This proposal would lengthen the time taken to reach the maximum OSMO supply by:

• Reducing daily OSMO emissions by 50% at the next software upgrade
• Signalling approval to double the time between Thirdening events, after the next Thirdening has occurred.

Details

OSMO is emitted daily at Epoch and the amount will reduce by a third every 365 epochs (The Thirdening) to an asymptotic supply of 1 billion OSMO.

This initial distribution mechanism was intended to seed early participants in the Osmosis ecosystem with voting power while simultaneously bootstrapping liquidity and security for dapps deploying on Osmosis to utilise.

The tokenomic model has been subject to change since genesis, most obviously so when the Terra collapse caused Osmosis governance to take a more conservative view of liquidity rewards, redirecting a total of 31.5% of emissions more than originally intended to the community pool in order to defer inflation until it became more sustainable.

While this reduced circulating inflation and total inflation will continue to reduce each year, total inflation remains at ~35% and the community pool has now reached 69 million OSMO. This proposal intends to speed up the reduction in inflation by implementing a single Halvening event at the next software upgrade and signalling approval for an increase of the time between Thirdenings, after the next Thirdening, to two years (730 epochs).

This would initially reduce the OSMO emitted at each epoch by half, from 547,945 to 273,973 and, after the next thirdening, maintain a lower rate of emissions of 182,649 per epoch for two years. Lowering inflation whilst maintaining a max supply close to the original tokenomic design.

Effect on Max Supply

Reducing daily emissions while leaving the existing thirdening model in place results in a much flatter inflation curve over time after this initial drop.

Chart of Inflation Curves

Because of the reduced daily emissions this reduces the asymptotic max supply to around 780,000,000 OSMO depending on when the reduction is implemented.

Chart of Max Supply over time

In order to maintain the maximum supply of around 1 billion, the thirdening length would need to be increased in a future governance proposal to maintain this more moderate rate of emissions for longer. This governance proposal also signals approval for this change, which would be implemented in a future parameter change governance proposal after the next thirdening event has occurred.

This would result in a slightly lowered Maximum Supply of around 980,000,000 OSMO, varying slightly depending on when the initial reduction is implemented.

Chart of Max Supply over time with Thirdening Length increase

For full modelling of the impact on inflation and emissions over time as well as potential alternatives considered see here

Effect on Rewards

By itself, this proposal would proportionately reduce all emissions to Stakers, Liquidity Providers, the Community Pool and Developers by 50% causing a sudden drop in rewards, similar to the smaller drop at each Thirdening event. This may be too large an impact all at once and so this proposal is combined with two other proposals:

Combined with Adjusting the Ratio of Emissions

When paired with the Proposal to Adjust the Ratio of Emissions, this results in a change in daily emissions of raw OSMO as follows:

• Staking Rewards remain static at 136,986
• Pool Incentives decrease from 73,973 to 54,795 (-26%)
• Community Pool decrease from 200,000 to 13,699 (-93%)
• Developer Rewards decrease in line with inflation 136,986 to 68,493 (-50%)

This results in no change for staking rewards with varying levels of cuts to all other areas. This also brings an improvement in the Net Yield for Staking and Liquidity rewards, a reversion of the increased growth of the community pool and a cut to the raw OSMO allocated to developer rewards. The latter, being vested, should see a compensatory benefit from the overall reduced inflation.

In short, the main reduction will be absorbed by the emissions to the community pool to limit the effects on stakers and liquidity providers.

Combined with Decreasing the Superfluid Discount

Further combining with the Proposal to Decrease the Superfluid Discount to 25%, results in a small cut to staking rewards due to the increased number of OSMO able to be staked while compensating Liquidity Providers with greater rewards from Superfluid Staking.

This also puts greater emphasis on the Superfluid Staking feature of Osmosis, increasing the share of rewards obtained from it compared to normal liquidity incentives as well as further increasing the security of the network.

To see or adjust the figures for each of these proposals and see specific impacts interact with this spreadsheet

Linked Passing Disclaimer

This proposal is being proposed as part of a set of three:

• A proposal that adjusts or confirms the current emission rate.
• A proposal that adjusts or confirms the ratio of emissions.
• A proposal that adjusts or confirms the superfluid risk factor.

A proposal from each type is required to pass for any to execute. If a proposal fails with between 50 and 75% of the vote being No it will be redrafted with community feedback. If a proposal fails with over 75% being No or is Vetoed then the proposal will be submitted as a confirmation of progression without that component.

Commonwealth Thread: https://gov.osmosis.zone/discussion/10681-tokenomics-upgrade-proposal