[BIP-19] Incentivize Core Pools & L2 Usage

[solarcurve]

Motivation

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.

Conclusion

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”.

Risks

• 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.

Specification

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

[mitche50]

@solarcurve

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%.

Personally I think this is a be reactionary to a massive whale having outsized influence. With Aura being launched recently and collecting a good amount of BAL already, having any changes to designations of pools or how they’re categorized / handled as well as adding a single point of failure seems like a risky move.

I’d say let’s see how the AURA / other BAL aggregators work out and create efficient markets before adjusting things.

[Xeonus]

It took me a while to wrap my head around the core concept of this proposal. Especially in terms of what it would mean for veBAL holders. I have to say @solarcurve came up with an ingenious mechanism on top of veBAL that should result in a positive net effect for the protocol and its supporters. I am in full support of this proposal!

[solarcurve]

Aura doesn’t add any incentive for voters to care about which pools are generating high protocol revenue.

You are simply betting on general increased usage of Balancer to lead to good things, which Aura will help with.

The goal here is to create a strong direct incentive for voters to direct emissions to pools that generate high fees. Any voter who chooses not to do this simply means the incentive is that much stronger for new voters to join the system and take the money.

[maxfiat]

As someone who advocated for building on top of Balancer in particular for its Asset Manager functionality, I definitely think this on the right track.

Only point I would add is that any rolling out of this concept should be accompanied with additional UI rails for setting up boosted pools, to ensure that every pool construction has a means of becoming a yield-bearing pool. I think you would see bottlenecking issues otherwise as it would require hand holding from the core team.

[khbw]

Very good optimization proposal, which will force veBAL holders to vote for pools that generate more revenue, I fully support it. But there is a question, why do we need to define Core Pools, as long as any Pool can generate enough swap fees, it can also be applied, isn’t it?

[solarcurve]

It is true we could simply say fees generated by each pool go to bribes on that pool. Problems would be:

1. we have too many pools to do this manually and automation would be months+ away
2. as we settle into this bear market I expect trading activity to decline significantly. Designating “core” pools creates a strong incentive for projects to adopt yield bearing tokens on Balancer. This allows us to diversify our revenue away from only swap fees.

[kia]

This is a very clever strategy. The problem with the veModel is that there are no incentives to vote for the more productive pools from the protocol’s perspective and this would tackle that issue.

I’m in support of exploring this idea.

Do we have any estimate of what the bribes on some of these pools might be and what kind of TVL that would result into? That might be helpful to crystalize the benefits for the veBAL votes.

[solarcurve]

https://www.notion.so/balancergrants/29db4a61f4b8490fb2fcfe68ce4cf4e4?v=9b732df232b4468ab637080f77fb94d4

This shows protocol fee distributions each week. You can get a sense of what bribes will be going to L2’s since all veBAL fees will go to bribes for L2’s. Guessing TVL is tricky but the trend will at least start going UP instead of down.

wstETH fees have consistently been $50k+ each week so expect that pool to get some fatty bribes. rETH is much smaller, usually $1-3k per week.

[basedcrown]

excellent proposal that forces behaviours that benefit the sustainability and long term success of balancer.

Also great value discount managing to get fees from Hidden Hand down to 1%; having an external team manage this service for us for such a low fee is definitely the way to go.

I am fully in support of the proposal as it stands.

[bakamoto20]

What’s the reason for Balancer not having its own bribe marketplace, and integrating that into the user interface? If we move forward with this proposal, it’s creating a dependency as you said & perpetually giving away a % to Hidden Hand for no reason really.

Not sure why we would in effect create a Hidden Hand monopoly we don’t have control over, when Balancer is also going to be providing most of the Bribes.

[solarcurve]

It is always an option to make one ourselves. Main reason we aren’t going to is it will create more weekly upkeep the Balancer team has to deal with. The distribution method used by hidden hand is very similar to how we used to do liquidity mining before veBAL - offchain calculations, etc.

Creating an automated on-chain system is a very big task and I believe we have higher impact priorities than trying to save 1% on protocol fees.

Working with Hidden Hand let’s us roll this out very quickly. It would be months+ without them.

[bakamoto20]

I think these are interesting things to think about in terms of long term strategy for Balancer. Thinking further on this, if we’re going to be putting all/most of Balancer’s underlying TVL into yield bearing strategies, it would also make a lot of sense to fork a well established lending protocol and create a Balancer lending market.

Attracting people to Balancer to borrow wouldn’t be an issue, as they’d have lower interest rates initially. The issue most lending protocols have is building up the supply side, and we already have the supply. Would be curious to hear @Fernando thoughts on this.

We can then still have boosted pools using other protocols, where those other protocols are in some sense “boosting” with bribes/their own veBAL, but for circumstances where that’s not the case, makes sense for Balancer’s valuation to have that value locked (and therefore to the benefit of everything Balancer does).

[Fernando]

I second @Xeonus’s comment.

Solarcurve’s idea is a net zero change of revenue earnings (disregarding the one-week shift of bribes) for veBAL holders in aggregate. The super smart thing though is that by diverting these to bribes for core pools, it takes revenues away from mercenary voters (who vote for pools that generate no protocol revenue) and gives it to good pool (which generate protocol revenue) voters.

Very much in favor!

[Fernando]

Thanks for chiming in @bakamoto20 and great to see you back! We all missed you =)

I don’t think I see how Balancer could become also a lending protocol without drastically changing all our vault infrastructure and migrating to a whole new version of the protocol. I personally think this would be a loss of focus and a gigantic task that we are probably not in the best position to undertake. Much better to focus on our core competency (a platform for programmable liquidity) and team up with our great partners like AAVE who are already doing a great job at lending.

There is so many ways that Balancer can still add value as a AMM platform: I think we are just scratching the surface and should keep laser focused on improving our existing infrastructure with a better SDK, better docs, simpler ways to integrate what we already have. On top of that we’ll ofc keep innovating on fronts like managed pools, which will open up a vast design space for things to be built on top of Balancer.

[bakamoto20]

Thanks! I think it’s an exciting period for Balancer, even with the wider market in disarray, it provides a good opportunity to make gains and take market share in % terms.

That makes sense, I guess I wondered if there was a simple way of implementing something with a fork without changing the vault (so something separate/outside of the vault), but for sure can understand it would be a complicated task to develop something effectively from scratch in that way and distract from other development.

[immutbl]

Every crisis is an opportunity. Thanks @solarcurve for recognizing this opportunity to improve the veBAL incentive structure. We as a DAO are learning from the cause and effect of each change we make and continuously iterating.

[LuukDAO]

Thanks, @solarcurve for continuously trying to find ways to improve Balancer.

Reward Optimization around Core Pools
I like the idea of optimizing rewards for veBAL holders that vote on pools that generate fees for Balancer Protocol. I would like to understand a couple of things in the proposal better.

The Current Core Pools would only focus on pools with yield-generating assets, while the vast majority of fees currently are generated by non-yield-generating pools.

1. Do you think the Core Pool concept could be extended to liquidity pairs that are essential for Balancer Protocol? What would this look like?

2. Would it be possible to simulate the returns for veBAL holders who would vote on Core Pools vs a non-Core pool with large bribes?

3. Have you thought of an alternative where use “Fee’s Earned” as a parameter to calculate BAL inflation sent to a pool? I want to avoid we go back to manual gatekeeping of rewards.

Creating a Unified Bribing Market
" I have coordinated with Hidden Hand, Aura, and many in the Balancer community, and I believe there is consensus that a single veBAL bribe marketplace is the best option."

As a Balancer Ecosystem member and builder, I find this a scary statement. Given the fact that Aura and other veBAL solutions have not reached maturity yet, I think it’s hard to make such statements and not wise to pick winners. I see competition on the vendor level (SPs, Partners) as a positive thing for the Balancer Ecosystem, and don’t think we should deviate from this approach if we consider Balancer Protocol to be an open platform we want people to build on.

When it comes to custom bribing solutions and integrations - I would like to see a cost analysis of the 1% (would also like to understand how will this be ratified and if the fee can be changed) fee from Hidden Hand over a period of let’s say 2 years under your simulation and compare this with alternatives. With dev groups such as Daoism system around who could build us a custom solution and multiple bribing markets coming to Balancer soon (e.g. Paladin), it might be wise to make a comparison before.

Maybe it’s worth hosting a workshop/call about this topic as I’m sure there are a lot of potential solutions we can come up with as a community.

[solarcurve]

1. The concept will be extended to liquidity pairs essential for Balancer protocol. There will soon be a wstETH/bbaUSD core pool which I hope will become one of the largest TVL pools we have. As for how this will look, it is as I outlined - pools should take advantage of yield bearing tokens to qualify as a core pool. If pairing against weth, consider wstETH or yearn boosted ETH or rETH, etc. If pairing against stables, consider bbaUSD or any future boosted stable pools.

2. You can review the protocol fee investment spreadsheet to get history on fees we’ve collected. From there one can extrapolate expected bribes and simulate various scenarios as desired.

3. If I understand correctly, you suggest linking fees earned to BAL emissions in a hard coded way - meaning emissions would not be determined by voting anymore. This is not possible I think within the veBAL system - but this proposal will create an incentive for fees and emissions to become linked together, ultimately the best we can do within the framework we have I think.

As for your concerns on the unified bribing market, I would argue a unified bribing marketplace is actually very good for promoting competition. No one is going to bribe in systems that hold very small amounts of veBAL so by operating separate bribe markets you serve to guarantee Aura’s dominance. With a unified marketplace, smaller operators like pickle, tetu, primeDAO, etc have access to the same bribes that veBAL and vlAURA does. Thus leveling the playing field and letting the best system win.

As for your concerns on the bribing solution/integration, one can see a cost analysis by applying a 1% fee to the protocol fee investment spreadsheet. Hidden Hand will create a special deposit contract that only we can use, allowing them to charge us 1% and continue charging the usual 4% to external bribers. Hidden Hand is the only marketplace that has proven product market fit atm so I figured leaning into their early traction made the most sense.

Longer term the system of collecting protocol fees, distributing, and bribing must be automated - I can’t say if the smart contracts team would want a 3rd party to develop that kind of critical infrastructure but I’d personally love it if Daoism Systems was interested in doing that. I don’t think there is value to be gained from commissioning a custom bribing platform - best leave that to interested 3rd parties in my view. My understanding of Paladin was it is different from Hidden Hand and not a simple deposit bribe, vote, collect - but would be interested to hear a proposal from them to be included in this initiative. Note that passing this proposal would not preclude future proposals from competing marketplaces, like Paladin, to be used by us to bribe.

I’ll be available in the public weekly call in discord Tuesdays 11am EST if anyone wants to discuss this proposal (or anything). Simply signal your interest in attending in #treasury and I’ll whitelist you for the voice channel.

[bakamoto20]

In terms of the bribing platform, I think there are benefits to Balancer having its own developed:

1. We don’t have ongoing % of protocol fee revenue going to an outside protocol. This would become significant and perhaps quite quickly become larger than the costs of having our own developed.
2. Improving the overall user experience: at the moment, Balancer users have to visit this other website to get involved in bribing. If it were accessible via our own user interface, it’s likely awareness among Balancer users would be higher. People could potentially also claim their bribes via the same claim page, etc, improving overall user experience.
3. Bribes needing to be updated/checked relatively frequently would bring people back to the Balancer user interface more regularly. This may have other benefits in terms of people depositing in pools / being aware of what’s changing at Balancer.
4. Our own bribe platform would be Balancer exclusive, potentially in the future Hidden Hand could be promoting other decentralised exchanges that implement some kind of vote locking. I suspect they’ll want to be managing bribes for as many platforms as possible.
5. If we want to automate all of the bribing process as you suggest, we’re not creating an outside dependency in something quite central to Balancer’s tokenomics if it’s a bribe platform we have control over.