[Pre-Proposal] veALCX - Application for ve8020 and Community Grant

Governance General Proposal
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Note:

This proposal is a pre-proposal by Alchemix to solicit feedback from the Balancer community and will likely need to be revised to reflect current statuses of projects after discussion and prior to going to vote.

Proposal:

Alchemix is requesting a grant of 25k BAL, for launching the ALCX/ETH 80/20 pool in accordance with [BIP-146] Incentivize 8020 BPT Staking (ve8020) (as well as the updates made in [BIP-225]), and requesting additional grants for subsequent milestones when eligible. As a part of this proposal, provided that Alchemix is awarded a grant, Alchemix will pair the 25k BAL with ~10 ETH (80/20 proportion) and lock this pair as veBAL and continuously vote for gauge rewards for pools beneficial to the Alchemix ecosystem (ALCX/ETH, alETH, alUSD, etc).

Alchemix will hold the veBAL from the BIP-146 grant in a veToken controller contract whitelisted by Balancer - similar to how Alchemix handles its SDT and SDL positions. Alchemix will uitilize the controller contract ideated in the veLIT discussion and released in BIP-225. If modifications are needed they will be requested in the comments of this proposal.

Additionally, Alchemix will coordinate and apply for a grant with the Balancer Community Grants Program, proposing the following milestones and associated grants:

  1. The launch of a generalized tool for users to migrate from 50/50 Sushiswap and Uniswap V2 liquidity positions to 80/20 Balancer positions for any ERC20 token - proposed 25k BAL
  2. The launch of a script that would enable other protocols to launch their own modified version of the veALCX system for their own tokenomic - proposed 25k BAL
  3. The first adoption/deployment of the veALCX system by another protocol - proposed 25k BAL

The entire 75k BAL will be used for long-term locking and voting purposes (either locked as veBAL or used to obtain AURA, sdBAL, or another veBAL-based protocol). Alchemix will pursue a whitelist to hold veBAL as part of this allocation.

Context - What is veALCX?

veALCX is an evolution of the veSystem first pioneered by Curve with veCRV, since adopted by Balancer, Solidly, and Velodrome, among others. “ve” stands for “vote escrowed”, which in practice typically means that users have the option to lock tokens for a period of time to gain voting power, and that voting power typically has economic value (such as directing protocol emissions). veALCX is currently undergoing audit with Chainsecurity.

veALCX retains some features of existing veSystems, while adding some entirely new ones. The featureset, with a quick summary of each feature, is below. A more detailed explanation can be found in this medium article: veALCX Update. Back in May, we shared a general… | by Alchemix Finance | Medium

  1. Users will need to provide liquidity to the 80/20 ALCX/ETH Balancer pool. These Balancer pool tokens will be locked to obtain veALCX.
    1. Users will lock their 80/20 ALCX/ETH Balancer pool tokens for up to 1 year, with a multiplier on voting power for each two-week epoch for which they lock (1 year lock = 26 epochs, so 26x voting power).
    2. Users may opt to maintain their voting power with no decay with a perpetual lock. They may begin their decay at any time at their discretion, at which point the 1-year unlock timer will begin.
  2. Alchemix will distribute revenue to veALCX holders. This revenue distribution will take the form of alAsset credit (e.g., alUSD and alETH), which can be claimed by the user or used to pay down their Alchemix debt.
  3. veALCX voters can vote in governance proposals, as well as on gauges that direct emissions to alAsset liquidity pools. There will be a bribe system for these gauges.
  4. veALCX holders also earn a secondary token called FLUX. When unclaimed, FLUX credit can be forfeited at the holders’ discretion to boost gauge voting power. Alternatively, FLUX can be claimed by a user and burned to unlock a veALCX position early, or FLUX can be sold to other veALCX holders that wish to unlock early. Claimed/purchased FLUX may NOT be used to boost gauge voting power.

Context - Why Balancer, Balancer-Specific Innovations

Alchemix initially looked to develop veALCX only to replace the single-staking ALCX pool. The idea is simple - share revenue with ALCX holders, and do it in a way that aligns those receiving rewards with the long-term health of the protocol. However, as development progressed, it became apparent that these goals were achieved in an even better way by using 80/20 Balancer Pool tokens. The reasoning for this is as follows:

  1. Liquidity is a major expense for protocols, and often forces farm & dump game theory. The ability to replace the current liquidity pool with an 80/20 pool means liquidity providers are more aligned with Alchemix (due to the position being largely ALCX), and far less subject to impermanent loss. Furthermore, wrapping liquidity into the veALCX system means that revenue share and liquidity incentivization can be combined and likely reduced expenses for the protocol.
  2. Additionally, there is a common misconception that an 80/20 pool will experience the same slippage as a 20/20 pool (A 50/50 pool with 40% of the value). This is not true; the slippage in the 80/20 pool is actually better than if one were to simply take the 20% ETH and pair equivalent ALCX with it. This means that if you take the existing ALCX single-stake liquidity and combine it with the existing Sushiswap liquidity, you get better slippage with the same TVL. (For those that want to dive deeper - the 80/20 liquidity curve equation is x^4y=k - This spreadsheet can be used by individuals that wish to verify how slippage manifests in 80/20 and 50/50 pools. )
  3. veALCX stakers will receive ALCX emissions. These rewards can be unlocked at the same time that the veALCX position is unlockable. Alternatively, users may claim the ALCX early for a 50% penalty. We recognize that some users may wish to compound their position into the liquidity pool - so a tool was built in to the system to allow users to claim their ALCX rewards with NO penalty, so long as they provide the required quantity of ETH to pair with the rewards and immediately LP and re-lock into their veALCX position.
  4. There is a regulation element to consider here: If a protocol were to simply share revenue with anyone that staked/locked the token, then they are not paying for a service - they are sharing revenue. However, by requiring liquidity tokens for veALCX, the revenue is being used to pay for a service - providing ALCX liquidity - and thus is an evolution of liquidity mining rather than direct revenue share. Note that this rationale speculation on how to best comply with future regulations and does not constitute legal advice in any form.

Context - ve8020 Incentivization Program Qualifiers and Requirements

Below is a list of the requirements and considerations for ve8020 incentivization grants, from BIP-146, with responses clarifying how Alchemix meets these considerations.

Project track record - has it been around a while, is it likely to exist going forward, does it have an active community/user base, etc.

Alchemix has existed for over 2 years, with continuous development throughout, and planned well into the future. Alchemix has multiple years of treasury runway, with the runway currently growing. Current protocol and treasury statistics can be viewed here: https://alchemix-stats.com/

Circulating market cap and trading activity - is there a reasonable likelihood for this ve8020 to contribute significant protocol revenue for Balancer?

The ALCX/ETH Sushi pool, which is being deprecated in favor of the ALCX/ETH 80/20 Balancer Pool, consistently generates $500k+ in volume per day, with the most recent week at $5m/week. Because veALCX replaces both Sushi liquidity AND gALCX (single-staking for ALCX), veALCX not only be expected to have similar volume to the Sushi pool with a similar quantity of ETH, but vastly increased TVL due to becoming a large ALCX token sink.

BAL incentives should go to ve8020 lockers only, and the lock should have a minimum duration of 16 weeks

Alchemix will lock the BAL it receives for the maximum period of time and continuously relock when expired, using the voting power for gauge rewards that are beneficial to the Alchemix ecosystem. Most immediately this would be ALCX/ETH, but could also include liquidity for current and future alAssets on mainnet and L2s, among any other voting approach that benefits the protocol.

Milestone Expectations

The current balancer pool has $4m of liquidity with $1.5m of volume in the first 30 days of existence. With no further migrations, this would be an expected $200k fees in 1 year, half of which goes to Balancer. Prior to the migration, the Sushi pool held $8m of liquidity, $4m of which is ETH and $8m of ALCX between the gALCX and ALCX/ETH liquidity pool. Liquidity mining would be shifted to BAL or AURA bribes, and gALCX emissions will likely be retired when veALCX launches. Therefore, it can be assumed at least $8m of ALCX and $2m of ETH will sit in the liquidity pool, possibly more if more ALCX is attracted via additional rewards from the gauge bribe multiplier. If liquidity moves to the balancer pool proportionally, that would result in an expected $300k fees per year for Balancer. From these calculations, Alchemix is on track to hit the first milestone this year and would be on the verge of the third milestone within 1 year of launch.

Reference/Useful links

Context - Community Grant

To enable users to easily migrate their liquidity, Alchemix is building a tool that withdraws liquidity from existing 50/50 Sushiswap liquidity positions, swaps assets to achieve an 80/20 balance, and deposits them to the Balancer 80/20 pools. The tool would be easily deployable or usable by other protocols that wish to offer the tool for their own liquidity migration (supporting migrating from both Uniswap V2 and Sushiswap). Alchemix is also working with another protocol to offer factory-style front end widgets that can be embedded in any webpage (more details to follow if the testing is successful, otherwise Alchemix will create its own forkable front end).

Alchemix would also like to offer a way for other protocols to easily deploy modified versions of the veALCX system for their own tokenomics, with various levers/inputs to set parameters as desired. This has no direct benefit to Alchemix, and would be a public good for DeFi protocols exploring options for tokenomics. It would, however, benefit Balancer greatly for other protocols to deploy the veALCX system, as the system inherently requires significant liquidity to be provided in Balancer and then locked long-term.

Alchemix would like to request a grant of 25k BAL upon the release of the migration tool, 25k BAL upon the release of the veALCX fork factory, and 25k BAl upon the first adoption of the veALCX system by another protocol. The entire grant will be used for long-term locking and voting purposes (either locked as veBAL or used to obtain AURA, sdBAL, or another veBAL-based protocol).

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A few items I expect to be discussed:

  1. Approving or modifying the community grant request figures and/or definitions of deliverables
  2. Going into more details on veALCX and/or the migration tool as requested. A majority of the development effort has gone into making this tool gas efficient, minimizing dependencies, using best security practices for AMM interactions to avoid sandwhich attacks and economic exploits, etc - with the idea that this will be used in the future and not just by Alchemix for a few weeks of migrations.
  3. Discussing timings of grants - ie, liquidity is already in the process of fully migrating to Balancer, but veALCX is not live yet. Alchemix would prefer to get the BAL grant now in order to start attracting more liquidity/migrators, rather than waiting for veALCX to be live - but it’s unclear from the proposal if the “locked” aspect of the liquidity needs to be live prior to recieving the grant, or if the existence of the 80/20 pool is sufficient to start.
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I’d suggest that you also take a look at the way the 80/20 program from RDNT is handling fees/incentives.

Instead of receiving laddered BAL grant, their pool is being considered as a core pool and has 0.5% fees. As a result, all of the swap fees are directed as bribes instead of paid to veBAL holders directly leading to votes.

In the first round the Radiant pool had well over 100k USD in bribs paid out to their pool from collected fees across the balancer and aura markets on hidden hands. POL can be used to earn BAL and AURA from those rewards which can then be locked to achieve the same effect as the grant.

From what I have seen so far, this format of incentivising an 80/20 pool seems both more beneficial to the DAO and less complex from a governance perspective (doesn’t require a grant). At best your locker would stake the tokens in AURA to farm max rewards. A single recipient gauge rules out AURA rewards as veBAL boost is no longer in effect.

See here for how this was handled in governance. We probably still need to write this up more. Get in touch with @solarcurve or myself if you want some help thinking about it.

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The amounts requested are over and above Balancer Grants delegated authority ($100k USD) so your application will need to be approved through governance. Specifically related to the grants portion of this proposal:

I like this idea, but a 25k BAL price tag is hefty. To justify this, can you provide how the ask has been calculated? Would Alchemix take any fees from the use of this tool or is it deployed and forkable by anyone?

We have teams proposing a similar “launchpad” for less than half of this ask. Can you provide details of what this would include ie:

  • Front end or repo only? We don’t see a FE as necessary given the caliber of teams that should use this, more of a confirmation.
  • What are the auditing requirements for future users/adopters of this script?
  • What modifications would be easily allowed for and covered by documentation? max lock durations, voting power multipliers etc

This milestone would need to have more consideration. The value to Balancer is not a clear, positive 25k BAL with just any project deploying this system. While not intentional, this would be extremely gameable. There would need to be minimum requirements on the team and adoption of their implementation.

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Great comments, and fully I agree the quantities need discrimination. Rather than bloating the proposal since I knew this would be a point of discussion, I just threw out the same quantities being used in the incentivization proposal.

I like this idea, but a 25k BAL price tag is hefty. To justify this, can you provide how the ask has been calculated? Would Alchemix take any fees from the use of this tool or is it deployed and forkable by anyone?

Alchemix is not taking any fees on the migration tool. It is deployed by Alchemix, but anyone could make a call to the contract with a univ2LP token (sushi included) and it will migrate them to the balancer or Aura pool they choose as their target. Protocols would also be welcome to fork it if they wish to use their own deployment. Because it’s general use, we’ve put additional effort into full testing and using best practices for working with AMMs and oracles (for example, oracles are a dependency best avoided to stand the test of time, and instances of reserves from AMMs are easily manipulatable. They are unlikely to be short term problems, but have created major problems in the past throughout DeFi - so need to be mitigated for a tool that is expected to be used long into the future, whereas it could probably be ignored for a tool that’s only being used for a few weeks).

Understood most teams could likely whip up a front end, but it’s still effort they have to spend so Alchemix can host a front end on our utilities page, and if the testing goes well offer an easy way to embed it into other webpages.

In general I agree 25k BAL is probably too high for this - would be open to suggestions that consider the level of effort, the expected use (ie, is there anyone today that this would immediately benefit? Are other protocols currently discussing ve8020 and if so do they have existing liquidity?), as well as the fact that the payment would be in a token with the self-imposed restrictions.

I’ll get some answers to your veALCX questions so that we can start dialing in what makes sense. Agree there would have to be restrictions around what protocol counts as deployment (TVL, longevity, etc - things to establish it’s a valid protocol. Perhaps simply go off of their own acceptance into the BIP 146 program, as those parameters are already pretty well defined).

The launchpad details will likely be easier to provide after the audit, but the intent would be that if deploying thru the script would not require auditing (but forking and tweaking the codebase would have no claims of being covered by audit). Part of the justification for the request is that the audit was ~$300k, ie it’s a launchpad for a fairly sizeable codebase. The system is also just a theory for now - not tested in the real world, so it could make sense to split up the milestones to be much more back-end heavy (smol grant for deploying/making it accessible, bigger ones if more DAOs adopt within specific terms. Ie, fully align incentives on if no one forks it vs if it becomes some sort of new standard for VE).

(separately, will discuss internally before responding to @Tritium )

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Just to let everyone know of status - we weren’t aware RDNT was denoted as a core pool, our understanding was you needed a yield bearing asset. With this being a possible option, we are going to go back to the drawing board a bit to evaluate. Will revise this proposal or share a brand new one, depending on which way we think is the best way to go. :slight_smile:

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Hey @Ov3rkoalafied , as you may know, Stake DAO was working on a factory to help protocols deploy their veTOKEN using Balancer LP tokens. I think we can partner here on this, and work together. We could add to this an automated deployment of liquid locker to this factory, which would make it even more attractive for protocols to use.

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Yes - I think there could def be a collab here to create a better and more generalized factory for basic ve8020, alchemix-style, and with liquid lockers. We will certainly explore this together once the contracts are closer to being finalized!