Introduce GovFactor, an on-chain voting incentive for Balancer Liquidity Providers.
_ (FireEyesDAO) has been actively working with the Balancer team over the past few months in an effort to develop a robust suite of governance mechanisms to complement the upcoming launch of Balancer V2.
One of the issues we concluded on: consistent voter participation has historically been an issue for many DeFi protocols. Whether it results in proposals not reaching quorum or only having a small number of participants involved, it’s become obvious that protocols must have meaningful voter participation across a diverse group of users.
The GovFactor proposal aims to create a simple incentive mechanism to actively participate in governance for users who already participate in the protocol.
As it stands, Balancer liquidity mining incentivizes passive participation. Liquidity Providers (LPs) simply deposit capital and earn BAL. Despite the significant subsidy LPs receive from the protocol, there’s no expectation or requirement that they actively participate in governance.
This ultimately represents a misalignment as LPs have no incentive to vote despite constantly accruing voting weight. If the suppliers are subsidized by the protocol with governance power, it’s important to ensure they also become active stewards of the protocol.
This does not mean that LPs MUST participate, but instead they should have an incentive to participate. Therefore, it may be worthwhile to incentivize those that service the protocol to help govern it as well, aligning their participation with added BAL from liquidity mining.
The GovFactor is an on-chain voting incentive for LPs that affects BAL liquidity mining allocations depending on whether or not an address voted on the last governance proposal.
A simple implementation for this factor is an “on/off” switch where LPs that voted on the most recent proposal by signing a transaction turn “on” the factor, moderately boosting their BAL liquidity rewards by a GovFactor determined via governance.
Providers that did not vote on the last proposal by signing a transaction have their GovFactor “off”, forfeiting the factor and in turn, receive lower LP rewards than those that voted on the last proposal. This dynamic will remain “off” until the next on-chain proposal is open for voting and ratified on-chain.
If all LPs vote, then the rewards remain the same as if no one votes.
The GovFactor’s “on/off” design creates a simple incentive for LPs to always be active in governance. While the exact numbers are to be discussed, a GovFactor = 1.1 - 1.25 should provide a fair boost to an LP’s BAL liquidity incentive in return for completing their basic duties as a steward of the protocol. To make calculations as simple as possible, GovFactor would be applied after all other factors.
GovFactor looks at addresses who have voted on the most recent proposal featured on Snapshot and references to see if the address is also providing liquidity to the protocol. If both variables are met, the protocol includes a factor to their weekly BAL liquidity mining allocation.
Regarding community concerns about doxxing, it’s important to note that this reference happens entirely on-chain, meaning there’s no need to cross-link any addresses to a forum or public username.
Ultimately, the GovFactor creates a unified incentive for those that service the protocol to become active governance participants as well and should be considered by the community as a simple mechanism for encouraging governance participation from the protocol’s service providers.
Some points to consider surrounding the GovFactor:
- The end result could be a lot of non-engaged voting, coming from LPs who don’t hold meaningful amounts of BAL (even if being large LPs) and who don’t really care about Balancer governance, putting little to no effort in the decision process behind their votes.
- The GovFactor encourages LPs to vote through their liquidity mining address, which could pose some issues for opsec conscious users. However, Snapshot now enables delegation from cold wallets which would mitigate this issue.
- The cadence between different governance proposals is likely to differ. This means that someone who votes on the last proposal preceding a large time gap to the next proposal may see increased liquidity rewards despite not actively participating in governance discussions.
- The state of Balancer Governance is relatively idle and therefore implementing a governance incentive isn’t currently necessary for the success of the protocol.
Poll 1: Consensus check on implementing a GovFactor as described above
- For: Implement a GovFactor for Liquidity Providers
- Against: Do not implement GovFactor and keep LM factors as it currently stands
Poll 2: Consensus check on GovFactor “on” weighting