A brief explanation to how things operate ‘under the hood’
Huge shoutout to Unity Chaos. Most of this information is by an essential member of the Osmosis Community Unity Chaos who is the mastermind behind how pools work and is adjusting/reviewing all LP’s each week to abide with governance.
It Starts With The Prop# 54 ‘Adjustment Model’
Pool Incentives — Subsidy Balance
Once a week, on Mondays around 4 PM UTC, a proposal is made from a copy of the above spreadsheet to adjust incentives on Osmosis. These adjustments are made to balance the subsidy (OSMO incentives paid / swap fees collected) of each pool, relative to the average of all pools. With OSMO pools targeting a subsidy level 1.5x the average, and non-OSMO pools targeting a subsidy level 0.5x the average. These adjustments are intended to be limited to no more than 15% relative change per week, so essentially a hard cap at 15%. If the weekly proposal is approved, the payout changes go into effect with the Friday 5 PM UTC epoch.
Currently, adjustments are based on total swap fees a pool is collecting, relative to total incentives they are receiving. So, pools which get more swap fees will get more incentives.
Incentives — Process and History
As For External Incentives Matching
Essentially, Osmosis takes the USD value per day of the external incentive (calculated each week when the adjustment proposal is made) and adds that amount to the target for the pool.
For onboarding, the “scale” parameter (15% currently) is not as strictly enforced. Therefore week 0, the incentive amount for a pool is set directly to the target subsidy level; subsequent weeks it’s a weighted average of the target; and the scale limited adjustment from the current value (75/25, 50/50, then 25/75, so that each week it becomes progressively the scale limited adjusted value, instead of the target). Once week 4 arrives, it is simply the adjusted value, so onboarding is considered finished.
Onboarding Process
For newly created pools to be included in the above process, they must be separately approved by governance. This is accomplished through a Text Proposal describing the pools to be incentivized. If the pools already exist, the proposal should specify the exact Pool IDs to be incentivized. If they do not yet exist, then, ideally the proposal should be as specific as possible when describing the pools that will be created (i.e. assets, weights, swap fees, exit fees).
Once approved, the pools will be added to the current spreadsheet, then used in the next weekly proposal. In fact, newly added pools do not have a current incentive share. Thus, their initial incentives share is set to the target subsidy level. As a result, a small percentage of the total incentives provide a very large return to a new pool with low liquidity — initially promising a massive APR in the 1000's%. Since the amount of OSMO allocated is fixed for the week, this APR will quickly attract additional liquidity providers that will each take a share. This causes the high APRs to quickly decrease to a more reasonable level by the time the incentives proposed on Mondays go live after the following Thursday’s epoch. Furthermore, attracting more liquidity to these pool will help mitigate slippage on trades.
Over the course of 4 weekly updates, the incentive share linearly transitions from using the target subsidy to using the regular adjustment process. (I.E., on week 0, it is set to the target, week 1 it is 75% target / 25% adjustment, etc.). So, this has the effect of allowing larger changes in the incentives during this onboarding process.
Related Proposals
Model Changes
Prop 13 (Original utilization balancing model)
Prop 24 (Onboarding Process)
Prop 47 (Incentives Matching)
Prop 54 (Subsidy Balancing — Current Model)
Prop 64 (Adjust gauge weights to 50/30/20)
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