[Proposal] Balancer V2 Liquidity Mining Program

Governance General Proposal
22

Hello everyone,

all very interesting and healthy. Perhaps it would be good if certain intentions of certain individuals were clarified before proceeding?

I believe, considering that the purpose is to create a decentralized model where everyone participates (DAO), that the part of those rewards intended to be deployed to attract capital (a copy of sushiswap in practice) is decided by voting once every 30 days, just like everyone today votes for other implementations or changes. Balancer pays an extra 10% to those who participate in the voting system in an effort to encourage engagement, we need to make sure that from this extra cost value is extracted. I don’t see the need for a small group of “ballers”. Ballers can change policies quickly but unfortunately, they do not guarantee impartiality. And this, from my point of view, is a big red flag.

How can you prevent a certain head of project XYZ from offering XYZ tokens to some ballers in exchange for qualifying for LM programs?

Regarding BAL rewards: I clearly remember, back in July / August 2020, the introduction of the BAL factor. It was introduced by @rabmarut exactly to avoid the dumping of the token and to encourage those that were invested not to do the same. This created two consequences: value retention and engagement of some sort. The reason why I’m still here writing to you guys is a direct consequence of that policy. Without that proposal, I and many other bright individuals that follow the Balancer evolution behind the scenes wouldn’t be here today.
This fact certainly cannot be ignored or discarded without deeply considering the possible consequences of such actions.
The value of Balancer is certainly represented by those who are very active on Discord (@tongnk etc), but also by that large slice of shareholders who, for various reasons are silent, but have their capital (real money) invested on the platform.

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Thanks everyone for your inputs! I’d like to add my personal thoughts on the issues brought up:

Why do we need a committee or smaller group representing BAL governance to decide on the tokens participating in liquidity mining?

It is IMO completely unfeasible to have governance votes to decide on all combinations of different tokens/projects that want their pools to be added to LM.

Why are Ballers deciding liquidity mining?

Given we need a practical/feasible way of discussing/defining LM pools every week, the best group of people the community could think of was the Ballers. They naturally emerged as active community members who are IMO out best bet to forming this committee. BTW, the fact that LM is discussed weekly does NOT mean pools may have only 1 week of LM, more on this concern below.

What is Fire-eyes involvement with Balancer?

To address @zumzum’s concerns: first of all none of the Fire-eyes members are Ballers, so I don’t see any conflict of interest here. Second, these guys have participated in the community of many other projects and are giving us lots of great insights and ideas from around DeFi. I’m sure our community wouldn’t be half as vibrant and engaged without their support in the last 6 or so months. Disclosure: Balancer Labs gave them a grant for this support, which I’m absolutely convinced was worth it.

Regarding the 3 main concerns that I think @stolos1 nailed really well here are my takes:

#1) reducing the incentive to reinvest weekly rewards into BAL pools, combined with high weekly inflation will create constant sell pressure on the BAL token.

There is no right answer to how much of the liquidity mining should go to BAL liquidity. If 100% of it goes to BAL we are not getting additional participants to hold BAL and probably won’t have much liquidity for any pairs that don’t include BAL, to me this is a recipe for failure: Balancer has always aimed at plurality and inclusiveness. Distributing more BAL to current BAL holders is not the way to go.

On the other hand I agree that having a staking boost for BAL has many positive effects such as incentivizing engagement and holding of BAL, which in turn reduces sell pressure, increasing the incentive for non BAL liquidity to be on Balancer thanks to a higher price of $BAL.

What’s the right trade-off? I don’t know, all I know is that we should not change things drastically, so I’d be in favor (in line with @Andrea81 and @zumzum) of us starting V2 at similar APY levels as V1 and then discuss going down slowly as we gather more information about V2 when it’s live. Lots of things are changing so we should IMO not change this now.

#2) allowing Ballers a little too much control, which may be biased by personal holdings / limited visibility and input into critical decisions on strategic projects (especially Tier 1 and Tier 2)

There is no perfect solution for this problem and having a committee surely creates risks of bribery, collusion and cheating. However, I don’t think this will happen because I trust in the good will of Ballers but most importantly, because it will be crystal-clear to the community if a shit token that otherwise would have no reason to join our LM gets added. If this happens there will certainly be a vote to replace Ballers (or only those who colluded). I think this in and of itself will be a strong deterrent against misbehavior already. Another two points that make misbehavior harder to materialize:

  • There will be independent parties participating in these meetings like Gauntlet, Dan Elizter, Cooper and others to be invited.
  • There will be public meeting notes by Ballers with the reasoning behind their weekly decisions regarding LM pools. It will be easy to spot empty justifications for shit coins that might try to bribe their way into LM.

#3) frequency of potential changes which causes lack of visibility and predictability for LPs (especially Tier 1 and Tier 2)

This is an important topic that I touched upon above that needs clarity. The fact that there will be weekly meetings DOES NOT mean that there won’t be visibility and predictability in LM rotation. I propose that pools CANNOT stay less than 4 weeks in liquidity mining if they are elected to be part of it. I agree it would be a lack of respect with stakers that paid high transaction costs to stake only to find out that their pool will only be getting LM for a week. This should not happen.
However, we STILL need weekly meetings because the moments when pools are completing 4 weeks are going to be all over the place with the large number of slots we will have. Likely every week the Ballers will be faced with decisions of replacing a pool that is older than 4 weeks or extending its slot because of the great volume and visibility it had (or for whatever other compelling reasons). To summarize, meetings have to take place weekly, but pools should have at least 4 weeks of duration (@0xLucas I think we need to add this to the proposal somewhere).

Summary

No solution for managing LM in V2 will be perfect, but after having thought of many options, the community has seemed to converge onto this proposal. The worst scenario IMO would be analysis paralysis and us not doing anything.
Will we make mistakes and have issues? We probably will, but I’m sure we’ll collectively learn from them and address them very quickly. That’s the only way we can move forward.

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The new schedule would abolish most small-cap pools and centralize the system big time. I don’t like that at all. The current system works perfectly. This proposal would kill the project.

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I understand your concern and also share it @icinsight, there are two main points however that led me to believe this new system would be better:

  • Balancer V2 will enable trades as cheap if not cheaper than Uniswap (if you use internal balances in the vault for example it will be A LOT cheaper, this will likely be a huge advantage for arbers/bots). So teams and LPs will be naturally incentivized to use Balancer V2, even without BAL incentives. Notice today no Uniswap V2 pools are incentivized and there is a lot of liquidity there (I know cheap gas costs is just one factor, but it’s IMO the most important one).
  • The current liquidity mining program is very inclusive which is great and in line with our values. But this comes at a cost: it’s extremely complex (this makes integrations very hard) and it’s also too centralized (depends on Balancer Labs running off-chain scripts and manually seeding a claim contract every week). The new proposal is a big step forward turning every thing more automated and trustless.

I hope that addresses your concerns and happy to discuss further if you have other thoughts!

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Would it be possible to have these meetings recorded for the larger baller community to observe the conversations? I for one would find it much more easy to understand the rationale for the decisions of the working group using this method to compliment any notes that are distributed afterwards.

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The key term is “very inclusive now.” That is good for progressive new projects who can now build on Balancer. The new system would be controlled by a small group of decision makers and only a handful of assets would be included, and no guarantee of continuity. That will change the whole project into something else.

There will be new platforms other than Balancer that will be more inclusive, so Balancer will take its course, and markets decide if that was the right one or not.

I understand the technical rationale, but I wonder if that is actually an excuse to make the project more exclusive and controlled. I am not against streamlining (i.e. one BAL/WETH pool instead of ten slightly different) though, as the proposal goes for Tier 1 and 2.

My counter proposal: Leave Tier 3 to small projects and assets without a cap of 14 in total, that would alleviate my concerns 100%. Consolidate strategic mainstream pools as suggested for Tier 1 and 2.

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I will add that ~80% of my ALL assets are now pooled in Balancer, so I have skin in the game.

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Thanks @icinsight, I also thought of the option of having a flexible number of slots, especially for the last tier. The problem with that is that then we would have to either:

  • change the total amount of BAL distributed every week (which to me is a no-go as the project needs predictability on the inflation)
  • change the amount of BAL for the higher tiers (which is also not good IMO as the stakers there need some predictabiity)
  • change the amount of BAL for the Tier 3 slots: this could unpredictably dilute the amount of BAL that all pools in Tier 3 would get, which in my opinion is also bad as we need consistency and predictability also for the pools in Tier 3.

I think giving a chance for projects/protocols to show their worth during 4 weeks of Tier 3 is a great compromise. If they are performing in terms of volume, number of unique users and other important metrics then they will be kept among the pools included in Tier 3.

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Well, that is one compromise. Dividing 2500 by 14 or some other number should not be an issue. I agree that 2500 is low, but it is better than zero for the majority of the small projects. Monitoring users and volume is a fair requirement for an ongoing inclusion.

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I think this is something we could consider, but I fear this could expose individual Ballers that position themselves against projects/pools. We all know how mean these crypto armies can be.

By having a decision + rationale owned by the whole group it’s much harder for specific Ballers to be singled out for pressure/blackmailing. Happy to discuss this further though.

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Glad to see discussions around this pick up!

I don’t think we should move in that direction. A four-weeks commitment is too long - it reduces the flexibility of the program and I’m afraid it will hurt our ability to accomplish Goal #3 from Mike’s excellent post kicking-off the V2 Liquidity Mining brainstorm:

I understand the concern and appreciate the care for small liquidity providers, but I would rather not sacrifice the LM program’s flexibility for this. Eventually this will probably be addressed by solutions built on top of the staking contracts - eg something that aggregates BPT before staking.

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Maybe 4 weeks is a bit too much, but I still think being able to add a pool to LM and then removing it after just 1 week would not be right with the stakers and token project added. This should maybe still be an option but IMO only in extreme cases (for example something fraudulent with that token/project was found). The agility Mike talks about can still be reached by adding new pools every week, it’s just necessary for Ballers to plan accordingly so they always have some slots that can be freed at any given week (i.e. at least one pool has already completed the minimum duration).

Curious what @mike thinks would be a good compromise in terms of minimum duration of a pool receiving LM.

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Some great discussion going on here, lots of good thoughts from everyone.

I agree on a number of things, namely:

  1. I it’s important that BAL pool APY’s remain solid, and greater than the majority of other pairs. Either that, or we need to think of some other kind of staking mechanism (e.g. a dBAL token which is the token eligible for a share of protocol “dividend” fees/other benefit which requires some kind of lock-up, although we’ve not voted in such fees yet) to ensure that V2’s launch isn’t accompanied by a sell-off, which wouldn’t reflect on the launch well.

  2. I think it’s right to have a way to add BAL rewards to particular high priority pools that are essential for ensuring a good trading experience, as suggested in the current plan. Same goes for being able to nimbly respond to new projects and attract users when particular tokens are “hot”.

  3. I share the concerns of those worried about “small asset” pools that will in effect lose their APYs as a result of this new program. I’m concerned that the new program optimises a bit too heavily towards traders rather than LPs. The thing that attracted me to Balancer initially was that I could pool any combination of tokens I wanted and then also earn BAL + fees for doing it. I get the impression that this is the same for a fair few LPs and I worry that losing this could make a usecase that attracted a lot of early users (who then went on to do other things with the protocol too) unprofitable.

I understand the argument that pools should be sustainable just based on fees, but IMO shorter term there is merit in attracting broader longtail liquidity, especially if we want to make the Balancer exchange a default destination people consider for all trades, like Uniswap currently enjoys. I think it’s worth emphasising that the reason lots of these pools are profitable on Uniswap is because it’s already this destination, which Balancer won’t immediately be.

  1. There’s definitely a trade-off around changing incentives too quickly pool-to-pool in the third tier. I’m not sure what’s best here, but I expect a compromise can be found in the 2-4 week minimum range.

  2. I’m a Baller myself so won’t get involved in discussing the committee idea too much in terms of for/against. I think a committee has pros e.g. it’s good in that it means decisions can be made quickly. Although it will be important that the process is seen as transparent, and absent of bad actors. All I will say is that Ballers to date were nominated for contributions to the community long before anything like this was proposed, and I have a lot of trust in everyone in the group currently to do right by Balancer.

Given the rewards are public in their very nature, there is also public accountability for all decisions the committee makes: if dodgy projects make it into rewards with flimsy justifications, it will be easy for the wider community to be able to tell. Where the larger risk for potential influence occurs is choosing between legitimate projects where it might be more like a coinflip what to include/not, although such a decision would at least be less significant in terms of its impact than scams etc, even in a worst case scenario where something bad happened. I think this is something to continue thinking about.

  1. I’d be very pro the idea of merging the two liquidity programs somehow, so e.g. half of BAL rewards being distributed as per the current system (perhaps removing balFactor), and the other half being prioritised as a “boost” for specific priority pools (which include a couple of BAL containing pools).

While I understand the desire to decentralise and also reduce the workload associated with this, this would reduce the risk of quickly losing the longtail of tokens that Balancer is currently quite strong for. It would also offer an opportunity to migrate fully to the new system at a later date (or otherwise transition slowly) in a lower risk way, after we’ve fully learned the pros/cons of the new program, which I’m sure won’t become fully evident until we see it running live.

I’d see this as a short term idea rather than long term solution, that at the very least ensures people can migrate their v1 pools to v2 and earn rewards like they’re used to being able to, and see the benefits of v2 before BAL rewards for the majority of pools aren’t incentivised. I worry that without an initial incentive like this in place that lots of people will just abandon their V1 pools and not migrate their liquidity.

It may even be worth thinking about delaying this “new” incentive program until after V2 is fully up-and-running, with the current reward system migrating like-for-like to V2 to get everyone to migrate their pools over, then transitioning towards this by slowly reducing the old style rewards & ramping up the new program in a way that reduces the risk of capital flight.

Anyway just my couple of cents. Very excited for V2 and the protocol being able to prioritise pool rewards better, will help in lots of ways I think.

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I fully support @bakamoto20 general comments and proposal to wait until V2 is launched and then slowly migrate to different reward programs. There are just too many moving parts at the moment.

And to clarify: I have nothing against the proposed list of ballers per se, but just general considerations on how misbehaviour can be prevented in the best interest of the project.

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I would like to speak on behalf of the smooth-brain-first-crypto-cycle investors like myself, because there are more of us then there are of you and you will need us to scale balancer further.

It took me close to a year of working with defi to finally latch on to balancer, so right off the bat you have a barrier to entry because the protocol is slightly more complex than other AMMs. And that’s not a bad thing! Balancer stands out, you have to dig a little deeper, not much, but for smooth brains it is a fair bit more than say uniswap. The reason I jumped onboard and invested a hefty amount of my holdings into eth/bal and btc/bal pools was absolutely 100% based on ROI. I like balancer, it’s different, slightly more exclusive, and it gives GREAT rewards.

If you reduce this reward incentive make no mistake about it, we the smooth brains do not care about the brilliance, the engineering, the tech. We will go elsewhere.

I just felt it needed to be said, cutting through the loftier ideas in the chat.

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First off, let me fully put my humble weight behind this suggestion.

Next, I feel the need to ad some points on my own.

There seems to be a huge consensus around the idea that we need to incentivise LPs with rewards. Returns are made out of rewards plus fees, and so the consensus implies that Balancer is incapable of generating enough fees to attract LPs. I disagree with this notion. More focus could be put on attracting volume and reducing other risks for LPs. Paying LPs for participation is not a sustainable model. Using scarce resources like BAL to invest in unsustainable advantages is not good practice.

As I feel alone in the above sentiment, I don’t expect the community to agree and so given that we have to incentivise LPs, I strongly believe they should support a broad and diverse base of tokens - as this plays into the unique properties of Balancer. Incentivising a few pools centered around a few core tokens feels to me like a “we also want to be Uniswap” strategy, which again, is not good practice. Embrace what makes Balancer unique, do not use BAL rewards to undermine it.

Why are we not considering incentivising tokens instead? As I understand V2, the notion of “pools” is less of a fact, and more of a concept and so this could easily be reflected in rewards too. Whitelisted tokens (and I do believe some QA is warranted for tokens to be eligible) could share the reward pool and be capped for rewards at some sensible level derived from trading efficiency. This also allows for special treatment of BAL, who could be the only token in the superior tier. This doesn’t really require the ballers to do anything but white- and blacklisting tokens, but it would make for a much more organic and natural ecosystem.

Balancers strengths are in flexibility and diversity. We should make that efficient and safe (those are two very different vectors), as this will sustain an ecosystem that is responsive to signals in the market and also attractive to a significant number of LPs, aggregators, arbs and end users. I think lower eth fees is a big win and a major contributor to increased volume. In addition, parts of those saved tx costs can clearly be captured as fees as well.

Let’s be a bit smarter about this than just providing more BAL for BAL holders. I get that it feels good, but seriously. It’s bad practice.

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I think that on a long term basis everyone agrees, but in the short term the liquidity mining rewards doubtlessly attract LPs, which is essential for being able to facilitate larger trades and compete on volume with other DEXs.

My understanding is that the intention isn’t to run rewards forever, but to get Balancer to a stage where it’s the primary source of programmable liquidity on ethereum, so that trading fees alone make pools profitable. Rewards will be voted out by governance when they’re deemed no longer necessary.

It’s the old two-sided network problem: you need trading volume to attract LPs, and LPs to attract trading volume. Rewards short-circuit building one side of the network by offering APY to LPs in the short term, so that Balancer can grow to a critical mass where they’re no longer necessary.

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I strongly agree with these two ideas.

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Another thought here in regards to distributing BAL rewards is to slowly lower the amount of rewards given to major pool receivers in relation to the price performance of BAL token. A flat percentage APY could be maintained, ideally, rather than a flat rate of BAL distributed. This would be very fair and allow for further BAL distribution to other pools without making V1 long term BPT holders suffer. And for now we really ought to keep the whales right where they’re at. They’ve taken the most risk to be here and they provide the most liquidity to the platform.

P.S. - As a smooth brain speaker I am awed by everyone here. I apologize in advance if I missed someone’s thoughts that may have already addressed this idea.

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“You” in this post refers to “all of you guys who seems to disagree with me”, not focused on @bakamoto20 in particular :wink:

You think we need to incentivise LPs to come around. I think you are right for a lot of liquidity, but I’m, not convinced;

  • we know what share of liquidity depends on rewards, what share of liquidity is removed if we cut rewards in half?
  • we know how much liquidity is considered critical mass
  • that the proposed incentive system takes either of the two preceding points into account

You think the best way to deploy incentives it to focus them on select pairs or tokens, I think if we have to use rewards they should be much broader distributed in support of the whole ecosystem. If we focus on select pairs for deeper liquidity, we are trying to become more like Uniswap. If we go the other way, we become more “Balancer”. I am very much of the opinion that providing liquidity to a lot (no, a LOT) of tokens is the right way to go for balancer (yes, just opinion, not data)

Based on the suggested rewards structure, You think that the more liquidity the better - for the select pairs or tokens.

  • I have not seen any data driven opinion about the marginal usefulness of added liquidity. There very likely is a right answer to this, but “as much as possible” is not it.
  • when we incentivise more liquidity on the platform than it can use in a valuable way, we take down the rewards for the existing liquidity. That is, we introduce inefficiencies in the economic model that we then have to compensate for by providing rewards. And we do this without knowing the answer to the previous bullet!

Finally, on BAL. It is clearly of high value to the project and should be used accordingly. When we release more BAL we also dilute the future value, whatever it may be. This dilution, the risk many talk about, would be far less if we stopped giving it out in the reckless way we now do. Again, ceasing the practice, would remove or reduce the need for it. Granted, BAL needs to have utility beyond accumulating intrest in it’s own currency and platform governance - but that’s true anyway. To me, Stacks seems to be on to a very interesting idea. Stakers are paid not in STX, but in BTC. This removes the inflationary pressure and turns STX into cashflow instrument.

I don’t have the time, tools or data available to do the calculations to find out what options we have and the best decisions we can do on them, but I do not see traces of a lot of data in the proposal and above comments, and that’s … bad practice.