OSMO LST Support Re-evaluation: September 2024, Provide backing liquidity to ampOSMO via Locust

Description

This proposal would allocate 1,000,000 OSMO from the community pool to support the peg of ampOSMO.

Current liquidity for ampOSMO is provided on a White Whale xyk pool and is stored in a custodial multisig according to Proposal 821. This liquidity continues to provide a base level of liquidity for both bOSMO and ampOSMO.

This additional liquidity would be provided to the concentrated liquidity pool, 1923, via a Locust vault.

Based on current performance of Locust Vaults vs xyk pools, this liquidity should be around 50x more efficient than the existing deployment, enabling the wider use of ampOSMO through deeper backing liquidity, decreasing volatility when holders decide to utilize the benefit of a Liquid Staking Token to change their holdings or a disposal is required by use cases such as lending protocols..

This proposal would transfer 1m OSMO equivalent of ampOSMO and OSMO from the community pool to the Osmosis Liquidity subDAO, which will deposit these to the ampOSMO Locust vault and return the representative tokens to the community pool.

About ampOSMO

ampOSMO is a Liquid Staked Token for Osmosis minted by Eris protocol.

Delegation weighting is determined by participants staking ampOSMO in turn to indicate their preferences from a whitelist of validators.

Eris Protocol also maintains a LST arbitrage vault for both ampOSMO and bOSMO to maintain their peg close to the redemption rate.

About Locust

Locust is a market making and position management tool specifically designed for Concentrated Liquidity (CL) pools.

In CL pools liquidity is often provided at inefficient ranges. This is largely due to the difficulty of active management coupled to a desire to ensure that a position remains in range as much as possible.

Locust LST strategies track the redemption rate of the LST and create positions based on the current market rate, the target price of the asset and the expected price at which redemption arbitrage reached equilibrium with staking. This ensures that this liquidity is always used to buy at a pre-defined discount to the target price and sell back at a discount

Proposed Deployment

• Initial strategy of target vault:
  • Spread: 1%
  • Discount 0.25%

The buy side, consisting of OSMO is from market price to market price - spread. The sell side, consisting of the LST, is from redemption rate to optimal rate - discount, where optimal rate is based on the profitability of redemption arbitrage vs staking.

For the ampOSMO/OSMO vault the fee schedule would be:

• Withdrawal Fee: 0%
• Performance Fee: 15%

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