Osmosis is introducing a new proposal aimed at improving the long-term sustainability of its native token, OSMO. This proposal seeks to modify the current distribution of taker fees by introducing a mechanism to burn 50% of OSMO taker fees, while continuing to distribute the other 50% to stakers. The goal is to reduce inflationary pressure on the OSMO token and create a more deflationary trajectory over time.
Background: Current Distribution of Taker Fees
Currently, Osmosis collects taker fees from all swaps conducted on its platform. These fees are typically distributed to stakers, incentivizing them to participate in securing the network. However, with this new proposal, the distribution model will change. Instead of all of the OSMO collected from taker fees being distributed to stakers, 50% will be burned, effectively reducing the circulating supply of OSMO. The remaining 50% will continue to be distributed to stakers as rewards.
The proposal comes as a response to growing concerns about inflation within the Osmosis ecosystem, particularly with the OSMO token. The introduction of a burn mechanism will scale with trading volume, creating a continuous and reliable process that gradually reduces the supply of OSMO over time.
The Rationale Behind the Burn Mechanism
One of the primary motivations behind this proposal is to tackle inflationary pressures on OSMO. By reducing the circulating supply through a regular burn mechanism, Osmosis aims to create deflationary pressure on the token, which could increase its value in the long term. As more assets and liquidity pairings move through Osmosis, this burn will scale with the trading volume, making the process more effective and efficient as the platform grows.
Another key driver for this change is the shift in liquidity focus on the Osmosis platform. With the OSMO decoupling initiative, liquidity paired with OSMO has been reduced, and the focus has shifted to other assets like BTC and USDC. As a result, the burn mechanism will help supplement ProtoRev's decreasing contribution to OSMO burns, ensuring that the platform continues to maintain a reliable burn process despite these changes.
Impact on Stakers and the Osmosis Ecosystem
By reducing the total supply of OSMO through burns, the proposal aims to retain more value within the ecosystem, ultimately benefiting long-term stakers.
Additionally, the burn mechanism is expected to provide a more reliable and consistent way to reduce OSMO inflation. With regular burning of OSMO collected from taker fees, the ecosystem will be able to better manage the supply and demand dynamics of the token, making OSMO a more attractive asset for long-term holders.
Future Implementation and Automation
The proposal outlines a manual approach to implementing the burn mechanism initially. Once approved, the process will begin manually with monthly governance proposals to burn accumulated OSMO. The long-term plan is to automate this burn process in future software updates, streamlining the mechanism and making it more efficient for the Osmosis community.
This step towards automating the burn mechanism would further solidify Osmosis’s commitment to improving the sustainability of its token and the platform as a whole.
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