This post is basically going to be of little interest if you are not involved or invested in the Osmosis project. I am posting here as this is where I put all my content. My LeoFinance friends that are not involved in Osmosis should move on to other posts. My Osmosis followers should read on...

Osmosis LP incentives.

Currently there is an allocation of approximately 370,000 OSMO allocated to LP incentives each day (epoch). This is based on 300,000,000 new OSMO from inflation in year one, divided by 365 epochs, with 45% of that total allocated to LP rewards. Then this amount is split up between all the incentivized pools based initially on Governance proposal 2 and then modified by the flawed Governance proposal 6. I say flawed because the wording stated one amount of token allocation, but the implementation has given these additional pools a higher share than it should have. Now we have Governance proposal 8 aiming to rectify that, but it to is flawed.

In my opinion, all these ad-hoc proposals are adding confusion and conflict to the LP incentive system. I would like to see a different system implemented to fairly and evenly allocate the daily LP rewards.

My suggestion.

I feel that LP incentives should be automated based on a daily TVL snapshot. The TVL of the Incentivized pools should be snapshot daily, and then rewards allocated proportionally based on each pools share of the TVL. That means that all pools would earn the same APR, and then all liquidity is treated equally. However, I would do so with one modification. A higher proportion of the token release each day should go to OSMO pools.

OSMO pools carry higher risk of Impermanent Loss than the ATOM based pools. ATOM is a much more stable, mature token, and an ATOM/AKT pool for example is lower risk than an OSMO/AKT pool. Also, having a higher incentive for OSMO based pools will likely reduce selling pressure, as the OSMO token will be more attractive to LP with, carrying higher rewards.

So, when the snapshot of incentivized pool TVL is taken each day, I would suggest then weighting the OSMO pools higher (say 25% bonus as an example).

Some example math.

Currently, ATOM/AKT pool has $12,000,000 in liquidity, and OSMO/AKT has $7,000,000 out of a total of $80,000,000. These are rough example numbers only, not exact. So, using my suggestion, I's put a 25% bonus on the OSMO/AKT pool, and set its adjusted TVL at $8,750,000

The total liquidity would get an adjusted total (say $88,000,000) based on the 25% bonus for OSMO pools.

ATOM/AKT would receive 13.64% of the total incentive (50,468 OSMO) and the OSMO/AKT pool would get 9.94% (36,778)

Based on the TVL amounts, and an OSMO price of $3.50, this would give the ATOM/AKT pool an APR of 537% and the OSMO/AKT pool 671% - based on current TVL amounts as a share of total TVL.

Using this method would give the same APR to all ATOM and OSMO based pools, regardless of the other token, as the return to each is the same proportion of their share of TVL.

Each day, the snapshot would adjust the returns to each pool, and each day the ATOM based pools would all get the same APR, and the OSMO pools would all get a little higher APR. The actual weighting difference between the two could be open to discussion, and change. I personally think OSMO pools should have a much higher APR than ATOM pools, as they carry higher risk, but they are also much more economically valuable to the Osmosis eco-system. OSMO pairs should earn higher than ATOM pairs, imho.

When new tokens add IBC, and are able to be added to the Osmosis platform, the process of adding them to the incentivized list is much easier in this system. The governance proposal would simply be "do you agree to pool "X" and pool "Y" being added to the LP incentive system with Pool "Y" being weighted 25% higher as the OSMO pairing.

If this token gets approved to be added, it's TVL simply gets added in, and everyone's APR gets diluted a bit, based on how much extra TVL this new token brings in.

This system, in my opinion, is much fairer and more sustainable for the long term. All tokens are treated equally, based on how much value they bring in to the system. Pools added get rewards based on their share of the total TVL.

People in this system would not be incentivized to chase max yield by adding to LP's with tokens purely as that pool has a higher incentive. All ATOM pools would have the same APR, all OSMO pools would have a slightly higher APR. People then simply pool with whichever token they prefer, rather than some pools gaining artificially as they have a higher ad-hoc incentive.

Automatically rebalancing rewards each day makes so much more sense to me than having an ad-hoc system, and rushed governance proposals where it is easy to mess up the detailed parameter changes.

A simple "Do you agree to REGEN/ATOM and REGEN/OSMO being added to the incentivized pool list?" and then the pools all being slightly diluted, but in a fair and equal manner, without REGEN being proportionally "over-incentivized" would be a far less complicated system. Everyone would know where they stand, tokens could then add their own incentives to their pools to make them more attractive, but the basic OSMO rewards would be clear and equal for all pools.

I hope this all makes sense to the Osmosis community, and can simplify what could quickly become a very complex and divisive issue for the community.

Thanks for reading,

JK.