSMO pairings should not be incentivized unless paired with Stable tokens. The proposal creates new Volume Splitting Groups (VSGs) consisting of reduced sets of pairings that prioritize establishing Stable pairings for assets, and indicates that incentives should migrate to these newly created VSGs.

Background

Osmosis currently incentivizes liquidity in pairings between any Quote assets since Proposal 670. This proposal removes OSMO from this criteria except when paired with a Stable asset.

These incentives are provided in terms of Volume Splitting Groups consisting of collections of common assets. As noted in Proposals 814 and 817, the OSMO pairing has been relatively unpopular for liquidity providers. When given the option with equal incentivization through VSGs, almost no efficient liquidity chooses the WBTC/OSMO pair over the WBTC/USDC or WBTC/USDT pairing, with only 37% of the ETH volume being catered for by the ETH/OSMO pairings over USDC, USDT, and BTC pairings.

A similar trend has been observed in the ATOM and TIA pairings with 55% of volume through ATOM now being catered for by ATOM/STABLE and 77% of volume through TIA by TIA/STABLE.

This indicates traders’ preference to trade to and from a Stable token and liquidity providers’ preference to manage tighter positions in Stable pairing positions, which outperform passing through an OSMO pairing.

This proposal is one of two initiatives that aim to encourage the primary pairings of OSMO and other listed assets with Stable tokens, moving away from the previous methodology of OSMO as the main routing token for the chain, initially proposed in Proposal 187.

A followup proposal to this will trigger the actual incentive migration after this proposal creates the VSGs. During the incentive migration to these VSGs, existing LP incentives allocated to the OSMO portion of pools will cease to be emitted but incentives allocated to Stable pairings should remain almost unchanged.

Around 50% of incentives will still go to OSMO pairings - represented by the existing OSMO/STABLE volume splitting group. This is consistent with the desire for tokens listed on Osmosis to be paired with Stable tokens for an independent valuation and ease of liquidity provision unless they expect to be directly correlated in ratio to another token.

This proposal also adds a new volume splitting gauge for ETH to include a selection of BTC/ETH spread factor pools, as enabled by the addition of the BTC quote asset in Proposal 813. While this pairing is not Stable based, it has proven to be an initially popular pairing on Osmosis due to being composed of the two highest market cap assets available.

Target Onchain Date: 8th August 2024

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2

For me this is good.

Does this also match with the analyses done by Hathor Nodes regarding the incentives given to a pool compared to the required liquidity? If above is correct, then those figures should also show that we might be overincentivizing liquidity of relatively low-usage pools OR that a large portion of earmarked incentives is send to the CP due to not being needed as incentives.

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There’s somewhat of a mismatch between the two incentive systems we have in place right now.

Hathor Nodes’ figures focus on building liquidity in specific pools
VSGs focus on building liquidity in asset groups

If Hathor Nodes’ figures show that ATOM/USDC 0.05% needs more liquidity, then we increase the whole VSG, and the volume preferences pull it to the highest volume pools - which will likely be the ones with the higher requirement but not necessarily.
By reducing to just stable pairings this is a lot easier to target attracting the most effective liquidity.

Over the last few months, the figures have generally shown that we were at or just below target for the OSMO pairings for both ATOM and TIA overall but needed substantially more stable paired liquidity as well as for the OSMO pools to migrate to a lower spread factor.

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Are there plans to adjust the Hathor model? Because it was mentioned already in the past on the forum (for quite some time if I remember correctly).

Because the effects of upping the incentives for a VSG can do just the opposite, since the VSG will reward the most used pool. So the APR on the most used pool will go up as well on the under-utilized pool. But it might not really end up in the right pool if I understand it correctly.

But also in essence we will never ever be able to position the incentives correctly at the right pools where we really need the additional liquidity through the VSG, unless it is placed in a VSG with just one pool?

5

Yes - there are plans to propose a more general “bootstrapping” model that more actively targets pools for increasing liquidity.
Hopefully, we’ll see that on the forums by the end of the month :slight_smile:

That’s the problem with the interface between the models. However, if there isn’t enough liquidity in the 0.2% pool, there almost certainly isn’t suitably placed liquidity in the 0.05% pool since the 0.2% is still seeing high volume-to-liquidity ratios.
Having the VSGs be of a single type of pairing makes this easier to manage though.

6

Does that effectively mean that in essence the 0.2% pool must be diluted enough in terms of volume vs liquidity to make a lower percentage pool more attractive in terms of the APR generated through trading fees?

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