The release of veBAL nearly three months ago represented a huge step forward for the Balancer ecosystem. However, the recent activity where a large percentage of BAL emissions have been directed to first the Badger then later the Cream pool has exposed a critical incentive misalignment in my view. Balancer’s most important metric is protocol revenue and there is no direct incentive for voters to prioritize pools that generate significant revenue. If such an incentive existed and large voters ignored it in favor of their special interest pool, external players would be financially motivated to lock veBAL and take advantage of that incentive.
I propose the creation of a “core” designation that governance would assign as part of the gauge vote approval. To be eligible, a pool must contain yield bearing tokens that Balancer earns a fee on. On Ethereum, core pools would see any fees they generate used as bribes for them in the next cycle. On Polygon & Arbitrum, all fees earned would be used as bribes for the core pools on each network, proportionally by TVL. This is intended to accelerate adoption of L2’s in the Balancer Ecosystem. Optimism is excluded as we have offloaded this responsibility to BeethovenX as part of the deal with them. Longer term if this initiative proves successful this process would be automated and L2 pools would be bribed based on fees generated rather than TVL. I’ve chosen to use TVL temporarily as calculating fees from yield and swaps is non-trivial and adds a significant amount of overhead - TVL is a close enough approximation as it is expected that most fees will be from yield.
Currently metastable pools are the only kind where Balancer earns the protocol fee on any yield generated by the underlying assets. This functionality is expected to extend to all of Balancer’s pool types later this year and these future pools could be added to the gauge vote as core pools. Some key L2 pools have been included despite the fact they do not contain yield bearing tokens - this is to begin rebuilding our L2 TVL in anticipation of the Balancer team converting these pools to yield bearing in the near future. Thus, the starting list of core pools would be:
- wstETH/weth (Ethereum, metastable)
- rETH/weth (Ethereum, metastable)
- stMATIC/wMATIC (Polygon, metastable)
- MaticX/wMATIC (Polygon, metastable)
- USDC/wETH/wMATIC/BAL (Polygon)
- wETH/USDC/wBTC (Polygon)
- wETH/USDC/wBTC (Arbitrum)
Note that fees earned being used as bribes is after the DAO takes their 25% cut. If we collect 40 wstETH in fees, the DAO would get 10 and 30 would be used to bribe for the wstETH pool for example.
All bribes would be paid in USDC
A final component to this initiative is allocating the bribes across all major players in the veBAL ecosystem. Since Hidden Hand is the predominant marketplace they will be the sole platform we use to bribe. Competing platforms are encouraged to make a governance proposal to be included in this initiative. Due to time and gas cost considerations I propose that only systems controlling more than 20% of veBAL be eligible for core pool bribes. Currently only Aura falls into that category. Bribes would be allocated according to the percentage of veBAL controlled.
Example: veBAL’s share of fees from the wstETH/WETH pool is 30 wstETH. Aura holds 20% of veBAL according to Dune. Thus, 6 wstETH (in USDC) is allocated as a bribe for the wstETH/WETH pool on the Aura marketplace and 24 wstETH (in USDC) is allocated as a bribe on the Balancer marketplace.
It is no secret that over time swap fee revenue will continue to decline. Balancer has the opportunity to lean into a second revenue stream - taking a portion of the yield on yield bearing tokens - that I believe will eventually represent the bulk of Balancer’s earnings. As the capability to earn protocol revenue on yield bearing tokens is extended to other pool types we must ensure voters have a financial incentive to direct emissions to these new pools. Boosted pools are an amazing mechanism to allow nearly any token with an associated lending market to become yield bearing - this is how we turn every pool into a core pool.
Bribing by external projects will still be effective though they will now be competing against core pools which was not a factor previously. However, if projects choose to take advantage of boosted pools and join this core pool program they would earn bribes for “free” which can be a powerful reason to bring your liquidity to Balancer. Projects who lock veBAL to vote for their non-core pool will see less earnings from protocol fees. However, I would argue that over the long term core pools can drive a lot of value to the protocol which would offset the short term “losses”.
- We create a dependency on Hidden Hand for this system to function. A substantial portion of Balancer’s protocol revenue could flow through them as a result of this initiative. They have agreed to give us a special exemption for bribes made using protocol fees - we’d only be charged a 1% fee rather than the standard 4%.
- This adds complexity to the manual collection of fees as we also now have to seed bribes.
- This introduces a barrier to entry for projects intending to bribe veBAL as they are now competing against the protocol itself.
- The use of non-native veBAL marketplaces (like Aura’s) could further erode any incentive to lock veBAL directly compared to using Aura or a similar system.
If approved, the following will be in effect:
- Whenever a gauge vote occurs there is the option for the proposer to request a “core” designation (must have at least 50% yield bearing tokens that Balancer earns the protocol fee on). This would cause fees earned by that pool to be used to bribe for veBAL votes on that pool.
- The pools listed above will become core pools
- All fees earned on Polygon & Arbitrum would be used as bribes for core pools on those networks, weighted proportionally by TVL of those core pools - after the DAO takes its 25%.
- All fees earned by Ethereum core pools would be used as bribes on those pools (each pool gets its own fees as a bribe), after the DAO takes its 25%.
- All fees earned by Ethereum non-core pools continue to be sent to veBAL and the DAO (75/25 split) as they are today.
- Protocol fee collection, distribution, and any subsequent bribing would now take place every two weeks on Monday instead of weekly on Wednesday. veBAL would still only be able to claim protocol fees on the UI at the end of each epoch every Thursday.
- Bribes would be allocated proportionally to any system that controls at least 20% of the total veBAL supply