As it has been discussed elsewhere, currently incentives are being farmed in its majority by bots gaming tight spreads to maximize the amount of incentives they receive, impacting negatively in the chain in the following major ways:
* Retail LPers are disincentivized of providing liquidity since their rewards are significantly reduced, therefore the rewards are not enough to counter any incurred IL.
* Swaps of large enough volume immediately go out of range, causing large spreads for swaps and defeating the purpose of CL.
* Liquidity provided is the most mercenary since it will leave immediately after incentives are reduced on something and moved to something else.
Because of the above we are proposing to pause incentives on these pools until a mechanism is live that allows to counter this, either by setting a minimum spread or by enabling the setting for minimum bond time for positions before receiving incentives.
The mechanism itself falls outside the scope of this proposal since the objective is simply to pause incentives to CL until a mechanism is enabled on-chain.
* By voting YES on this proposals stakers agree to pause incentives on CL pools until a mechanism is in place to counter gaming of CL incentives.
* By voting NO on this proposals stakers disagree to pause incentives on CL pools.
No on-chain date until further discussion on the topic.
This is a signaling proposal to implement the minimum of 1 day uptime mechanic that is currently available but disabled in concentrated liquidity pools. This will limit incentives to accounts that have maintained their liquidity for at least a day in the same range. The change will prevent bots that earn high swap fees by using ultra tight liquidity ranges of earning the OSMO incentives.
- By voting YES on this proposals stakers agree to implement the minimum of 1 day uptime mechanic that is currently available but disabled.
- By voting NO on this proposals stakers disagree to implement the minimum of 1 day uptime mechanic that is currently available but disabled.
Target on-chain date: 2023-Nov-09
I totally agree that there should be some mechanism that disincentivizes competition for tigther and tigther ranges for variable pools (i.e. OSMO/USDC etc.). As you said, this drives out a lot of retail LPs. Due to arguably unnaturally tight ranges from a few bots/LPs, retail does not only receive a lot less reward share but also less spread incentives. I think it’s totally fine if LPs pull their positions super tight to receive a bigger share of spread rewards, but the OSMO incentives should serve broader liquidity. Otherwise I think it’s safe to assume that the overall liquidity will shrink and in the case of OSMO there is also the aspect of demand for the asset that is somewhat tied to how much is sitting in pools vs. free-floating or reserving staking yield.
For anyone that is curious about similar pain points communities in the Ethereum eco went through I encourage to have a look at a few blog posts from Revert Finance, such as this.
In regard to this proposal specifically - stopping incentives until some mechanism is active - I’m rather neutral.
I don’t think pausing incentives will be particularly beneficial, right now we are sending out around $6500 in OSMO per day. Even if all of this gets immediately sold the impact of that is tiny relative to OSMO token liquidity.
This also seems to be working as intended? Sure the shift to deep liquidity rather than broad might have happened faster than expected but deep liquidity is what is incentivised in the current system.
The incentives might be being taken by bots, but they are providing liquidity in a tight range for trading. There is nothing special about non-bot liquidity that makes it more desirable?
I agree that there should be a mechanism to encourage breadth for the second point though.
Rather than this prop I propose 2 different props:
1: This proposal to be changed to signal implementation and approval of the “uptime” mechanic at 1 minute in the next software upgrade.
2: The Migration of USDC incentives from Proposal 648 in the November incentive renewal to be cancelled and put into reserve since it likely won’t attract further liquidity which is some savings if these are concerning.
If the intention is to remove users from LPing then yes. We should remove the option from the front end.
The incentive right now is deep liquidity in such a tight range that any sizeable trade will be outside that liquidity.
I agree with @luisqa here. We should not forget that CL only works if there is enough liquidity available within a very tight range to either consume the complete trade OR if there is enough liquidity outside the very tight range to avoid big changes in price.
If we disincentivize people using a bigger range than the bots, resulting in minimal rewards, then we might end up with 2 groups of LP-ers;
- bots in a very tight range
- LP-ers on a full range position
And when a size goes outside the very tight range we might get enormous price swings due to low liquidity, which is totally undesirable from a trading perspective.
CL is good, but the execution must be spot on. I agree that maybe setting a range which is at least XX% below and XX% above as boundaries as minimum would help battling aggressive bots and giving dedicated people a chance, whilst also strengthening the protocol in general.
I’ll focus on this and will update the original post.