Summary
Balancer’s DAO2DAO growth model is centrally focused on the development of a flourishing developer ecosystem integrating with the Balancer protocol and building applications on top of Balancer as a core piece of DeFi infrastructure.
The technical benefits of Balancer’s flexible design and the partner-first mentality of the Balancer community have attracted high-value projects that have invested in building innovative solutions using Balancer’s liquidity pools.
To further align the interests of the Balancer community with our ecosystem partners, and to further incentivize the growth of this ecosystem, we propose a model to standardize protocol revenue sharing for all liquidity pool creators.
This model would apply equally to all new pool types and be implemented primarily outside the pool, in a FeeSplitter contract that interacts with the ProtocolFeesCollector, so that the standard is enforced rather than opt-in .
Goals
In order of priority:
- Provide a frictionless rev share experience for developers building novel products on top of Balancer; e.g., yield-space AMMs (Element, Tempus, Sense), Forex markets (HaloDAO), ETFs (PowerPool, Indexed)
- Minimize governance overhead for the Balancer DAO; i.e., prefer automated solutions over human intervention
Solution
We prefer a completely permissionless model for sharing revenue with pool creators. That is, any type of pool, from any type of pool factory, can divert a share of its protocol fees to the pool’s “owner” or possibly another dedicated address. Sharing is enabled by default, meaning anyone can create a pool on Balancer and instantly become a partner who participates in the revenue sharing program.
This is made possible by developing a FeeSplitter contract that the Balancer DAO can authorize to withdraw from the ProtocolFeesCollector contract. It would be designed so that anyone can permissionlessly “poke” a given pool to have its collected protocol fees extracted and split in two directions: a share to the pool’s owner, and the remainder to the Balancer Treasury which is managed by the Balancer DAO.
We envision that the default rev share for a given pool would be something small like 10% of protocol fees collected, but that the Balancer DAO would be authorized to “boost” the rev share percentage for any pool or pool factory to a much higher value like 50%. The small default value enables us to stay true to Goal #2, whereas the “boost” capability allows for very high-value partners, such as those listed in Goal #1, to be rewarded for their hard work at the DAO’s discretion.
The most important assumption that makes this model work is that pools collect their protocol fees in the form of BPT. This change is already in the works for upcoming pool factories, but some pools will be too old to have utilized this mechanism and others may find it infeasible. Older pools with owners should simply migrate to the new format when it is available. In special cases where collecting fees as BPT may not be feasible - for example, if a pool contains derivative tokens with expiry dates - the Balancer DAO may opt to manually share revenue with these owners from the Balancer Treasury on a quarterly basis. Given that this operation adds significant overhead for the DAO, violating Goal #2, it will only be performed for “boosted” partners.
Potential Drawbacks
- Anyone can be a "partner.” This could be viewed as a benefit, but it also has the side effect that there is no clear distinction between a degen pool creator and the designer of a brand new AMM who poured a year of effort into development. Both are equally rewarded proportional to the protocol fees they drive. This is mitigated by the “boost” capability which allows the Balancer DAO to single out high-value partnerships.
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Liquidity fragmentation. Sharing revenue with pool creators incentivizes pool creation. This could potentially lead to competition among creators resulting in many similar pools being constructed with different owners. But there are a few reasons that this is less of an issue on V2 than V1:
- The Balancer Vault used in V2 greatly reduces gas costs for multi-pool trades.
- Given appreciation in the price of ETH and increased network congestion, the gas cost of pool creation is now quite high, on the order of thousands of dollars.
- The V2 liquidity mining program directs incentives to individual pools rather than applying globally to all liquidity as in V1. Schelling points will naturally arise from pools favored by LM.
Benefits
- Align incentives between the protocol and its partners. Because shared revenue is proportional to protocol fees collected, incentives are perfectly aligned between the protocol and partners: the more revenue the protocol makes, so too does the partner. This also has a desirable side effect, which is that only pools truly adding value to the protocol will benefit from revenue sharing. This should assuage fears of a “low-effort” cash grab attempt being treated as a partnership; it will only find success if it generates revenue for the protocol.
- Offset pool creation gas costs. Balancer has never attempted to reimburse the expense (thousands of dollars) of pool creation. Historically, creation has been an expensive process that can only become profitable if the creator’s own liquidity earns substantial revenue during its lifetime. This means that pool creation has only been profitable for very large players. If, instead, pool creators are rewarded independently of their own liquidity, then pool creation becomes more enticing to smaller players with creative ideas and moderate risk tolerance.
- Incentivize new markets on Balancer. Pool creation incentives should lead to a race to establish Schelling points for given trading pairs on Balancer. Creators are rewarded for being the first to spin up a market for token X, which naturally attracts a greater variety of long-tail tokens to the platform.
- Incentivize profitable investment vehicles on Balancer. Similarly, pool creators would now be incentivized to create the “best” possible pools for LPs. Whoever arrives at the most profitable pool architecture for a given set of tokens will be well rewarded. In a way, this is similar to how Yearn incentivizes the creation of strategies on its platform; a liquidity pool, from an LP’s perspective, is a profit maximization “strategy.”
- Incentivize more active pool management. If rev share is paid to pool owners, who often have authority to modify pool parameters like swap fees and amplification coefficients, then this model incentivizes those owners to be more active in optimizing revenue flow through their pools. They should be constantly trying to maximize protocol fees generated by their pools, acting in a similar capacity to Gauntlet.
- Outsource marketing to pool creators. Anyone who stands to benefit from a given pool becoming more liquid has an implicit incentive to attract as many LPs as possible to that pool. Pool creators will be naturally inclined to spread the word about their pools and draw more attention to the Balancer protocol.
Future Improvements
The items below have been casually discussed to differing extents. Pending further discussion, some may be proposed as subsequent additions to the model.
- Some form of veBAL staking/voting may be utilized in order to decide the amount of the rev share between a min and max value, e.g., 10% and 50%. This would completely remove any requirement of DAO involvement in designating high-value partnerships.
- The Balancer DAO could maintain a blocklist of pool factories for which rev share should be disabled; for example, ManagedPools have their own manager fees that accrue to the owner, so it does not make sense to share additional protocol fees with the owner.
- Yes, let’s do it
- No, this is not the way
0 voters