Introducing veBAL tokenomics

Summary

BAL is a governance token that has been successfully used to define important parameters of the Balancer ecosystem. The community believes that there is further room for improving the tokenomics of BAL and some sort of staking/locking should be implemented. Staking of BPT has already been proposed and approved by the community in the past[1]. The current proposal contains details of a concrete implementation of locking BPT.

To avoid reinventing the wheel and spending additional time with non-core development, Curve’s tokenomics[2] seems an obvious fit for Balancer Protocol as well. It has been battle-tested with billions of dollars and attracted a thriving ecosystem around it.

Core proposal

Curve’s ve (vote-escrowed) system will be used as an all-around solution for Balancer protocol tokenomics, solving at once a few outstanding problems the Balancer ecosystem currently has:

  • BAL minting is not automated and the inflation schedule is not yet locked forever. This reduces predictability and trust in the overall system.
  • BAL holders do not have any direct power over how BAL liquidity mining gets distributed.
  • Lack of a mechanism for distribution of protocol level fees, which have recently been approved by governance[3].

Instead of pure BAL, BPT of the 80/20 BAL/ETH pool[4] will be locked into veBAL, similar to how CRV can be locked into veCRV. This has the big advantage of keeping BAL liquid as well as setting a precedent for other teams to do the same with their 80/20 Balancer pools. Alternatives to veBAL have been considered, like vebptBAL. The simplicity of veBAL — even though what is locked is not pure BAL — has however been the preferred option.

veBAL and governance power

All votes, onchain or on snapshot, will be done considering veBAL balances instead of BAL balances as happens today. This ensures long-term alignment as only users locking BPT will have a say in Balancer’s governance.

To get veBAL, anyone will be able to lock BPT of the 80/20 BAL/ETH pool for any amount of time between 1 week and 1 year. Notice this is a change from the max duration of 4 years initially proposed in [1]. This is proposed to allow for an eventual migration to a new governance system with a wait time of 1 year instead of 4. Of course this migration can only happen if the veBAL governance approves it.

After locking the 80/20 BAL/ETH BPT, the user will have a non-zero balance of veBAL and will be able to help govern Balancer protocol, also benefiting from other parts of the new tokenomics system as described in more detail below.

New proposed BAL inflation schedule

The current BAL supply today (as of Jan 27th) is 47,470,000 BAL. This includes BAL that is being vested by early stakeholders, the fundraising fund and the ecosystem fund. Please refer to the BAL launch medium post[5] for more details.

Since the launch of BAL, the inflation has been a constant 145,000 BAL per week. To change that and make the Balancer ecosystem more sustainable, a new inflation schedule is proposed. Every 4 years the inflation should be halved, with gradual steps every year starting one year after the launch of the new tokenomics system. This would mean a final BAL supply of about 94,000,000 BAL. A more detailed calculation can be seen on this public spreadsheet[6].

This new inflation schedule will be immutable:

Onchain Gauge System to determine Liquidity Mining distribution

Currently, liquidity mining is done via a tier system approved by the community[7]. The distribution is fixed for tier 1 slots (it can only be changed via governance vote) totaling 60k BAL. The remaining slots are allocated by the Liquidity Mining committee, which is part of the Partnerships subDAO[8]. BAL token holders have no direct say in which pools receive BAL from liquidity mining.

In the new system, however, all liquidity mining BAL minted will be distributed through the gauge system. Gauges are contracts that allow LPs (liquidity providers) to stake their BPT (Balancer Pool Token) and periodically claim BAL from liquidity mining.

The amount received by each LP will depend on:

  • how much the pool they are providing liquidity to receives
  • what share of the pool’s liquidity they have
  • the boost applied to their LP share based on how much veBAL they hold[9]

Each pool receives a share of the total BAL minted every week. That share is defined by how much veBAL voted for that pool.

Gauge types

There are different gauge types that are used in the ve system, each type gets a fixed percentage of the BAL supply minted weekly. Within each gauge type there can be many gauges that share the amount of BAL sent to that gauge type. The following gauge types and weights are proposed:

  1. Liquidity Mining committee: 10% (14,500 BAL)
  2. veBAL: 10% (14,500 BAL)
  3. Ethereum mainnet pools: 56% (81,200 BAL)
  4. Polygon pools: 17% (24,650 BAL)
  5. Arbitrum pools: 7% (10,150 BAL)

New gauge types can be added and the weights/percentages of all gauge types can be changed by governance. These changes are however not expected to happen frequently.

Gauge type 1) is an allowance for the Liquidity Mining committee to grant LM to strategic partnerships for Balancer protocol with the expectation that long term these partners will accrue veBAL to ensure they get LM through their own gauge. The LM committee should not accumulate BAL, that is, it commits to sending any unused BAL for any given week to the DAO treasury (not later than 7 days from receiving it).

Gauge type 2) is BAL that will be distributed to veBAL holders, similarly to LM that is distributed today to LPs of the 80/20 BAL/ETH pool. It is meant to keep locking 80/20 BPT attractive as it helps veBAL holders avoid dilution and compensates for the impermanent loss risk of LPing.

Gauges 3, 4 and 5 will be LM that is distributed to mainnet, Polygon and Arbitrum according to the veBAL voting power each pool gauge receives from veBAL holders.

Initial gauges

In order to avoid the governance overhead of voting on adding dozens of initial gauges, all pools that will be receiving liquidity mining at the moment of system activation will be allowlisted. This however does NOT mean that they will have an initial percentage of LM. This will be defined by veBAL voting power.

Protocol revenue distribution

75% of protocol revenues collected by the protocol fee collector[10] will be distributed to veBAL holders. The other 25% of the fees will be kept by the DAO treasury as a reserve. This has been suggested by many thought leaders like Hasu, on his New Mental Model for DeFi Treasuries[11].

Given Balancer protocol is permissionless and meant to have thousands of pools, fees are going to be collected in potentially thousands of different tokens. Some type of consolidation will be necessary for the fees to be claimable by veBAL holders in a meaningful, gas-efficient way. The fee consolidation prior to distribution will initially be handled by the treasury subDAO, but should be replaced in the near future by a fully decentralized smart contract implementation, akin to Curve’s burner contracts[12].

Upgrading the system

Like with Curve, the system will not be upgradeable. In case the veBAL governance decides for a new system, the way to implement it would be to abandon the current system and direct minted BAL to the new system. This can only be done with a 1-year time delay, which ensures that anyone locking BPT for the longest duration possible will have the opportunity to withdraw their BPT before the minter points elsewhere.

The inflation schedule however will NOT be upgradeable and will be fixed forever.

Benefits

Beyond increasing the overall predictability of Balancer Protocol and the BAL governance token as mentioned above, there are many other benefits worth mentioning:

  • Long-term alignment. By locking BPT, token holders will be encouraged to support Balancer over the long-term instead of speculating short-term.
  • Plug&play compatibility with Curve’s ecosystem. Curve has achieved tremendous success with a thriving ecosystem built around their ve tokenomics. By using the same system we make it trivial for teams like Yearn, Element, Convex and so many others to become part of Balancer’s ecosystem too.
  • Developer time/effort saved for core Balancer work. Tokenomics is super important but it is not what makes Balancer (or any other protocol for that matter) unique: precious development time should be focused on pool primitives and making Balancer easier to integrate with. Only this will help Balancer achieve the vision of becoming the leading liquidity platform for others to build on top.
  • Motivation for other DAOs to take a position in Balancer beyond just token-swaps. It has become common for DAOs and protocols to purchase CRV in the open market to make sure they have a say in the Curve Wars. By having protocols aligned with Balancer longer term we expect utility and usage of Balancer to increase as well.

Alternatives considered

  • Launching our own staking contracts (which are ready and audited but don’t solve all the problems that this proposal does).
  • Using mStable rewards distributor or a variation of it.
  • Keeping status-quo.

Risk assessment/mitigation

  1. Immutability of the system will likely be a problem at some point in the distant future: It’s impossible to be at the same time predictable and upgradeable, so the trade-off chosen was that the system itself cannot be changed, but veBAL governance can choose to direct BAL inflation to a new system with a minimum 1-year delay. This is not expected to happen any time soon, but as things change hyper fast in this space, this system will likely not be the best option in say 5 years from now.
  2. Platforms built on top (like Convex on Curve) can take over control with central points of failure. We expect veBAL governance to consider single point of failures for projects that apply to have their smart contracts be allowlisted for locking BPT. Ideally only projects which let token holders vote directly with their voting power (instead of delegating all their power to a multisig) will be approved.

Implementation

The main goal of the implementation is to change as little as possible from the battle-tested original Curve implementation. There could be some minor necessary technical changes that are necessary to adapt it to Balancer. The essence of this proposal or the parameters laid out however should not be changed.

Voting

This proposal will be posted on the forum for 1 week prior to voting. Voting will then be open on Snapshot for three days. This vote will be a single choice vote. You may vote on the Proposal by selecting “Yes, let’s do it” or “No, this is not the way”.

Thanks to everyone who contributed with feedback and suggestions, also thank you to Curve for having created this great tokenomics system and also to the Yearn community[13] for inspiration for this proposal!

I’m curious to hear everyone’s thoughts and if you think anything proposed can be improved.

References:

  1. Staking of BPT for Economic and Governance Benefits
  2. Curve’s veCRV documentation
  3. Activate the Protocol Fee
  4. 80/20 BAL/ETH pool
  5. BAL is live!
  6. Proposed supply inflation schedule
  7. Balancer V2 Liquidity Mining Program
  8. Partnerships subDAO and the Liquidity Mining committee
  9. Curve’s LP boost calculation
  10. Protocol fee collector
  11. New Mental Model for DeFi Treasuries, by Hasu
  12. Curve burner contracts and fees documentation
  13. YIP-65: Evolving YFI Tokenomics
23 Likes

This is one of the biggest and most positive changes Balancer has seen since v2 launched, and maybe this is even bigger than v2 in some ways.

I’d like to give a HUGE shoutout to Fernando’s leadership in getting this off the ground. I know he has put in a ridiculous amount of time on this and I strongly believe these changes will serve Balancer very well for a long time to come. Maybe we don’t say it enough but we’re very lucky to have Fernando :heart:

10 Likes

This is an exciting step for the Balancer community! I am confident the Tribe will be max locking its BAL to be a long term partner in this transition :slight_smile:

8 Likes

I’d echo solarcurve’s sentiment and add, I think a lot of people have been waiting for some, if not all of the features outlined above. I personally look forward to more of the liquidity mining decisions going into the hands of BAL holders. It will be interesting to see what transpires the months/years following this implementation. I think this change also unlocks a lot of opportunities on the partnerships side as well. Thanks for the write-up Fernando.

3 Likes

A barrier for some users in veCRV tokenomics is the gas costs maintaining their lockups.

Will veBAL lockups be managed on Ethereum L1? Arbitrum? Polygon? All three?

6 Likes

Thanks Fernando for leading this major change. I know he spent a lot of time listening to the community and looking at a lot of different options. This is a thoughtful proposal and an important milestone for Balancer. Let us witness together.

3 Likes

Exciting times for Balancer! Thanks for the clear write down :100:

One question from my side is how voting will be possible for BAL holders on L2s?
Will there be a deployment of an 80/20 BAL/ETH pool on each Balancer instance from which community members can create veBAL?

If locking will only be possible with the L1 80-20 pool, I would love to see not taking the voting power from L2 habitants directly. Could it be feasible to allow BAL tokens held on L2s for voting?

All in all I’m supporting the changes, especially the fixed BAL inflation. However, IMHO the voting system needs to be able to include L2-only habitants.

4 Likes

this is an amazing proposal, really excited to see this coming soon :fire: :fire:
+1 to previous questions regarding Balancer’s Polygon and Arbitrum users:

  • I think it should be able to stake veBAL in their respective L2s (similar to what hundred.finance did)
  • Are we going to create a 80/20 pool in Arbitrum? (existing is 60/40)

Thanks again for all the hard work you are doing

4 Likes

I am excited about this proposal, the issuance of tokens and their distribution was something that had to be reviewed. I believe that everything that has been written has a clear vision of the long term, growth and sustainability of the ecosystem. Very happy to be here. :partying_face:

4 Likes

Great news!

I second the replies before me: please make sure BAL-ETH pools on Layer 2 (e.g. Arbitrum) can also be locked for veBAL.

5 Likes

Incredible proposal - will make the BAL token more competitive. Impressive. I also hope there is a plan to make all the BAL claim tokens into one Tx and not one Tx per week. This would be fantastic.

3 Likes

Thanks for your question @tomuky! In the proposal I suggest changing as little as possible since everything in Curve’s ve contracts is so intertwined and any change could force us to have to redo the whole thing. That would take a loooong time and get in the way of many of the benefits I list (like contracts being battle tested and trusted, plug&play use by others etc).

So no: lockups will be managed on Ethereum L1 just like with Curve.

4 Likes

Thanks for your question @merkleplant!

Like I mentioned above to tomuky this would unfortunately not be possible without a major overhaul of the current Curve contracts. Breaking up veBAL into many layers makes things super complicated, I considered that possibility but ended up convinced it would not be worth the trade off.

So unfortunately this will happen just like on Curve: voting for L2 pools will have to happen on L1 Ethereum.

2 Likes

Thanks for your question @agrosso, sorry to not be able to satisfy this request with my proposal which I totally understand. The reasons are in my answer above to tomuky and merkleplant.

@baller-simulation I think that also answers you question/comment. Unfortunately I had to make trade-offs in my proposal.

1 Like

Fernando, thank you so much for the post (+ all the work you have been doing for years now). Balancer is always an innovative and constantly evolving protocol, which makes the community an exciting place to be. Tokenomics improvements and redesign is a topic that has been at the forefront of Balancer as well as other communities for a while, and this is certainly a thoughtful proposal to address that. A key set of questions revolves around the new benefits / losses ascribed to BAL holders from this.

Per your sentence, veBAL does not come from BAL being locked:

If an individual solely owns BAL (no LP), how does veBAL incorporate that user? Would people now have more of an incentive to disregard BAL / sell it as they get the rewards from juiced incentives? When it comes to Curve, CRV emissions are valuable in themselves to accumulating more governance power / value. How would this be the case with BAL emissions?

2 Likes

I’m a big fan of the proposal. Max locking period of 1 year is an improvement over Curve, because who knows what good tokenomics the community will come up with in the next 4 years. Being able to migrate is important. And locking an LP token is a very good idea too :+1: at some point you may want to ask yourself “what amount of liquidity is too much liquidity?”, but because the pool is 80/20, it should be ok.

5 Likes

Thanks for your question @Long_Gamma, it’s a good one!

It will be simple for all BAL holders to add BAL to the 80/20 BAL/ETH pool and then lock that BPT into veBAL. Unfortunately whoever wants to participate in the proposed governance system has to take on some exposure to ETH (namely 20%). Only holding BAL won’t give governance power in the proposed system. This is one of the downsides I considered in the trade-offs, but ultimately IMO the upsides of having BPT locked instead of pure BAL far outweigh the downsides.

People can keep locking the BAL they get from holding veBAL into more veBAL, effectively countering the dilution caused by the inflation schedule.

4 Likes

LongHash Ventures is very excited to see the culmination of many months of work, community engagement, discussion, feedback, and revision of this proposal, and kudos to Fernando for leading the charge on this, particularly given the idiosyncrasies associated with this proposal, including the need to be exposed to the BAL/ETH pool, and the technical challenges in implementing the Curve system.

We worked closely with Fernando, Kristen, and many other contributors at Balancer during the middle of 2021 on various topics, including Governance, as part of our Venture Building program for portfolio companies, and one of the key outcomes was writing a proposal to establish a staking mechanism as a precursor to more formalized decentralized governance.

We are very supportive of the proposal in its current form and excited to back it during voting.

4 Likes

Great things ahead! Love to see all the changes happening over the last months. Balancer has been truly active as a community :slight_smile:

Even though the case for having voting and locking only done on L1, I would still like to voice my opinion on it as well, for the record.

So far, I have voted on almost all votes for the last half year of me being an active Balancer community member. Just holding BAL and snapshot made this an easy task.

Having only voting of BPT tokens live on L1 will price out smaller holders, even me, from voting. Doing new tx of adding BAL to the pool and then locking each time will just not be worth the gas fees for me (taking into account my limited gov power anyway…), effectively meaning the end of my voting participation.

So even though I support the veBAL idea, it is with mixed feelings.

3 Likes

Hey @Fernando! Many thanks for the clarification :innocent:

While supporting to revamp the governance system as well as defining a fixed BAL inflation, sadly, I can not support a governance system that is less accessible for some parts of the community than for others.

One follow-up question from my side (where I may have missed the reasoning):
Whats the rational of revamping the governance system “right now”? Could there be a way of pushing the effort a bit more further and waiting for protocols building gov systems which include L2s?

Anyway, all other parts of the proposal look promising and I’m sure you put a lot of thought into the trade-offs. Keep up the great work! :100:

2 Likes