Prop 533: Supercharged Incentives Model

This proposal signals approval of the initial Supercharged Liquidity incentive structure.

* Supercharged Liquidity’s incentive model would base a position’s incentives on how much it is actively being utilised.
* Incentives are manually claimed rather than distributed at epoch.
* As the position must either be wide enough to include a volatile spot price or adjusted to follow, Supercharged liquidity positions will not be bonded.
* Bonding will still be required if a user wishes to participate in Superfluid Staking and will consist of a full range position.
## Proposed Incentives Model
The current model splits incentives allocated to a pool to liquidity positions equivalent to their share of the bonded liquidity. This is because all classic pool positions provide liquidity over the same pool curve and so have the same breadth of liquidity position, providing the same proportion of their overall liquidity to the active spot price.

In the Supercharged Liquidity model, positions can have different ranges at which they provide liquidity and so will have different proportions of their liquidity able to be used at the spot price.

Wider positions contribute a smaller percentage of their overall liquidity to the active tick than narrower positions. One can imagine a wide position as a very wide and shallow bucket with a thin amount of liquidity at any given point, and a concentrated position as a narrow and tall bucket with significantly more liquidity depth. In this case, the second bucket would get a much larger portion of the incentives as much more of its liquidity is actually being used in swaps. In other words, incentives are now based on the actual usage of the liquidity rather than spread evenly across all liquidity.

The proposed model will encourage users to concentrate their liquidity to improve the efficiency of their position at gaining both a greater share of the spread rewards as well as incentives. Osmosis benefits from this activity by rapidly gaining deeper liquidity at the spot price.
## Technical Implementation

A position’s participation in active trading on the spot price is measured by an accumulation mechanism on each trade occurring between two ticks, where ticks are defined as specific spot prices of a pair asset in the quote asset.

Ticks

Ticks are specified at regular intervals increasing the precision of a position compared to standard implementations of concentrated liquidity which rely on percentage differences. Osmosis defines valid ticks as having a default spacing of 100 and an exponent of -6 at the spot price of 1. This results in an initial incremental price point of 0.0001 initially.

Below this, the exponent automatically increases to have an increment of 0.00001 and above a spot price of 10 the exponent automatically decreases to give an incremental spot price of 0.001. The increment precision increases and decreases as the spot price rises by each factor of 10.

Example
Spot price Range Increment
0.001<0.01 0.0000001
0.01<0.1 0.000001
0.1<1 0.00001
1<10 0.0001
10<100 0.001
100<1000 0.01
1000<10,000 0.1
10,000<100,000 1

If further granularity in price is needed then the tick spacing can be reduced from 100, but cannot be increased once set. i.e. A position with the default exponent of -6 and tick spacing of 100 can be set to begin at 17,099, 17,100 or 17,101. rather than being restricted to choosing either 17,099.60 or 17,101.30. This can be decreased to the 0.01 level if required by decreasing the tick spacing.

Active Tick Incentivisation
While the spot price stays between two ticks, spread rewards are accumulated. When a tick is passed these are allocated proportionately to the liquidity that was present in the previously active tick.

Rather than being allocated at epoch, liquidity incentives are assigned to positions continually. These are still attributed proportionately to the liquidity provided, however only to liquidity that is present in the active tick. This means that a narrower, actively managed, but small liquidity position may receive greater incentives than a larger full range position as long as it continues to occupy the active tick.

Note that unlike classic pools the spread rewards do not get accumulated automatically within the pool and incentive rewards do not get distributed automatically at epoch. Both are shown as unclaimed rewards and claiming may be triggered at any time.
## Incentives Migration
As Supercharged pools are created and linked to existing pools, they will share the same quota of liquidity incentives for the pool as a whole, allocated by the same mechanism that is currently in use.

Osmosis incentives will be allocated to the linked Supercharged pool rather than the Classic pool, and the classic pool will receive a share of these incentives as if it is a full range concentrated liquidity position, minus a discount factor to encourage migration to occur, set to 5% at launch.

External incentives gauges will remain on the original classic pools with the bonding requirement, teams loading external incentives can then opt into the new mechanism by redeploying subsequent incentives to a Supercharged pool. Users should receive a warning when they are losing incentives overall by performing a migration.

Commonwealth Thread: https://commonwealth.im/osmosis/discussion/11641-supercharged-incentives-model