# Decentr Proposal for external incentives for Osmosis Pool #644


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Greetings everyone. Mike FaJohn here. I am going to breakdown details of the proposed proposition to address the liquidity crisis the Decentr network is facing with pool #644 on app.osmosis.zone
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## The prop in a nut shell:

Add external incentives to Osmosis pool #644 (Dec/Osmo) To bolster liquidity, reduce slippage on the pool, and generate upside buy pressure of the $Dec token.

## How it works:

Decentrnet will provide a proposed 1,000,000 (one million) $Dec tokens to be distributed to Osmosis pool #644 Dec/Osmo distributed daily for 2 months. The number of $Dec tokens distributed daily will be an estimated 16,666 every Epoch. The amount of $Dec received is subject to liquidity conditions in the pool. The tokens for the incentives will come from the Developer’s wallets and will not cause any change to network emissions or new inflation.

## Why are we doing this?

Since the launch of Decentr.net, The only On/off ramps into the network have been Osmosis pool #644 (Dex) and Ascendex (Cex). These 2 ramps generate all the volume for the entirety of the network. When an investor wishes to purchase $Dec, They must either purchase on Ascendex or swap IBC assets on Osmosis to obtain $Dec.

Many users around the world can not access Ascendex as it is a UK based exchange. That leaves Osmosis as the only other option currently.

Osmosis as a DEX does not hold nor own any Decentr. In order for someone to purchase $Dec on Osmosis, a liquidity provider is required to pair $Dec and another asset into a pool to facilitate transactions (Swaps). These liquidity providers are awarded a small percentage of the swap fees as a reward for providing the liquidity to allow users to swap the assets. In this case $Dec and $Osmo in pool #644.

Liquidity providers take extreme risk when providing IBC assets to be swapped. The 2 most common risk are exposure to 100% of inflation and Impermanent loss.

Inflation: Users who stake $Dec to secure the network earn staking APR to counteract inflation. They lock their tokens up on chain delegated to a validator and in return the network assures they will not suffer loss due to inflation. In the case of liquidity providers, They bond their tokens into a liquidity pool and do not earn any staking APR to counteract the loss from inflation. Overtime their liquidity loses value as there is no anti inflationary forces to prevent inflation. This often times discourages people from committing liquidity for any meaningful period of time.

Impermanent loss: When liquidity providers provide liquidity to a pool, The pool must maintain a 50/50 split balance of the assets in the pool at all times to facilitate transactions. That means dollar for dollar, There must be an equal USD balance of $Dec and $osmo in pool #644 at all times to maintain parity and facilitate transactions. As both underlying assets are liquid in nature, The price of $Dec and $Osmo constantly changes every second. To account for price volatility, The Pool automatically adjust the liquidity providers holding to always have a 50/50 pairing. In the event that one of the underlying assets depreciates in price, It results in the pool automatically swapping the stronger asset for the weaker one. This is called impermanent loss.

In a Hypothetical situation we will assume asset #1 and asset #2 are both worth $1. We have 10x of each asset in a pool. If asset 1 drops by 10% down to 0.9 and asset #2 remains at $1, The pool will automatically convert 1x of asset #2 into asset #1 making the new token distribution 11/9. Now the liquidity provider is holding more of a less valuable asset than the asset he originally provided to the pool. In the event that he was to close his position, That loss is finalized and he has suffered impermanent loss.

## How does External incentives help?

External incentives are the median that offsets loss to liquidity providers. Simply earning 0.2% of swap fees is not enough alone to counteract the losses they incur. External incentives assure that Liquidity providers are offsetting inflation and negating to some extent the losses incurred by impermanent loss. This helps build investor confidence and allows them to be willing to take the risk associated with providing liquidity to the pool for long periods of time.

## What negative effects could come from this?

The only negative effect is the possibility of some of the 1 million $Dec allocated to incentives being sold off (profit taking) This could incur short term sell pressure over the 2 months but it is just as likely that the emissions from the pool are recycled back into the pool or even used to open Staked delegations on the network. Any sell pressure is also likely far less than the amount of new buy pressure from people opening positions into the liquidity pool to earn the rewards.

## Why should you care about liquidity providers or pool #644 on Osmosis?

As stated above, When someone wants to make a purchase of the $Dec token on Osmosis.zone, They must swap an asset for the Dec token. The AMM (automated market maker) Facilitates that transaction for the user by utilizing the liquidity pool automatically.

In our next hypothetical situation, Lets say a user has $1,000 USDC and wants to purchase $Dec with it. The user goes to the swap page and selects USDC as the token in and Dec as the token out. The AMM calculates how much Dec the user will receive from the transaction. First the user must pay the swap fees in association with the pathway that the AMM must take to facilitate the transaction. In this case, The AMM will first swap USDC for Osmo. That has a 0.2% fee. Then the AMM will swap the Osmo for Dec. that has another 0.2% fee. The end user has now had to pay 0.4% in fees to facilitate the transaction.
Now for the problematic part, Liquidity in the pool must have enough underlying liquidity to facilitate all transaction being conducted on the pool in real time. If there is not a large enough pocket of liquidity, This results in a loss to the user in the form of slippage. The larger the amount of the token he is trying to purchase results in a larger amount of slippage.

The biggest issue with Pool #644 is how anemic the liquidity conditions are. For the last several months, Total liquidity provided to the pool has been around $30,000 USD. That means there is roughly $15,000 USD worth of $Dec and $Osmo in the pool.

This is adequate for small purchases of Dec but once you start to purchase more than $100 USD worth of Dec in one transaction. Slippage and price discrepancy increases greatly.

Lets take a look at the current slippage and price change of our hypothetical user trying to swap $1,000 USDC for $Dec.


As you can see, Due to low liquidity conditions in pool #644, Slippage is high and the user loses almost 6.5% of the $Dec he should receive because of it and the impact the transaction has on the liquid supply of $Dec. Without adequate liquidity in the pool. The swap creates a huge price discrepancy leaving the user short changed.

Lets take a look at a healthy pool with a robust and strong pocket of liquidity for comparison.


As you can see, The same User purchasing $Atom has virtually no slippage and loses virtually none of his liquidity in the swap because the $Atom pools on Osmosis have deep liquidity and can easily facilitate the transaction.

Encouraging liquidity providers to lock up their $Dec and $Osmo and bond it in pool #644 will greatly reduce slippage and allow for more accurate purchases and sells of $Dec on Osmosis to occur. Validators and delegators will benefit as they will be able to have accurate and consistent monetization of their staking rewards. Purchasers of the $Dec token will benefit as they will receive a more accurate and reliable swap of their liquidity as they enter the network.

Now lets take a look at what would happen if a validator or large holder of $Dec wanted to exit a position.


You simply can’t. Trying to close a $10,000 USD position, there is simply not enough liquidity in the pool to allow for the transaction. The user would have to break it down into multiple smaller transactions and incur even deeper losses making it not viable to use the pool as an off ramp. As fresh investment into the liquidity pool is incentivised, The pool will have the liquidity to facilitate even larger transactions at less of an impact on price and slippage.

Liquidity providers take extreme risk to assure that the network has adequate liquidity to facilitate users needs. They are the backbone in which the network is built and make sure all users are getting the fair valuations of their buys and sells as they deserve.

This proposal will properly encourage and incentivize liquidity providers to shoulder the risk on our behalf. It will give them a fair reward for their efforts that is equal to (even slightly less) than most other networks offer in external rewards on Osmosis to bolster their liquidity reserves.

Once the proposition is passed, Liquidity providers will be able to lock up their tokens with a 2 week unbonding in order to start receiving the rewards. They can also opt for a 1 day or 1 week unbonding and the pool will automatically adjust the APR they earn giving people committed for longer periods of time more of the rewards.

## How will this affect the $Dec token?

By awarding new liquidity providers with the incentives from this proposal, They will purchase $Dec to bond it into the pool. This will cause upwards price action as the token is accumulated. These tokens being purchased will be locked up in a state similar to that of a staking delegation removing it from the liquid supply and making $Dec more open to price movment as the liquid supply shrinks. This will eventually lead to more price stability as the size of the pool increases.

## How will Validators benefit?

Aside from the upside buy pressure to accommodate liquidity providers opening positions, The $Dec token will become more easily obtainable to all allowing for new users and delegators to enter the network without incurring steep losses from slippage. These new users will delegate to the validator set and help further decentralization while increasing the rewards validators receive from commissions.

*That is all for now. I hope this answers many of the questions Deconauts have and I hope you can all see the value in this proposition. Honestly this is something all networks do. Only they typically do it very early on. Because we have not taken action to pass such a proposition sooner, Pool 644 has incurred steep losses and liquidity has dried up leading to the insane slippage we incur now and lack of adoption from the cosmos ecosystem as they do not want to incur losses to enter the network. This will build a foundation for our pool on Osmosis that will serve us all for years to come.*

*Thank you everyone for taking the time to read this.*

**Mike Fajohn**