Authors: Beethoven X contributors (composers and music directors)
This proposal presents an opportunity to position Balancer and Aura as the leading forces of technology on Optimism. It aims to seize the upcoming launch of Aura to leverage cross-chain Balancer boosts, restructures the network’s liquidity, and propel Balancer, Beethoven X, and Aura toward increased market dominance. This proposal seeks to do so by proposing a modified protocol fee structure and core pool framework, similar to other successful Balancer deployments.
Background and Motivation
Optimism’s bedrock upgrade has transformed the Superchain thesis into reality. With the impending Base Launch and the continuous development of the OP stack, we believe Optimism is poised to attract greater attention and liquidity. With the launch of Aura, these developments present an opportunity to cement the joint Balancer and Beethoven X deployment as a core technology and liquidity host on the network.
Since the approval of the Beethoven X friendly fork of Balancer in November 2021, the partnership between the two protocols has flourished into a truly unique relationship. Nowhere else in DeFi has a fork become an essential SP of the original protocol. For the last year, we have recognized we are stronger when we work together, pushing the boundaries of what we can achieve and building a better ecosystem along the way. If we look back, the joint Optimism deployment was the pivotal milestone in the expanding relationship between these two protocols.
Since its launch in July 2022, the joint Balancer and Beethoven X Optimism deployment has demonstrated its innovative prowess, becoming the primary host of LST liquidity, amassing $60 million in TVL in April 2023, and generating approximately $370k in protocol revenue. While these metrics are indeed commendable, there is room for improvement. With the recent emergence of L2 veBAL Boost powered by LayerZero, there is the opportunity to leverage the impending launch of Aura and make considerable improvements to network market share.
This proposal seeks to optimize the current incentive structure to coincide with Aura’s launch. Specifically, it aims to restructure the distribution of protocol fees to bootstrap an enhanced liquidity flywheel on the network and adopt a modified Balancer core pool model per BIP-19, supplemented by Beethoven X’s Optimism grant.
Current Protocol Fee Distribution
In line with other Balancer deployments, the joint Balancer/Beethoven X deployment currently allocates 50% of swap fees and yield capture as protocol fees, with the remaining portion directed towards LPs. Based on initial governance approvals, both DAOs agreed to a 50 / 50 split of the protocol fees as part of the joint deployment.
BeethovenX’s governance adopted an additional proposal, where it committed to allocate 50% of its share of the protocol fees, converted to OP, matched with Beethoven X’s OP grant, and emitted to pools as liquidity mining or gauge incentives. In certain instances when positive ROI was achieved, these incentives were directed towards Hidden Hand’s OP vlAURA gauge market, but have more often been used as direct liquidity incentives.
Beethoven X’s grant-matching approach is a sustainable incentive model designed for long-term success. Other partnerships, such as Rocket Pool, have played a pivotal role in bootstrapping liquidity by directing their OP grants toward Optimism pools. However, the joint deployment has faced limitations in competing with the incentives provided by other protocols due to the number of incentives the joint deployment can currently emit based on the portion of protocol revenue flowing to Beethoven X.
The Value of Optimism Deployment
From January 1 to June 30, 2023, approximately $77.8k in BAL rewards have been emitted to OP pools through veBAL, while Balancer’s revenue share directed towards the DAO treasury amounted to approximately $125.5k, resulting in a positive net cash flow. During the same period, Beethoven X incentivized pools with $56.6k worth of BEETS tokens, recycling half ($62.8k) as incentives from its share of protocol fees matched with OP.
With the anticipated launch of Aura and cross-chain veBAL boosts, Beethoven X, Balancer, and Aura will unlock more efficient means to foster liquidity growth. Historically, Aura has provided the Balancer ecosystem with an additional liquidity layer enabling efficient vote markets. As such, Beethoven X’s current OP grant matching program can shift to being deployed as gauge vote incentives to direct BAL and AURA emissions to increase protocol TVL efficiently. If voting market efficiencies reduce, the incentive program can continue to emit direct liquidity mining incentives on pools. Aura has also proposed an OP grant that would direct additional direct LP incentives or match bounties placed on any Aura voting markets with OP.
By leveraging the cross-chain veBAL boost and providing an efficient liquidity layer, combined with potential OP matching, Aura is a growth catalyst for the Balancer and Beethoven X deployment. With these additional optimizations to our incentive systems, we can ensure that our entire ecosystem substantially increases market share and revenue potential on Optimism.
Core Pool Framework
The Balancer Core Pool Framework implemented through BIP-19, allows us to designate certain pools as “core pools.” Under this framework, protocol fees earned on other Balancer L2 deployments are utilized as gauge incentives for core pools on those networks, accelerating the adoption of L2s within the Balancer Ecosystem. BIP-19 was approved to collect and allocate 65% of the fees of all pools and proportionately direct them as gauge incentives to each L2’s core pools to bootstrap their liquidity.
Gauge Framework v1, as proposed in BIP-57, introduced rating criteria for the Balancer community to evaluate all current and future veBAL gauges. This framework incorporates an “overall” factor, derived from the “weight” factor and “market cap” factor, as well as a “revenue” factor. It imposes a 2% cap, 10% cap, or no cap to gauges.
BIPs-19 and 57 have also been applied to designate at least two 80/20 pools, Radiant and Alchemix, as uncapped core pools, in lieu of receiving ve80/20 grants
This proposal aims to adopt these frameworks for the Balancer/Beethoven X deployment on Optimism. However, we propose a modification to the distribution system: Rather than distributing incentives between core pools based on TVL, we propose incentives are distributed based on protocol fees generated by each pool, a calculation that can be efficiently derived using the Beethoven X dashboard.
Specification
This proposal seeks to ensure that we bootstrap the launch of Aura in the most efficient way possible with two changes.
- Adopting a modified version of Balancer’s protocol fee distribution
- Establishing an Optimism core pool framework
Adopting Modified Version of Balancer’s Protocol Fee Distribution.
We propose the joint Beethoven X / Balancer deployment on Optimism adopts the same 65/35 Protocol Fee distribution structure as other Balancer deployments: 65% of the fees used as incentives on the vote market for Optimism pools, and 35% goes to DAOs, with an equal split between Beethoven X and Balancer.
If approved, this action would take place as soon as possible to capitalize on Aura’s launch on the network. 65% of the fees would be utilized to buy OP and direct OP as voting incentives for core pools. The resulting action would see 65% of all protocol fees paired with OP from the Beethoven-X/Balancer OP grant, meaning a net 130% of protocol fees distributed as voting incentives.
There is also the potential for further matching from Aura’s OP grant request. If Aura’s OP grant is also approved, this would see a net 260% of protocol fees distributed as voting incentives for vlAura voters while the grants are active. Voters will see an increase in voting incentives that go towards pools of Optimism with the potential to increase even further with every voting cycle due to the positive flywheel effect.
Protocol fees are currently collected every two weeks with all fees sent to the Beethoven X Treasury on Optimism automatically. Balancer DAOs share is then bridged to the Balancer Treasury on Mainnet. The proposal aims to keep this procedure to streamline the process of OP grant matching, with OP directed towards voting incentives for vlAura voters, or as direct Liquidity mining incentives depending on voting efficiencies.
Adapting the Core Pool Framework for Optimism
The Optimism deployment will adhere to the Balancer Core Pool Framework that is in place for all other chains. However, we propose to add a slight change to the distribution mechanism: Instead of distributing the voting incentives based on the TVL of the pools, we propose to distribute incentives based on fees (yield and swap fees) generated over the previous two weeks. Beethoven-X has developed a dashboard that details a pool’s contribution to fees and the resulting incentive distribution those pools will receive. While distributing incentives based on TVL is a good approximation, using fees as the underlying data is more accurate.
If this proposal passes, the following existing pools would be designated as core pools:
- Rocket Fuel (reth/eth metastable)
- Shanghai Shakedown (wsteth/eth metastable)
- Tri-Sonne Harmonic Crescendo (bb-so-wbtc/bb-so-wsteth/bb-so-usdc weighted pool)
- Gyroscope ECLP (wstETH/WETH)
Dependencies
- For this BIP to become active, Aura must launch on Optimism, which is planned very soon.
Risk Assessment
Via redirecting a portion of Balancer’s protocol fees to voting incentives for veBAL / vlAURA voters, the net percentage of protocol fees flowing to the Balancer DAO treasury as well as Beethoven X DAO treasury will be reduced to 17.5%.
While this reduces potential future treasury runway, it also has the potential to bootstrap the TVL of pools that contribute considerably to revenue. Paired with a cross-chain Balancer boost, Aura’s Liquidity mining boost, incentives, possible Aura OP matching, and potentially positive ROI on voting markets, yield-bearing core pools will have the potential to see a considerable increase in TVL. To add to this, these pools are unique in that an increase in TVL directly correlates to the revenue generated.