[Proposal] Allocate 900k ATOM for LPing in the Osmosis stATOM/ATOM pool

Hub Proposals Community Spend
1

Allocate 900k ATOM for LPing 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 (93%[1] of DEX 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 $2.83 Million of stATOM volumes over the last week. This is 318x the stATOM volumes that Neutron did over the last week (~$8k), 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.

  1. Measured using volumes on the dates Sep 17th-23rd, across the Dex’s Osmosis, Astroport on Neutron, and Kujira ↩︎

  2. This choice is justified because liquidity is only really needed below the redemption rate. The current redemption rate is 1.228, and is only increasing. So under one static range, we want most of the liquidity to be under the redemption rate. The only reason for liquidity above this rate is to accomodate the rate growing. A better strategy is to have most liquidity in dynamic vaults, which is what is being tested for with an initial 10% in quasar. Under the configuration of an upperbound of 1.35, the community pool won’t have to update this for at least 6 months. ↩︎

13 Likes
2

Supportive of this proposal.

To echo Sunny’s comments, Osmosis is the most popular onchain venue for trading both ATOM and stATOM. In addition, ATOM and stATOM also see significant usage in Osmosis’ ecosystem of DeFi applications - Mars, Levana, Membrane, etc. Users have a clear preference for using ATOM on Osmosis, and deploying ATOM liquidity where there is the greatest demand to use it makes sense.

While enabling increased onchain usage of ATOM would be the primary goal of this protocol-owned-liquidity (POL) position, let’s quickly consider the economic angle. Assuming $200,000 average daily volume in the stATOM/ATOM CL pool, and assuming the Cosmos Hub POL position captures half that volume - given the 0.3% swap fee on the pool, the position would generate $109,500 annualized. This is a very conservative figure, as it uses a low average swap volume and does not include OSMO and STRD incentives. A more realistic figure would be ~$250,000 of annual revenue.

To put that figure into perspective, $250,000 is roughly the same as the current total annualized revenue from ICS payments from all partner chains combined.

Taking a step back, Osmosis has always been highly supportive of Cosmos Hub and ATOM. Ever since Osmosis launched, back in June of 2021, it has continuously devoted more internal incentives to its ATOM/OSMO pool than to any other. And as a result, Osmosis has always offered the best experience for trading ATOM onchain.

So to sum up, this proposal would increase onchain usage of ATOM and stATOM, while at the same time generating significant revenue for Cosmos Hub. And after all, Osmosis has always been highly aligned with Cosmos Hub.

5 Likes
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Alignment with the hub so enter the ICS definitly and lets go :wink:

4

What if instead of the Hub owning this POL, the Osmosis community pool owned it?

Now hold on Hub gov don’t start throwing things. Hear me out.

In exchange for this, what if the Hub community pool owned the OSMO POL from Osmosis Proposal 641. IMO these joint proposals are ripe for a treasury swap.

One of the primary concerns with Prop 641, which may cause it to be repealed otherwise, is that OSMO holders don’t really get a ton of value from provisioning this liquidity. Swapping it for this ATOM POL would give the Osmosis treasury a yield-bearing liquidity position that would significantly diversify the assets in that treasury, reducing insolvency risk for the protocol.

Similarly, I imagine that ATOM holders might have the same argument: “what’s in it for us?” With this swap, ATOM holders get closer alignment with Osmosis as well as a yield-bearing OSMO POL position. This also significantly benefits Stride, who is a consumer chain of the Hub’s security (which means more revenues for the Hub).

Meanwhile, this liquidity lives on Osmosis, which naturally benefits Osmosis further as well. It’s a huge win all-around.

The two positions are roughly equivalent in value, and any imbalance between them could be made up for with an increase in size of one or decrease in the other.

Obviously, I’m just brainstorming here, and this would need to go back through Osmosis governance first, but it looks like things are headed in that direction anyway. This might be a good opportunity to provide additional value not originally anticipated as part of prop 641 and foster better alignment between the Hub and Osmosis (which is sorely needed by both chains imo).

2 Likes
5

I am in favour of the hub providing liquidity on the Osmosis ATOM/stATOM pair.

I am also strongly in favour of the idea of some ATOM being deployed into a vault that:

  1. Defends the soft peg (protecting those using stATOM as collateral)
  2. Returns a profit in ATOM to the community pool.

Based on the eth equivalent on Somm such a vault should be profitable to the hub.

With that said I am not sure about the timing or quantity and if there should be any sort of fee paid by Osmosis for such liquidity.

On timing:
With Timewave coming very soon, I would prefer to wait for a system like that to be live that see a multisig involved.

On quantity:
I feel like it would be good to understand what that additional liquidity achieves in more concrete numbers. Otherwise we just end up comparing it to the provision on Neutron which seems an unfair comparison because of difference in alignment and Duality isn’t live.

On a fee:
Probably the most on continuous part of this. Should the hub ask for a fee for the provision of liquidity? In my view it should ask for x% for non ICS chains. I am very open minded about how exactly such a thing is designed because a good deal should be beneficial to both parties. I think it would be good for the hub to have OSMO on its balance sheet and it think it potentially interesting for osmosis to receive some of the revenue from the pool in exchange.

I would be delighted to see Osmosis and the Hub have a formal, mutually beneficial agreement. Ultimately this proposal is going to set the tone for future POL deals the hub strikes and I think it is important that it is structured as well as possible.

6 Likes
6

Very interesting idea.

I totally agree that the Cosmos Hub and Osmosis should be closer aligned. A token swap between the two chains would definitely make sense, brings them closer together and align incentives over the long run.

Owning each others token via POL does sound compelling and should be further explored and discussed imo.
It might make sense to wait for Timewaves to launch, as @BendyOne stated, before conducting a token swap or deploying POL.

3 Likes
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how are LSDs capital efficient if each DEX requires such large amounts of idle capital to function?

1 Like
8

I support this prop. We need to increase liquidity on osmosis

2 Likes
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CONTEXT:
Before diving into the question of whether or not to allocate any portion of our liquid supply to a decentralized exchange (DEX), it is crucial to first contemplate the strategic implications involved. The Hub’s vision of liquidity as a service underscores the necessity of considering the strategic aspect when it comes to utilizing our liquid supply.

ANALYSIS:
With this strategic perspective in mind, it is prudent to assess the potential competitive landscape to determine whether the decision is advantageous for the Hub. In light of the Duality merger with Neutron, and the return of the unclaimed airdrop to the Hub’s custody by Neutron, it’s evident that a strategic partnership has been forged. Duality’s automated market maker (AMM) with an adjustable curve model is poised to offer features similar to those found in Osmosis’s concentrated liquidity. From a purely strategic standpoint, it stands to reason that deploying liquidity to stabilize LST ATOM pairs would be more economically sound for the Hub if it were done through Duality.

CONCLUSION:
This post is not intended to dictate that liquidity deployment must exclusively occur in Duality and not in Osmosis. Rather, it underscores the importance of aligning Osmosis with a similar economic framework as Neutron has. In this regard, various possibilities can be explored, such as liquidity swaps, revenue sharing, and protocol treasury alignments. At Govmos, we sincerely hope that, at some point, ATOM and OSMO can move beyond their historical differences and reach an economically beneficial agreement. However, in the interim, it must be acknowledged that this proposal falls short in that respect. We would be more than happy to support an updated version of this proposition that would come with additional factors to compensate this gap.

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4 Likes
10

Fully supportive of this prop on 1 condition:

Osmosis becomes a consumer chain.

Makes no sense to continue to pick winners outside of ICS chains imo.

1 Like
11

Why is that a requirement? They run their own validator set and do not want to switch. Osmosis is part of the AEZ in an economic sense. There is no other place to swap in and out of atom with sufficient liquidity. Forcing established chains like osmo into this box is not healthy. There are many big chains coming to IBC (dydx, celestia, berachain), and they don’t all wanna be controlled by cosmos hub validators. The focus should be on trying to promote a mutually beneficial economic system.

12

You may missed the point.

Why on earth why the hub give Osmosis $6m more in liquidity, when they can keep it in house on Neutron/Duality?

I’m not interested in this proposal without some additional alignment from Osmosis towards the hub.

3 Likes
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What would be a suitable form of alignment, that doesn’t involve adopting an immature technology like ICS v1?

14

I second this. I get the idea, but at current rates the token needs help and cant keep gifting community pool funds to non-beneficial counterparties. I understand having deep liquidity, but foundations do not give out grants to chains that dont benefit them. OP doesnt give grants to ARB why would ATOM give grants out to OSMO?

Open to discussion if im missing something here. I could see it as beneficial since OSMO controls the volume

1 Like
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I don’t think I did. The reason is so you don’t fragment the liquidity. Sure, open to hearing what you might consider additional alignment.

16

Overall idea is good. However 900k ask is too high. Also, providing all that liquidity to a single DEX doesn’t make much sense.

My suggestion is to provide 100k each to various DEXs such as Osmosis, FIN, Duality and so on. That ensures that the Hub allocation does not favor a single DEX at the expense of others. I wouldn’t recommend a total amount bigger than 500k split across all DEXs.

Osmosis should not be the only place that has sufficient liquidity to swap ATOM.

4 Likes
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Because Osmosis does help ATOM. As mentioned in the proposal, it is the primary driver of ATOM DeFi usage.

1 Like
18

I get that I meant direct revenue source. I am concerned at meaningful capital generation back to the hub, I think down the road could revisit this prop. As of right now, I cant make a case for it other than it being beneficial for Osmosis.

I could see a case for STRD having an impact, im not opposed in the future. In the moment it doesnt economically make sense

19

That’s a stretch. The three largest users of stATOM are Umee, Shade, and Kujira, and only one of those uses Osmosis for liquidations. And the ask here of $6.3m worth of ATOM is larger than any of the actual DeFi usecases. There’s no direct link between Osmosis liquidity and more stATOM DeFi usage.

Would you support proposals to grant ATOM to both Shade and Kujira as well, since they are among the largest stATOM users and have in-house DEXs?

7 Likes
20

I will vote yes on this proposal. Good alignment with other cosmos assets (osmosis/stride) and creates revenue for the hub. This is very low risk experiment for the hub and can be returned in subsequent proposals if it is not achieving the desired goals.

1 Like