TL;DR:
Due to Balancer being very inefficient in high fee environment I propose a complete change in BAL distribution that I think could result in 20-30 massive pools that would be the ONLY recipients of BAL. The list of eligible pools would be revised weekly by a BAL vote.
Background:
The high fees are the elephant in the room.
In such a high fee environment many Balancer’s cool features are IMO unsustainable. The ETH on chain fees are likely to keep going up over the coming years. Off the top of my head, trades with Balancer are several times more expensive than trades with Uniswap due to pool fragmentation. We are very poorly positioned to deal with high fees. By offering many pools we please LPs by allowing flexibility while we upset traders and arbers causing very high ETH fees.
Ultimately we need to migrate to layer 2 where we can enjoy all cool Balancer features, but this will likely not happen for many months.
Till then small traders will be reluctant to trade. Arbitragers only arbitrage big inefficiencies because arbing small inefficiencies is not profitable. Volumes will stay low. I see a lot of small pools with no txs in the last 24h.
Only big ballers can afford to trade on Balancer and we serve them with only a few big pools. I think we should focus on them being our target customers. I think that the way to compete for a large market share and prevent from becoming insignificant is to have a few massive pools offering low slippage without fragmentation.
I don’t think that we can compete with low volume Uniswap traders on small cap niche coins (unless we reduce fragmentation). I think the niche that we can fill is serving big traders.
By incentivising all pools on Balancer (currently >1200) we’ll keep incentivising an incredibly fragmented marketplace full of small caps, many of very poor quality. No matter how much we try, a rational actor will find it more reasonable to trade these small caps on Uniswap due to lower fees (on uniswap you trade with a single pool, not with a few).
I think that shifting rewards to 20-30 biggest pools will result in LPs merging into these big pools.
While equality for every coin and pool feels nice, so far it has resulted in massive Balancer locked in value generating rather unimpressive volumes. While Balancer being a new player is partly to blame, I view the current liquidity composition as irrational. I think the fragmented composition and overrepresentation in coins generating near 0 volumes is a burden that needs to be dealt with.
With BAL holders weekly updating a list of 20-30 pools, I think that rational voters would vote in the following pools:
|80% BAL 20% WETH|0.15%|$39,938,133.15
|60% MKR 40% WETH|0.20%|$24,723,466.86
|50% USDC 50% mUSD|0.05%|$19,046,096.37
|5% MTA 95% mUSD|0.10%|$15,200,520.9
|50% WETH 50% mUSD|0.10%|$12,686,975.19
|50% yUSD-SEP20 50% USDC|0.01%|$11,594,445.78
|80% UMA 20% WETH|0.30%|$9,641,329.88
|80% MTA 20% mUSD|0.10%|$8,400,185.51
|50% WBTC 50% WETH|0.40%|$6,361,504.68
|50% sETH 50% WETH|0.01%|$5,791,912.93
|85% PNK 15% WETH|0.30%|$5,842,276.49
|50% sUSD 50% USDC|0.02%|$5,653,591.81
|50% SRM 50% WETH|0.20%|$5,380,640.16
|50% REN 50% renBTC|1.00%|$4,355,498.63
|66.67% BAL 33.33% WETH|0.50%|$4,406,300.62
|50% BAT 50% WETH|0.20%|$2,895,509.04
|80% ANT 20% WETH|0.10%|$2,569,332.14
|50% LEND 50% WETH|0.15%|$2,396,251.65
|50% USDC 50% WETH|0.15%|$2,319,734.4
|65% BZRX 35% WETH|0.70%|$1,840,900.48
and maybe a few more
I think it’s reasonable to allow shareholders 2h to vote after the normal vote, so that they can outvote any suspicious behaviour as a safety valve.
In the future, BAL holders could negotiate creation of new pools between themselves before the vote. Ultimately some 3 and more coin pools would emerge - I’d see them as very capital efficient.
This proposal would not only help with the fee problem, but would be a solution to the current whitelisting problem.
It would respect the current high BAL ratio (staking) proposal.
Large pools will lure big traders due to low slippage. ETH gas cost of big arb trades is relatively much smaller than arbing with small arb trades. This would result in much more efficient arbitrage.
Uniswap has 254m liquidity and does 197m 24h volume
Balancer has 321m liquidity and does 51m 24h volume
While some of this is due to popularity of Uniswap, with onchain fees much higher than Uniswap fees, I’m worried that things may get worse.
What do you think?