Tokenomics Roadmap

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:

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 Status
July 2025 Proposal to reduce staking inflationary rewards by 50% :white_check_mark:
Trial elimination of recurring liquidity incentives :white_check_mark:
Increase OSMO burn rate, lower non-OSMO accumulation rate in Community Pool :white_check_mark:
Top of Block auction parameter adjustments :white_check_mark:
Top of Block auction working as intended :hourglass_not_done: Patch being tested with some validators
Begin using USDC from Top of Block auction for OSMO support and buybacks :hourglass_not_done: Proposal Pending
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
8 Likes

I would have liked more info about the Dev Vesting, which is probably the biggest expenditure and driver of OSMO price underperformance, but I like the proposal overall. Thank you.

2 Likes

What do you mean with “main driver of price underperformance”?

You mean sell-offs from the dev funds?

Does this also include adding new routes for arbitrage as well? As I have always understood maintenance is mostly manual to connect new routes, but in the end ProtoRev should be able to update itself really fast based on optimal routes I guess. So a method to auto-maintain ProtoRev would be cool.

Probably also no changes on this one except changing the way how these are counted in the supply?

And, something which should not be forgotten; how does Polaris fit in this timeline-wise?

1 Like

Does this also include adding new routes for arbitrage as well? As I have always understood maintenance is mostly manual to connect new routes, but in the end ProtoRev should be able to update itself really fast based on optimal routes I guess. So a method to auto-maintain ProtoRev would be cool.

Routes get added automatically now!
From what I understand (which isn’t as thorough since it’s not something our team originally designed), there are “hot routes” that are added manually as routes to actively arbitrage, but there’s also autodetection of the highest liquidity pairings for each asset.
When a trade is made, the price is checked against the highest liquidity pool to determine if any backrun is available. Now, in theory, good routing would mean that the highest liquidity pool was already utilized; however, it’s possible that a trade used USDC → OSMO and something like USDC → ETH → OSMO. Now the protorev would know that there is a BTC pool with ETH and would perform a BTC → OSMO → ETH → BTC trade to backrun that.

As routing improves, protorev revenue naturally drops, but the number of hops that the protocol checks may no longer be sufficient, and/or the logic for finding the best pools to arbitrage into may not be entirely accurate, as the landscape of liquidity has changed dramatically since its initial implementation.

Probably also no changes on this one except changing the way how these are counted in the supply?

That’s correct - this ended up blocking the previous inflation cut proposal since they’re pre-minted and committed. Tying them to inflation was a mistake in hindsight since the team isn’t going anywhere!

And, something which should not be forgotten; how does Polaris fit in this timeline-wise?

These changes are working within our existing framework rather than relying on additional revenue streams. We’ve not yet established what any revenue stream for Polaris would look like since we’re focusing on getting product market fit. There are multiple potential streams on the horizon, of course, you need to build with options in mind, but these tokenomics changes are about making Osmosis self-sufficient before that comes into play.

1 Like

How do you mean this one?

That is a tough one, since you could advertise with low / no fees at this very moment, because it fits a market of small traders, but when introducing a model for revenue it will always hurt this group as well. In the meantime big traders have already moved elsewhere and will be harder to stimulate coming back. So it is maybe a risk to not take the potential revenue streams along in designing the product.

How do you mean this one?

Protorev is the backfilling of transactions - if liquidity condenses over a few pools or the router splits over more pools then it won’t collect as much as the trading flow is more efficient.

Aaah, I understand. Because it will also need to perform more transactions and thus pay more taker fees and such, right?

1 Like