Summary
Proposal to reduce Protocol-Owned Liquidity closer to its state prior to Berachain expansion.
Background
When Berachains Proof of Liquidity (PoL) went live, we deployed Protocol-Owned Liquidity (POL) to participate with a flywheel of incentives<>rewards. The high degree of third party participation in the pool necessitated a significant expansion of POL to maintain profitability within this. Upon the Berachain Foundations changes to PoL barring any entity from receiving rewards in excess of 40% for a given pool, profitability fell to negative for the network and was as a result discontinued. Roughly 70% of POL previously on Berachain was onshored to mainnet, with the remaining 30% staked with Beradrome due to our lock-in for the "Real Deal" program, and to guarantee access to liquidity any OHM holders or LPs remaining on Berachain.
The current state of liquidity for OHM is:
1.95m OHM (13% circulating supply) as POL;
340,000 OHM (2.2% circ) from third parties;
sum of 15% circulating supply.
The state prior to Berachain was:
900k OHM provided by the protocol (5.8% circ);
25k OHM provided by third parties (0.15% circ);
sum of 6% circulating supply.
Proposal
Given roughly two weeks have passed since PoL rewards to OHM-HONEY ceased, and thus we can assume LPs and holders have repositioned accordingly, we should reduce POL closer to its previous state. I suggest targeting a ratio of 8% circ in liquidity, which would mean removing roughly 1m OHM from POL. Less would be withdrawn if more third-parties withdraw, more would be withdrawn if third-parties add more.
Motivation
15% of circulating supply in an effectively full-range LP is tremendously high liquidity. Realistically, this is detrimental to the network at this point in time, as it suppresses volatility significantly and leads to lethargic behavior. It is worth noting that having this depth of liquidity for the past few weeks, paired with the negative price action experienced, has brought us to our lowest staking-adjusted supply since we launched (56,650 gOHM with launch supply of 55,454). This leads me to personally be happy to have had this liquidity structure for the time we have, but still not want it to persist. Removing POL will reduce depth by 30-40%, increase potential bi-directional volatility, reduce protocol market exposure, and increase YRF budget by virtue of greater reserves.
