As the liquidity mining migration nears completion and additional deployments of Balancer v2 are coming soon to L2’s / side chains like polygon, I wanted to begin discussion around activating the protocol fee. For the unaware, Balancer v2 has the ability to impose a protocol fee that will collect a percentage of liquidity provider fee earnings. It can be set from 0% currently to as high as 50%.
This proposal would set the protocol fee at 10% on all current and future Balancer v2 deployments. This means LP’s would retain 90% of their fee earnings and 10% would go to Balancer protocol. A future proposal would address possible uses for these funds, such as reinvestment on Balancer, yield farming using other protocols, and paying out some portion to BAL holders. This proposal would simply begin passive accumulation of fees.
For comparison’s sake, Sushi takes 16.67% of their LP’s fee earnings (0.05% out of 0.30%).
Motivation
Years from now Balancer will complete its path to decentralization when Balancer Labs hands control over future development, marketing, biz dev, etc to Balancer DAO. While our earning power is small currently, accumulating a treasury now has many benefits:
Exposure to future upside of every token supplied on Balancer
Having a say in governance of other protocols (we accumulate their gov tokens)
A well diversified treasury reduces risk of having to sell BAL in the future to fund operations.
Essentially Balancer starts to become a token with direct exposure to ETH and DeFi plus a supply of stablecoins. The earlier we begin accumulating a treasury the more hardened the protocol will become against any future extended price drops.
Before the crash in May, Balancer v1 was averaging between $1M and $3M of LP fee earnings per week. The last two weeks, Balancer v2 was around $440,000 of LP fee earnings per week. I think we can reach and exceed v1 levels of earnings relatively quickly between optimization of our ETH mainnet incentives and adding other deployments like polygon.
Specification
All current and future deployments of Balancer v2 would activate the protocol fee at 10% via transactions from the relevant multisig. Proceeds from the protocol fee would be passively accumulated until a future proposal is made as to how to use them.
I agree with everything you have said but I think 10% is a little high and could discourage LP’s as we are now all making 10% less. I think we should turn it on but start extremely low at 1-3%
Compared to Sushi that seems extreme. I think it might make sense to alter it in the future, up or down from 10%, but I think 10% is a good place to start because it undercuts Sushi while leaving us with decent earning power if we just reach v1 fee levels.
The metric I’m hoping to hit over the months/years is protocol profitability - protocol fees collected > BAL rewards spent. That will be a sign that the platform has reached critical mass and BAL rewards/inflation can come to an end. Obviously we currently struggle to reach pool profitability, where LP fee earnings are > BAL rewards. Reaching protocol profitability when protocol fee is 10% is going to be that much harder. at 1%, it becomes 10x harder vs 10%.
While in principle I’d value more growth rather than treasury, specially at this early stage were market share is more important than revenue, balancer’s volume is pretty low in comparison to uniswap or sushiswap while in polygon you have quickswap with signficant volume. Perhaps having a yield tied to the volume instead of reducing rewards for LP’s actually increases it since most of the revenue comes from reward distribution.
In summary I agree, 10% is reasonable in the sense that I don’t think it moves the needle for LP’s, most of them are actually doing it for the rewards and are bullish on the token anyhow.
Actually I would go further as to suggest the following (perhaps it has already, been an LP since 2020 but first time here) say we estimate 6m diversified treasury we could allocate a portion of it to a single side bal stalking pool which is to be an insurance for the protocol against black swan events, it would operate as the lender of last resort. This will reduce dumping of the token by LPs that deposit it in the single sided pool, it will generate a yield and it has a service attached to the yield (thinking howey’s test ref sec and potential regulation coming once tradefi starts to operate with defi in different fronts)
Lastly a yield sets an estimated price floor for the asset which also enables other use cases such as a more trust worthy collateral option which could eventually imply lower collaterization ratios
It’s an interesting idea but question is what constitutes a black swan. Does a random token on balancer going to zero count? That could get messy imo. If it’s simply ensuring a bug on the platform, imo better we just set aside some treasury funds and put them to work yield farming somewhere.
Single sided staking is not my favorite idea generally. The token just sits there doing nothing earning a subsidized yield. Meanwhile, 80/20 BAL/WETH increases token liquidity and generates trading fees for very little IL. We probably want to stick to supporting the 80/20 pool rather than single asset staking imo
Indeed, such definition is messy, however if we ever are to truly scale outside the boundaries of crypto (which I understand there are varied opinions) or even within crypto if we attach a yield to the token without any expected service/work performed by the token holder we will likely encounter regulators making an observation that such token is a security since you are buying the token with the expectation of profit derived from the work of others. There are already discussions as to a global minimum tax, such things will eventually come in some form or another. Yes perhaps investing the protocol treasury could be a middle ground while others more specialized than myself find a way to allocate such yield to the token bearer while minimizing long term contingencies (who knows, perhaps 5 years down the line there are crypto specific regulations with participation from crypto enterprise that give clear guidance on this issues that are common to many protocols)
I agree the majority of LP providers are doing it for the rewards - and now they just got 10% less, that is a significant number especially since the transition to v2 we are not seeing many pools that have 50-70% anymore. Sure those were unsustainable numbers, but moving to v2 everyone all took a hit. (anyone who was in a bal pool is down 50-60% since the crash too, I know I am) Now you are asking for 10% more, and you can’t even tell me what my tax is going for yet? Can you see why LP’s might be a little hesitant to pay that much? Of course, we want BAL Labs and the DAO to make money - do you think whales are anti-capitalist? (not you I’m just making a point, that it is reasonable that there is a small fee)
However, when I think about things for a second, I guess I’ll support starting high and lowering over time, I think the prospect of raising it from a low point is a lot harder than lowering from a high. Like I stated I supported all the reasons, so I’m not going to stand in the way of progress. But I do think we will see a small hit from some LP’s - I think it will be negligible in the long run but this might run into some marketing I was planning so you might lower OUR number
to be clear, this protocol fee simply comes from fee APY. BAL rewards APY still goes 100% to LP’s, which is the vast majority of the total APY on most v2 pools.
and the revenue from the protocol fee is governed by BAL holders, not Blabs. (correct me if I’m wrong someone!).
Where did we get with this? Looks good to move to a proposal to me, vast majority in support. I don’t think we should be distributing these tokens to holders for the time being, but keeping them in the DAO’s treasury to help us with diversifying out of pure BAL a bit.
I’d also suggest doing a quarterly swap of everything that’s not BAL and has a balance greater than $10,000 into 50% USDT/USDC/DAI BPT & 50% WETH/WBTC BPT (or some other similar combo). This would enable the treasury to provide useful liquidity with the fees collected (a service/work being done?) and simultaneously diversify some of its risk.
I don’t think we should get into the game of speculating on other projects’ tokens really, if we want to hold lots of project tokens we’d really need some kind of investment manager which seems OTT for now.
The value of these tokens/pool holdings is then an extra thing in effect in control by BAL governance, adding value to the token. In the future it could be distributed to holders as dividends, used to fund growth, or anything.
Regulatory concerns and waiting for Balancer to become more established (meaning higher fee earnings I think) were the points of feedback I got privately.
Maybe it is smart to wait, since if we don’t try to increase fee earnings we won’t have revenue growth. So far, no sign of revenue growth from when LM migration completed to now that I see from the data.
Yeah, I think the down market hasn’t helped wrt growing volumes & revenues. Volume’s been down everywhere, but hopefully will be some picking up if the market rebounds from here. TVL per BAL has been growing but we’re lagging on volume (and consequently fees).
Do we have an idea of what the specific regulatory concerns are? Other protocols seem to have pursued enabling protocol level fees, but can appreciate concern here especially given recent talk from the US.
