This proposal reduces the inflationary subsidy of the revenue-based staking rewards to the point where emissions are fully offset by taker fee burns, marking a key milestone of fully sustainable and deflationary OSMO.

Current Status

This proposal forms part of the phased transition outlined in the [Hidden link], ultimately targeting a Minimal Viable Emissions model where staking rewards are primarily sourced from real yield. This proposal follows on from [Hidden link], which reduced the staking reward subsidy by half, followed by a monitoring period of at least 21 days. As expected by the nature of the change, over this monitoring period, there was an initial increase in OSMO that unstaked, reducing the amount of stake securing the chain from 45.3% to 43.5%. Since then, unstaking activity has stabilized, returning to the typical churn of 3–6 million OSMO bonded and unbonded per 14-day unstaking period. Chart 1: % OSMO Supply Staked after Proposal 957. Source: [Hidden link]

The decline in the staked percentage was more modest than expected, indicating that Osmosis is still rewarding stakers sufficiently even under the lower subsidy rate.

This proposal continues the process of determining the optimal level of revenue subsidy necessary to ensure the security that Osmosis requires through incremental reductions in emissions.

It takes the critical step of reducing OSMO inflationary minting to be lower than the sustained burn rate from taker fees, with the thesis that a lower but sustainable APR, combined with a deflationary trajectory, may prove more attractive to long-term holders than unsustainable high yields from inflation.

For a full analysis of this methodology, security impacts, and risks, see the initial [Hidden link]

Proposed Change

The proposed change is as follows:

• Reduce the token distribution allocated to Staking Rewards from 25% to 8%
• These diverted tokens are redirected to the Community Pool and remain out of circulation unless actively spent via governance, functioning as a soft burn while preserving the one billion OSMO cap.
• Governance can choose to fully burn these tokens through a spend proposal to the null address if no alternative use becomes apparent, and this accumulation is viewed as detrimental.

This reduction would result in 10,000 OSMO being minted for security each day, consistently lower than the reliable OSMO burn rate from taker fees of [Hidden link] since [Hidden link]. This results in OSMO being deflationary every day from taker fees alone.

Additional burns, such as those from ProtoRev and Top of Block auctions, are then bonus deflation beyond this. ProtoRev has an [Hidden link] of 2,500 in the last 90 days, and Top of Block burns, such as [Hidden link], total around 850 OSMO/day in USDC. Together with the excess taker fee above that used for the offset results in a typical 3,350 OSMO/day of net deflation.

While the reduction in inflationary emissions is significant, the resulting decrease in staking APR is relatively modest, as more rewards now come from actual protocol revenue. Current staking APR is ~6%, with this proposal reducing it to ~3.7%, comprising ~2.6% from protocol revenue and ~1.1% from emissions.

This headline APR is still comparable to [Hidden link]. While bond rates apply to fiat currencies, they serve as a valuable benchmark for “risk-free” returns. Assuming stakers view OSMO as a value-preserving asset, this rate remains competitive for long-term holders.

Should this cut trigger significant unbonding, the resulting higher share of rewards for remaining stakers will re-equilibrate staking incentives, and governance can revisit parameters if needed.

By pairing sustainable staking returns with a reliably deflationary supply, Osmosis strengthens its long-term value proposition for stakers, holders, and liquidity providers. Chart 2: Osmosis Staking APR composition, past and projected

Summary of Metrics