This proposal signals community consent to migrate LP incentives to use an optimization algorithm. The Osmosis Grants Program partnered with Chaos Labs and Hathor Nodes to research, develop, and implement a new method of distributing internal incentives to LPs. This is a continuation from the original proposal with community feedback applied.
The algorithm and its methodology can be viewed here. The algorithm was developed based on research that has been conducted over the last few months. Updates made since the last post can be viewed here. The research is not final, and the paper outlines future research for fine tuning the algorithm over the next few months.
The algorithm focuses on creating smart incentives. Its goal is to provide the minimum number of incentives required to maintain healthy liquidity levels. This means some LPs can have their incentives increased, while others are decreased. An example of this is the increase signaled in LPs for the USDC/OSMO LP compared to the reduction signaled for the ATOM/OSMO LP. An LP’s incentives could increase one month and then decrease or remain the same the next. The goal is streamlining the incentives process while keeping its cost to the protocol low.
This section will provide a high level overview of changes made to the model since the last post.
Originally, the optimization process was focused on swap data (i.e. swaps occurring in each LP). The community requested we broaden the process to include liquidity needs that are not related to trading volume and slippage. After some refactoring, we are now able to accommodate constraints of any kind.
Originally, Stableswap LPs were set to receive 4% of incentives designated for LPs. This process has been updated to reflect the process currently used.
Competitive Slippage Levels
The community requested we lower the maximum slippage levels in Balancer Pools to ensure trading on Osmosis remains competitive w/ other dExes. We’ve reduced the maximum slippage levels from 1% for retail swaps and 10% for whale swaps to 0.25% and 2.5% respectively. These levels can be adjusted as needed.
TWAP Oracle Manipulation Resistance
As Osmosis grows, it begins to host dApps that rely on its TWAP Oracle pricing. TWAP Oracles can be targeted for manipulation by malicious actors. To ensure that builders on Osmosis can comfortably use our oracles, we’ve added a liquidity constraint for a few pools:
- Pool 1: ATOM/OSMO
- Pool 678: USDC/OSMO
- Pool 704: axlWETH/OSMO
- Pool 712: axlWBTC/OSMO
This constraint calculates the minimum liquidity required to hinder attacks on these LPs TWAP Oracles.
What are the next steps and longer term plan if this proposal is accepted?
The plan for phase 2, the immediate next steps, can be adjusted based on community input in this thread! Here are our thoughts at the moment.
Immediate Next Steps (1-2 months)
- Monitor LP efficiency
- Volume discovery and increase effectiveness of LP bootstrapping
Post Calibration Period
- Working group to monitor and provide adjustment recommendations
- Supercharged Liquidity Incentives
Part of the goal of this discussion is to open the floor to the community for any questions you might have. We’ll be answering questions in this post over the next week or two before putting the proposal on chain.
To help facilitate the discussion, we’ve selected a few topics that we’d like community input on.
- External Incentives
We received mixed feedback on if external incentive matching should be automated or not. Would love to poll the community on this again.
- Immediate Next Steps/Future Research Topics
We’ve outlined some areas of further research in the original paper. If the community has anything they’d like to see researched or fleshed out, feel free to leave suggestions! Glad to discuss those topics and even shift priorities around if there’s anything of particular interest to the collective community!
Future topics of further research:
Inactive Liquidity: Some LPers are now inactive users. In theory, if they should never return, the incentives APR is irrelevant to them. If they’re still unbonded, they will still receive a share of these rewards though. Some additional research into accounting for them could be helpful in finer-tuning incentive numbers.
Monitoring LP Efficiency: Having a central location to monitor the Volume/Liquidity and Liquidity/Incentive ratios of LPs would be helpful for both the incentives working group and the broader community. This data can also be used for setting target TVLs as an alternative to the current methodology.
Volume Discovery: Liquidity in an LP draws volume, but there is a diminishing return to this relationship. When bootstrapping LPs, having a fine tuned algorithm for shifting the target TVL for the first few months -instead of a constant default- could help maximize the volume/liquidity ratio of newer LPs.
Stableswap Liquidity Optimization: Applying the broader concepts of this process to our core stableswap LPs. The LPs are relatively new so a bootstrapping period is needed regardless so this can wait a few months.
- Incentivized Pools Selection
The scope of this grant was focused on how to provide incentives to LPs that have been selected by the community. Is there interest in having this group research and present any possible metrics/indicators that an LP is in need of incentives?
- Recent Tokenomic Changes
With the recent set of tokenomic changes, inflation and LP rewards have been reduced. A month has passed since these changes and so this program would proceed as planned if passed. Alternatively, if the community feels that incentives have been reduced enough, we can run the optimization program in maintenance mode. This would set the target liquidity level of healthy LPs equal to their current liquidity level and then simply increase/decrease incentives based on their GAMM velocity.
We will answer questions on this post until next Wednesday/Thursday. Then a proposal will be made on chain. If this proposal passes, then the incentives will shift to being run by this incentives program. Chaos Labs and Hathor Nodes will monitor incentives and liquidity levels of pools and put up future incentive adjustment programs. Public meetings will be held twice a month to discuss the state of incentives. The first incentives change would not occur until after the first working group meeting (Mid August if all goes well).
Last but not least, we’d like to once again acknowledge and thank our data providers and earlier reviewers. Their infrastructure and assistance has been invaluable to this process!
V1 Early Reviewers:
Connor | Flipside
It’s been a pleasure working on the incentives program these last few months, and we look forward to hearing from the community!