osmosis

Prop 522: Liquid Staked Token Incentive Category

This proposal would introduce a new Incentives Category dedicated to pools containing liquid staking tokens with an allocation of 5% of Osmosis incentives. This incentive allocation will assist in establishing and maintaining functional liquidity for the use of LSTs in Osmosis dapps.

Details

Since the advent of Cosmos-native liquid staked tokens (LSTs), Osmosis has been the de facto hub of LST activity, despite allocating few OSMO incentives to LST pools beyond some external matching and the stOSMO/OSMO pool.

LSTs are an important part of DeFi in proof of stake systems as they overcome the majority of the hurdle rate that must be met by a protocol wanting to incentivise using a token for an action such as liquidity provision, lending collateral or stablecoin minting.

While Osmosis’ solution to this for OSMO token liquidity provision is Superfluid staking, this is not yet available for transferred tokens or in non-pool locations.

With the emergence of locations for LST usage across the Osmosis ecosystem, this proposal aims to cement Osmosis’ place as the liquidity hub for LST redemption across the Cosmos by creating a new incentive category that will ensure functional liquidity exists, either for the redemption or liquidation of liquid staking positions.

Category Criteria

A pool will be automatically accepted for incentive matching if it meets all of the following requirements:

  • Pairing is LST/LST Underlying Token
  • The LST Underlying Token has an incentivised OSMO pool.
  • Governance has approved the LST provider, either specifically or by accepting incentives on at least one LST pool.
  • Swap fee less than or equal to 0.3%.
  • Receiving external incentives of at least 50 OSMO in equivalent value per day for an epoch length of at least 7 around the date of OSMO incentive allocation.

Incentives allocation

5% of Incentive emissions will be allocated to this category split as the following:

  • 4% will be allocated based on the standard incentive model
  • 1% will be allocated proportionately to the collateralised assets that are being used as leverage from apps deployed on Osmosis
  • As the number of Dapps deployed on Osmosis increases, these ratios or totals may change as non-OSMO liquidity becomes more useful to ecosystem health. This is currently biased towards the usual incentives model as stATOM is the only asset currently being used as collateral.

These incentives will be obtained from the following methods:

  • 2% removed from OSMO/MINOR category with the OSMO/stOSMO pool moving to this category accounting for ~1%
  • 3% removed from OSMO/MAJOR category with the Maximum Incentives on OSMO/ATOM also being lowered by 3% to 32%, maintaining overall ATOM liquidity.
  • If added by automatic matching, a pool’s incentives will be capped at the level of external rewards, encouraging LST providers to continue to provide incentives for the pools whilst subsidising this activity.

Projected Model

As an example, these rules would result in the following incentives levels being allocated if this proposal directly changed incentives.

https://docs.google.com/spreadsheets/d/1yupf-2lu0UdSGF0Dshi_dhQMCUgRx_KCO0E5N93wTQg/edit#gid=9186761