Some of you who are a part of Discord will have noticed the discussions over the last few weeks (within the Liquidity Mining committee in particular), about the types of pools we create and incentivise. Within this there have emerged two quite different ideas about Balancer’s current primary objective, and I want to get a better sense of what the community thinks, in a less free flowing context where parts of the debate often get lost.
These two differing views on what our current primary objective should be can be summarised as follows:
- The current primary objective of Balancer is to provide useful liquidity to traders and a diverse range of options for Liquidity Providers: both in terms of assets, and market positions. Primary KPIs are TVL & Trade Volume. Optimising for fee generation is primarily a future concern, that requires us to first establish a critical mass of liquidity and attract good flow. LPs aren’t only interested in fees, they also care about the market position they’re taking, and recognise that often market position is much more important than fees. Currently fees are subsidised with BAL rewards & pools should be trying to slightly undercut the market to attract volume.
- The current primary objective of Balancer is to generate fees. Each pool should be designed in order to generate the maximum fees we can from arbitrage & people doing less-than-all asset deposits/withdrawals to pools. Pools should be included/excluded from BAL rewards based on whether they are currently generating high fees. Our focus is attracting LPs into pools that do high fees, regardless of whether these pools are useful to traders. Balancer will never get “good flow”, so don’t bother trying. What’s most important is that Balancer can show high fee APYs against pools, start taking significant protocol fees, and build a treasury.
I fall very firmly into camp #1. I believe we should be creating a wide array of pools with competitive fees for traders. Index-type pools can fit into this strategy, but we shouldn’t be trying to force USD into them all (not all LPs want USD exposure) to generate more arbs, and we shouldn’t currently be incentivising indexes with fee levels which make them useless to traders (above 0.3%), as that’s effectively wasting our liquidity’s potential to add value.
I believe it’s important we can get the community to align on what we are pursuing here, and will defer to the community’s judgement. At the moment, the same debate is happening each week, where a fee maximiser (#2) is widely publicly campaigning to increase fees on pools & add pools with fee maximising structures, plus quickly drop pools that don’t generate as many fees; and a TVL/Volume maximiser (#1) is at odds with them.
My view is that we need to align the community on this, not split and end up with a hashed compromise that means there’s constant friction every week debating fee structures/horse trading for pool fees, rather than what pools we should be creating & incentivising to achieve Balancer’s primary objective.
At any stage, Balancer can revert to high fees & extracting fees from arb volume, if that’s what we want to be. The arb volume will never go away. The window to become a competitive DEX is one which will continue to narrow and get harder/more competitive, however. If we want to achieve that objective we need to throw 100% at providing competitive liquidity, and make it crystal clear to the wider community that we fully intend to be a competitive DEX: not solely monetise arbs & less-than-all asset deposits/withdraws.
The more I’ve thought about it, the more entrenched I’ve become in my view: we’re only going to be a competitive DEX if we’re aligned in trying to design & incentivise that, and throw everything at it. The constant debate and campaigns to focus on high fee % high volatility pools, and public negativity around the idea that we can even be a competitive exchange is bad for our marketing/growth (if that’s what we want to be). Other DEX’s we’re competing against are not arguing each week whether they can even be viable or not.
I believe that with the vault, asset managers, internal balances, stable pools, smart pools & wide array of functionality being built over the coming months that Balancer is a competitive DEX and can go on to be DeFi’s primary source of liquidity. I believe the future of DeFi trading is aggregators: integrated into wallets, portfolio manager apps, etc. The “go direct to Uniswap to trade” is going to slowly cease to be a thing over the years as market participants become more educated. We will continue to be competitive with Uniswap V3, Sushi, Curve, etc as the product evolves. But I don’t think we will compete as a DEX unless we’re all aligned around actually doing that.
Perhaps we should consider having a governance vote on some Primary KPIs for Balancer, that we can align on aiming towards during 2021, and all work towards achieving?
If we at least have community agreement on whether we look to serve traders with our liquidity or not, it will make Liquidity Mining decisions easier: fees cease to be the primary issue, and pool design to maximise broad, useful liquidity within the BAL allocation we have available can be the focus.
I welcome the community’s discussion around this, and recognise my view is just one of many (hence the desire to find some solid ground on this we can build from). I’m sure others will have a lot to add, fleshing out both sides of the debate.