This article outlines the Osmosis Foundation’s vision for the evolution of OSMO tokenomics over the next six months. It aims to provide a strategic rationale to connect upcoming governance proposals and developments into a coherent roadmap.
These changes represent a major step toward a more sustainable, resilient, and value-driven economic model for Osmosis. Each proposal is designed not just to improve individual mechanisms but collectively to unlock a healthier, more self-sustaining ecosystem.
For the most recent primer on current OSMO tokenomics, see this blog post written at the start of the year: Osmosis Tokenomics into 2025
All adjustments are subject to governance discussion and approval and aim to bring Osmosis into a fully sustainable form, where its circulating supply remains constant or deflationary by the end of 2025, creating a better environment for participants in the Osmosis ecosystem.
This article focuses specifically on adjustments to Osmosis’ current economic mechanisms. It does not cover other engineering work, such as software upgrades, security enhancements, future Polaris integrations or new value sources for Osmosis that are being developed.
Sustainability
The primary aim of these initiatives is to ensure that Osmosis’s revenue exceeds its costs, which is crucial for protocol sustainability.
Osmosis on-chain tokenomic mechanisms currently have four significant inflows and three major outflows, each of which is reviewed below, along with our plans to improve revenue generation and minimize expenditure.
Revenue
Taker Fees
Taker fees currently generate the majority of Osmosis’ revenue.
Taker fee collection occurs on the token that enters a trade, resulting in a wide array of tokens being initially collected.
The non-OSMO tokens are currently split 55/45 between accumulation in the community pool for later usage, either as is or as a designated “default” denomination, and an OSMO buyback.
Bought back OSMO is added to the OSMO directly collected from taker fees and is split 50/50 between distribution to stakers and a token burn.
Planned improvements include:
- Changing the accumulate/buyback split to be 25/75, as well as changing the distribute/burn split to be 30/70. This adjustment will increase the OSMO burn rate directly while maintaining staking rewards from taker fees. This parameter change will be proposed within the next month.
- Adding a form of fee tiering. The design will likely rely on both having quantities of OSMO staked as well as volume performed that month in the address, although these may be added individually. Implementation is scheduled to arrive in Q4.
- Changing the list of tokens that the Osmosis Community pool holds to be far smaller, as well as the default denomination to BTC, resulting in a more focused community pool that continually DCAs into a Bitcoin reserve. This action consists of two parameter change proposals and a software upgrade, which will take place by the end of August 2025.
The taker fee mechanism is being adjusted to burn more OSMO and accumulate fewer long-tail assets in the community pool. These changes aim to increase deflationary pressure on OSMO and build a more focused Bitcoin reserve, without significantly reducing staking yield.
ProtoRev
The ProtoRev module arbitrages between on-chain pools, resulting in OSMO being burned and other tokens being collected in the community pool.
This module is currently being reviewed to ensure it is performing at optimal levels, thereby increasing revenue generation.
Top of Block Auction
The Top of Block auction allows traders to bid in USDC for block priority, primarily used for cross-chain or CEX/DEX arbitrage.
- A bug in the implementation has been fixed and is undergoing final testing for imminent release. This bug allowed arbitrageurs to claim a high-ranking slot in each block without paying a premium. Resolving this should increase revenue from this module, as using it will become essential to capture an arbitrage opportunity in the block.
- The USDC already collected from the Top of Block auction will be proposed as OSMO support and buyback. Through a single-sided liquidity position, this will both increase the resilience of the OSMO price and perform an incremental buyback while OSMO is at low price levels. This action should be in place by the end of July 2025.
Transaction Fees
Transaction fees are utilizing an EIP-1559 style market and are performing well.
Improvements here are relatively minor and will consist of parameter changes to optimize the gas market and block capacity as required.
Expenses
Expenses on Osmosis are still primarily composed of inflationary emissions, which have acted as a supplement to actual revenue distribution.
This supplement has decreased to a level where we plan to move towards an effective inflation rate of zero.
This re-evaluation of inflation emissions is something that many proof-of-stake protocols are also currently considering. Notably recently:
- Celestia is debating moving to Proof of Governance to reduce inflation to 0.25%
- NEAR debating cutting from 5% inflation to 2.5%
- SOL narrowly failing to pass an incremental inflation reduction due to the Supermajority requirement
Proposed changes for Osmosis focus on clarifying what is emitted by the protocol into the circulating supply, compared to what is deferred by accumulation in the community pool, and incrementally increasing that deferral to reduce effective inflation.
Osmosis will continue to mint 1 billion OSMO tokens over time. However, the changes below cause the majority of remaining tokens to be diverted to the community pool, where they may either be used for targeted initiatives with measurable impact or permanently removed from circulation via explicit burn proposals.
Staking Rewards
The most significant expense is on inflationary staking rewards.
These currently account for around two-thirds of the total staking rewards and represent half of the inflation.
Inflation to staking will be proposed for further reduction by redirection to the community pool, allowing the yield from taker fees and transaction fees to be sufficient to cover security costs.
The lower inflationary rewards post-thirdening have not resulted in undelegations above the typical rate, and the percentage staked has increased so far, indicating that these emissions can likely be cut further, resulting in generally lower inflation for users not participating in staking while maintaining the same net yield for stakers.
Reductions will be phased in through multiple proposals, with the first, a 50% cut, targeted for mid-July, contingent on staking participation under new headline APRs.
Staking rewards from inflation will be gradually reduced, beginning with a 50% cut in July. The goal is to lower inflation and rely on real protocol revenue to sustain network security.
Developer Vesting
Osmosis’ approach to vesting is unusual compared to all other token emission schedules.
The Dev Vesting allocation is pre-minted, like other projects, but is third-party reported as part of inflation as if it were not pre-minted, due to confusion surrounding the non-standard Cosmos mint module.
The plan is to incorporate these tokens into circulating supply calculations and adopt a more standardized display mechanism, more fairly reflecting the market cap compared to the FDV of OSMO by using a more commonly used tokenomic model.
As a side effect, the reported circulating supply of Osmosis is expected to increase by approximately 9% during this change, scheduled for Q3, although no tokens will be minted as a result.
Developer allocations will be incorporated into the circulating supply calculation to better align reported metrics with industry standards.
Liquidity Incentives
The impact of liquidity incentives has been generally low on Osmosis for the last few months.
Currently, this is a relatively small expenditure that has primarily been allocated towards incentivizing the OSMO/USDC pairing to offset the inflation incurred by LPs.
As inflation winds down, Osmosis will phase out recurring liquidity incentives, replacing the redirection mechanism that has been in place for all previous incentive cuts with a direct assignment of this distribution to the community pool.
Future allocations may take the form of fixed-duration community pool spends or protocol-owned liquidity, given the historically low impact of incentives.
The proposal to trial the elimination of liquidity incentives aims to go live in mid-July.
Recurring liquidity incentives are being phased out. Instead, the community pool will fund targeted, time-limited incentives or provide liquidity directly. This reduces passive inflation and shifts to more intentional capital deployment.
Summary
With the implementation of these proposals, the target is, by the end of 2025, to:
- Increase the real revenue of stakers from the current 2.2% to 3%+
- Increase the burned OSMO per day to be greater than any remaining emissions, resulting in a net deflationary OSMO.
- Maintain liquidity and staking levels.
Each of these changes will be proposed individually and monitored for impact. Community feedback will guide whether reductions to staking rewards and emissions are sustained, deepened, or reversed.
Timeline for Governance Discussions
| Date / Quarter | Proposed Initiative Start Time |
|---|---|
| July 2025 | Proposal to reduce staking inflationary rewards by 50% |
| Trial elimination of recurring liquidity incentives | |
| Increase OSMO burn rate, lower non-OSMO accumulation rate in Community Pool | |
| Top of Block auction working as intended | |
| Begin using USDC from Top of Block auction for OSMO support and buybacks | |
| August 2025 | Parameter changes and upgrade to focus community pool holdings on BTC and select assets |
| Q3 2025 | Update to circulating supply reporting to include developer vesting |
| Update to inflation endpoints to reflect OSMO entry into circulating supply | |
| ProtoRev Module review to optimize performance | |
| Secondary staking emission proposal - to be determined | |
| Q4 2025 | Fee tiering based on trading volume |
| Fee tiering based on OSMO stake |