Smart Routes, Smart Rewards: Osmosis' Volume Splitting Incentives Mechanism

Osmosis continues to innovate and iterate on incentivization strategies with a new feature, Volume Splitting Incentives. Introduced in Osmosis V20, these gauges present a novel mechanism to divide incentives between pools in proportion to the trades they facilitate, marking a departure from traditional incentive models where incentives are manually allocated.

Understanding Volume Splitting Incentives

Pool Groupings

Unlike conventional gauges, Volume Splitting Incentive gauges cover a group of pools rather than a single pool. Incentives are allocated to this grouping, opening up new incentivization strategies such as targeting pairings rather than pools or grouping of like assets.

Osmosis has initially passed proposals to create groups for major pairings such as OSMO/ATOM, as well as Stablecoin Agnostic groups that incentivize groups of pools involving well known Stablecoins such as USDC, USDT and DAI.

Dynamic Recalibration

The proportion of incentives distributed to each pool within the grouping is recalculated every epoch based on the trading volume in the pools over the previous day. This real-time adjustment ensures that pools generating the most volume per unit of liquidity receive a proportionate share of incentives.

Encouraging Liquidity Migration

Lower fee pools are often associated with higher trading volumes due to lower costs for traders and increased arbitrage opportunities. Volume Splitting Incentives actively encourage liquidity to migrate to these high-traffic, lower-fee pools, creating a self-sustaining cycle where liquidity providers in established markets will be compensated for moving to a lower fee liquidity pairing, while liquidity providers in less popular routes will continue to benefit by remaining in higher fee pools.

Fees and Attractiveness

As liquidity moves to lower-fee pools, the fee per trade decreases, making Osmosis a more attractive exchange for traders, increasing the volume on the chain. This shift also alters the fee collection ratio between Liquidity Providers and the protocol, compensating the protocol for any liquidity incentive costs by increasing the revenue from the taker fee.

Illustrative Example:

Consider an OSMO/ATOM pool with a 0.2% Spread Factor and a default 0.1% Taker fee, resulting in a total swap fee of 0.3%. If liquidity migrates to a 0.05% Spread Factor pool, the total swap fee lowers to 0.15%, with the protocol receiving two thirds of this rather than the original third. Despite potential lower swap fees for Liquidity Providers, Osmosis Incentives then bridge the gap compensating Liquidity Providers for the fees taken by the protocol with an interest in the governance of the protocol itself.

In the dynamic landscape of decentralized finance, Osmosis’s Volume Splitting Incentives is a catalyst for transformative shifts in liquidity locations. By optimizing trade routes based on demand and strategically increasing the protocol’s revenue share, Osmosis charts a course toward a more efficient and rewarding decentralized exchange ecosystem. The beauty lies in the simplicity of the mechanism – recalibrating incentives, encouraging liquidity migration, and initiating a flywheel effect that propels Osmosis into a new era of prosperity.


I’m in full support of this proposal.

Would be amazing if we could lower the average swap fees on Osmosis from 0.3% to 0.2% or even 0.15% over the course of the next year.

Love the flywheel effect this would create: Lower fees for traders, increased trading volume, increased LP earnings + Protocol Revenue.