This thread as an opportunity to discuss some things a few of us have been thinking about with regards to LPs and better aligning incentives between LPs and BAL holders, in advance of a formal proposal being put forward if we gain sufficient traction for a specific approach.
In growing Balancer we want to incentivise as many LPs as possible to become actively involved in the community and marketing the protocol to the wider crypto community, in order to build the Balancer brand and achieve its goal of becoming the top source of defi liquidity.
There are various ideas that have been raised to encourage LPs to further grow the protocol, and hold BAL tokens to incentivise brand loyalty & growing the protocol:
We could take an approach that has similarities with Curve, which has worked very well for them. In order to earn the maximum BAL rewards for depositing in Balancer pools, you have to lock up some amount of BAL for a period of time up to 4 years. The longer an LP locks their tokens, the greater their BAL reward boost factor (up to a limit).
The nice thing about Curve’s mechanism is that it also means any yield aggregators that may choose to build Balancer vaults have to lock up some BAL for years to maximise APYs. Their mechanism can be explained here: Boosting your CRV Rewards - Curve Finance
Worth thinking about if we went down this type of path is whether locked BAL also got proportionally more voting power than unlocked BAL (the longer you’re locked, the more voting power your BAL has). This helps to further align LPs & governance with the long term interests of the protocol.
Instead of distributing only BAL to LPs each week, we distribute some mixture of UMA KPI tokens (that expire some months into the future, where the greater Balancer V2’s TVL/trading volume is, the more the KPI token is worth, up to a certain ceiling) and BAL.
Trading volume could potentially be more interesting than TVL (encourages LPs to think about how they can grow volume: create/deposit in pools likely to increase volume more, promote to traders), although it would take thought to prevent it being gamed. For example, we’d probably have to ensure only Trading Volume done at a minimum fee level counted, so people didn’t just create ~0.01% pools or wash trade.
I suspect we could design it in such that wash trading would be unprofitable for the minority that would do it, a majority of LPs wouldn’t go to the effort and a lone actor would be wash trading for the entire protocol’s volume just to get gains on their own LP rewards.
More on how this works can be read here: UMA KPI Options and Airdrop. UMA will be airdropping a new… | by Hart Lambur | UMA Project | Medium
I think we could potentially make something like this more successful than UMA did with their initial program, as we’d only be distributing to LPs, the $ amounts would be much more significant to people and our products are easier to understand / much more widely used in DeFi to date (“usage” is a simple LP deposit or trade).
This was discussed in the past. Some share of BAL rewards earned each week can’t be claimed for a period of time, e.g. 6 months.
I’m sure the community has other ideas for what we could do here, too. Of course the trade-off with any of these approaches is that we make the liquidity mining a varying degree of more complex for LPs: it’s a bit more to understand, and we’d have to educate users. Locking also ties people to using particular wallet addresses for the locking period.
Personally I think that the losses in simplicity of rewards could be outsized by the gains in community participation & incentive alignment for any of these approaches, and look forward to hearing people’s thoughts on ideas here or other approaches we could try. The UMA option could be something to try initially, as we could do it for a one-off quarter/couple of quarters very easily to see how it worked, vs. the Curve like path which is a greater overall commitment in terms of development & launch effort.
The UMA option is also something which I’m sure they’d be delighted to work with us on some shared marketing for, and would likely pick up attention in defi as something interesting if we moved relatively quickly to try it before another significantly sized DEX.