Deploy BTC/USDC liquidity position

Description

This proposal approves the deployment of the BTC purchased in Proposal 859 along with USDC to form a liquidity position as outlined below. Unless Proposal 859 passes this proposal has no impact.

This set of two proposals seeks 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.

1. Deploy BTC in a concentrated liquidity position
   • Range: -20% to +20%
   • At current market ratio this would be $68k to $101k but will vary depending on spot price.
     • Minimum possible lower bound to be 55k USDC
     • Maximum possible upper bound to be 110k USDC
     • Deployment will use as much of these funds as possible within these bounds while maintaining the 20% range.
   • Spread factor: 0.1% (higher spread due to price discovery period)

2. Position Management
   • This position will be transferred back to the Osmosis Community Pool for holding along with any excess BTC or USDC.
   • Once created, this position will remain in use until retracted by a future governance proposal
   • Reasons for retraction include events such as:
     • BTC leaving this price range
     • Acquisition of fees from the position
     • Redeployment into a new position or location
     • Dissolving this position to use the contained USDC or BTC

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

1. Deployment of BTC into a concentrated liquidity position with a 0.1% spread.
2. Transfer of position to the Osmosis community pool for holding.

Success Metrics

• Volume facilitated through position
• Fees earned (LP + taker)
• Slippage reduction during volatile periods
• Net Bitcoin exposure gained
• Market share of Bitcoin trading volume

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 position size of 500k USDC (vs. the available 1.6M USDC) helps mitigate the risk while still achieving the strategic objectives.

The position set aims to be useful to Osmosis in all standard scenarios. If Bitcoin increases in value by 20%+ the idle USDC has returned a 10% profit + fees. If Bitcoin decreases in value by 20%+, Osmosis accumulates BTC to its treasury, increasing long-term alignment. If Bitcoin remains within this range, Osmosis generates additional fees as protocol revenue while benefiting from increased Bitcoin liquidity on Osmosis.

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