Motivation
With the coming transition to veBAL, it’s time to re-evaluate the economics around how the protocol captures fees. When the protocol fee was initially activated and set to 10% there was no plan for veBAL and no plan for how the collected fees would be used. After the activation of veBAL, 75% of protocol fees will go to lockers and 25% to the DAO.
According to our most recent revenue projections (credit Zekraken), lockers only stand to gain around $2.1M per year ($2.8M * 0.75). With ~$95M in BAL/WETH that’s an APR of ~8%. Note that this assumes all LP’s lock and does not include revenue from other sources like the agreement with Copper (hard to accurately predict). There is upside to this 8% APR if fewer users lock and Copper revenue remains strong.
The vast majority of TVL, volume, and fee earnings come from pools that receive BAL incentives. There is little evidence to suggest that swap fees are driving any significant amount of usage at the moment. By introducing veBAL, we are making the competition around BAL incentives the primary driver of the protocol’s growth going forward. We can accelerate the adoption of this flywheel effect by increasing the protocol fee from 10% to 50%. This would move the 8% APR immediately to 30-40% APR.
It also has the added bonus of increasing the DAO’s potential earnings from ~$700k per year ($2.8M * 0.25) to potentially as high as ~$3.5M if there is no response from LP’s to the protocol fee increase. This allows the DAO to build up a stronger balance sheet and better prepare for extended market downturns.
I believe we can choose to focus on BAL emissions as the primary growth driver OR swap fee earnings. Right now, most LP’s use Balancer because of BAL emissions and not because of swap fees. This means LP’s will want to lock veBAL so they can ensure continued emissions to their pool(s) of choice. Locking funds for a year carries significant opportunity cost, so that will be balanced by the revenue lockers receive from protocol fees. The higher that revenue, the more likely lockers will choose to participate in the “BAL wars”.
For those users of Balancer who are primarily interested in earning swap fees, there is little reason to lock veBAL. By keeping the protocol fee at 10%, we are placing a high value on these users in terms of the protocol’s future success. I would argue our path to success is in creating the strongest incentive possible for participation in veBAL. Increasing the protocol fee to 50% in combination with the release of veBAL creates a very compelling narrative for users to understand the value proposition in locking.
Risks
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LP’s who primarily value swap fee earnings will leave Balancer
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Mitigation: none. I believe this group represents a tiny number of total Balancer users, so this is an acceptable risk.
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This will hurt partners like Element who don’t rely on BAL rewards.
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Mitigation: We are in talks with partners to understand how an increase to 50% would affect them. There is also the potential for a revenue sharing arrangement in the future, where the 50% protocol fee would be split between the partner and Balancer DAO.
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As emissions decrease due to the new veBAL emission schedule, the protocol won’t be able to evolve to a model that is sustained with swap fees only
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Mitigation: If the goal is to move away from emissions entirely, it will be necessary to reduce the protocol fee as emissions come to an end. Alternatively, a new split of the protocol fee could be proposed that allocates some to buying BAL to distribute through the gauge system. This keeps liquidity mining going without requiring new emissions.
Specification
Network: mainnet
Multisig: 0x10A19e7eE7d7F8a52822f6817de8ea18204F2e4f
ProtocolFeesCollector: 0xce88686553686DA562CE7Cea497CE749DA109f9F
Set fee:
ProtocolFeesCollector.setSwapFeePercentage(500000000000000000);
Network: polygon
Multisig: 0xd2bD536ADB0198f74D5f4f2Bd4Fe68Bae1e1Ba80
ProtocolFeesCollector: 0xce88686553686DA562CE7Cea497CE749DA109f9F
Set fee:
ProtocolFeesCollector.setSwapFeePercentage(500000000000000000);
Network: arbitrum
Multisig: 0x6207ed574152496c9B072C24FD87cE9cd9E17320
ProtocolFeesCollector: 0xce88686553686DA562CE7Cea497CE749DA109f9F
Set fee:
ProtocolFeesCollector.setSwapFeePercentage(500000000000000000);
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