Modifying wrapFactor: applying a 0.7 factor to SOFT-pegged pairs

TL,DR

Proposal to apply a wrapFactor = 0.7 to the liquidity of every pair of soft-pegged tokens for the purposes of liquidity mining distribution, in an effort to attract more useful liquidity to the protocol.

Context

The original proposal approved about a month ago applied a wrapFactor = 0.1 for hard-pegged tokens, i.e. tokens that are equivalent to each other. Example: {USDC & cUSDC}.

Read more: wrapFactor: penalizing pairs of equivalent tokens in liquidity mining

Since then, we have seen the rise of pools that are not subject to that wrapFactor, but contain tokens that track the same asset and are naturally highly correlated. These are being called soft-pegged pairs. Example: {USDC & mUSD}.

Liquidity in soft-pegged pairs usually attracts relatively little trading volume on Balancer while at the same time exposing LPs to a lower risk of impermanent loss. Many community members have expressed their concerns about this type of liquidity being unfairly highly compensated by the current mining distribution rules with their less useful liquidity. Some believe the wrapFactor for the soft-pegged pairs should be as low as 0.3. Others believe it should not apply at all.

After weeks of much debate, it seems 0.7 is a reasonable compromise. For being a contentious topic, a final decision has been postponed until a voting tool using BAL tokens was implemented. This value could be revised (up or down) at some point in the future, according to community sentiment regarding the practical results observed.

The Proposal

For every pair, we analyze:

  1. Is this a hard-pegged pair? If so, wrapFactor = 0.1;
  2. If not, is this a soft-pegged pair? If so, wrapFactor = 0.7;
  3. If not, wrapFactor = 1.0 (i.e. no liquidity adjustment from the wrapFactor).

Other examples of soft-pegged pairs:

  • {renBTC & WBTC} (both track BTC),
  • {DAI & cUSDT} (both track USD),
  • etc.

Further Considerations

All liquidity in compliant ERC20 tokens is welcome in Balancer pools, but BAL distribution is a scarce weekly resource (i.e. for an LP to get more BAL, other LPs have to get less). So penalizing soft-pegs is the equivalent of giving an extra incentive for liquidity that has shown itself more useful to the protocol. The 0.7 value has been seen (apparently by most community members) as a conservative measure, that doesn’t drastically alter the current incentives for liquidity and is an adequate value with which to move forward.

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Why you should vote to reduce rewards for softpegged assets?

Balancer and BAL will succeed when we get trading volume on the exchange. BAL rewards are bringing liquidity which generates volume. Unfortunately BAL rewards for soft pegged asset pools (USD-USD and ETH-ETH) are even better than rewards for other pools. Other pools generate a lot of useful volume while the stable pools generate significantly less volume. As a result, it makes more sense to farm BAL with soft pegged assets because:

-BAL reward is even better (higher, 1.00 fee factor which other pools can’t afford)
-No permanent loss (unfortunately called impermanent loss)
-Additional rewards from other platforms like weekly MTA from mStable

example:

The $4.5m BAL-WETH pool with 0.95% fee has a BAL fee factor of 0.80,
while the $22m USDC 50% mUSD 50% pool with 0.05% fee has a fee factor of 1.00 + MTA rewards

This incentive misalignment has resulted in a bizarre and unsustainable liquidity composition on Balancer. Uniswap has only occasional small soft pegged pools while on Balancer’s No 1. $22m pool and 3/10 biggest pools are soft pegged. For example, the biggest pool is bootstrapping mStable more than it bootstraps Balancer.

I think that this liquidity composition problem significantly contributes to the fact, that we have 3x more liquidity than Uniswap and we have 6x LESS volume than Uniswap. I believe that if we make and incentive for the softpegged liquidity to move to normal, natural pools, we’ll see less slippage and more volume, a win for Balancer.

Balancer is an exchange designed for volatile assets while other exchanges like Curve have way better design for soft pegged assets (less slippage, more tailored price curve). We should not try to claim that Balancer is well suited for soft pegged asset trading in the long run.

How do you feel about your flagship $7.9m BAL pool being down -3.5%, earning BAL at 0.64 ratio…

…and this $4.5m BAL pool down 6.8% due to volatility, earning BAL at 0.80 ratio…

…while at the same time there are guys coming from outside with no interest in the platform, following guides for 5 year olds telling exactly where to click to split ETH into WETH + sETH and grab BAL at sweet 1.00 ratio with no risk?? Same for USD-USD pools?

Enjoy the memes:

1 Like

(I had to attach images in separate posts due to forum rules)

(I had to attach images in separate posts due to forum rules)