Osmosis: Deploy Protocol Owned Liquidity of AXL/OSMO via Astroport PCL

This proposal would send 500k AXL and 650k OSMO to the Osmosis Liquidity subDAO for deployment into an Astroport AXL/OSMO PCL pool and return to the community pool.

Background

The Osmosis Community Pool owns 1.09M AXL, mainly from the loan repayment for the Axelar Loan Swap (Proposal 332).

This AXL has been sitting unused in the community pool for two years. While inflation has impacted the proportion of Axelar supply that this represents, the AXL repayment was initially valued at approximately 1 million USD and is now worth 1.77 million USD, representing a considerable success for the Loan Swap mechanism.

About Axelar

Axelar delivers secure cross-chain communication for Web3. Its infrastructure enables dApp users to interact with any asset or application on any chain with one click.

The Osmosis community voted Axelar the first canonical Ethereum bridge service provider in Proposal 206. Axelar currently facilitates most ETH liquidity on Osmosis and is a source of WBTC, USDC, and DAI, as well as connections to other ecosystems such as Polygon and Arbitrum.

Around 42.5M USD of tokens used within the Osmosis ecosystem have arrived via the Axelar bridge.

State of Liquidity

Axelar liquidity on Osmosis is present primarily as the Classic pool AXL/OSMO and a Supercharged pool AXL/OSMO. The Supercharged liquidity is mainly deployed in a full-range position rather than taking advantage of the capital efficiency available in Supercharged pools.

AXL/OSMO Supercharger pool liquidity distribution

This has been reflected in reduced trading volumes compared to other trading locations despite large amounts of liquidity being available on Osmosis and Axelar being a Cosmos SDK-based chain.

Snapshot of AXL Markets Source: Coingecko Markets

The ratio of Volume to Liquidity is typical for Classic and Full-Range positions. Ideally, the Supercharged Liquidity pool would concentrate on a more aggressive position. However, since Osmosis has both tokens available in the community pool, it is possible to deploy them into a position that will facilitate a more significant share of Axelar volume on Osmosis. This will also earn additional protocol revenue on these inactive assets.

Quantity

This proposal asks for 500k AXL and 650k OSMO, valued at approximately 1.6 million USD. This is around 46% of the AXL in the Community Pool, leaving the remainder available for future deployments such as Liquid Staking, expansion of this deployment, or alternative vault deployment.

Axelar and Osmosis have similar market caps. In previous forum discussions, a swap of around 300k OSMO was suggested for similar situations. However, as Osmosis already owns both halves of the liquidity that is currently unutilized, a larger quantity is being requested for deployment. This larger quantity is equivalent to the original loan swap and ensures that Osmosis will retain the majority of AXL for future usage while receiving the trading benefits of more capital-efficient liquidity for AXL. Furthermore, it will enable Osmosis to begin acquiring protocol revenue on dormant community pool assets.

Mechanism

Liquidity would be deployed into an Astroport PCL pool with the standard fee range on Osmosis of 0.05%-0.2%.

Astroport PCL pools are more suitable for unmanaged liquidity positions than Osmosis Supercharged liquidity positions as they adjust both position and fees automatically without input from the liquidity provider. These properties make them ideal for Protocol Owned Liquidity deployments of volatile assets where a chain’s governance does not have the agility to maintain narrow liquidity positions.

Astroport pools have a variable fee depending on volatility. Currently, trading through this pool would be split as follows:

0.1% Taker Fee to Osmosis
0.05%-0.2% adaptable PCL fee, one quarter to Astroport, three quarters as returns to this position.

The subDAO will then transfer the tokens representing this liquidity position back to the community pool, along with any excess OSMO or AXL that cannot be deposited.

Liquidity subDAO

The Liquidity subDAO can be viewed here and is a 4/6 multisig comprised of

CryptoAssassin (Validator)
EffortCapital (Blockworks Research)
Johnny Wyles (Osmosis Labs)
NosNode (Validator)
RoboMcGobo (Osmosis Grants Program)
Trix (Independent)

This multisig has previously been used in Proposal 715 to deploy liquidity to stSTARS/STARS and acts as an intermediary to perform multi-stage or time-dependant transactions, such as adding liquidity to a pool with a ratio of assets that will vary before a five-day Osmosis governance proposal is completed.