[PASSED] [PROPOSAL] Updating the Hub's stATOM/ATOM POL on Osmosis

[JohnMontagu]

Author

Citadel One

Updates

- 30th of August: After considering community feedback which was voiced in the beginning period, we’ve amended the Proposal to exclude increasing Quasar’s allocation. I recommend all community members ignore/ vote No on Proposal #956 and vote on Proposal #957 instead.
You can read further on the reasons why here.

- 28th of August: Update the title to LAST CALL as the proposal will be pushed on chain soon, please submit any additional feedback in the next 24 hours.

- 17th of August: Add the proposal of giving the custodians the ability to update the range in the future without going through governance.

- 17th of August: Add the proposal of increasing the amount deployed via Quasar.

- 17th of August: Update the implementation section.

Summary

As stATOM redemption rate continuously increases (currently at 1.407 ATOM which surpasses the upper bound of the initial range), the POL position is currently out of range and not earning any swap fees.

This proposal seeks to:

• update the liquidity range for the Hub’s POL of stATOM/ATOM on Osmosis from the previously set range of [1.0, 1.35] to a new range of [1.1, 1.45].
• Increase the amount deployed via Quasar from 90K ATOM to 210K ATOM by adding 120K ATOM.
• Give the custodians of the position the power to update the position in the future if it goes out of range again.

These changes aim to ensure the efficiency of the Hub’s liquidity in the pool.

Background

In the original proposal #858, the Cosmos Hub community approved the allocation of 900k ATOM to provide liquidity in the stATOM/ATOM pool on Osmosis, with 90% of this liquidity placed within a static range of [1.0, 1.35].

This range was chosen to provide liquidity mostly below the redemption rate of stATOM, which at the time was 1.228.

The rationale behind the initial range was that liquidity is more effective below the redemption rate. However, a buffer above the redemption rate was included to accommodate the continuous increase.

Rationale

As of now, the redemption rate of stATOM has increased to 1.407 ATOM and surpassed the position’s upper range of 1.35. Making the position Out Of Range, which means all assets parked in the pool are in $ATOM ( approx 811,060 $ATOM) and not earning any fees from swaps. For more details:

Meanwhile, the amount deployed via Quasar has generated almost as much revenue while only representing 10% of the total POL deployed.

To address this, I propose

• Increasing the liquidity deployed via Quasar to a total of 210K $ATOM ( a suggested improvement by @JohnnyWyles):
  This will allow the Hub to increase its revenues while minimising its exposure to $stATOM.
  → Note: Deployment via the Quasar vault incurs a 20% performance fee ( applied only to accrued revenue and not the principal).

• Adjusting the range of the remaining liquidity to [1.1, 1.45]:
  This range will accommodate for the rate increase, maintain most of the liquidity below Stride’s redemption rate all while earning swap fees for the Hub’s liquidity.

• Give the POL’s custodians the power to update the the position if it goes out of range again ( a suggested improvement by @RoboMcGobo):
  This will make sure the position never stays Out Of Range by allowing the custodians to move quickly and eliminating the waiting period of 28 days ( at least) of waiting period associated with governance.
  → Note: This power only concerns performing updates to the range when it’s out. It doesn’t allow any other updates, such as increasing the amount deployed via Quasar for ex…
  → Note: For records sake, @JohnnyWyles will update the community about these updates if/ when they happen by commenting on this discussion/ the initial discussion.

Here’s what the current deployment look like vs what it’ll look like if this proposal passes:

Proposed Implementation

The position is managed by a 3/5 multisig on Osmosis with Zaki Manian, Valentin Pletnev, Joni Z, Masha and Johnny Wyles as signers.

As suggested by @RoboMcGobo, this section has been updated to propose that, if the proposal passes, signers will have the discretion to implement the suggested changes in order to maximise safety and avoid any sort of market manipulation.
This is in regard to the timeline, number of transaction and size when performing the updates suggested.

Note: Plans to re-route POL deployments through Hydro are currently in discussions in the forum. In case the plans are finalized before a favourable outcome to this proposal, the implementation of this proposal will be managed by the Hydro committee.

Voting Options

• Yes: You’re in favour of updating the liquidity range to [1.1, 1.45].
• No: You’re against updating the liquidity range to [1.1, 1.45].
• Abstain: You’re neither for nor against but wish to contribute to quorum.
• No with Veto: Strongly oppose the proposal and deem it a spam, harmful to the Hub.

[Govmos]

In representation of the PRO Delegators’ validator, we lean towards a favorable vote for this proposal. Our sole remark pertains to the time efficiency aspect. Considering the 14-day on-chain voting period prior to the tallying, could it be anticipated that the situation will regain equilibrium within that duration? This would make this adjustment unnecessary by that time.

[JohnMontagu]

The stATOM/ATOM exchange rate is correlated with the redemption rate of Stride’s stATOM, which will only increase in time as it accrues staking yield.

Barring a large sell pressure from stATOM to ATOM ( from liquidations for ex), the position is unlikely to go back into range.

[Govmos]

Thank you for this clarification! We mistakenly believed this ratio was anchored as a deviation to the protocol redemption rate. With this new understanding, we fully support the proposition. Furthermore, we recommend increasing the range further, as the 1.45 ratio is expected to be met by early December.

Note: this chart presents the ratio betwen stATOM/ATOM within osmosis only. The technical study simply displays a linear regression trend prolonged into the future.

Considering the aforementioned 14d voting period, we suggest to raise the bracket toward [1,15-1,5] which should be enough to cover until February next year.

[JohnMontagu]

Thanks for putting this together. Considering the timeline, that might be an option as well.

Curious to hear the thoughts of @JohnnyWyles & @sunnya97 on the optimal range.

[RoboMcGobo]

Hey @JohnMontagu thank you so much for raising this proposal! Stride is supportive of the proposed adjustment.

A minimum range of 1.1 is far below the lowest historical depeg percentage for stATOM, so will provide a comfortable margin of protection against depegs. As raised by @Govmos the upper bound of 1.45 will necessitate another adjustment after a couple of months, but it’s likely hydro will be live before then, so that probably doesn’t matter. As you’ve mentioned, the ideal here is to keep the bulk of the position in ATOM to optimize for depeg protection and maximize fee revenue to the Hub.

I’d propose two changes to this proposal aimed at making this adjustment safer and reducing some gov overhead related to this position:

First, the position should ideally be moved over multiple transactions rather than all at once. This protects the lending markets backstopped by this position from the risk of opportunistic market manipulation timed with this migration. The multisig should have the discretion to move the position over as many transactions as they deem safe and necessary.

Second, since hydro isn’t live yet and unexpected delays can happen, I’d suggest that this proposal also give the multisig discretion to make future adjustments to the range at their own discretion if the position falls out of range again. This will prevent having to go to governance to adjust the position again and allow the multisig to iterate a bit more quickly. This would resolve the concern mentioned above about the upper range.

[JohnnyWyles]

If the signaling proposal to transfer this position to Hydro as part of the initial seed liquidity goes through, then December should be fine for the range. Much like now, the liquidity still remains useful when out of range as it provides peg support during spikes.

A major issue that has come up when talking about POL is also the amount that is held as the LST. The greater the proportion held over market rate, the more of the LST has to be held, which wasn’t really considered an issue when this first went on chain but now has concerns raised about the dilution of voting power.

If this isn’t an issue and folks don’t think Hydro will pass/be in ready for December then the range should be extended though.

One way to mitigate this is to move more of the funding into the Quasar vault that is currently assigned 10% of this.
Although it is in a higher spread pool, it currently sits at 1.334 - 1.379 making it around 8 times more efficient than the existing liquidity in exchange for performance fees and is almost entire ATOM.

I suggest removing around 120k of ATOM from the static position, adding it to the Quasar vault - yielding almost the same depth for collateral as currently exists, and then migrating the remaining 690k ATOM to a new static position of 1.1-1.45.

[JohnMontagu]

Hey Robo,thanks for chiming in, both are great suggestions!
I’ve amended the draft to include both points:

@RoboMcGobo

The multisig should have the discretion to move the position over as many transactions as they deem safe and necessary.

→ the signers will have the discretion to implement the updates in the safest way. This includes N° of transactions, timeline and size.

@RoboMcGobo

give the multisig discretion to make future adjustments to the range at their own discretion if the position falls out of range again.

I ended up removing this from the original draft assuming Hydro will take over by the time the position needs another update but you’re right, it’s best to eliminate this problem in the future in case the re-routing takes longer than expected.

→ The signers have the discretion to update the range of the position. To keep the community up to date of such updates, I suggested that if/ when such updates are made, Johnny Wyles adds it to this forum discussion ( or the original one).

[JohnMontagu]

Hey Johnny, thanks for the feedback. It makes sense to me.

I’ve update the original draft to propose increasing the Quasar position by 120K ATOM.

[wassie]

If fee is also the concern and Quasar is earning 9x more fee why not put Half if not all in the Quasar? It also saves the controllers from marinating the liquidity manually.

Because we feel we are late in our contribution, we will vote Yes as it is.

[waqarmmirza]

So CP funds are now earning for;

Stride as they charge 10% on all the LSTs.
Quasar is charging a 10% fee on LP management.
Osmosis is earning on the trade fees and TVL.

Actual Atom Stakers are now earning less APR as CP funds once idle and meant for development are now taking the Staking APR.

Tell me again who is the beneficiary here?

[JohnMontagu]

Sharing the last update here for visibility:

@JohnMontagu

- 30th of August: After considering community feedback which was voiced in the beginning period, we’ve amended the Proposal to exclude increasing Quasar’s allocation. I recommend all community members ignore/ vote No on Proposal #956 and vote on Proposal #957 instead.
You can read further on the reasons why here.

[JohnnyWyles]

I feel like the Quasar complaints stem from the purpose of this liquidity being unclear.

If this liquidity is designed to earn yield for the Cosmos Hub, Quasar is doing a terrible job compared to a vault that was constantly in position - but still just as good as the previous static position through the efficiency gains.
However, no other vault exists for this yet as competition. Astroport isn’t quite the same thing as a narrow vault and Apollo isn’t deployed on Osmosis.

Pulsar Finance | The Leading Cross-Chain Portfolio Manager

If this liquidity is designed to support the peg of stATOM by providing a backstop of ATOM liquidity in a thin, mostly single-sided position that adjusts as the redemption rate naturally increases, then Quasar is doing a less-than-perfect job but is still far outperforming the static liquidity position due to the narrower liquidity.
No other vault exists here yet either. If this is the purpose of this then Margined vaults may be a better deployment once polished since they have specific settings that allow easier LST repegs.

In both cases, Quasar is performing worse than is possible but still better than the static position and need to clarify their usage + improve performance to compete with alternatives.

To address @waqarmmirza 's comment.
Stride gets paid more in an entirely static position since it has to contain stATOM. Minimizing this is the main reason to go for a vault that does not need a forward-looking holding.
Quasar gets paid more if their position is in range - it is a performance fee rather than a management fee. At 20% we’re looking at $1k for maintenance since deployment.
Osmosis earns the LST protocol fee on trades (0.02%)
ATOM community pool earns the Liquidity Provider fee of between 0.05% and 0.3%, depending on deployment pool.
Hydro is meant to skew this further to the ATOM community pool by requiring a bid - which would likely be based on the projected earnings of each category.

The main benefit of this liquidity is that ATOM gets a deep LST and a further use case as collateral. When deployed in a mostly ATOM position, the actual financial costs of lost fees are tiny compared to that benefit.

[waqarmmirza]

Thank you for detailing. I would encourage the OP to also make this data public with all the earnings and beneficiaries. It should be public information.

Definitely Hudro looks a better solution.

[JohnMontagu]

Hey @waqarmmirza, could you clarify which data is missing from the discussions, I’d be happy to add it?

• The Stride fees were addressed in the discussion. And the idea was to reduce the CP’s pool exposure to it. There was also a table detailing the position’s holding of stATOM approx in the case of the proposal’s passing.

@JohnMontagu

Screenshot 2024-08-18 at 17.33.431350×678 92.3 KB

• Quasar’s fees were also mentionned

@JohnMontagu

→ Note: Deployment via the Quasar vault incurs a 20% performance fee ( applied only to accrued revenue and not the principal).

• Osmosis’ earning aren’t relevant here in my opinion, as they come out of the taker’s side ( the user performing the swap pays an additional fee on top of the LP fee).

@waqarmmirza

Osmosis is earning on the trade fees and TVL.

It’s also worth noting that currently the position is fully in $ATOM ( both static and quasar deployments) meaning that no fees are being earned by Stride. However, if the goal is to earn swap fees, a portion of the position will have to be held in stATOM which will involve a 10% performance fee charged by Stride on stATOM held ( that’s how LP’ing works).
Hopefully with the launch of Hydro, we will see a better ROI for the CP’s funds as the positions will be better managed. Which is why we decided to amend the proposal and remove the allocation increase to Quasar’s vaults.

[waqarmmirza]

With the information missing i meant, i propose we should public the following information:

• How much Stride is earning/has earned on the stAtom? Hypothetically if the we have 40% stAtom on a yearly average basis this means we staked roughly 325K Atom with stride, at 15% APR these ~325K atom is generating ~5000 Atom for Stride protocol in fees yearly.
• How much Quasar has earned from the position.

These kinds of little details.

[JohnMontagu]

sharing updates regarding the actions taken to update the position following the passing of the proposal:

• Withdrawal of 50% of liquidity from the current static position of stATOM/ATOM.
• Swap of 50,000 ATOM to a minimum of 34960 stATOM.
• Creation of a [1.1, 1.45] position in the stATOM/ATOM 0.05% pool

Currently 50% of the Hub’s position is back in range earning fees, more details here.

Plans to withdraw the rest of the position and redeploy it in the new range, are already in motion. I’ll share updates here once it is finalized.

Thanks to @JohnnyWyles for executing the prop

[JohnnyWyles]

I’m beating @JohnMontagu to it here to say that this liquidity is now fully relocated resulting in increased stability for the stATOM/ATOM market and fee revenue for the Cosmos Hub.

Proposal 957 is now complete

[JohnMontagu]

Thank you @JohnnyWyles