Rebalance Osmosis Treasury towards BTC

Description

This proposal approves the purchase of 250k USDC worth of BTC as outlined below to rebalance the Osmosis treasury. A further proposal will approve the deployment of this into a liquidity position.

This set of two proposals seek to utilize 500k USDC from the Osmosis community pool to establish a strategic liquidity position in BTC, aimed at increasing market depth for Bitcoin trading and generating additional revenue for the protocol from both liquidity provision fees and protocol fees.

This position aims to be a success for Osmosis community pool holdings regardless of the price action of Bitcoin.

Background

• The Osmosis community pool holds 1.6M USDC; this is an important resource for Osmosis, and the value of this should be preserved where possible.
• The Osmosis community pool also holds approximately 1.9M USD of non-Osmosis native, volatile tokens as can be viewed here.
• Bitcoin is underrepresented in this total with holdings of around 62k USD.
• Osmosis aims to establish itself as the premier decentralized exchange for Bitcoin.
• Bitcoin markets have historically experienced reduced liquidity during significant price movements.
• Bitcoin is currently trading near all-time highs, resulting in lowered liquidity in pools.

Strategic Rationale

While this proposal involves taking on directional risk near Bitcoin's all-time high, there are specific reasons why this approach is justified for Bitcoin specifically:

1. Strategic Asset: Bitcoin holds a unique position in Osmosis's strategy as it aims to become the dominant Bitcoin decentralized exchange.
2. Market Leadership: Establishing deep liquidity during price discovery moments is crucial for market leadership as a reliable trading location for Bitcoin.
3. Ecosystem Development: Supporting Bitcoin pairs aligns with broader protocol goals of having the most liquid blockchain assets used as routing mechanisms.
4. Treasury Asset: Bitcoin is a preferred treasury asset for crypto projects, especially one as Bitcoin-aligned as Osmosis.
5. Alloyed Asset Support: Additional Alloyed BTC serves to increase the liquidity of the Alloyed routing mechanism as well as allocating any risk associated with this mechanism to the community pool directly. I.E. In the even of a corruption event, the community pool would be able to directly absorb the corrupted asset to make Alloyed BTC users whole.

Proposal Details

Action Items

Convert 250k USDC to BTC via limit orders on Osmosis

• Place a limit buy at market price when proposal passes. This may be repositioned in order to fill if there is a sudden BTC price movement.
• Dollar Cost Average mechanics may be used for future deployments, but as this is a rebalancing of the Osmosis treasury only limit order functionality will be used.
• Position size: 250k USDC equivalent

Risk Analysis

• Community pool exposure to Bitcoin increases

  • Risk: Bitcoin could decrease in value within this liquidity range. This is potentially more likely due to BTC's current status of being near all time highs. ("buying the top") Bitcoin downside is acceptable in the short-medium term. This proposal approves Osmosis to purchase $250k of BTC at approximately $70k. A moderate downside would result in Osmosis purchasing BTC at greater discounts.
  • Risk: Bitcoin could decrease in value beyond this liquidity range, leading to a loss of up to 500k USDC previously accumulated by the Osmosis community pool. That scenario also has trouble for broader crypto market depending on the extent of the decrease.

• Liquidity position upside capture

  • Risk: Compared to simply purchasing Bitcoin, the liquidity position would exit all Bitcoin purchased at an average value of 10% increase from the purchase price, leaving only the fees accumulated as Bitcoin.
    • Mitigation: This justifies the usage of USDC in the community pool over the use of the existing BTC collected from fees. This USDC is currently idle. Obtaining a 10% increase is beneficial, allowing the BTC already in the Community Pool to benefit from any further upside.

• Community pool exposure to USDC

  • Risk: Remains constant with current holdings as long as the liquidity remains in place, as any issue would result in the position quickly becoming 100% USDC.

• Community pool exposure to Alloyed Bitcoin

  • Risk: There is an increased risk from holding the IBC natively issued USDC due to increased exposure to multiple sources of Bitcoin. This is mitigated through both inter-chain and intra-alloy rate limits. In the event of a security issue involving the BTC Alloy the Community Pool should include this position's Bitcoin holding in any resolution proposal to make users whole.

• Community Pool asset exposure within liquidity pools

  • Risk: While adding liquidity to pools adds an additional layer of risk compared to native asset deployment, the Osmosis Concentrated Liquidity pools have been live with no security events for over a year.

• Use of Multisig for execution

  • Risk: This 4/6 multisig has previously been used to deploy liquidity in other proposals, acting as an intermediary to perform multi-stage or time-dependant transactions, such as adding liquidity to a pool with a ratio of assets that will vary before a five-day Osmosis governance proposal is completed.

Risk Acknowledgment

This proposal explicitly acknowledges that:

1. This position takes on higher downside risk while capping the upside at 10% + fees
2. The entry timing near BTC's all-time high increases the risk of this downside
3. This strategy would NOT be advisable for other assets as a use of Osmosis' stable assets. An exception is made specifically for BTC due to its strategic importance to Osmosis.
4. The use of Alloyed Bitcoin is strategically important, and the community pool takes on a greater risk than regular users of the Alloy during any security event resolution.
5. The deployment mechanisms and liquidity mechanisms outlined are acceptable.

Technical Implementation

Liquidity SubDAO to initiate 250k USDC conversion to BTC via limit orders.

Conclusion

While this proposal involves taking on additional risk to the Osmosis community pool, the strategic importance of Bitcoin to Osmosis justifies this targeted approach. The conversion of 250k USDC (vs. the available 1.6M USDC) helps mitigate the risk while still achieving the strategic objectives.

Forum Post: https://forum.osmosis.zone/t/strategic-btc-position-for-enhanced-market-liquidity/3254