Strategic BTC Position for Enhanced Market Liquidity

Proposal Discussion
1

Proposal 1: Rebalance Osmosis Treasury towards BTC

This proposal approves the purchase of 250k USDC worth of BTC as outlined below to rebalance the Osmosis treasury. A further proposal will approve the deployment of this into a liquidity position.

This set of two proposals seek to utilize 500k USDC from the Osmosis community pool to establish a strategic liquidity position in BTC, aimed at increasing market depth for Bitcoin trading and generating additional revenue for the protocol from both liquidity provision fees and protocol fees.

This position aims to be a success for Osmosis community pool holdings regardless of the price action of Bitcoin.

Background

  • The Osmosis community pool holds 1.6M USDC; this is an important resource for Osmosis, and the value of this should be preserved where possible.
  • The Osmosis community pool also holds approximately 1.9M USD of non-Osmosis native, volatile tokens as can be viewed here.
  • Bitcoin is underrepresented in this total with holdings of around 62k USD.
  • Osmosis aims to establish itself as the premier decentralized exchange for Bitcoin.
  • Bitcoin markets have historically experienced reduced liquidity during significant price movements.
  • Bitcoin is currently trading near all-time highs, resulting in lowered liquidity in pools.

Strategic Rationale

While this proposal involves taking on directional risk near Bitcoin’s all-time high, there are specific reasons why this approach is justified for Bitcoin specifically:

  1. Strategic Asset: Bitcoin holds a unique position in Osmosis’s strategy as it aims to become the dominant Bitcoin decentralized exchange.
  2. Market Leadership: Establishing deep liquidity during price discovery moments is crucial for market leadership as a reliable trading location for Bitcoin.
  3. Ecosystem Development: Supporting Bitcoin pairs aligns with broader protocol goals of having the most liquid blockchain assets used as routing mechanisms.
  4. Treasury Asset: Bitcoin is a preferred treasury asset for crypto projects, especially one as Bitcoin-aligned as Osmosis.
  5. Alloyed Asset Support: Additional Alloyed BTC serves to increase the liquidity of the Alloyed routing mechanism as well as allocating any risk associated with this mechanism to the community pool directly. I.E. In the even of a corruption event, the community pool would be able to directly absorb the corrupted asset to make Alloyed BTC users whole.

Proposal Details

Action Items

Convert 250k USDC to BTC via limit orders on Osmosis

  • Place a limit buy at market price when proposal passes. This may be repositioned in order to fill if there is a sudden BTC price movement.
  • Dollar Cost Average mechanics may be used for future deployments, but as this is a rebalancing of the Osmosis treasury only limit order functionality will be used.
  • Position size: 250k USDC equivalent

Risk Analysis

  • Community pool exposure to Bitcoin increases

    • Risk: Bitcoin could decrease in value within this liquidity range. This is potentially more likely due to BTC’s current status of being near all time highs. (“buying the top”) Bitcoin downside is acceptable in the short-medium term. This proposal approves Osmosis to purchase $250k of BTC at approximately $70k. A moderate downside would result in Osmosis purchasing BTC at greater discounts.
    • Risk: Bitcoin could decrease in value beyond this liquidity range, leading to a loss of up to 500k USDC previously accumulated by the Osmosis community pool. That scenario also has trouble for broader crypto market depending on the extent of the decrease.

  • Liquidity position upside capture

    • Risk: Compared to simply purchasing Bitcoin, the liquidity position would exit all Bitcoin purchased at an average value of 10% increase from the purchase price, leaving only the fees accumulated as Bitcoin.
      • Mitigation: This justifies the usage of USDC in the community pool over the use of the existing BTC collected from fees. This USDC is currently idle. Obtaining a 10% increase is beneficial, allowing the BTC already in the Community Pool to benefit from any further upside.

  • Community pool exposure to USDC

    • Risk: Remains constant with current holdings as long as the liquidity remains in place, as any issue would result in the position quickly becoming 100% USDC.

  • Community pool exposure to Alloyed Bitcoin

    • Risk: There is an increased risk from holding the IBC natively issued USDC due to increased exposure to multiple sources of Bitcoin. This is mitigated through both inter-chain and intra-alloy rate limits. In the event of a security issue involving the BTC Alloy the Community Pool should include this position’s Bitcoin holding in any resolution proposal to make users whole.

  • Community Pool asset exposure within liquidity pools

    • Risk: While adding liquidity to pools adds an additional layer of risk compared to native asset deployment, the Osmosis Concentrated Liquidity pools have been live with no security events for over a year.

  • Use of Multisig for execution

    • Risk: This 4/6 multisig has previously been used to deploy liquidity in other proposals, acting as an intermediary to perform multi-stage or time-dependant transactions, such as adding liquidity to a pool with a ratio of assets that will vary before a five-day Osmosis governance proposal is completed.

Risk Acknowledgment

This proposal explicitly acknowledges that:

  1. This position takes on higher downside risk while capping the upside at 10% + fees
  2. The entry timing near BTC’s all-time high increases the risk of this downside
  3. This strategy would NOT be advisable for other assets as a use of Osmosis’ stable assets. An exception is made specifically for BTC due to its strategic importance to Osmosis.
  4. The use of Alloyed Bitcoin is strategically important, and the community pool takes on a greater risk than regular users of the Alloy during any security event resolution.
  5. The deployment mechanisms and liquidity mechanisms outlined are acceptable.

Technical Implementation

Liquidity SubDAO to initiate 250k USDC conversion to BTC via limit orders.

Conclusion

While this proposal involves taking on additional risk to the Osmosis community pool, the strategic importance of Bitcoin to Osmosis justifies this targeted approach. The conversion of 250k USDC (vs. the available 1.6M USDC) helps mitigate the risk while still achieving the strategic objectives.

Proposal 2: Deploy BTC/USDC liquidity position

This proposal approves the deployment of the BTC purchased in Proposal 859 along with USDC to form a liquidity position as outlines below. Unless proposal 859 passes this proposal has no impact.

This set of two proposals seeks to utilize 500k USDC from the Osmosis community pool to establish a strategic liquidity position in BTC, aimed at increasing market depth for Bitcoin trading and generating additional revenue for the protocol from both liquidity provision fees and protocol fees.

This position aims to be a success for Osmosis community pool holdings regardless of the price action of Bitcoin.

  1. Deploy BTC in a concentrated liquidity position
    • Range: -20% to +20%
    • At current market ratio this would be $68k to $101k but will vary depending on spot price.
      • Minimum possible lower bound to be 55k USDC
      • Maximum possible upper bound to be 110k USDC
      • Deployment will use as much of these funds as possible within these bounds while maintaining the 20% range.
    • Spread factor: 0.1% (higher spread due to price discovery period)

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  1. Position Management
    • This position will be transferred back to the Osmosis Community Pool for holding along with any excess BTC or USDC.
    • Once created, this position will remain in use until retracted by a future governance proposal
    • Reasons for retraction include events such as:
      • BTC leaving this price range
      • Acquisition of fees from the position
      • Redeployment into a new position or location
      • Dissolving this position to use the contained USDC or BTC

Risk Analysis

  • Community pool exposure to Bitcoin increases

    • Risk: Bitcoin could decrease in value within this liquidity range. This is potentially more likely due to BTC’s current status of being near all time highs. (“buying the top”) Bitcoin downside is acceptable in the short-medium term. This proposal approves Osmosis to purchase $250k of BTC at approximately $70k. A moderate downside would result in Osmosis purchasing BTC at greater discounts.
    • Risk: Bitcoin could decrease in value beyond this liquidity range, leading to a loss of up to 500k USDC previously accumulated by the Osmosis community pool. That scenario also has trouble for broader crypto market depending on the extent of the decrease.

  • Liquidity position upside capture

    • Risk: Compared to simply purchasing Bitcoin, the liquidity position would exit all Bitcoin purchased at an average value of 10% increase from the purchase price, leaving only the fees accumulated as Bitcoin.
      • Mitigation: This justifies the usage of USDC in the community pool over the use of the existing BTC collected from fees. This USDC is currently idle. Obtaining a 10% increase is beneficial, allowing the BTC already in the Community Pool to benefit from any further upside.

  • Community pool exposure to USDC

    • Risk: Remains constant with current holdings as long as the liquidity remains in place, as any issue would result in the position quickly becoming 100% USDC.

  • Community pool exposure to Alloyed Bitcoin

    • Risk: There is an increased risk from holding the IBC natively issued USDC due to increased exposure to multiple sources of Bitcoin. This is mitigated through both inter-chain and intra-alloy rate limits. In the event of a security issue involving the BTC Alloy the Community Pool should include this position’s Bitcoin holding in any resolution proposal to make users whole.

  • Community Pool asset exposure within liquidity pools

    • Risk: While adding liquidity to pools adds an additional layer of risk compared to native asset deployment, the Osmosis Concentrated Liquidity pools have been live with no security events for over a year.

  • Use of Multisig for execution

    • Risk: This 4/6 multisig has previously been used to deploy liquidity in other proposals, acting as an intermediary to perform multi-stage or time-dependant transactions, such as adding liquidity to a pool with a ratio of assets that will vary before a five-day Osmosis governance proposal is completed.

Risk Acknowledgment

This proposal explicitly acknowledges that:

  1. This position takes on higher downside risk while capping the upside at 10% + fees
  2. The entry timing near BTC’s all-time high increases the risk of this downside
  3. This strategy would NOT be advisable for other assets as a use of Osmosis’ stable assets. An exception is made specifically for BTC due to its strategic importance to Osmosis.
  4. The use of Alloyed Bitcoin is strategically important, and the community pool takes on a greater risk than regular users of the Alloy during any security event resolution.
  5. The deployment mechanisms and liquidity mechanisms outlined are acceptable.

Technical Implementation

  1. Deployment of BTC into a concentrated liquidity position with a 0.1% spread.
  2. Transfer of position to the Osmosis community pool for holding.

Success Metrics

  • Volume facilitated through position
  • Fees earned (LP + taker)
  • Slippage reduction during volatile periods
  • Net Bitcoin exposure gained
  • Market share of Bitcoin trading volume

Conclusion

While this proposal involves taking on additional risk to the Osmosis community pool, the strategic importance of Bitcoin to Osmosis justifies this targeted approach. The position size of 500k USDC (vs. the available 1.6M USDC) helps mitigate the risk while still achieving the strategic objectives.

The position set aims to be useful to Osmosis in all standard scenarios.
If Bitcoin increases in value by 20%+ the idle USDC has returned a 10% profit + fees.
If Bitcoin decreases in value by 20%+, Osmosis accumulates BTC to its treasury, increasing long-term alignment.
If Bitcoin remains within this range, Osmosis generates additional fees as protocol revenue while benefiting from increased Bitcoin liquidity on Osmosis.

Target Onchain Date: 11th November 2024
Note: Adjustments to the price ranges above may be required within the 3 day window in the event of any sudden market move. The proposal intends to buy BTC at market value and place a position at +/- 20% of this price and any changes will reflect this.

Addendum

Current Breakdown of liquidity on DAODAO does not include the recent ERC20 pools from Proposal 802

Osmosis Community Pool Exposure in non-OSMO native assets:

Stables - $1.8M (51%)

USDC - 1.65M
USDT.kava - 68k
USDC.eth.axl - 67k
DAI.axl - 2.8k
USDT - 1.2k

Cosmos - $1M (28%)

AXL - 502k - $414k

  • AXL: 76k - $54.6k
  • AXL Liquidity Pool: 426.5k - $359k

ATOM: 72k - $321k
AKT: 37k - $87k
TIA: 17k - $75k
Regen/NCT Liquidity Pool - $42k
STARS Liquidity Pool - $37k
Other: $25k

ETH - 99.77 - $381k (11%)

ETH - 12.01 - $41k
ETH.axl - 2.72 - $9.3k
wstETH: 0.17 - $700
In LPs: 84.87 - $288k

ERC20s - $269k (8%)

LINK: 3.88k - $58k
ARB: 87.32k - $58k
OP: 31.53k - $57k
PEPE: 3.6B - $52k
SHIB: 1.54B - $44k

BTC: 0.85 - $75k (2%)

BTC: 0.27 - $24k
WBTC: 0.37 - $33k
WBTC.axl: 0.21 - $19k

SOL - $1.8k

SOL: 10.8 - 1.8k

4 Likes
2

We believe this strategy is worth exploring, though we acknowledge the inherent risks in not adopting a delta-neutral approach to hedge against Bitcoin’s volatility. Exposing the community pool’s stable funding to a volatile asset is a decision we understand, yet it must be approached with caution. We appreciate that you’ve highlighted these risks in your post.

At Govmos, we benefit from Phil’s expertise as a long dated financial risk manager, whose guidance in this case would be to cap exposure to volatile assets at a maximum of 15% of the overall community portfolio in stablecoins. Based on this benchmark, your proposal meets the acceptable threshold (i.e., 1.6 million USD * 15% = 240,000 USD). However, Phil has also noted that allocating this entire cap to Bitcoin alone would run counter to the financial management principle of diversification. Therefore, should this proposal move forward, he recommends reaching this cap gradually, adopting a progressive strategy for treasury management.

In summary, we are generally inclined toward a positive stance on including a measured Bitcoin exposure in the stable treasury holdings. However, we advocate for a more conservative approach at this stage. On behalf of the PRO Delegators’ validator, we would cast an no vote unless the proposal is revised to reduce the allocation and introduce refinements to the treasury strategy—whether through diversification or by employing delta-neutral management to mitigate volatility.

We remain open to collaborating with the liquidity subDAO to further develop this proposal if assistance is needed.

Thank you for reading,
Govmos
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1 Like
3

Thanks for feedback!

Regarding sizing, I actually have the opposite concern of wondering if were starting too small for the impact we want to have, since I’m measuring this impact in liquidity, with BTC-bag-holding downside risk. 500k on a 40% range means that a .5% price movement only has $6250 liquidity being swapped against. So this is good but additive to other means. Rather than starting with larger swaps though, I think its better to start at this size since this will give good impact to test with. (Maybe considering tightening the ranges though)

Re Diversification, we do have $300k atom, $85k AKT, $70k TIA, {some amount > $100k} ETH (many in CL positions), ~120k AXL

Also concretely, its only $250k getting swapped at current price (at time of completion whenever it may be) Community pool has 1.75 million total stables (add in the axlUSDC + USDT as well), so a ~15% swap to BTC now, and 15% alloc for further swapping over time. The community pool right now is under-allocated at BTC. I’m trying to collate full numbers for community pool non-osmo + non-ion holdings, but preliminarily looks like 1-2%. Whats unfortunate is that this strategy on the BTC bull case doesn’t lead to increased to BTC holdership, beyond what we get from fees. (minimum $5k lol)

The main concern in my head is wrt this maybe buying the top, especially for when this actually gets executed. I anticipate that as the main conversation problem, but I think thats partially exactly why increased liquidity now is useful

The USDC in the community pool’s main jobs IMO:

  • Act as an insurance fund for potential hacks
  • Enable growth of the Osmosis ecosystem

I do genuinely think that BTC also acts as an insurance fund here as well, and is in many ways more correlated to the value that may need to be insured. This proposal clearly helps enable growth wrt liquidity and volumes. (Continuing a flywheel of at minimum arbitrage)

2 Likes
4

Nope, buy OSMO instead! Sorry but I did not sold my BTC to invest in OSMO, to lose market value and then let you use my liquidity to buy back BTC higher!

5

I hear you. However, this is money sourced from taker fees. 50% of which has already gone into buying back and burning OSMO.

The question is what to do with the remainder, using it to enhance liquidity of key assets on Osmosis feels like a win. Its seems to me like its a significantly better strategy than increasing liquidity incentives, as this provides longer term liquidity guarantees, and does not come at a supply shock to OSMO.

Furthermore, this maintains the key ability of the osmosis community pool to act as an insurance fund in event there was a critical bug in the codebase.

Keep in mind that taker fees earned off of this liquidity deployment would automatically go into buying back and burning Osmo.

3 Likes
6

I definitely think this is a strong use of the USDC in the community pool given how important BTC will be to Osmosis’s roadmap (and, presumably, Polaris’s roadmap). I’ve taken a very risk-averse stance with respect to uses for the USDC because of how important it is to maintain a stable treasury position in volatile markets, but if we’re going to use it, it should be on targeted growth initiatives like this.

But I also agree with @ValarDragon 's point that this liquidity might be a bit too small to have the intended impact. I think there are some additions to this prop that could be made to bolster liquidity without touching any of the USDC.n held by the treasury above and beyond the $500k proposed here:

  • The treasury also holds ~ $63k in BTC (allBTC, native wBTC, and wBTC.axl). I think this proposal should include these funds as well. The wBTC can be converted into allBTC at no cost, increasing the allocated funds by a little over 10% while maintaining the treasury’s BTC exposure.

  • The treasury holds $66k in USDC.axl. This feels like added unnecessary bridge risk. I think it makes sense to include these funds in the proposal, and increase the BTC position size while doing a bit of treasury clean-up to diversify out of the riskier USDC.axl asset.

Both of these changes would increase the liquidity available under this proposal by a bit more than 20% while (arguably) consolidating specific treasury asset allocations into alloyed assets and away from 100% bridged assets.

The only other worry I have is with the range. 20% in either direction feels a bit small for a passive position. Would it make sense to keep the funds in the liquidity subdao instead so that we can adjust as needed? Especially given this election-related volatility, I think it’s reasonable that BTC could go up more than 20% or retrace by about that much and give up the post-election gains in a relatively short period of time.

If the position does fall out of range, I imagine there could be some negative downstream effects on BTC collateral in the time it takes for governance to approve an adjustment. Alternatively, maybe the range could be increased slightly to 25% or 30% in either direction? Very cognizant that this would unfortunately decrease liquidity depth.

2 Likes
7

The BTC currently in the pool was left as a safeguard against any increases above that 20%. I agree that we should de-risk the USDC.axl into USDC, but I think adding that to this proposal adds additional complication. We also have 70k USDT and I’d like to see that used to make that route a little more reliable with recent issues.

I am also a bit concerned about this position being suitable with the current volatility.
However, any appropriate changes are directly opposing.

We increase the depth of the liquidity at each price point to make the liquidity more effective, increases the exposure of Osmosis to a reduced benefit/loss on realization <> we increase the range/use an Astroport pool which lowers the impact, but lowering the usefulness of this liquidity.

We increase the quantity provided (Dev/Robo) <> We increase exposure at a new BTC high price point (Phil)

We should try to mitigate as many of these scenarios as possible but I believe that most of these are dealt with in the original proposal text, except perhaps the recent price spike increasing the downside risk vs the upside.

Aside, I have edited the above proposal to split it into a Purchase proposal and a Liquidity provision proposal as well as clarifying the Osmosis community pool’s total holdings based on feedback elsewhere.

2 Likes
8

Yeah this resonates. Would make sense to have the ability to tap into this liquidity to obviate the need to swap into BTC at a higher price in case BTC continues to go up only :sweat_smile:

9

Let’s go big and apply some marketing to non-Osmosis users.

1 Like
10

In response to:

  1. recent price movements
  2. the comments made by @ValarDragon and @RoboMcGobo

We would like to offer using our CL MMing vault to manage this liquidity.

This strategy pro-actively moves CL positions to ensure that inventory is sold at a discount.

At a high-level we would manage ±5% either side of the spot price but provide less liquidity close to the mid-price and more towards the end of the spread.

Key benefits would be:

  1. increased impact of the funds provided
  2. better price setting on the exchange
  3. never selling treasury inventory at a discount

A detailed description of the strategy can be found here: https://hackmd.io/@qQcLYljPRmienxSOqO4Ctw/ryExi5Rbke.

Visualisation of the strategy:

Screenshot 2024-11-11 at 16.14.06
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What happens if the price moves ±5% in a short time???

NOTE: our executor would move liquidity if it saw a price movement greater than the $T_o$ threshold off-chain - thus pro-actively moving liquidity.

If the single side of liquidity is consumed in a time quicker than our BE can react the vault would be single sided.

In this scenario we would simply make bids/asks as before without any opposing liquidity.

Whilst this would not be great for the market the inventory would rebalance over time.

Note: in response to @Govmos we are currently building a hedged vault that would help with this use-case in the future.

1 Like
11

This POL for BTC looks like it’ll make up the vast majority of BTC/USDC liquidity in the protocol. We currently have less than $50k of liquidity in any one single USDC pairing, the largest one being here (side note, it’s absolutely wild that we have this much volume routing through so little liquidity. Very surprised we don’t have more LPs taking advantage of this)

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I think it’d be too risky to deploy all of this liquidity to Margined’s vaults given it’d make up the majority of all liquidity pooled with USDC. BUT I do think it’d be reasonable to deploy a portion of it in this way (maybe 10-20%?). It should make the position more profitable from a fee perspective than the wide position being proposed here, and will marginally increase execution pricing (no pun intended :sweat_smile:), which helps resolve some of @ValarDragon 's concerns about capital efficiency and not going far enough with this proposal. It feels like a worthwhile experiment.

It’d also be a great way to support an Osmosis native protocol (though I’m a bit biased here given they’re an OGP grantee) with a good history of executing well (their LST vaults currently account for ~1% of Osmosis’s volume).

2 Likes
12

There was substantially more liquidity before this spike, but it has been withdrawn. Liquidity may be waiting to see a leveling off before redeploying.

I also echo your comment here that I think we should deploy further liquidity into Margined vaults to trial and then expand, as well as use DCA mechanisms to offset the downside risk of buying during a spike for any future deployments.

I didn’t load this on Friday as intended to gather some feedback on these options but, as Robo points out, the remaining liquidity is now rather thin so I am going forward with the proposals to chain now to ensure we have a deeper baseline of liquidity in the short term. I believe the risk of not deploying this additional liquidity is less than the stated risks of establishing this static position from a limit order.

1 Like
13

After assessing the updated information in this revised proposal, we now understand the rationale behind it. The current treasury allocation indeed lacks sufficient BTC exposure, which stands in contrast to the principle of balanced diversification that we consistently support. With this clarification in mind, we are aligned with supporting the proposal, as it appears well-suited to serve the chain’s best interests. Additionally, the use of a limit order for executing the swap represents a substantial improvement over previous suggestions, as it helps mitigate volatility risks—particularly crucial in light of recent market fluctuations.

The underrepresentation of BTC is a primary factor in our decision to support increasing Bitcoin exposure within stable holdings. This proposed allocation aligns well with a balanced portfolio approach. We further suggest considering a mid-term DCA (dollar-cost averaging) strategy, potentially combined with a delta-hedge management approach to address the heightened volatility of BTC in recent markets.

Thank you for reading,
Govmos.
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