Observations on the current state of Balancer

[Andrea81]

As promised, here are some of my considerations that pushed me to reconsider my Balancer investment.

Some background:

I have no affiliation with any other protocol.
My interest in Balancer started during the 2020 summer and at the official token launch.
At some point, my Balancer LP were worth just over 650K$.

From the very beginning, I saw in balancer a potential game-changer in the DeFi ecosystem and Fernando a smart and kind guy. I followed and listened to all his interviews and read any piece of article I came across. I assume the rest of the Dev team has similar ethical values and vision as Fernando.

Recently, some changes have forced me to change my view. I will try to be brief and go straight to the point but there is a lot to cover. My contribution is my form to thank the balancer team.

Views are my own. If anyone feels offended, please consider that this is not my intention. I hope is taken the right way!

Let’s begin:

Weaknesses:

As AMM, Balancer doesn’t enjoy:

1- first-mover advantage (UNI - L1;QUICK - Polygon etc)

2- innovative features (SUSHI miso/Kashi; UNI V3)

3- IL protection (BNT)

Instead, Balancer offers 2 unique features (strengths):

1- multi-asset pools

2- weighted pools (80/20 and so on)

Nevertheless, balancer lab is apparently fixated on competing with other AMM on the 50/50 pool game. This should be pretty clear to us by now and the tweet below should serve as final confirmation

Nowadays competition expanded to L2 platforms, so the game is getting tougher and tougher.

As said, Balancer does not enjoy the first-mover advantage nor have a super-strong brand recognition despite being one of the pillars of the DeFi ecosystem. This puts the protocol in a somewhat weaker position.

Consequently, a natural question would be: why is balancer not exploiting all its capabilities but chooses instead to compete against the various Goliath at their preferred game? I hope someone can answer this question and can show that this policy has proven to be successful.

BAL token and distribution:

The token has consistently underperformed any defi asset since its inception. However, on V1 the trick to this was to provide liquidity to the 50/50 BAL/ETH pool to reduce downside risk while generating rewards (thanks to the BAL factor). Over time the risk goes down as more and more rewards are issued up to a point where risk becomes zero (rewards equal initial investment in eth value, not $) ~ that point, however, was never reached.

Rewards have been a great incentive to maintain my interest in the protocol, follow the development and being proactive with voting/forum/discord. I also offered volunteer work asking nothing in exchange. Intercom work and some translating were done as a result.

With the V2 introduction, the initial proposal by 0xLucas (fire eye partner) (14% APR!) was fought hard and changes were made, however, the BAL factor was discontinued. The BAL factor boosted weekly rewards if you participated in any pool containing BAL tokens. Additionally, large token holders were not allowed to get the BAL factor incentive if I remember correctly. This to me was a very democratic way to distribute the token to the little guy, allowing the building of a good position over time and creating engagement.

The BAL factor was cancelled without an open discussion and the possible ramifications of such a decision. V2 is using a different reward system. We haven’t reached cruise speed as the transition V1-V2 is still ongoing.

However

The 80/20 BAL/WETH pool carries a 60% increased risk than a 50/50 pool and lower rewards. Not a good risk/reward ratio for me. This, together with the discontinuation of the BAL factor presented a capital allocation concern. Below is the reduction in BAL rewards of my wallet (BAL not $ value). Data from 30/09/2020 until 23/06/2021. A picture worth 1000 words.

The voting:

In over one year, I’ve participated in all voting and observed similar dynamics: Balancer has the same problems seen on some other protocols: large wallets can influence the direction of the voting. A handful number of wallets with large amounts of BAL tokens, can move the needle far enough and go against the vast majority. This is not a problem today but lobbyist could push one day in the not too distant future for certain protocol changes that go against the community at large.

Quadratic voting is necessary but I don’t know if and how this can be implemented. In short, however, the small guy needs to have more voting power in comparison to large token holders. This can be easily designed. I have drafted the table below a couple of months ago. I called it BVR (Balancer Voting Rights)

The BAL voting incentive (govFactor) does not guarantee community engagement but only opportunistic voting. History has shown that the Balancer voting process does not improve the quality of implementations or proposals (always the same guys propose changes).

Hundreds of wallets vote pretty much for the same thing (I have some observations about this but I will spare you lol), 90%-10% is the general outcome but no active discussions are really happening. The Forum is a shred of clear evidence: there are only a few proposals now and then. One could argue this is happening on Discord, but Discord is messy, everyone talks on top of others and is difficult to follow.

So to me, the 10% incentive (govFactor) for active voters is a misallocation of capital.

Tokenomics:

Part of the selling pressure perhaps is coming from the lack of utility of the token. As described, governance-only is overvalued by many protocols which are just starting and really new, especially when large holders can heavily influence voting results.

So proper tokenomics should be introduced. I’ve seen some proposals regarding Curve. Generally is a good system and certainly a starting point. Up to 4 years locking period is however a very long time. Especially in crypto. MStable has a similar system but much more reasonable: Vest your MTA for a period of up to 16 weeks (this will generate interest) plus your LP rewards will be directly proportional to the vMTA-LP ratio. Sounds more complicated than what it is: the more tokens you stake, the higher the reward.

LPs

As mentioned, challenging other protocols on the 50/50 pool game is the wrong approach. Each token pair should have 3 LP options: Long token 1 (80/20), neutral (50/50), long token 2 (20/80). If I believe BTC will outperform ETH I will move my funds to LONG BTC. You get the idea.

This will allow investors to keep funds in the protocol, betting on the direction of the market while having rewards exposure by remaining invested. I believe with V2, this can be easily implemented. Some UI changes need to happen to make it easier for the non-tech savvy to interact with Balancer.

Indexes:

The second selling point of Balancer is multi-asset pools.

I think DeFi is coming for the trillion-dollar derivatives market and investment funds will go for indexes much more than for single protocols. Balancer needs to prepare for this eventuality.

I am hyper bullish on indexes and protocols like “Indexed” (https://indexed.finance/).

They create various index funds of crypto markets, similar to ETF on TradFi:

• DEFI5
• CC10
• Oracl5
• And so on.

The community decides what tokens should make a certain category or what index they should deploy next.
BTW, an interesting thing about Indexed.finance is that their funds are built on Balancer but then they deploy on Sushi, Uniswap, Quickswap to gain exposure to the broader market. This show, once again, how much Balancer is overlooked at the moment.

• Balancer oracles
• Balancer top defi
• Balancer NFT
• Balancer AMM

are just some examples but should also be a no brainer. With good branding and marketing, this is an area of great opportunity.

These are the new pools deployed on Polygon and to me, they make no sense. In the short term, I believe people will farm the s*** out of them, especially with the current market conditions. But we are here for the long run. I am sure there is sophisticated reasoning behind these compositions, but in all honesty, what are the pools trying to replicate? Long polygon tokens only? No. For the conservative investor? no Long DeFi? Maybe one. I am confused.
As an “expert”, I wouldn’t invest a single $ into these pools. Imagine the guy with zero experience. Balancer needs to have products targeting the guy/gal next door too.

To recap;

• Balancer has great potential but it feels like a Ferrari on 2nd gear.

• Opportunities are everywhere but Balancer is not grasping them.

I am sure I am not aware of many things happening behind the scenes so my opinion is based only on what I see.

Apologies for being maybe too direct on certain topics, but I’m saying it just to help and to give back to the community given how good Balancer has been to me.

Hope this helps.

[DavisRamsey]

What a thread!

I’ve been told we all agree on where Balancer ends up long term, just disagree on how to get there.

The way I see the path forward is to optimize for LP fee earnings, activate protocol fee, accumulate a treasury. I think having defensive pools (heavier BTC/stable weights) & offensive pools is a good idea and one I’ve been tossing around lately myself.

The polygon pools are all over the place, but that’s because bakamoto and I have very different ideas about what needs to happen (in the short term I guess? lol). So we have to do some his way, some my way and you end up with what we have. Have to believe this is part of the process and a necessary growing pain I suppose.

btw what pools would you want to see on polygon? what pools were you in on v1 besides BAL/WETH or was that it?

incoming response from bakamoto “that tweet is a huge misrepresentation of the strategy” etc etc

[marta]

Thank you @Andrea81 for this great feedback and insights.
First - I would ask you to apply to become a Baller. Your contributions and your insights are super valuable. Ballership is about recognition and “seniority” in the community and you deserve both!

As for your feedback, I think you have a lot of fair pointsm What are actionable next steps, in your opinion?

I wonder what does @rabmarut think about your observations.

[Andrea81]

Thank you @marta for the kind words!

Regarding the next steps? Well, first we should all understand what is the long term goal and if the Devs share the same vision. By saying this I mean not a generic vision in the likes “we want balancer to be a key part of the defi ecosystem” but rather having a clear goal.

Competing head to head with multi-billion dollar protocols like UNI could result in hurting the project and retreat at some point. There is a war out there for users and capital. It’s time to get creative.

Short term actions should therefore include:
1- 2 assets pool designs (I see the L1 pools and I think: how many more 50/50 WETH-REN pools does the world really need? I’m saying this as a REN darknode operator, which means I am a REN superbull, but the market is flooded by the token. BTW, If the protocol manages to accumulate a treasury (as @DavisRamsey mentioned) would be very interesting to use the REN tokens to run nodes and generate fees)
2- multi-asset pool designs (what is the team opinion on this? is there any agreement? what other options can be offered?)
3- a dedicated team/individual that scans the market for L2 opportunities and creates partnerships (similar to AAVE or the recent QiDao - I really like this partnership)
Midterm
4- L2 L2 L2: Arbitrum (@rabmarut mentioned Balancer is looking into it in another forum) Fantom, Avalance and others.
5- Balancer has zero marketing, why?
6- UI- I’ve received some comments on intercom regarding dark mode, I would also add more features tho. I envision a platform that takes the user through the investing process. The UI should ask, if prompted, “are you bullish? bearish? bullish on what? bearish on what? I have these options for you to consider, this was the performance during the last x months, if you stake x BAL I can additionally reward you with X BAL per week”. The future goes toward a more interactive relationship man-machine. On the contrary, I think for example that SUSHI interface is way too complicated for the average investor/user (one of their weaker points IMO), Balancer can excel in this;
7- tokenomics as mentioned above. Let’s start with something! Balancer can evolve and fine-tune in the future;
Longer-term:
8- Voting is not a pressing issue but something that needs to be addressed as the protocol moves more toward “decentralisation”.

These are the more pressing issues I see and things that can be addressed with minimal/no capital expenditure. Of course, then it’s up to the team to make the final decisions

[Andrea81]

@DavisRamsey

btw what pools would you want to see on polygon?

Multiasset: Polygon only tokens against MATIC is a must (QiDao as said is a great idea); something can be done with DYFN I suppose too;
2 assets: Overweight/Underweight assets VS MATIC
I would talk to Indexed for double rewards or even triple (MATIC/BAL/NDX)

Polygon is cool and all but is also a minefield, look at Polywhale (KRILL) or Titan. Finding good projects is hard but composing a “degen” polygon pool could be an option, maybe with a circuit-breaker in case things go very wrong).

I will scan the market more to offer you options

@DavisRamsey

what pools were you in on v1 besides BAL/WETH or was that it?

Heavy BAL/WETH 50/50 - 80/20 (I even sold some cold storage BTC to buy BAL);
heavy BTC/ETH
medium BAL/ETH/BTC;
light LINK/ETH.

Somewhat conservative I would say.

[Fernando]

Thanks so much for your great suggestions @Andrea81 and for taking the time to create this extremely well thought out thread with a lot of healthy, constructive feedback. There is a lot of work to do and people like you are those who will make it possible.

As @DavisRamsey mentioned I think most of us agree that Balancer long-term should tackle asset management use cases and not focus on fighting on the DEX front with Goliaths. Being on par with them on the DEX side might even be possible if Balancer gets a lot of assets from asset management users since their tokens will naturally be exposed as liquidity for traders.

It’s a fact that the asset management market in tradfi is much larger than the exchange market:

However in my opinion we cannot just ignore the relevance of having trading volume on Balancer since this is what makes providing liquidity attractive for LPs (liquidity mining is not going to be forever and APY from trading fees have to be attractive for LPs to stay).

To summarize we as a community need to start looking more into asset management opportunities (Blabs is working on this and will share more soon) without forgetting that Balancer needs healthy volumes and LP fee generation. There is no clear answer on how to achieve this, but we should all discuss and experiment together.

On marketing: that has definitely been an area we at Blabs have not focused on so far. But now we have a small but great Marketing team led by @Meghan that’s doing a great job which will hopefully be more visible over time.

Last but not least I second Marta’s opinion that you should definitely be a Baller, please come join the team!!

[Andrea81]

Thank you @Fernando!

I fully understand the need to create a protocol that is capable of generating healthy fees. In the end, the most important thing is to make Balancer financially sustainable. Regardless of the LM program.

However, something escapes me: why is it not possible to distribute the trading fees of two assets among all participants, regardless of their position? 80/20; 50/50; 20/80? In V2 this shouldn’t be a problem, right?

I struggle to understand why we just want to offer a 50/50 ETH/USDC LP trying to attract liquidity but not three different products? In my view, this should be more attractive to those seeking a more or less aggressive strategy. Eventually, all liquidity ends up in the USDC and ETH reservoir without any fragmentation. Where am I wrong?

@bakamoto20 ? @DavisRamsey ?

[DavisRamsey]

by creating & incentivizing 80/20 50/50 20/80 ETH/USDC compared to only incentivizing ETH/USDC 50/50 (total rewards the same) you increase the gas cost of trades that need to tap 3 pools instead of 1.

While the vault is more efficient for tapping multiple pools, the more pools a trade needs the higher the gas cost. It’s just not as bad as v1. So that’s the argument against it.

Ignoring the above, to me having 3 pools like this doesn’t make much sense. 80/20 USDC may as well be 100% USDC, 80/20 ETH may as well be 100% ETH. Furthermore, only reason someone would LP in one of our 2 token pools is to auto farm free BAL or they have no interest in active LP’ing. Jumping between 3 diff pools depending on ur market outlook strikes me as the activity of an active LP, and there is no comparison between fees earned here vs fees earned on uni-v3 for active LP’s. uni-v3 far better.

[icinsight]

In Polygon GAS cost is not a factor.

[DavisRamsey]

true! if you subscribe to bakamoto’s theory of attracting users by undercutting quickswap/sushi on fees, perhaps it does make sense to make a ton of 2 token pools with 0.25% fees and incentivize with BAL rewards.

[bakamoto20]

Whether active LP strategies on Uni-V3 are more profitable is still quite contentious incidentally. Dune Analytics

To date the active LP managers are doing worse than an Uni V2 position with 0 fees. Liable to change in the future, but active LP management on ethereum is going to be hard, whether it’s positions being frontrun in the mempool or mitigating the potentially huge IL if your position-management strategy isn’t profitable for the current market.

[kstone]

I’ve really appreciated reading these observations as well as the discussion on Balancer’s Primary Objective.

It speaks to the strength of this community that these questions are being raised and discussed openly.

For the sake of accuracy, I want to clarify that BLabs is fine to express a view on this - in fact, we are actively working to communicate our thoughts - and receive your feedback - on the current state and the future strategy of Balancer. However, we first needed to understand what role BLabs should play in the larger community.

As first movers, creators, and an organized participant of the protocol, Balancer Labs has a higher level of responsibility not to abuse its influence and instead to appropriately steward this influence in alignment with the community’s decisions.

This is the reason why our primary objective is to support and elevate all active participants in the Balancer ecosystem. To that end, we hired Marta who revamped Discord, started monthly town halls, is expanding Balancer’s presence in Asia-Pacific, and dramatically improved the structure of the baller program.

All this was being done while V2 was launched, the BLabs team doubled in size, and we completed token purchase agreements to ensure continued operations.

Where I believe we have fallen short is in providing consistent communication about what BLabs is thinking and what we are working on. My commitment is to improve our communication since I believe that being informed is crucial to ensuring this community is supported.

Thank you for raising and discussing this @Andrea81, @bakamoto20, and all the community who continues to contribute to the success of the Balancer Protocol.

[Andrea81]

Hi @kstone ,

and welcome to the Balancer Forum!

I very much understand that lately, together with the launch of V2, various initiatives have accumulated that perhaps have somehow overloaded the team.

I also appreciate the fact that Blab wants to raise the role of users and the community by trying to intervene as little as possible on the decisions concerning the direction and evolution of the protocol.

However, I think that there is a need to respect project evolution times. Balancer is still an extremely young protocol that needs leadership and a well-defined roadmap to reach its maximum potential.

This can only happen with consistent communication and consultation with the base (who is also financially aligned and has an interest in making things go in the right direction).

So thank you for deciding to join the group and look forward to your ideas, inputs and updates!

[kstone]

Thanks I have been watching the forum and Discord but most of my time the last six months was focused on hiring the right people. I really love seeing the engagement and intelligence of this community!

I fully agree with you - and I hope that was communicated in my last post - Balancer is a very early project and it is important to have clear leadership & a defined strategy.

We are also in agreement with how to get there, consistent communication & consultation. My curiosity is about where & how that is most helpful.

The townhalls were the first step on this journey but there is so much more we can be doing. Bi-weekly updates are also underway and should be out shortly. We are working on a formal strategy doc as well and hope to get the first version out the week after next to receive & incorporate any feedback.

Is there any other information that would be helpful? And what are the preferred digital avenues to receive this type of information?

If anyone wants to chat in real-time about how BLabs can provide consistent communication and consultation - please message me on Discord (kstone #9073) - I’d love to set up a time to meet you and talk more!