This proposal causes 100% of the value gained by ProtoRev to be used to initiate a deflationary burn mechanism while retaining the non-OSMO tokens earned to diversify the community pool.

• OSMO obtained by Osmosis through the ProtoRev module will be burned.
• Non-OSMO tokens obtained by Osmosis through the ProtoRev module will be sent to the Community Pool for later use and an equivalent value of OSMO from the Community Pool burned.

Details

OSMO obtained via ProtoRev is effectively burned as long as it does not re-enter circulation. There is however the potential to enter circulating supply and so is not a true deflationary model as the maximum supply remains at 1 billion.

In order to create this burn, Proposal 516 asked that the non-OSMO assets used by the protocol be used to purchase and burn OSMO. While this gives a beneficial effect on supply, it is only around a quarter of the revenue collected through the ProtoRev module at the expense of assets that Osmosis currently has no other method of obtaining without arranging a token swap or purchase through intermediary multisigs.

Non-OSMO tokens have greater flexibility in usage, being able to earn further yield or replace requirements for rental through protocol liquidity or perform community spending without the inflation concerns of using the native token. Therefore it would be best for Osmosis to retain these tokens in the community pool.

As the community pool gains these tokens it no longer requires as many OSMO tokens and so it is an appropriate gesture to burn the corresponding value in OSMO. This burn rate may offset or eventually surpass the replenishment of the Community Pool by inflation and so should be pausable by governance to ensure that a software upgrade is not required to prevent excessive burns of the OSMO in the community pool.

Burning the OSMO remaining in the ProtoRev wallet confirms that it will not re-enter circulation and establishes a deflationary mechanism for Osmosis. This will likely take a long time to become net deflationary, relying both on the thirdening of Osmosis inflation and increased levels of ProtoRev generated, but will grow in efficacy as the network matures.

Commonwealth Thread: https://commonwealth.im/osmosis/discussion/11418-protorev-allocation-june-1st-due-date