[Proposal] Activation of the protocol fee to grow the Balancer DAO

[Xeonus]

The Balancer ecosystem is maturing at an incredible speed. Not only have we deployed Balancer v2 on other chains like Polygon and Arbitrum but also successfully migrated most of the v1 liquidity to v2. With additional features like linear pools on the horizon it is time to seriously evaluate the activation of the protocol fee to create a sustainable platform. In the following article, I want to illustrate how our protocol is currently operating, what it would mean if the fees are activated and how we could move forward.

What is the protocol fee?

Balancer v2 imposes the possibility to activate the “protocol fee”. The protocol fee would collect a percentage of the pool fees and passively accumulate them over time. The fee can be set in a range between 0-50% of the pool fee. The protocol fee is currently set to 0%.

Why should we activate protocol fees?

In the current state, the Balancer protocol provides around 145’000 BAL weekly in incentives across the protocol (on multiple chains) without asking for anything in return. To me this was mesmerizing when looking at the overall distribution of BAL and co-incentives across chains (see https://balancer.tools or Balancer as an example for ETH mainnet). This is a good way to bootstrap liquidity and distribute our governance token. However, to be a sustainable and most importantly innovative protocol, we also need to collect fees as a revenue stream. As we want to transition to a fully decentralized autonomous organization (DAO), we need to think about its future and how to achieve that. The only way to be able to run a successful DAO is the availability of funds to sponsor future development and innovation of the protocol as the vision of Balancer Labs is to slowly transition from a core component to a contributor of the protocol (My Vision for Balancer Protocol )

Furthermore, as @DavisRamsey already nicely demonstrated, a treasury would allow BAL to have direct exposure to other blue chip currencies like ETH, making us more resilient in tough market conditions ( [Proposal] Activate the Protocol Fee )

What speaks against activation of the protocol fees?

• One could argue that in the current state, we are just “too early” to activate fees and that we would repel potential investors.
• Other arguments include that we would clearly signal for something we do not want e.g. profit over innovation.
• Our market share is too small. We should not impose fees on the already small user-base (https://dune.xyz/balancerlabs/balancer-report )
• We do not have a clear roadmap on what to do with the fees - so why impose them in the first place?

What is the competition doing?

Nearly all popular protocols like Uniswap, Bancor, Sushiswap and others impose protocol fees. For example, Sushi takes 16.67% of their LP’s fee earnings (0.05% out of 0.30%). In that sense we are the only “major” protocol not imposing any fees.

How does protocol fee activation impact LPs and traders?

To give you a better understanding of how the fee will impact traders and liquidity providers, I want to illustrate 2 examples comparing trades and collected LP fees as well as the potential revenue stream on the protocol.

Impact of the protocol fees for trades

As a trader, you will not be impacted by the protocol fee. Each pool has the option to dynamically assign fees (e.g. managed by Gauntlet). The protocol fee would simply take a fraction of the already imposed pool fee to allocate to a treasury.

Here is an overview of the currently running fee structure:

(see https://dune.xyz/balancerlabs/balancer-pools )

We would always impose a fixed fee percentage (e.g. 10%).

Impact of the protocol fees for liquidity providers

As a liquidity provider, you will be directly impacted as a fraction of the pool fee is not accredited to LPs anymore. Let me illustrate an example of how that would impact a LP position. I am using small numbers to more easily illustrate the impact:

• TVL in Pool: $10’000
• Your LP position: $1’000
• Your share (%) of pool: 10%
• Pool fee: 0.1%
• Protocol fee: 10% of 0.1% → 0.01% to treasury, 0.09% to LPs
• Weekly collected fees: $100 → 90$ to LPs, 10$ to treasury

Your fraction of collected fees

• without protocol fee: $10 (10% of $100 collected fees)
• WITH protocol fee: $9
• Impact: $1

Please note that

• Liquidity mining APR is not affected
• 10% of all collected fees are subtracted from the pool fees and allocated to a treasury
• Therefore the impact for you is that you earn e.g. 10% less on e.g. 0.1% pool fees which makes up a very small fraction of your total incentives.

Impact of the protocol fees on our ecosystem

We have a pretty good understanding of how much fees accrue on ETH mainnet (https://dune.xyz/balancerlabs/Balancer-V2-LP-Revenues )

On average, in the last couple of weeks, the protocol accrued roughly $40’000 USD in fees daily. This would net about $4’000$ in accrued daily fees for a potential treasury if protocol fees would be set to 10%. Mainnet would therefore potentially net around $120’000 USD in protocol fees per month that could be utilized by the DAO.

Below is an overview of accrued fees with 7d averages for most popular Decentralized exchanges deployed on ETH Mainnet, Polygon and Arbitrum. Keep in mind, Balancer is one of the only protocols not accruing fees right now:

CryptoFees.info

How will the protocol fees be utilized?

In an initial phase fees will simply be accrued in a treasury. There are many possibilities and opportunities to pursue once fees accumulate. The following non-exclusive list shall give you examples on what could be done with collected fees:

• Create a DAO treasury index fund to secure liquidity and sustainability of the DAO
• Deposit accrued fees in Aave
• Have funds to grant talented Devs resources to build upon the Balancer protocol
• Buy back BAL and stake in the 80/20 pool
• Distribute parts of the revenue to protocol participants e.g. LPs
• …

Of course, all these examples would only be implemented after careful consideration and discussion with the community and snapshot votes!

What should we do moving forward?

In my honest opinion, not doing anything is the wrong move. There is never a good time to activate any kind of fees. I strongly suggest that we as a community need to make a decision NOW on how to proceed and start a vote. I believe that imposing a fee does not significantly impact our TVL nor attractiveness as a bleeding edge AMM. On the contrary, we make a strong point towards decentralization which is a crucial part for building a resilient and future-proof protocol and DAO.

Additional Information: State of the protocol

Our governance token is distributing at an impressive rate, having more that 38k unique holders:

(see https://dune.xyz/balancerlabs/balancer_2 )

In terms of TVL, we grow steadily and organically

However, compared to the competition, we only make up a small fraction fo the market:

Our market share on mainnet currently hovers around 8% (see https://dune.xyz/balancerlabs/balancer-report )

We are currently the underdog in terms of TVL and market share although that might change if we could push for better integration, documentation and marketing - something a financially independent DAO could achieve for Balancer.

TL;DR:

• The activation of the protocol fee is a way to grow a treasury for the DAO
• The impact of the protocol fee is small compared to our other attractive incentives
• We are the only big protocol not imposing fees
• We as a community need to decide what to do and make a strong case for or against the protocol fee.

References used in this article:

[Proposal] Activate the Protocol Fee

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. Th…

My Vision for Balancer Protocol

TL;DR Balancer protocol is transitioning from a product phase to a protocol phase. Its long-term success will be the success of what’s built on top of it. Balancer should be dead simple to integrate with/ build on: we need better docs/templates/tutorials and the ecosystem fund should be deployed for this. Useful liquidity – which facilitates trading volume – is necessary to keep Balancer relevant for aggregators/wallets/apps. Liquidity mining should incentivize useful liquidity but also be use…

https://dune.xyz/balancerlabs/

CryptoFees.info

• Yes, let’s activate the protocol fee!
• No, let’s wait!

[DavisRamsey]

Very cool proposal! Much better than my old one from back in the day

Good luck!

[ZenDragon]

A great job on this proposal as a whole, supporting evidence and arguments are all valid. I support you and this direction. The only question I land on is do we want to charge as much or more than Sushi’s 1/6 protocol fee? Also, do we have to charge this to all of our pools or can it be a little heavier on highly rewarded pools? Thanks for you work, look forward to thumbs upping more related to this in the future.

[zekraken]

Good job, I’m on board with this proposal. Two points I’d like to focus on.

There is never a good time to activate any kind of fees.

There is however a wrong time and that would be waiting for too long. This wrong time would manifest around when LM emissions are coming to an end and a good portion of TVL is moving on because of it. You can’t be reactive in these types of situations, you need plan for the future early so there are opportunities to react to a changing landscape if need be.

Additionally as you stated above, and it’s an important distinction, this is not a proposal to add a new fee. A portion of existing fees collected will be added to the treasury for the betterment of the platform as a whole. Not to mention a stepping stone to establish a stronger DAO for the long run. Yes as an LP you will lose a small portion of your swap fees, but what if the platform can add features that brings more swap fees then it would have otherwise in the prior environment?

Our governance token is distributing at an impressive rate, having more that 38k unique holders

If one looks at the chart on BAL holders it seems that growth of BAL holders is leveling off (for now). To me this seems like a good time to make a proposal such as this. A bigger platform change should have a respectable number of representatives to opine and make a thoughtful decision. I think we have a core group of representatives for this leg of the journey.

[DavisRamsey]

I don’t think we can pick and choose pools. But it is worth noting that currently LBP’s would not get charged a protocol fee (my understanding). Which needs to be fixed probably if we do this.

Secondly, all custom pool factories made by partners like element or tempus also would not charge a protocol fee. If we wanted them to pay, we’d need to reach out to them on a case by case basis to determine how that would be done.

[Ash]

Voting yes, but I would suggest that the fee be taken by the DAO in the form of BPT so we gradually begin to own more and more of the liquidity on our exchange over time, making us less reliant on distributing BAL bribes for liquidity, which is not sustainable forever.

[Andrea81]

I support this proposal.

The layout is clear and coincise.

Protocol fees are the foundation and the first step for a more sophisticated economic policy that Balancer probably needs.

@DavisRamsey said in the past that if those fees were introduced some time back, by now our treasury would have grown by a considerable amount. So I’m assuming that the right time to move is sooner rather than later.

I also hope Balancer Labs shares this vision and supports this proposal.

[LuukDAO]

I think starting with lower protocol fees as suggested makes sense - when the protocol grows and generates more fee’s we can further lower (or increase) it.

I do see your point in wanting to have flexibility on fee level, I think starting off with a fixed and simple design is good - afterward we could experiment with different fee’s per pool based on specific characteristics or for example different fees per user based on specific characteristics (go collect all these POAPS).

[Fernando]

Thanks @Xeonus for the proposal and everyone for the discussion around it. Balancer Labs will keep 100% neutral on this one.

This does not mean that we do or do not endorse it, we just want to let the community be 100% in control of this discussion.

[mike]

Personal opinion below (not Balancer Labs): I agree that protocol fees are an important discussion point for the long term and I am excited to see the community engaged in that process. That said, I am concerned about whether all the implications have been considered and addressed. So timing of when these fees will be turned on and how that fits into a larger roadmap are also something to consider.

To be accurate, Balancer Protocol is not the only protocol without a protocol fee turned on: Uniswap, dYdX, and several others don’t have protocol fees on at this time. The original post referenced cryptofees.info which shows the total gas costs people are paying to use a protocol - not the underlying protocol level fee.

One reflection after reading the original piece is that there are many different options listed for how the fee can be used. The list of potential options given are all in different directions and each one requires a ton of thought to how it would work. It worries me that the community has not discussed in depth & decided how these protocol fees will be used. If protocol fees are turned on and then the details of the options are fleshed out in a rush, it may hurt the Balancer Protocol’s long term success.

Turning on protocol fees also plays into BAL token economics, staking contracts, potential boosting, and many other parts of the protocol which are still under design and development. Proposals at this stage should start with how protocol fees could be used with lots of debate and fine tuning. Not “lets turn on protocol fees and figure it out from there”.

Separately, Defi, DAOs, and crypto in general is a highly uncertain space in understanding how it interacts with different jurisdictions. Things are still early on the path to decentralization and waiting x months to turn on protocol fees has little downside compared to turning on now.

[zekraken]

I do think it makes sense for the actual snapshot proposal (when it gets to that point) to include what the protocol fees would be used for and how that fits into the larger scheme of things. To get to that point discussions need to be had to flesh all that out, agreed.

I think this proposal is acting more as a feeler to get the community’s temperature on turning on the protocol fee, while at the same time providing some addition context and data behind the topic. In terms of the cryptofee.info data, the numbers seem to line up pretty closely to the swap fee data in DUNE.xyz unless I’m mistaken. Although the swap fee data includes LBP pools which may not make sense to include.

I think the idea here was to show a starting point in terms of what a protocol fee could be applied to (a % of swap fees). Ultimately, I think this topic and the subsequent discussions should be a main focus for the community over the coming months.

[Andrea81]

Hi @mike,

thank you for your message.
I’m glad you are seeing community involvement as a good thing.

To address some of your questions:
Balancer and the Balancer Community should make decisions only based on what we think is better from our perspective. If other protocols have or not a protocol fee in my opinion is “nice to know” but not something that should change our perspective.

Moreover, protocol fee is the necessary step that once activated, will change the mindset and prepare for those other steps that will also need to be implemented (tokenomics can be used as a broader term here). We cannot predict with certainty how successful this initiative will be, but we also know that the current state of things hurts, without any doubt, the price performance of the BAL token. The BAL token is a fundamental part of the success of the Protocol as it is strictly related to our ability to attract additional TVL via distribution methods;

It is true, DeFi and DAOs have a very uncertain future, and the uncertainty is given by the intrinsic condition they have: a new form of governance and economic policy that could fail as much as becoming the new standard of governance.

In my humble opinion, doing nothing (or delaying further such implementation) would be the wrong approach and would in fact hurt the protocol more than whatever “conservative” policy has been adopted until now.

I am in favour of this proposal and would like to encourage you to embrace this (controlled) risk.

[DavisRamsey]

“Turning on protocol fees also plays into BAL token economics, staking contracts, potential boosting, and many other parts of the protocol which are still under design and development.”

I’m glad all of these things are under active design & development by the core team. In light of this, taking a pause and waiting does make more sense. It was my impression the core team was not prioritizing token economics and was expecting the community to lead that effort (see Markus’ discord msg Discord)

It’s my personal opinion that using the protocol fee to reinvest in LP’ing on Balancer would act as a natural tailwind to growing the protocol. The DAO’s expenses will remain quite low as long as Balancer Labs exists, so funding ongoing expenses is not much of a concern. If the team fixes the LBP contract so protocol fees are collected as intended, we’d be able to have a stake in the long term success of these very large projects using us as a launchpad. It’s not an exaggeration to say this alone would be worth several million just taking into account v2 LBP’s - not to mention they’d be earning fees on balancer or a high APR in the project farm. The power of compounding returns in this manner could be extremely profitable for the DAO in the future.

I view activation of the protocol fee as the first sign that the DAO is coming to life. It will be difficult to come to conclusions about uses of the fee, how it fits into a broader system, etc without first agreeing that turning it on is a good thing. The giant caveat here is since the core team appears to be actively designing/developing these solutions, then I’m confident in their capability to present a full system and we can rally behind that. In its present state, I don’t think the community is equipped to lead these discussions. We would need to attack this piece by piece, first piece being turning the protocol fee on.

[Fernando]

Thanks everyone for their input so far.

I think this proposal has already gotten to a point (enough support, well defined) that it has to be put to a binding snapshot vote.

I’d just propose we wait to do it next weekend so that it has a total of at least 2 weeks for open discussion of pros and cons given its importance.

Please everyone who’s just lurking around and following this thread: do chime in and tell us what you think!

[mike]

And to be clear, I do think the community should lead a lot of these discussions on governance and economics. It was really cool to see this initiative and don’t take my comments as anyone should give up on these discussions. I personally just feel very strongly that we should figure out step 1 (how protocol fees will be used and play into the broader picture) before moving on to step 2 (actually voting to turn them on)

[ValeryWeb3]

Full support !!! we need to build the treasure for the Balancer DAO. token holders will decide how to use it. In my opinion the best option will be put some “future” money in lending or something to get some yields on top, and send this to the staking contract, salaries for devs and others.

[Xeonus]

I really appreciate your input on having a clear plan about how to utilize protocol fees. Rest assured, we take this endeavor very seriously and do not want to rush a not well thought out treasury investment strategy.

I also see another important factor here that was not emphasized enough so far: if we do not push for protocol fees now, then when is the right time? Every day we further stretch out a possible decision the more opportunity costs are accrued for us as a DAO.

I personally see our plan as follows (based on discussions in the Baller and DAO Discord channels):

1. initiate a snapshot vote in a few weeks as suggested by Fernando
2. activate protocol fees if the vote passes quorum
3. accrue fees in the treasury in a kick-off phase for a couple of weeks / months
4. present possible treasury investment solutions to the community and openly discuss the best way moving forward
5. initiate the next round of snapshot votes to signal what kind of investment strategy will be chosen

So my point is: we want to introduce a sustainable treasury in a multi-phase approach with full transparency and community-involvement as our highest priorities.

[zekraken]

I can fully get behind this plan. I think it is important for future investment decision we get a good active dialogue with lots of input before making a decision.

[DavisRamsey]

This will likely move to a snapshot vote in a couple of days. The vote will be “turn on the fee” with yes/no choices and a starting fee of 10%.

[bakamoto20]

I disagree with activating the fee at this stage, I am concerned it will change the way the BAL token is valued by the wider market and end up having a net negative impact on the ecosystem fund combined with whatever we generate from enabling the fee.

I also think we need to carefully think about how we approach the protocol fee with respect to partners building on top of Balancer. I’m concerned that expectations aren’t necessarily clear/aligned here and that we would need to address this before enabling any fee.