The launch of Osmosis will begin the next epoch in AMM platforms through providing a platform for modular, customizable AMMs. To make such a progressive, adaptable protocol work, governance will be a key factor to Osmosis’ success. Almost every element of the protocol is intended to be upgraded as necessary to keep Osmosis on track to becoming the most innovative AMM platform operating today. Stakeholders will vote and help plan to implement new features for the protocol, like front-running protection, validator-backed oracles, and more. Governance also allows for rapid fine-tuning of existing parameters such as liquidity mining incentives which can be adapted as often as a weekly basis.
Along with everything else, governance will also have the opportunity to shape the direction of the protocol’s core tokenomics. The community can decide after launch to revise the token model. In fact, this is encouraged! As new innovations come to the platform, some of which are already in works, the core tokenomics of the system will need to adapt as well.
However, to make this work, the community needs to be seeded with an initial distribution and token model which can then be iterated upon. In the post, we will present the initial token model to distribute the native token of Osmosis, OSMO, to stakeholders most aligned with the strategic direction of the protocol.
Token Release Schedule
Osmosis will have an initial released supply of 100 million OSMO at genesis, split evenly between the Fairdrop recipients and a strategic reserve. The addition of the strategic reserve in genesis is a slight departure from the earlier Vision for Osmosis post, but we believe that the strategic reserve will be crucial in aligning key advisors and to further reward those performing important services for the chain.
Unlike most Cosmos SDK chains where tokens are distributed on a per block basis, Osmosis has daily epochs and releases new tokens only at the end of each epoch.
Under the initial token model, new tokens would be released according to a “thirdening” schedule. Similar to Bitcoin’s halvening, where token issuance is decreased by half every four years, in Osmosis, the token issuance will be cut by ⅓ every year (365 daily epochs).
To expound further, the thirdening schedule works as follows: In the first year, there will be a total of 300 million tokens released. After 365 days, this will be cut by ⅓, and thus there will be a total of 200 million tokens released in Year 2. In Year 3, there will be a total of 133 million tokens released. And so on. This thirdening process will allow OSMO to reach an asymptotic maximum supply of 1 Billion.
Newly released tokens will be distributed to a combination of staking rewards, liquidity mining incentives, developer vesting, and community pool according to the following distribution:
- Staking Rewards: 25%
- Developer Vesting: 25%
- Liquidity Mining Incentives: 45%
- Community Pool: 5%
As announced in the Osmosis Vision Post, the genesis supply of Osmosis will include a “Quadratic Fairdrop” to ATOM holders. There will be a total of 50 Million OSMO allocated to ATOM holders based on a snapshot taken during the Cosmos Hub Stargate Upgrade on February 18, 2021. The amount of OSMO that each address receives is proportional to the square root of its ATOM balance at that time, with a special 2.5x multiplier for staked ATOMs.
This fairdrop design ensures that all members of the Cosmos Hub are given a fair opportunity to participate in Osmosis, especially those that had helped secure the network through staking. Recipients can view their fairdrop allocation here.
Fairdrop Claims Process
While the fairdrop gives OSMO to all ATOM holders, we want to make sure we especially incentivize recipients to become active users of the Osmosis platform. For this reason, the majority of the fairdrop must be claimed by recipients by performing a few simple tasks.
20% of an account’s airdrop allocation will be immediately available in their genesis account. To claim the full OSMO allocation, users will need to perform four on-chain activities:
- Making a swap
- Add a liquidity to a Pool
- Stake OSMO
- Vote on a Governance Proposal
Performing each of these activities will unlock an additional 20% of the airdrop amount. This process will ensure that airdrop recipients are active users of the protocol.
We also want to make sure that the fairdrop goes towards rewarding early adopters of the platform. For this reason, there is an incentive to perform these tasks early. A fairdrop recipient can claim the full total of their OSMO allocation by performing these tasks within the first 2 months after the launch of Osmosis. After the second month, the claimable OSMO per account will decrease linearly over the next 4 months. 6 months after the launch of Osmosis, all unclaimed fairdrop tokens will be transferred to the on-chain community pool.
At genesis, there will be an allocation of 50 million OSMO set aside in a strategic reserve. This strategic reserve allocation will be controlled by a multisig dao, initially composed of members of the development team, but will be expanded in the future. This strategic reserve is intended to align long-term key strategic partners who will help push forward the Osmosis project through grants and strategic fundraising rounds. The strategic reserve OSMO will not be used to market sell, and any strategic fundraising round participants will be subject to vesting periods. And funds raised by the DAO will be used to fund Osmosis development efforts.
At the discretion of the multisig members, the strategic fund may also be used to delegate to validators who are providing high value “above and beyond” services to Osmosis, such as operating infrastructure like block explorers and relayers, or contributing open source tooling/resources to the ecosystem. In order to maintain decentralization of the network, the strategic reserve DAO will not “overstake” such to have a controlling share of the network.
Every epoch, 25% of tokens released will be in the form of new staking rewards issued to validators and delegators who help secure the chain. Validators are entities that operate nodes that participate in consensus of the chain. Over time, validators will be expected to operate more processes for the chain such as price oracles, bridges, and more as the functionality and scope of Osmosis expands. At genesis, there will be slots for 100 validators, selected by highest amount of delegation.
Delegators meanwhile delegate their stake to validators who use it to increase their slashable bond for misbehavior. Delegators serve an important active role in the network by being the bonded entities responsible for selecting high quality validators and participating in governance of the chain. Through staking, delegators have strong skin in the game to help govern and operate the network effectively.
Rewards are distributed to stakers delegated to a top 100 validator, proportionally to the amount of OSMO staked. However, validators charge a commission rate to their delegators on staking rewards earned. Each validator may choose their own commission rate, but there is a network-wide mandated minimum commission rate. At genesis, this minimum commission rate is set to 5%.
25% of the released tokens per epoch are in the form of vesting developer rewards. These 225 million OSMO are reserved for the development team, but are non-transferable nor stake-able until they are released.
Most importantly, in order to maintain strong decentralization, in a situation where the initial dev team is no longer the primary development team for the network, the chain can choose to reclaim any unreleased tokens from the development team and redirect them to the community pool or towards a new set of development teams via a governance proposal.
Liquidity Mining Incentives
45% of released tokens per epoch are designated to go to liquidity mining rewards. LPs will be able to bond their LP tokens in order to earn liquidity mining rewards and governance will get to choose which pools’ LP tokens will be incentivized. There will be a post coming soon explaining the liquidity mining rewards process in much more detail.
Over time, there may be new ways of incentivizing liquidity mining, such as Bancor-like impermanence loss protection or other ideas in development. It is suggested that governance use this allocation of tokens to experiment with such new models of incentivization.
If governance believes that liquidity mining incentives are too high for achieving the desired effect for the chain, it may also choose to direct a portion of tokens released for liquidity mining incentives towards the community pool, so it may save them in order to be spent at a later time.
A base 5% of all newly released tokens go directly to the Osmosis community pool. This pool can be spent by Osmosis governance and should be used to improve and build the Osmosis ecosystem.
The expectation is for the community to leverage this pool early into the bootstrapping phase to allow useful tooling, infrastructure, educational content, and other resources to be quickly available.
The following request for proposals provides a starting point for areas such as tooling, infrastructure, and governance that we believe will improve the usability of Osmosis. We invite our community members to discuss, provide suggestions, and brainstorm ideas on new areas of emphasis that the community pool should be used to incentivize long-term success of Osmosis.
At Osmosis launch, there are three primary types of fees: transaction fees, swap fees, and exit fees.
Transaction fees are paid by any user to post a transaction on the chain, and is dependent on the computation and storage costs used by the transaction. Minimum gas costs are determined by the proposer of a block in which the transaction is included. Validators can choose which assets to accept for fees in the blocks that they propose. This transaction fee is distributed to OSMO stakers on the network.
Swap fees are a fee charged to any trader making a swap in an LP pool. Swap fees are calculated as a percentage of the swap size, and are specific to each pool, as the pool creator can specify the swap fee when creating the pool. Swap fees are charged in the input asset of a swap, and the fees are added to the pool, effectively being distributed to all LPs in a pool proportional to their LP token shares.
Exit fees are a fee charged on an LP that is leaving a pool. Exit fees are calculated as a percent of the LP shares trying to be redeemed. The LP shares are burned, effectively distributing their value to all LPs remaining in the pool at the time of exit, proportional to their LP token shares. Similar to swap fees, exit fees per pool are set by the pool creator.
OSMO governance may choose to add new types of fees in the future to help bolster the network.
This token model is created to bootstrap the Osmosis ecosystem with well-aligned incentives for key stakeholders and contributors. However, Osmosis is first and foremost an AMM laboratory. It will become clearer over time how the token model needs to evolve to best support the needs of the project. The Osmosis Labs development team already has features in development that are expected to have impacts on the optimal token model design.
Thus, the token model is intended to be adapted and updated by the community over time. Such adjustments to the model can be proposed and voted on through on-chain governance. OSMO holders should feel empowered to change the token model of the chain as necessary to support their vision for the platform.
The launch of Osmosis is slated for June 2021. The OSMO airdrop will be claimable for eligible recipients at that time. Further details about the Osmosis launch will also be released in coming days.