cosmos

Prop 858: Allocate 900k ATOM as Cosmos Hub Protocol Owned Liquidity in the Osmosis stATOM/ATOM pool

The Cosmos Hub community has explicitly signalled that the growth of liquid staked Atom is a key initiative for the ecosystem. Since prop 800, executed on June 28th, 2023, the Cosmos Hub has provisioned 450k ATOM of liquidity for liquid staked Atom. With the recent release of the LSM in Prop 821, native staked atom is now able to become liquid staked, without waiting 2 weeks. This has caused a surge of liquid staked atom, and the community pool should now double down on its investment in bolstering stability of the staked atom peg and protocol revenue from enabling this.

To recap, the reasons for the community pool adding more liquidity to Atom/stATOM is:

  • DeFi Collateral Asset
    • ATOM DeFi requires markets (Lending, Perps, Stablecoins) that enable stATOM as collateral
    • The high ATOM staking APY means that lending Atom is uncompetitive and lending markets need liquid staked Atom
    • Most on-chain liquidity is against Atom, and therefore lending markets must be able to liquidate stATOM for ATOM.
  • Protocol Revenue
    • LP'ing gives the community pool revenue based on swap fees. If volume increases with the growth of stATOM/ATOM, this will keep increasing.
  • Low risk
    • The risks of the community pool having liquid staking positions is:
      • Stride code risk
      • Slashing risk of the validators constituting stATOM
      • Time preference of the unstaking window
        • The community pool does not really feel time preference for most of its capital on the order of one unstaking window.

Given this, more ATOM should be deployed to bolster liquidity for stATOM. Given that stATOM has grown since prop 800, and is expected to continue, we suggest increasing the Cosmos Hub community pool's stATOM/ATOM position here by a factor 3. This translates to adding in 900k ATOM into ATOM/stATOM liquidity, bringing the percentage of stATOM backstopped by the community pool to a bit under 33% of all stATOM currently minted. Furthermore, as explained in the Mechanics section, we suggest using concentrated liquidity positions for this, making this liquidity >15x times more effective than what has been provisioned to date.

Why Osmosis for provisioning this liquidity?

Osmosis remains very clearly the hub of user activity and defi volumes in Cosmos, and is obviously central to the ATOM Economy. It is the center of on-chain ATOM volumes and the main driver of ATOM usage in DeFi. If ATOM is to be Interchain money, Osmosis is the place to be.

As ATOM LSDs are a key part of ATOM's moneyness play, it is key to drive alignment and liquidity on Osmosis.

Osmosis's concentrated liquidity pools are the optimal place for the Cosmos Hub to deploy ATOM/stATOM Protocol Owned Liquidity for a variety of reasons:

  • Osmosis has done $459k of stATOM volumes over the last week. This is 22x the stATOM volumes that Neutron did over the last week (~$20k), where current POL is deployed. (data reference)

    • The Cosmos Hub will earn far more protocol revenue on its provisioned ATOM on Osmosis through trading fees due to the far greater volumes

  • Osmosis is used as the liquidation venue for most major Cosmos DeFi apps both on-Osmosis (i.e. Mars, Levana, Membrane, etc) and off-Osmosis (i.e. IST, Umee, Nolus, etc)

    • Increased liquidity helps increase the usage of stATOM as the collateral SOV of choice, as higher liquidity enables higher deposit caps.

  • Is more capital efficient than alternatives

    • Due to usage of Supercharged Liquidity, within the single, simple static range proposed in the Mechanics section, we are 15x more effective than simple CFMM's such as astroport
    • With the usage of already live, dynamic Quasar vaults (which don't exist on alternatives like Neutron), the capital efficiency can exceed 100x more than alternatives.

  • stATOM liquidity on Osmosis will make it easier to use stATOM for gas fees on Cosmos Hub, Osmosis, and other chains that use fee-abstraction

    • This will increase ATOM's moneyness throughout the Cosmos ecosystem

Thus building deep liquidity for ATOM LSDs on Osmosis is pivotal to the success of Cosmos DeFi and ATOM as one of its core SOV assets. The ATOM Economic Zone must extend anywhere ATOM can be used for security OR as money.

Mechanics

We propose putting 90% of this amount in a a static liquidity position of stATOM/ATOM [1.0, 1.35][^2]. This liquidity will be far more beneficial to the ecosystem due to its capital efficiency enabled by Osmosis's supercharged liquidity. With the suggested static range, the liquidity will be >15x as efficient as it would be on a classical AMM like Astroport.

We also propose that the other 10% be provisioned into the upcoming stATOM/ATOM Dynamic S+ vault on Quasar, which will use a dynamic liquidity provisioning strategy with data provided by Define Logic Labs, one of the data science firms behind the Real Yield strategies on Sommelier.

In a LSD liquidity pool, most liquidity above the redemption rate is effectively wasted, as a buyer of stATOM would be better off minting stATOM than buying above the redemption rate. However, managing liquidity to track the dynamic redemption rate is a challenge, especially for a DAO. Thus, by leveraging a dynamic vault like Quasar's, the Hub's ATOM liquidity provision will be even more effective. Over time, as Quasar and other vault providers prove themselves, a higher percent of the liquidity should be provisioned into the them, as directed by Hub governance. As currently Quasar is the only vault provider with a CL vault live, we are suggesting them to start with.

The funds will be custodied by a 3/5 multisig account cosmos1lq0gyl7eh4k8wm8ycdsqh7mrsawc8tp3nf2kzy consisting of: