Hi All,
I’m an analyst on the Messari Governor team and I recently published an article focused specifically on the Peace Treaty proposal entitled Governor Note: The veBAL Wars. My goal was to better understand the history of the veBAL system, the events that lead to the peace treaty, and the implications of the deal for the Balancer DAO and protocol.
In the spirit of public goods, Messari has unlocked the article and made it FREE for the Balancer community to enjoy.
Teaser
I hope you enjoy reading the full article on Messari, but if don’t want to make the click, here’s a quick teaser of the first part of the article:
Key Insights
- Balancer introduced vote escrow tokenomics to align tokenholders with the protocol’s success and revenues. While the veBAL experiment has attracted partners, it’s also attracted a whale, referred to as Humpy, who has amassed control of 35% of veBAL.
- Over the past eight months, Balancer has struggled to align Humpy’s activity with DAO objectives through incentives, instead being driven into a cat-and-mouse game to control the whale’s profit-seeking activity through governance.
- Trapped in an illiquid position in the 80BAL/20WETH/tetuBAL Balancer pool, Humpy opted to double down on protecting their extractive strategies against Balancer governance. The result has escalated the conflict across the Balancer ecosystem.
- A recent peace treaty aims to reach a gentleman’s agreement and de-escalate the conflict, allowing Humpy to continue to farm their most aggressive gauge strategy at a 17.5% gauge limit in exchange for Humpy’s alignment with DAO strategy in all other positions.
Introduction
It’s a story of two factions of voters, each with conflicting views and intentions, fighting for control over the future of the Balancer protocol.
On one side, we have the Balancer stakeholders (comprising vested BAL holders), core community and team members, and strategic partner Aura. These stakeholders uphold an idealistic vision for the Balancer protocol and aspire to align Balancer token voters with protocol revenue generation.
On the other side lies Humpy, the veBAL whale, Tetu (Layer-2 liquid locker), and a Balancer community member named Andrea. They are agnostic about protocol revenues but astute players within the veBAL game. They leverage the veBAL incentive framework for personal gain by executing clever, possibly harmful, strategies.
On Dec. 1, 2022, Balancer published the Peace Treaty proposal, an attempt to reconcile the escalation of each party’s actions in what has become an engrossing power struggle and an imperative case study in DAO governance, tokenomics, and design incentives.
A veBAL Primer
Vote escrow tokenomics is an incentive alignment mechanism introduced by Curve in 2021. In early 2022, Balancer adopted a version to attract liquidity providers (LPs) to the protocol and align tokenholders with the protocol’s success through a revenue share.
veBAL is the governance token of Balancer and is obtained by locking 80BAL/20ETH Balancer Pool Tokens (BPTs). veBAL holders can direct BAL emissions to LPs or themselves, obtain governance rights, and accrue a portion of protocol revenue.
In theory, the vote-escrow incentive structure creates an incentives flywheel in which partners can create a stake in the Balancer community (veBAL) to direct liquidity to their token’s LP via token emission incentives. In turn, trading volumes for those projects generate revenue for Balancer and other veBAL holders.
Section 1: No Bad Actors, Only Bad Designs
In practice, veBAL is morally agnostic.
Unaligned actors who aggregate veBAL can direct emissions to themselves (up to 10%) or unproductive liquidity pools. Further, BAL emissions in Q3 were over 10x the value of the revenue share sent to veBAL holders. Without safeguards in place or a high-enough price wall to deter BAL accumulation for self-interest, the system invites parasitic flywheels in which actors can leverage their veBAL holdings to direct emissions toward their own LP position in illiquid and low-volume pools. This allows them to amass compounding voting power while returning little to the protocol/DAO. If successful, emission siphoning concentrates governance power, unproductively allocates inflation spending, and rewards toxic behavior.
This has created a whack-a-mole dynamic within Balancer governance as Balancer stakeholders have raced to create proposals, incentives, and strategies to limit extractive behavior from misaligned parties.
The BAttLe of CREAM
The Balancer Discord has monitored a particular veBAL whale, Humpy, since they first emerged as a large liquidity provider on the Badger/WETH pool. It wasn’t until May 2022 that the whale’s actions in the CREAM/WETH pool confirmed the whale’s intent.
Understanding the dynamics of the veBAL system, Humpy leveraged their veBAL to execute an extremely profitable yield strategy. The strategy involved amassing a position in CREAM, creating a CREAM/WETH pool, passing a CREAM/ETH gauge proposal, and setting the pool trading fees to 10%. Once created, Humpy deployed their veBAL holdings across multiple addresses to direct BAL emissions to the pool’s gauge.
… To finish reading this free Governor Note, head to Messari .
