[BIP-734] Balancer V3 Launch and Protocol Enhancements

[Xeonus]

Contributors: @Marcus and @mendesfabio (BLabs); @danielmk , @naly (Beethoven-X); @ZenDragon ,@Mike_B , @Tritium and @Xeonus (Maxis)

Summary

The launch of Balancer v3 presents the DAO with an opportunity to optimize its fee model and core operational framework, positioning it to dominate the yield-bearing market and enhance long-term revenue generation and redistribution for LPs, veBAL holders, and the DAO.

Upon approval, this BIP will implement the following changes:

Balancer v3

• Initial Launch: Mainnet and Gnosis chain
• Launch Strategy: Primary focus on boosted pools technology without base pairing provisioning (e.g. Aave boosted waUSDC:waUSDT instead of standard USDC:USDT)
• Timeline:
  • Tentative launch end of Q4 2024
  • Activation of veBAL gauges and core pools in Q1 2025
  • Expansion to more chains thereafter
• Simplified Fee Model:
  • Universal fees: 10% on yield, 50% on swaps (enforced via vault^[1])
  • Core pools require 50% yield-bearing tokens and a minimum $100k TVL^[2]
  • Non-core pools fee split: 82.5% to veBAL holders, 17.5% to DAO
  • Core pools fee split: 70% as voting incentives, 12.5% to veBAL, 17.5% to DAO

Balancer v2

• Maintaining current fee structure: 50% on yield, 50% on swaps
• Core pool framework [2] adjustments:
  • Discontinuing non-core pool fee redirect to core pools (as introduced per [BIP-457])^[3]
  • Same fee split as v3: 70% as voting incentives, 12.5% to veBAL, 17.5% to DAO
  • No other change to the existing framework
• Non-core pool framework adjustments:
  • Same fee split as v3: 82.5% to veBAL, 17.5% to DAO^[4]

Introduction

The launch of Balancer v3 represents a major milestone for the DeFi ecosystem. v3 is designed to propel on-chain adoption forward by significantly simplifying custom pool creation, enhancing the customizability and extension of proven pool types, and introducing the first version of boosted pools that channel all underlying liquidity into lending markets for optimized LP yield accrual.

Over the past year, Balancer Labs, in collaboration with numerous DAO contributors, has devoted extensive efforts to delivering one of the most flexible and innovative DeFi products to date. This journey began with a complete UI and UX overhaul via the ZEN interface, reached a significant milestone with the launch of CoWAMM—a novel solution for LVR mitigation—and now culminates in Balancer v3, a comprehensive reengineering of the platform’s underlying technology.

As outlined by Fernando, in his post on the protocol’s future, Balancer v3 strategically focuses on key priorities such as fungible liquidity, stablecoins, long-tail, and yield-bearing liquidity, and introduces new customizable options for extending existing pool types through hooks.

Alongside these technical advancements, Balancer v3 provides a unique opportunity to refine the protocol’s core mechanics, particularly its fee structure and pool framework—critical elements for long-term DAO sustainability. The following temperature check proposes adjustments to the fee model and core pool framework, set to take effect with the release of Balancer v3.

Simplifying the Protocol Fee Model

Fee Model on Balancer v3

The development of custom pools provides the DAO with a unique opportunity to integrate innovative pool types and advanced mechanisms for fee accrual and redistribution.

Currently, a significant portion of Balancer v2’s revenue is derived from a specialized fee-capture system on liquidity pools hosting yield-bearing assets like Liquid Staked Tokens (LSTs) and Liquid Reward Tokens (LRTs). With the launch of 100% Boosted Pools in v3, this established yield-capture advantage will be extended, allowing revenue generation from vanilla, non-yield-bearing tokens by deploying them into yield-generating markets. This approach enables any token with an external yield market to be composed and “transformed” into a yield-bearing asset, unlocking new revenue streams for the DAO - a system that no other DEX in DeFi has.

Although the technology has demonstrated its product-market fit for yield-bearing liquidity, the existing 50% yield-capture fee has faced resistance from LST protocols and liquidity providers, limiting the DAO’s ability to capture this market segment fully. Given the critical role of yield capture in revenue generation, the DAO must reassess the current fee model to remain competitive and dominate this market.

Thus, our strategic focus for v3 centers on accelerating the adoption of boosted pools and solidifying the DAO’s position within the LST and LRT market. Additionally, we aim to drive continuous product innovation to continue to unlock unique revenue streams through hooks and custom pool logic.

To support this, we propose implementing two key changes:

1. Reducing yield fees to 10% to increase adoption of yield-bearing liquidity on Balancer v3
2. Strengthening veBAL holder benefits with a simplified fee model^[5]

The veBAL system and BAL token emissions, being immutably established in Balancer v2, will continue utilizing the core pool framework and gauge system. This ensures alignment between token emissions and performance while maintaining veBAL’s long-term relevance. Importantly, veBAL holders will benefit from concurrent revenue streams from both v2 and v3.

Fee Structure Overview:

• 10% fees on yield-bearing asset yields
• 50% on collected swap fees

Pool Classifications:

• Core pools: as per new revised core pool framework
• Non-core pools: All other pools

Fee Distribution:

• Core pools: 70% voting incentives^[6], 12.5% veBAL, 17.5% DAO
• Non-core pools: 82.5% veBAL, 17.5% DAO

This model achieves three key objectives:

1. Streamline veBAL holder benefits through an 82.5% total fee share
2. Aligns BAL emissions with high-performing pools
3. Maintains sustainable DAO SP (service provider) funding and operations at 17.5% fee share.

Modified Fee Model on Balancer v2

Balancer v2’s success as a governance token, and LST / Yield Bearing liquidity hub in 2023-2024 informs our approach to fee model optimization. While preserving the core framework’s integrity, we’re proposing targeted adjustments to align with v3’s launch:

• Maintaining current fee rates: 50% yield fees, 50% swap fees
• Updating non-core pool fee distribution:
  • Previous: Redirected 50% of fees to voting incentives
  • New: 82.5% to veBAL, 17.5% to DAO
• Updating core pool fee distribution to be in line with v3:
  • 70% as voting incentives, 12.5% to veBAL, 17.5% to DAO

This modification serves to:

• Sustain momentum in successful core pools
• Direct swap volume success to veBAL holders
• Encourage v3 migration through lower yield fees (10% on v3 vs 50% on v2)

Revised Core Pool Framework

For a pool to be eligible for core pool status, certain criteria must be met. We propose to make it more clear what will be a core pool in the future:

Composition requirements

• Minimum 50% yield-bearing or boosted tokens for pool types such as weighted or composable stable pools
• 80/20 weighted pools that utilize Balancer as their primarily liquidity hub (e.g. RDNT:WETH 80/20 pool on Arbitrum). Protocols need to apply to core pool status for such pool types^[7]
• Must maintain a minimum $100k TVL

Technical Requirements

• No yield fee exemption
• Fee settings delegated to Balancer governance
• If no protocol fee settings are present or managed by another entity, the pool can only become core pool if an alternative protocol fee setting is setup in place^[8]

Token Requirements

• All tokens must have verified smart contracts
• No tokens with transfer restrictions or rebasing mechanics

Core Pool list maintenance

• Core pool status is evaluated on a bi-weekly basis before fee sweeps by automated checks managed by Balancer Maxis [5]
• New pool types or compositions not described within this framework need governance approval to be added to the core pool list
• The DAO shall review this framework and propose adjustments through DAO governance

Impact of Fee Change

Based on the proposed fee changes, we have conducted backtesting on v2 data and ran simulations to assess the potential impact of v3 adoption.

Balancer v2

The revised fee model adjustments to Balancer v2 would result in the following change in fee distribution to key stakeholders:

• veBAL: increase of 46.7% of revenue share compared to the current model
• Voting incentives (to veBAL and vlAURA holders): 30.3% decrease
• DAO: no change

Monthly fee distribution on v2: actual vs proposed (average of August, September and October 2024)

Balancer v3

While the reduction of yield fees from 50% to 10% in v3 represents a significant change, our analysis [1] demonstrates how optimized yield fee utilization will maintain robust protocol revenue. We conducted detailed simulations using 5 out of our top 10 pools by TVL, focusing on two key pool categories^[9]:

1. Stable USD vs boosted stable pools on v3
2. Composable stable LST/LRT vs Aave or Morpho boosted pools

Monthly income to liquidity providers comparing Balancer v2 vs v3

Monthly yield fees to the fee collector

Key Findings:

• LPs will experience a 407% increase in income from boosted yield and reduced yield fees
• Protocol yield fee revenue maintains 56% of current levels even with reduced yield fees
• Enhanced yield capture from new boosted stable pools effectively compensates for most of the yield fee reduction to 10% assuming the same TVL levels

This analysis shows that while yield fees are decreasing, the protocol’s ability to capture and optimize yield fees through new pool types ensures sustainable revenue generation. The 407% increase in LP yield income demonstrates the effectiveness of this strategic shift toward yield optimization.

Launch timeline

The proposed Balancer v3 deployment schedule:

• Q4 2024: Initial launch on Mainnet and Gnosis chain with strategic pool selection
• Q1 2025: veBAL gauge system activation with new fee model implementation
• Q1-Q2 2025: Multi-chain expansion phase

Technical Specification

A detailed technical specification execution plan will be posted as a separate BIP outlining the modified fee collection mechanism on v2 and the implementation for v3 in early 2025

Conclusion

The launch of Balancer v3 marks a strategic evolution in the protocol’s development. It brings significant enhancements to custom pool creation and extends the flexibility of proven pool types while preserving the strong foundation and market leadership established with v2.

By refining the yield fee capture structure and streamlining core functionality, v3 is poised to deepen yield-bearing liquidity, boost returns for liquidity providers, increase benefits for veBAL holders, and foster sustainable long-term growth for the protocol.

This proposal strikes a balance between innovation and stability, setting the stage for Balancer’s continued leadership in DeFi infrastructure. We invite the community to support these enhancements as we embark on this exciting new chapter in Balancer’s journey.

References

[1] Fee distribution modeling
[2] Balancer v2 core pool framework
[3] Historical core pool dashboard
[4] Protocol Fee Dune Dashboard
[5] Balancer v2: Automatic core pool list

---

1. As with v2 yield fee can be set to be exempt. For stable pools no rate provider = no yield fees ↩︎

2. Same globally for Balancer v2 and v3, see [BIP-457] and the automatically bi-weekly updated core-pool list ↩︎

3. A core pool’s incentives for a given round will be capped at 70% fees it earned over that round. This effectively removes the payment of non-core-pool swap fees to core pools as specified for L2s in BIP-19 and for Mainnet in BIP-457) ↩︎

4. As opposed to a non-core pool redirect where 50% of non-core pool fees were recycled as core pool voting incentives to boost BAL emissions to core pools. ↩︎

5. Based on Balancer v2 backtesting, voting incentives on v3 might first decrease but that assumes the same TVL numbers. The biggest fee earners on Balancer v3 are LPs. By decreasing yield-fees, we are incentivizing LPing greatly with boosted pools which then results in more core pool voting incentives based on higher TVL targets. ↩︎

6. Core pool incentives [3], [4] are only placed if the minimum incentive thresholds are met. Currently, these are $500 for the veBAL market and $800 for vlAura market to hit minimum voting thresholds. These values are set by the Maxis in coordination with Aura contributors in the fee allocator constants as per [BIP-457]. ↩︎

7. Check the ALCX/ETH proposal as a good example ↩︎

8. CoWAMM v1 pools can’t become core pools as there is no protocol fee setting present. Gyroscope v1 pools hosted on Balancer v2 can only become core pools if the Balancer DAO protocol fee collector is set as target ↩︎

9. Comparison data between v2 and v3 can be accessed here ↩︎

[viniabussafi]

Extremely bullish on V3 making devs and LP’s lives better!
The team has worked really hard on this proposal and this is reflected by how well structured it is.
Very excited about the future of Balancer.

@Xeonus

LPs will experience a 407% increase in income from boosted yield and reduced yield fees

This is the way.

[Franklin]

@Xeonus

Key Findings:

• LPs will experience a 407% increase in income from boosted yield and reduced yield fees
• Protocol yield fee revenue maintains 56% of current levels even with reduced yield fees
• Enhanced yield capture from new boosted stable pools effectively compensates for most of the yield fee reduction to 10% assuming the same TVL levels

Amazing. Awesome work by the Maxis and all Balancer contributors!

Balancer is back, baby!

[0xDanko]

Great timing!

Impressive to see such a feat of accomplishment by such a decentralized workgroup. Seeing that you guys really managed to involve so many key contributors for this launch proposal is a true testament of how successful Balancer DAO coordination skills have become. Kudos again, fellas!

Would also add these changes on v2 are very welcome (arguably overdue), so we should expect it to still be fully functional for another run - and we can monitor the results of these proposed changes.

Super boolish Balancer is well positioned for the DeFi Renaissance and building real value to the ecosystem through innovation.

Cheers!

[kaiAura.finance]

Excited to see the proposal. At first glance, seems kaiAura stakers will earn slightly less on voting incentives, but it’s possible they make more than that offset back in bribes / bal price appreciation. This proposal has a lot of downstream effects. Glad to see the team pushed a well researched proposal.

[Tritium]

Conversations with many partners, and endless hours of modelling have all led to the same conclusions: For the last months, our yield fees have been limiting Balancers growth.

This change should reduce the tax on yields to well below to benefits of V3 boosted pools in all cases. This enables us to break through the glass TVL ceiling we have been pressed up against.

At first total fees flowing through the DAO may be a bit lower in order to create a more attractive proposition for LPs. With a bit of growth based on that better LP prop, and more volatile markets. It should be very easy to make up for the missing yield fees with trading volumes. As a DEX, this should be Balancers primary revenue source anyway.

The changes will also result in less incentives being placed by Balancer on incentives markets, leaving room for new entrants and current veBAL participants to catch a better premium and engage more in our tokenomics.

Feeling Boolish. It’s time to grow!

[danimim]

Bullish!
The team put in a ton of work, and it really shows. Excited to see the proposal. Can’t wait to see what’s next for Balancer!

[Fernando]

This is ballish: Let’s go v3!!

[ZenDragon]

@Xeonus did an amazing job leading the charge on these changes from a data driven perspective. Kudos to every contributor on the list for spending the time to consider all the moving parts in this system. Reducing the yield fees to 10% for both LPs and Balancer to continue to benefit from the yield bearing AUM it facilitates so well, while benefitting LPs asymmetrically with the superior product v3 will introduce is a fantastic play. This simplified fee model is a easy to understand and elegant solution, as opposed to the non-core pool fee convolution from the previous year.

I believe whole heartedly in this structure to be the best way to propel Balancer higher in terms of reputation for innovating, and value proposition to the greater market. From the feedback the partner management & BD team has gathered, many external stakeholders would be happy to see Balancer go this direction. This model reduces the barrier of entry for new protocols to join the Balancer ecosystem and the new v3 technology will grow the pie for everyone who already involved. I am for sure in favor of this proposal as it is written, given it takes effect once v3 has it’s first wave of gauges live.

One can simply not be ballish enough.

[rebelhermits]

Hello.

Regarding the proposal to allocate 50% of fees for voting incentives directly to veBAL, I have a few thoughts IMHO.

Reducing the voting incentives derived from fee revenue could weaken the competitiveness of bribes, leading to fewer external bribes in USD value and thus further decreasing veBAL revenue to some extent. I noticed that the backtesting did not take into account the potential revenue reduction of veBAL holders caused by this decrease in bribes.

In the long term, reduced veBAL revenue may lead to a lower BAL price, which in turn could diminish the incentives for LPing—a negative feedback loop.

[rebelhermits]

result in less incentives being placed by Balancer on incentives markets

I don’t quite understand the reasoning behind this change. I do realize that in the short term, the upgrade to v3 will lead to an increase in overall LPing revenue, which will subsequently boost veBAL revenue.

However, reducing the allocation for the bribe market will decrease the competitiveness in bribe market, resulting in external bribers from providing less bribes counting in USD value, which could negatively impact BAL’s price to some extent. This, in turn, may reduce LPing revenue, which would be detrimental in the long run.

In my view, the significant increase in trading volume is a short-term effect (a bonus period from the v2 to v3 upgrade). Over the long term, trading volume growth will align more closely with market trends. If we want to achieve additional trading volume growth, the key lies in the price of BAL. A higher BAL price would, in fact, attract more LPing participation.

Therefore, I have significant doubts about reducing bribes, and I even see it as bearish for BAL. I’d much prefer increasing bribes as much as possible rather than reducing them.

Just my humble opinion, with respect.

[Xeonus]

@rebelhermits

Reducing the voting incentives derived from fee revenue could weaken the competitiveness of bribes, leading to fewer external bribes in USD value and thus further decreasing veBAL revenue to some extent. I noticed that the backtesting did not take into account the potential revenue reduction of veBAL holders caused by this decrease in bribes.

Thanks for this comment but that is actually not true IMO. What happened in the last year is that we paid more voting incentives than there are emissions available causing the emission efficiency (a measure of how much emissions you get for incentives) to be <1. Example: Balancer places $1000 in incentives. Let’s say BAL emissions efficiency is at 0.9, meaning only $900 in BAL emissions would be going to gauges a.k.a. one would get less in BAL emissions back than put in as incentives - for partners that is not ideal. By reducing our share of voting incentives, we actually free up the market to external parties and they can decide if it is worth it to place incentives or not. The market would naturally go to equilibrium of efficiency = 1 in an ideal scenario. The only reason for the protocol to place voting incentives in the first place is to align revenue generation with token emissions, that’s the whole point of the core pool framework. Given the upcoming BAL token emission reduction, there is even less room for incentives, hence this change is the only viable option to make positive impact in the long run. Note that overall still 82.5% of all revenue goes to veBAL and vlAURA holders in one form or another, it is just taken away from the incentive pot while increasing the passive fee share pot to veBAL (see “Monthly fee distribution on v2” chart).

[Tritium]

Swap fees come from having pools with depth where there is volitility and decent trading fees. The swap fees on stableswap tend to be 0.05 or less, often times 0.01.

Weighted pools with volatile assets, which are not included in core pools, take swap fees around 0.3-1%, so much less volume is needed to make the same money.

veBAL could be incentivising weighted pools to grow, if we were offering a brib premium well over 1 on a consistant basis, allowing DAOs to get extra bang for their incentive buck. As @Xeonus mentioned above, the current configuration is not creating this kind of an environment.

I agree the price of BAL needs to go up in order to support more liquidity, this is the other way the premium gets pushed up. If you look at the the graphs in the original BIP text up top, direct flows to veBAL (USDC yields to veBAL lockers) is expected to increase as a result of this change. Why do you think this will have a negative effect on the value of BAL. It seems to me that V3 launch + higher direct yields is likely to be a catalyst for newfound market focus on the BAL token.

In the end, right now the amount of TVL Balancer can support in core pools is limited by the price of BAL. If we get too much interest bearing TVL, the price of BAL is insufficient to support paying back the yield fees taken, yields drop, and liquidity moves.

This change + V3 boosted pools should make it much harder to end up in a situation where core pools are underperforming vs just holding the underlying assets. These combined dynamics should enable significant growth in both core pools, and weighted pools with higher swap fees. This growth should more than make up for the reduction in yield fees being taken.

For Balancer to succeed we have to grow, if we want to grow, we can’t tax LPs to the point where are great tech becomes uncompetitive. This change has been carefully thought out to strike a balance between all these factors. It would not have been possible without boosted pools, but V3 opens new opportunities.

[ZenDragon]

@rebelhermits appreciate you raising concerns against the ideas above! From my perspective, this proposal actually increases the recycling portion of core pool fees from 50% to 70%, while reducing the yield fee to 10%. What this does is essentially concentrate incentives around high swap fee earning pools, as opposed to the the ones which were earning high yield fees but generating low volume. Removing non-core pools from this “pot” of incentives pays those revenues out directly to veBAL holders. So while incentives on the vote market decrease, the veBAL holder will still receive the non-core pool swap fee value passively. This is good, because Balancer’s sustainability should stem from leveraging it’s unique tech and take a fair fee for it. The fee on swaps is extremely competitive relative to other Dexes, 50% with a net 70% rebate is a bargain relative to Balancer’s competition; while a 10% fee on yield for unique rehypothecation tech I think is more than reasonable.

To take a step further, there is very high likelihood new participants will enter the vote incentive market given the room Balancer is making in it by reducing it’s recycling size. This will be net positive for veBAL holders in both the passive and active incentive markets as LPs and projects are keen to pay less fees increasing Balancer’s yield bearing depth and ability to win swaps. There is a power in having diverse market participants as well. By flooding our own incentives market, we are shutting out new players from entering with ease.

As the previous commenters have stated; Balancer’s best chance at long term growth and success is by growing adoption for the Dex itself. The hurdle rates of supporting more TVL decrease when the yield fee is lowered, and boosted assets create far more flexibility. In my opinion, the narrative of continuous innovation at Balancer will carry the project further than a short stint of reduced vote market incentives. I hope these points help to build your confidence in the proposed changes.

[Fry]

It’s fantastic to see Balancer v3 progressing with such a well-thought-out and ambitious roadmap. The proposal reflects strong strategic thinking, particularly in balancing innovation with the needs of the ecosystem.

• Fee Reductions as a Bold Move:
  Reducing yield fees from 50% to 10% is indeed a bold move. But as a strategic step to enhance adoption of yield-bearing pools and attract liquidity providers it is the right play. By reducing friction for LSTs and LRTs, Balancer is positioning itself to dominate the yield-bearing liquidity space. A fee reduction on the yield bearing pools can unlock new revenue while still aligning with the long-term growth of veBAL.

• Boosting Efficiency in the Voting Market:
  The fee reduction will also free up efficiency in the voting market, particularly for external bribers, who will now find the incentives more compelling. This should lead to more external engagement, increased bribes, and the introduction of net new pools and liquidity to Balancer, which will ultimately benefit veBAL holders.

• Revenue Boosts for veBAL Holders:
  In the short term, the increase in non-core pool fees to 82.5% for veBAL holders will likely result in a noticeable revenue boost, as shown in the simulations provided. The backtested data on Balancer v2 shows a significant potential increase in veBAL’s share of revenue, underscoring the immediate benefits of this proposal.

• Yield-Bearing Pools with Greater Efficiency:
  The push for 100% boosted yield-bearing pools is awesome! These pools provide greater efficiency significantly enhancing LP yields. The 407% projected increase in LP income highlights that the reduction in fees is mitigated by the improved yield capture mechanics, making the overall impact far less dramatic.

• Bold Moves for the Next Cycle:
  For Balancer to be a top contender the next cycle, bold moves like this are essential. V3 sets the stage for Balancer to push the boundaries of liquidity infrastructure and ensure Balancer remains at the forefront and attracts the full weight of ecosystem support.

A huge thanks to the team and contributors who worked on this proposal. The effort to align technical innovation with economic sustainability is great to see! Excited for this vision to come to life!

[jameskbh]

Glad to see the efforts of a year taking shape as the v3 launch is approaching!

The changes in the fees seems reasonable, and it will open room to attract more protocols interested to take advantage of the unique set of options Balancer provides.

Happy to help in any way!

[Xeonus]

https://snapshot.org/#/balancer.eth/proposal/0x7a451385e49e341dce818927bf36aa35dfc6e42dabe328cb34e873c84fa452e4

[rebelhermits]

Let’s set aside the topic of V3 for now—I’m also looking forward to and highly appreciate V3. My concerns are solely about the following changes:

• Updating non-core pool fee distribution:
  • Previous: Redirected 50% of fees to voting incentives
  • New: 82.5% to veBAL, 17.5% to DAO

However, I believe the changes to non-core pools will instead discourage liquidity providers.
Previously, in non-core pools, at least 25% (50% * 50%) of the fees were used for bribing, but now it’s 0.
These bribes were ultimately converted into premiums to attract liquidity providers.

Now that these bribes are gone, it means that pools with high trading volume can no longer receive the corresponding premium; instead, the premiums are redirected to other pools that obtained them through bribes. In my opinion, this is excessive taxation on liquidity providers. Since 50% of the fee income from high-performing pools is now distributed to veBAL holders and the Balancer DAO, and these pools no longer benefit from bribes, veBAL holders lack the incentive to vote for them. Consequently, these pools lose the opportunity to earn premiums as they did before through bribing.

I am very concerned about the long-term fate of these pools. These pools like WBTC:ETH might remain popular in competitors, but on Balancer, fewer and fewer people may provide liquidity on these pool because of lacking of incentitive and can only get 50% of swapping fees, seems no one will bribe on WBTC:ETH after this change.

Additionally, with reduced competition in bribing, liquidity providers’ overall income decreases. While I admit this approach temporarily improves bribing efficiency, in the long run, the decreased attractiveness of non-core pools to liquidity providers is not a good thing. Enhancing bribing efficiency should come from an increase in token price, not by reducing the competitiveness of bribing.

Furthermore, let’s look at the successful strategies of recent market players. Aerodrome, the most popular DEX on the Base chain, distributes 100% of fee income as bribes to token holders. These token holders then vote, allowing popular pools to maintain sufficient premiums. All bribe participants must compete with 100% of the fees. This setup drives up the token’s price, thereby increasing the efficiency of bribing. Eventually, they became vampires to other DEXs through premiums and dominated the market. Intuitively, going against the strategies of successful DEXs is not a good idea.

cc @Xeonus @ZenDragon

for comments from @Xeonus

Example: Balancer places $1000 in incentives. Let’s say BAL emissions efficiency is at 0.9, meaning only $900 in BAL emissions would be going to gauges a.k.a. one would get less in BAL emissions back than put in as incentives - for partners that is not ideal.

I believe the core reason for the low emissions efficiency is last year’s decline in the price of $BAL. Reducing bribing competition for this reason is not the right approach, as I mentioned earlier:
• On one hand, reducing bribes will significantly decrease the premiums for non-core pools (previously, they could earn 50% of the swap fees + 25% of the bribes * emissions efficiency, but now they can only earn 50% of the swap fees), so we cannot compete with other dexes in non-core pools like WBTC:ETH.
• On the other hand, reducing competition will lead to an overall decline in revenue in the bribing market → veBAL holders’ income decreases → $BAL price drops → emissions efficiency is further reduced.

We all agree that the price of $BAL limits Balancer’s growth, so our strategy should focus on increasing veBAL’s revenue instead.

The most efficient way to increase veBAL revenue is to invest swap fees into the bribing market. This intensifies competition, enabling veBAL’s income to grow exponentially. For example:
• Convert 12.5% of veBAL’s income into contributions to the bribing market.
• Reduce the 17.5% USDC share Balancer DAO receives from swap fees and allocate it to the bribing market; instead, Balancer DAO could obtain a portion of $BAL from weekly BAL emissions.

These are just preliminary ideas to spark further discussion.

[Xeonus]

@rebelhermits

However, I believe the changes to non-core pools will instead discourage liquidity providers.
Previously, in non-core pools, at least 25% (50% * 50%) of the fees were used for bribing, but now it’s 0.
These bribes were ultimately converted into premiums to attract liquidity providers.

For clarification: in the old implementation non-core fees were redirected as voting incentives to core pools. Now they are distributed between veBAL holders and the treasury, overall simplifying the model significantly.

@rebelhermits

I am very concerned about the long-term fate of these pools. These pools like WBTC:ETH might remain popular in competitors, but on Balancer, fewer and fewer people may provide liquidity on these pool because of lacking of incentitive and can only get 50% of swapping fees, seems no one will bribe on WBTC:ETH after this change.

Again, to be clear: non-core pools didn’t get any votes in the first place as those fees were redistributed to core pools only. Nothing would change in that setup except that we stop paying premiums to core pools. Therefore, we should take the bigger picture into account and not rely on emissions anymore for our products. Balancer v3 can achieve this with intrinsic boosted yield and pool creator fees. Our project is too advanced in the emission curve, even if BAL price appreciates significantly, liquidity attraction should come from a great product without additional incentives and that is what we are aiming for.

@rebelhermits

Furthermore, let’s look at the successful strategies of recent market players. Aerodrome, the most popular DEX on the Base chain, distributes 100% of fee income as bribes to token holders. These token holders then vote, allowing popular pools to maintain sufficient premiums. All bribe participants must compete with 100% of the fees. This setup drives up the token’s price, thereby increasing the efficiency of bribing. Eventually, they became vampires to other DEXs through premiums and dominated the market. Intuitively, going against the strategies of successful DEXs is not a good idea.

We shouldn’t compare ourselves to a DEX that has a fresh token emission setup massively outpacing any older DEX like us. Aerodrome will run into the same issues 1-2 years down the line. Their model is simply not sustainable long-term. It works great for them now but my take is they will run into the same issues in a few years, meaning they will ultimately also need to optimize on how to redistribute fees.

@rebelhermits

We all agree that the price of $BAL limits Balancer’s growth, so our strategy should focus on increasing veBAL’s revenue instead.

Please study again the model. veBAL holders will remain the biggest benefitooor of incentives, we simply redistribute them from voting incentives to passive fee income. Net sum stays the same for veBAL holders although there will be a lower global yield-fee which is really needed to get any meaningful traction for our protocol. Note that many partners didn’t like our high yield-fee cut and some projects even chose to get yield-fee exemption meaning there was zero income neither to the DAO nor veBAL holders in those instances. The new fee model so far seems to be perceived very well and no partner so far said to opt out of it. To me that is a net positive effect already.

@rebelhermits

Reduce the 17.5% USDC share Balancer DAO receives from swap fees and allocate it to the bribing market; instead, Balancer DAO could obtain a portion of $BAL from weekly BAL emissions.

I disagree with this approach as this would complicate things a lot:

• who decides where votes go? Implies a voting committee which speaks against decentralization. Even if it is automated it would be the same as we do with core pools now.
• a DAO position would be against true decentralization IMO, veBAL holders should be independent entities
• In the end holding a veBAL position, voting for incentives and take that as an income stream to the DAO is the same thing as simply having a fee cut in place as proposed. I don’t see any benefit in your suggested approach at all.

I really value your inputs and the thoughts you have put into your responses. We had the same thoughts at some point but overall came to our proposed conclusion for an effective fee redesign. Finally, I want to emphasize that we will very closely monitor our new setup and if we see that things don’t work out as we anticipate, then there is always an option to propose further changes to find the optimal solution for market conditions - but for now our main focus is a successful v3 launch!