Return Staked Protocol Owned Liquidity to the Community Pool

Eliminate staked protocol owned liquidity

note

this draft requires further revision

Intro

About 5% of total stake on Osmosis is staked protocol owned liquidity, and this means that governance has a voice in governance and consensus. Proof of stake protocols require that stakeholders, with opinions, make decisions.

facts

  • every governance proposal’s outcome is currently off by 5%

  • the authority of validators to act in consensus is made less clear by staking protocol owned liquidity

    • Validators are supposed to be chosen by stakers, but staked protocol owned liquidity means that validators are chosen by governance
  • every human staker will earn 5% more after this proposal is implemented, because their rewards are diluted by staked protocol owned liquidity

    • eliminating the community pool’s participation in staking eliminates staking rewards that otherwise go to the community pool
  • copy staking does not solve this, but instead:

    • makes validator votes worth more than votes from delegators
      • if current numbers are used, a validator vote will be worth 110% what a delegator vote is woth
    • makes the validator set less competitive by increasing the cost of joining the validator set
    • adds new discriminatory dynamics, making it more difficult for exchanges to run validators on Osmosis

Given these facts, protocol owned liquidity should never be staked, and staked protocol owned liqudity should be returned to the community pool using MsgFundCommunityPool.

Vote Options

  • YES - instruct teams managing staked protocol owned liquidity to return staked funds to the commmunity pool as of the passage of this proposal
  • NO - take no action
  • ABSTAIN - express no opinion and support the winning side
  • NOWITHVETO - vote no and vote veto. If the veto tally passes 1/3, the deposit for this proposal will be burned.
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There is currently no pSTAKE funded Stake yet.
@JohnnyWyles just posted this though - Re-evaluation of Liquid Staked OSMO held by the Community Pool

I personally think this is an important topic that needs further discussion and shouldn’t be ignored at all

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Estimate seems high - there was the 10M in the Stableswap pool from the 20M spend, this will have compounded slightly though.
Then another ~1.2m from the boneOSMO and ampOSMO sides of the SAIL provisions.

Since it doesn’t directly vote it doesn’t directly influence voting power, however of course it does influence voting power by the delegates (probably the ampOSMO and boneOSMO moreso since their sets are very limited so far).

I do believe that the community pool should hold zero liquid staked OSMO unless we actively want to pay Liquid Staking Protocols for extra security.
Removing this all at once is excessive though and we should trend towards this.

The point of Re-evaluation of Liquid Staked OSMO held by the Community Pool is to start the process of diversifying the stake rather than remove it entirely.
Over the next few months, the positions will gradually return to OSMO as the redemption rates increase and a more general subsidy model should be proposed to tackle the trend towards single LST domination.

In my opinion, the best possible model for this is Osmosis holding 0 LSTs.
Positions should be in vaults which have upper positions tracking the market rate and automatically auto-arbitrage any LST acquired until the market rate = redemption rate - swap fee.
Any purchase that took the LST over this point should be treated as a new mint and routed as such, eliminating the need for liquidity over the redemption rate and so for the Osmosis community pool to supply liquidity in the form of the LST rather than just OSMO.

The difficult part in this whole conversation is that it is very easy to deploy CP assets into a LST, but very hard to get out. @JohnnyWyles is correct on that one.

I can remember @sunnya97 was quite against LST-providers for OSMO in general.

The interesting part here is not perse that the mentioned percentage is influencing certain proposals, but that it should count the full percentage of VP of validators benefitting from the LSTs. Because the validator can and will vote in specific ways on proposals based on the self-interests. And that is not limited to their share of the LST-pie.

Take for example the proposal for liquid staking a part of the CP on DYDX using Stride (Mintscan and Mintscan). That was accompanied by a proposal from Persistence (Mintscan) which was voted down.

Looking at the forum the conversations are quite interesting:

Interesting to see as well is that there are suddenly accounts responding in these topics which you never saw before on the forum and have never been seen afterwards. But accounts who managed to respond on that specific thread within a couple of hours.

That being said, I liked the statement made by @JohnnyWyles with respect to the VP from validators benefitting from the Protocol-Owned-LST-pie. That VP is tainted and should at least Abstain looking from a potential conflict of interest.
I am also painfully aware that even without that share we have an awful lot of Abstainers and on top of that political voters. But if this thread started by @faddat would at least get 1 variable out of the equation to get to better and cleaner governance, then I am a big fan.

I firmly agree that VP is tainted by community funded LST.

It is only trust and morals that stop a validator voting solely for their self interest and not the collective interest.

We dont yet have the bar set for social responsibility and as such, self interest is likely to be without penalty.

Any community funded mechanism that promotes self interest over the collective interest is naturally bad for the community.

At the same time, with validators likely to see zero penalty for self interest, why would they act against their own interests?

This is classic game theory.

LSTs play an important part in DeFi usability and so I don’t believe the community pool LSTs should be pulled in one go, but there needs to be a transition to a system with better designed incentives or none at all.

If incentives exist, they need to be designed such that the interests of all parties are aligned and are not disparate.

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If anyone has time, the next step here would be to determine if there is enough organic liquidity for stride on osmosis, so that if all of the gov funds were pulled, there would still be an ability to swap between stosmo and osmo.

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Ok, so I was looking for input towards unwinding this with minimal disruption, but I actually think that was misguided.

Staked protocol owned liquidity harms precision and clarity in two absolutely mission critical aspects of Osmosis:

  1. Consensus
  2. Governance

Eliminating distortions to our critical functionality is more important than small disruptions.

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Since this proposal by the quicksilver team is likely going on chain tomorrow, I figured it was a good time to weigh in.

Disclosures:

  • I’m a contributor to Stride, who this proposal would negatively impact
  • The proposer is a contributor to Quicksilver, A Stride competitor who would benefit greatly from this proposal (not sure why this disclosure was not made by the proposer)
  • I’m an OSMO holder, who would be significantly negatively impacted by this proposal’s likely impact on the OSMO price

Economic Concerns

The first thing that I want to address about this proposal is what’s not included in the proposal text anywhere. Specifically, no mention is made about the economic impact that this extremely aggressive measure would have on Osmosis and the OSMO token. As a TLDR, this proposal would:

  • Immediately reduce Osmosis’s TVL by nearly 20%
  • Force all lending / CDP protocols supporting OSMO LSTs to drastically reduce deposit caps on OSMO LSTs, further reducing TVL and causing a supply glut of OSMO to enter the market
  • Hamstring the growth of the OSMO liquid staking market, making OSMO a less attractive asset overall.

As an example of the second and third points, lets look at the impact of the POL currently liquid staked with Stride. Because of this POL:

  • stOSMO is the third largest collateral asset in the Cosmos ecosystem, behind USDC and stATOM.
  • stOSMO represents over $6.5 million in locked OSMO across Mars, Umee, Shade, Kujira, Inter-protocol, and Membrane.

The depth of liquidity created by this POL has already returned an immense amount of value to Osmosis, and that value continues to grow every day. This proposal would not only hamstring the growth of OSMO’s economic influence as collateral in the Cosmos Ecosystem, but would actively be a step back.

If liquidity is pulled like this, All of the above protocols would need to significantly reduce deposit caps for stOSMO, which would reduce the number of liqudity sinks available for OSMO and cause an influx of OSMO supply (which I assume would likely be sold given those lack of sinks).

I personally believe that the proposers have chosen to ignore the economic impacts that this proposal would have on Osmosis because it doesn’t suit their narrative, a narrative which I’d like to address now.

Governance Impact

This is false for so many reasons, not the least of which being that the number of tokens currently staked by the community pool is roughly 10m, not 20m. I think Jacob / Quicksilver may have forgotten that LPs on Osmosis are 2-sided, meaning 10m OSMO max would have been liquid staked under the proposal referenced here.

Additionally, this assumes that 100% of delegators vote, which as most of us know by now is pretty much the opposite of what happens. Delegators simply do not vote. The overwhelming majority choose to delegate that responsibility to their validators, and “vote with their feet” by changing validators that do not align with their interests. Jacob himself admits this.

This is the main reason why copy-staking does, in fact, fix this.

Delegators can continue to vote with their feet under a copy-staking model, and this actually gives delegators more power, because for every vote a delegator redelegates from a validator, more than 1 vote leaves that validator. This increases validator / delegator alignment.

Since Copy-staking is on the way for Stride at least, this proposal is completely unnecessary.

Additionally, the passage of proposal 769, while not doing a perfect job of addressing the potential economic impact I describe above, does work to shift LST allocations by the community pool to 100% OSMO positions, which addresses Jacob’s concerns without nuking Osmosis’s TVL (and that of the builders on Osmosis like Mars and Umee) and while maintaining LST liquidity depth to ensure that non-community pool liquid staked OSMO remains viable.

Again, all facts are pointing to this proposal being overly aggressive and completely unnecessary, which leads me to seriously question the motivations for putting it up in the first place.

I’m not one to often attribute to malice what can equally be attributed to incompetence, but given the motivations at play here by the Quicksilver team, the fact that the concerns raised in this proposal have already been addressed, and the extreme negative impact this proposal will have on Osmosis’s TVL I’m inclined to vote NoWithVeto on this proposal if it goes live, and would encourage others to do the same.

Two big concerns here:

This feels like “re-litigation” over an LST that just got approved (changing this to be based on CL, and diversify to multiple derivatives)

Even if this wanted to be done, I think directly pulling out liquidity all at once is reckless. StOsmo became a collateral asset due to this, and quick changes in behavior puts lots of osmo at risk and destabilizes the protocol.

This would come at massive economic and reputational costs to Osmosis. The community pool made a commitment for this liquidity, at bare minimum the liquidity should have some gradual pullout.

I actually do agree that at longer time horizons, community pool should change the ownership for w/e portion of staking derivative it owns, having its governance power waived. (And reduce the amount that came from converting its own asset into staking derivative)

Now that there is protocol taker fees going to stakers, this does effectively increase the staking derivative reward going to itself.

2 Likes

As I go through this, I feel a lot has changed with some of the recent developments in governance.

I agree that these are both downsides to the proposed implementation of copy staking.

At the same time, Stride’s copy staking proposal is a step towards undoing the concerns around tainted VP and misaligned rewards that prompted my original comments - for Stride at least.

I believe that the points made about staked protocol owned LP in the ammended proposal are still fair and valid, but for me at least, don’t promote urgent pulling of the liquidity.

There are also a number of governance participants that support a data driven gradual phase out of community owned LP, preserving Osmosis short term economic interests with a view to long term resolution of the governance issues that are described.

Is that something that could be considered instead in this proposal?

I don’t understand this - I believe prop 769 would allocate Osmo towards Quicksilver. Quicksilver would also be adversely impacted by this proposal.

Even without the existing community pool Osmo allocation, Stride would remain dominant in liquidity.

With the changes in Protocol-Owned-LSTs I think it is good to first see what happens now.

It is already changing towards 2 other providers who either stake to the indicated preferred validators by the qOSMO-community OR via an automated model as Persistence is using.
The possible upcoming change of Stride towards copy-staking might not be the optimal solution, but it takes the painpoint out of the discussion around tainted VP, since it will effectively not be relevant anymore.

The community has agreed on having Protocol-Owned-LSTs and has agreed to the changes. Having that in the back of the mind it is time to do the agreed-upon changes first, assess what happens before we are going to do new changes imo.

Nope this was in error. Will revise down to just breaking consensus and governance by 5% and reducing rewards earned by stakers who paid for their osmo by 5%.

Weather it is 5 or 10% really isn’t the point though.


There is no acceptable amount of distortion on consensus and governance.

Zero is the only acceptable number.

If the level of distortion can be zero, why would we take actions that make it nonzero?


Let me know if you have suggestions on a gradual approach, but fundamentally given the level of effort that went into making governance vote power the same as consensus vote power the same as staking rewards, we want that level of distortion at zero.

Also, it is surely reversing an earlier governance decision – a quite poor one that put the operation of the chain as it is designed at risk.


I disagree and think that all that happens with stride’s copy staking is that the interests of delegators that paid for their stake are diluted by validators pumping their Vote Power by 5%.

Each atomic bit of stake should vote exactly once and copy staking pumps validator votes when compared to normie votes.

It used to be that validators had no special anything, but under a setup where there’s 10,000,000 staked protocol owned OSMO and that stake is exactly copy-staked, validator votes are worth 5% more than regular user votes AND that 5% cannot be overridden.

Even if copied stake abstains, distortions to governance occur via quorum.


Quicksilver doesn’t see harm to consensus and governance as a positive, ever. We think that people who paid for their stake should be the only people who determine what the chain does, which is why we didn’t go around seeking out staked protocol owned liquidity.


I don’t know how there can be an acceptable amount of distortion to the desires of the people who worked for, or paid for their osmo.

The entire consensus, staking and governance stack was built around getting that number to zero. It was a tremendous mistake, that I personally participated in encouraging, to make that number nonzero.


Well, that is if you’re not a centralized exchange or another validator whose stake stride chooses not to copy. Then you’ll not be getting the vote power pump and your vote power will be diluted relative to others.

And if you’re not an incumbent validator, you will have a harder time joining the validator set.


the argument, in summary

There’s no potential benefit that can be had from liquid staking that is worth breaking fundamental concepts standing behind consensus, governance and delegator rewards.

Even if copied stake always abstains, it affects governance.

Even if staking is copied, validator votes are enhanced in strength relative to the votes of regular users. This is outside of the design of cosmos style staking.

If community pool osmo is prohibited from participating in consensus and earning rewards, we have created a new asset, “neutered osmo” which should have its own price and set of ideas. Probably should prove to be almost worthless, since the core functions of OSMO are consensus, staking and governance.

Users care when they get slashed, forcing them to make good validator choices. The community pool does not have feelings or opinions, and can’t make choices.

The crux of the issue that this proposal looks to solve is the un-earned governance and consensus power that the community pool is giving to validators specifically through the holding of stakedOsmo assets. Is that the only problem statement that we want to resolve through this proposal?

To this end then, as suggested by @JohnnyWyles and @RoboMcGobo would it solve the issue to put forward in the proposal that the community pool funds transition towards a concentrated liquidity position made up of 100% OSMO for all of the liquid staked providers pools? This would make stakedOsmo held by the community pool zero.

This would have to be rebalanced regularly - but this would serve to have the liquidity to liquidate stakedOsmo assets, whilst promoting users to mint using the normal minting pathway.

I would expect this preserves the economic benefits (to a large degree), whilst also rectifying the concerns around consensus and governance?

The key pain point would be handling the rebalancing such that the stakedAssets peg is protected in preventing cascading liquidations whilst also not setting the upper bound too far below redemption value so as to reduce the usability as collateral.

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Problem:

Extraordinary amounts of effort were put into making consensus and governance fair. No one’s vote, weather for consensus or governance, was to be worth more than anyone else’s. Staked POL ended this.

I disagree with this on principle.
Pure Proof of Stake is a Plutocratic system by design, that the more stake an address has, the more valuable its vote is.
Each OSMO within those addresses may have the same voting power but may not exercise that right equally due to non-participation in governance, staking on inactive validators, or not staking at all.

The portion of inflation that goes to Liquidity Providers, when combined with Superfluid Staking, adds a portion of voting power to those who contribute to the underlying liquidity on Osmosis. A part of the inflation is also allocated to the community pool and developer vesting, which in turn go towards those who contribute to the mechanisms that governance and consensus support. This encourages contributors to stake and helps shift the default Plutocratic system towards a more Meritocratic one.

Raw copy voting would retain the voting power of each individual OSMO as it would be scaled proportionately, and it would have no impact on consensus decisions.
The Stride proposal currently onchain to move to filtered copy staking merely aligns voting power and staking inflation with the push towards Meritocratic systems that other portions of inflation have already encouraged by filtering for some basic parameters of an actively engaging validator.

I also want to note that the current Liquid Staking positions in CL pools will already reduce the LST held by the community pool to 0 over the next few months as the redemption rates increase against these fixed positions.
When these are repositioned, hopefully, we will have better mechanisms in place that cause Osmosis to hold far less LST while providing liquidation depth for LSTs, as the intention behind this liquidity was.
I know of at least two teams working on mechanisms for this at the moment!

I campaigned against having Protocol-owned-LST in the first place as well. However, I also learned that sometimes my own campaigns may prove unsuccessful and the community can decide otherwise. At this point in time I don’t think there is actually a broad support for pulling the PoLST in the first place, also looking at proposals passing on other chains. The best we can do is the diversification which is already in place and trying to make the impact on VP distribution as small as possible.

Totally agreed that joining the set properly becomes harder. Even with the cutoff point at the bottom 8 validators it is possible to enter the set, but the barrier into the active set past the bottom 8 becomes a lot harder. So that is something where there is a need for attention how to mitigate that risk.

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Yeah, so:

@ValarDragon is right that it could be too fast of a move. This prop was formed by abscence of other good seeming options.

@JohnnyWyles we aren’t going to “fix” proof of stake by distorting it for liquid staking.

@RoboMcGobo is wrong that I’d intentionally misstated figures. But I did make a mistake then correct it.

I’m super ambivalent about a model for liquid staking that distorts consensus and governance. Copy staking lessens this problem, but brings with it its own set of problems.

Regards,
Jacob

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