Revert Auto Staking of LP rewards to Validator Set Preferences (671)

[JohnnyWyles]

Background

This issue is to action Proposal 671

Under the current tokenomic design, OSMO liquidity rewards are mainly allocated to Supercharged pools, as these cater for the majority of volume, accumulating block by block, requiring a claiming transaction.

With the increased swap fees generated by the efficiency of concentrated liquidity positions, the fee subsidy rate on Osmosis has fallen below one, meaning that more fees are being generated for liquidity providers than they are receiving from OSMO incentives.

This has changed the purpose of OSMO incentives from being the main reason to provide liquidity to being a guide to which pools should have additional liquidity deployed to optimize trading routes.

Since the loss of the OSMO multihop discount with the implementation of taker fees, this will likely be pairings directly between two non-OSMO assets. Incentivizing these pools to attract liquidity will maximize volume by minimizing trader fees per trade. Therefore, the purpose of OSMO incentives is to bootstrap these pools initially, followed by supplementing any impermanent loss over time by Liquidity Providers.

Historically, Osmosis governance has been reluctant to allocate OSMO incentives to non-OSMO pools as these liquidity providers have no reason to keep the emissions by compounding back into the pool. ... Suppose OSMO incentives are to resume being allocated to non-OSMO pools. In that case, alignment must be encouraged between Liquidity Providers for these pools and Osmosis. Since these liquidity providers are mainly after the trading fees in their pairings, they will likely sell any OSMO rewards for bonus yield rather than engaging with its usage.

This proposed tokenomic change adds some friction to an undesirable user flow for Osmosis while lowering it for a more desirable one, making the choice of OSMO reward usage a conscious one rather than routine. In the event of losses by liquidity providers, they may unstake these rewards and sell to recoup their losses. Until then, the minority of their rewards will further secure their liquidity on chain and earn them staking rewards, partially composed of the taker fees their liquidity helps generate.

This awareness of the governance process also encourages active liquidity providers on Osmosis to engage with Osmosis governance to request developmental improvements that improve the platform and attract further liquidity providers.

Suggested Design

• Automatically claim OSMO incentives in all pools at Epoch, GAMM redirect from wallet deposit, Supercharged claim transaction.
• Stake these to the Validator Set Preferences for a user
• If no Validator Set Preferences then create one from existing staking set
• If no existing staking set then set a vesting time equal to the staking time

Acceptance Criteria

All Internal OSMO rewards have a delay equal to the staking time between allocation and liquid.