OSMO LST Support Re-evaluation: September 2024, stOSMO, Reupload

Description

This proposal is a reupload of Proposal 842 which failed due to incorrect execution parameters.

This proposal aims to further optimize the stOSMO liquidity held in the Osmosis community pool, maintaining the resilience of the stOSMO peg while reducing underlying liquidity and the OSMO staked by the community pool.

Current stOSMO liquidity

• 9M OSMO in a stOSMO Stableswap pool, remaining from Proposal 641

  • 50/50 stOSMO/OSMO

• 8.3M OSMO in a static Concentrated Liquidity position from Proposal 769

  • This position is from 1.2075 - 1.27, as the current market rate is 1.27 this is mostly OSMO and recently went out of position briefly.

• 200k OSMO assigned to stOSMO as a trial Locust vault deployment in Proposal 798

Proposed actions

Transfer all stOSMO stableswap liquidity, stOSMO concentrated liquidity, and liquid stOSMO to the Osmosis Liquidity subDAO to perform the following actions

• Remove all protocol liquidity from the stableswap pool.
  • This should be performed incrementally if the existing concentrated liquidity position is out of range during this action.
• Create a new stOSMO position of 1.24 - 1.3 in the 0.05% pool using the newly available liquidity.
  • This position will initially be 50% stOSMO and 50% OSMO.
  • This position will last approximately three months before it becomes entirely OSMO through the redemption rate increase, closing the Osmosis community pool’s static holdings of Staked OSMO via Stride.
• Remove the 1.2075 - 1.27 position from the concentrated liquidity pool
• Transfer 700k OSMO and any excess stOSMO from fee collection into the Locust vault for stOSMO/OSMO as previously used in Proposal 798.
• Transfer the remaining OSMO, the vault representing tokens, and the static position ownership to the community pool.

stOSMO Liquidity after proposal

• OSMO assigned to stOSMO support lowered from 17.5 million to 10 million.
  • The stOSMO peg performed very well during recent volatility. The initial 20 million OSMO liquidity was assigned when Stableswap pools were the only option for deployment.
• Liquidity depth remains similar due to increased overall concentration.
  • Static positions perform approximately 10x better than stableswap pools
  • Locust vaults have trended towards holding a narrower position in a mostly single sided position and perform approximately 30x better than stableswap pools.
• Osmosis community pool holdings of stOSMO will be removed through arbitrage over three months.
  • This reduces staked OSMO held by the community pool to a minimal amount depending on the liquidity usage. If stOSMO loses peg, more is staked until arbitraged back. If the market rate is close to the redemption rate, then stakers are undiluted.

Forum Thread: https://forum.osmosis.zone/t/osmo-lst-support-re-evaluation-september-2024/3113