This proposal approves a format for using protocol revenue derived from the Top of Block auctions as both OSMO liquidity support and an incremental buyback and burn mechanism.
This proposal authorizes an allocation of 120,000 USDC from the Community Pool to be reimbursed by the Top of Block USDC upon completion of the upcoming software upgrade, as outlined in Proposal 958.
Mechanism Purpose
This mechanism aligns with the theme of converting protocol revenues into strategic buy pressure and sustained deflationary mechanics. It avoids creating upward resistance as the ratio of USDC to OSMO increases, while providing liquidity and an additional source of protocol revenue directed at reducing the maximum supply of OSMO if the ratio decreases.
When combined with the existing buyback and burn mechanisms from Taker Fees and ProtoRev, and the reduction of inflationary emissions from Liquidity Incentives ending and Staking Inflation reductions, this mechanism aims to establish an adaptive rising floor for the OSMO/USDC ratio, as well as using one stream of USDC arriving in the community pool to consistently and regularly buy back OSMO whenever the ratio dips. The OSMO/USDC ratio is equivalent to the OSMO price in USDC and is used throughout this proposal to describe liquidity positions.
Mechanism Design
Liquidity will be deployed in multiple consecutive ranges at 0.01 USDC bands below the current spot price of OSMO, using only USDC.
A 0.5% spread pool will be used to maximize fee earnings while liquidity is active, while keeping the default 0.01% OSMO/USDC pool more competitive than this protocol’s liquidity.
There will be a maximum of 5 positions placed at one time, utilizing up to 20% of the allocated USDC each.
Example: Initial placement
- Spot ratio: 0.176
- 0.17-0.16
- 0.16-0.15
- 0.15-0.14
- 0.14-0.13
- 0.13-0.12
If the ratio moves up and holds above the next potential position for more than one week, liquidity is repositioned up by withdrawing the lowest position.
Example: Spot Ratio rises above the next potential position
- Spot Ratio: 0.182
- 0.18-0.17
- 0.17-0.16
- 0.16-0.15
- 0.15-0.14
- 0.14-0.13
0.13-0.12
If the spot ratio falls into the top position’s range. In that case, this USDC now acts as functional liquidity for OSMO and will generate fees on this position, compounding the impact of this revenue on the incremental buyback.
Current data estimates an APR of 90% for this position, which translates to an APR of 18% for the overall allocation.
Example: Spot Ratio falls into the range of the top position
- 0.18-0.17 ← Spot Ratio 0.178
- 0.17-0.16
- 0.16-0.15
- 0.15-0.14
- 0.14-0.13
If the ratio falls through the range, the position (now fully converted to OSMO) is withdrawn and burned by sending it to the null address, removing it from the maximum supply.
Example: Spot Ratio falls out of the range of the top position
0.18-0.17← Withdrawn as OSMO and burned- 0.17-0.16 ← Spot Ratio 0.167
- 0.16-0.15
- 0.15-0.14
- 0.14-0.13
If the ratio falls through all ranges, then the allocation has been fully utilized for buying back and burning OSMO. In this example, that would be at an average price of 0.15, burning 800,000 OSMO, plus any fees accrued during the liquidity deployment.
This approach ensures:
- Downside support via newly created protocol liquidity
- Upside responsiveness via dynamic repositioning of protocol liquidity
- Deflation via burning if support positions are breached
- Utilization of the protocol USDC from Top of Block auctions that would otherwise sit idle, to earn further protocol revenue
- Optionality of deployment as governance controls the allocation size and timing of this mechanism’s activation
Funding Details
Authorize the use of existing Community Pool funds to pre-fund the equivalent USDC amount, which is awaiting migration to the community pool, ahead of the upgrade that will perform this migration.
Direct these funds to the Liquidity SubDAO, which will manage the active deployment and maintenance of the strategy as outlined above.
A further proposal may be passed to withdraw the remaining USDC from this liquidity deployment, otherwise it is expected that all 120,000 USDC will be utilized in this strategy, resulting in a reduction of up to 800,000 OSMO plus fees to the maximum supply.
Target Onchain Date: 21st July 2025