Osmosis, the leading Automated Market Maker (AMM) and decentralized exchange for the Cosmos ecosystem, recently approved a series of community governance proposals to redistribute the OSMO initially staked with Stride, deployed from its community pool, among alternative Liquid Staking Providers – including pSTAKE’s very own stkOSMO solution.
The proposal aims to enhance Osmosis’s decentralization by improving capital efficiency and redeploying stOSMO liquidity into Quicksilver’s qOSMO pool and pSTAKE Finance’s stkOSMO liquidity pool.
The Need for Liquid Staking Diversity for Decentralization
Osmosis is the liquidity and DeFi Hub of Cosmos. The Osmosis AMM allows users to create interoperable community-managed liquidity pools for token swaps across the Inter-Blockchain communication (IBC) protocol.
OSMO, the native token behind the blockchain, is used for voting in governance, staking to secure the chain, and providing liquidity to the pools for token swaps. It also has a Superfluid function that allows users to maximize rewards while helping secure the network by allowing OSMO tokens to be used for staking and providing liquidity simultaneously.
For liquid staked tokens to thrive, there must be adequate underlying liquidity for the tokens to be sold through the liquidity pools to avoid slippage and allow consistent redemption of liquid-staked assets. At the same time, there needs to be adequate diversity amongst liquidity pools to ensure that one liquid staking provider doesn’t control a majority share of the sector to secure decentralization.
Centralization of liquid staked assets proved to be a major concern for Ethereum, with the unease surrounding Lido’s 30% share of all liquid staked Ether. The problem was highlighted by co-founder Vitalik Buterin, who suggested that any staking pool controlling more than 15% of the liquidity should be expected to increase its fees until its share drop below the threshold to promote decentralization;
Although different from the liquid staking centralization witnessed through Lido on Ethereum, enhancing the liquidity distribution among the liquid staking pools is also essential to ensuring long-term decentralization for the Osmosis blockchain.
The proposal highlighted that Stride’s stOSMO pool held the majority share in the liquid staking arena, with most liquid-staked OSMO placed in the stOSMO/OSMO pool.
As you can see, Stride has the largest share of liquid staked assets in the Osmosis ecosystem via stOSMO. As a result, a recent proposal went live concerning the need for more liquid staking diversity surrounding its Liquid Staking Providers.
Considering liquid staking providers have the potential to utilize its underlying stake to vote through validators, diversifying liquidity amongst the liquid staking pools is essential to remove the soft bias of validators voting for proposals that favor their validator set rather than the blockchain itself. The OSMO community has the perfect opportunity to help with the diversity by redeploying its assets initially allocated to Stride.
Osmosis Redistributes Liquid Staked OSMO From the Community Pool for Decentralization
Earlier this month, a proposal was put forward on the Osmosis forum surrounding a discussion to re-evaluate the liquid-staked OSMO held by the community pool.
With over 25 million OSMO allocated to the stOSMO/OSMO pool from Protocol-Owned Liquidity (POL), the liquid staking provider holds significant voting power through its validators on Osmosis proposals.
The deployment from the community pool was essential in spurring the adoption of stOSMO across the Osmosis ecosystem, allowing for adequate liquidity to ensure redemptions of OSMO for stOSMO. However, with Stride having 25 million OSMO under management – with 10 million OSMO provided by the community pool – there’s a clear competitive advantage for the Liquid Staking Provider to continue growing, which would result in reduced distribution and decentralization among staking pools.
The now-approved proposal suggested removing half of the liquidity from the stOSMO/OSMO Stableswap pool and redeploying it into the more capital-efficient stOSMO/OSMO Supercharged position. Then, the 2.5 million OSMO saved from the capital efficiency would be redistributed to the Supercharged positions of qOSMO and stkOSMO.
In addition to Stride’s stOSMO, Osmosis has previously supported alternative Liquid Staking Tokens through ampOSMO and bOSMO. The latest proposals are set to further enhance the distribution and decentralization of Osmosis by allocating funds from the Community Pool to stkOSMO and qOSMO.
The Osmosis community has approved all the proposals (linked below) to re-evaluate liquid staked OSMO held by the Osmosis Community Pool :
https://www.mintscan.io/osmosis/proposals/769/
https://www.mintscan.io/osmosis/proposals/770/
https://www.mintscan.io/osmosis/proposals/771/
StkOSMO: Enhancing Distribution Through 75 Osmosis Validators
stkOSMO has been a core part of the pSTAKE Finance protocol since the liquid staking solution launched in December 2023. stkOSMO allows delegators to liquid-stake OSMO with 75 validators to receive OSMO staking rewards and use stkOSMO in DeFi.
The $OSMO allocated to pSTAKE Finance from the Community Pool will not only enhance the diversification of the Osmosis liquid staking layer but also further decentralize the network. stkOSMO sets itself apart from the alternative OSMO liquid staking solution through its decentralization strategy. The solution delegates the stake across its validators based on an automated weighting distribution mechanism to help bolster decentralization.
The parameters automatically delegating the stake include Voting Power, Commission, Uptime, Governance Participation, and Slashing History. In turn, this delegation strategy pushes decentralization even further through a distribution mechanism that utilizes on-chain metrics.
As a result, stkOSMO helps align the Osmosis community with liquid staking while offering innovative features like Flash Unstake and ensuring a fair distribution of the stake. By redistributing the OSMO delegated from the community pool across multiple liquid staking providers, Osmosis is moving toward sustainable decentralization, ensuring an adequate distribution in its liquid staking pools. Simultaneously, pSTAKE will witness increased adoption and enhanced liquidity of its liquid staking tokens – resulting in a win-win scenario for both communities.
Additionally, this will help supercharge the Osmosis DeFi ecosystem, with more adoption of $OSMO LSTs such as stkOSMO coming to Quasar, Levana, Mars and other protocols.
Overall, we’re thrilled that the Osmosis community has trusted us to help enhance the liquid staking distribution on its network as we persist in pushing liquid staking tokens to become the base asset for the entire DeFi industry.
