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