[Proposal] Staking of BPT for Economic and Governance Benefits

Summary

LongHash Ventures proposes a program for BAL/WETH LP token (“BPT” throughout this proposal) holders to stake their BPT for different periods of time in order to get economic benefits, such as boosting their Liquidity Mining rewards, and governance benefits, such as having the ability to vote on proposals. This staking feature is beneficial for the Balancer protocol as it rewards BAL holders who take a long-term view through staking of their BPT, while still ensuring BAL is not sitting idly staked but within a BAL pool.

For the purpose of focusing on the staking and governance mechanisms, this document will only propose staking of BPT from the BAL/WETH pool. In the future, proposals can be made to include BPTs from other BAL pools. Additionally, this proposal will only propose staking on L1. Staking on L2s such as Polygon should be addressed in a separate proposal.

Background

LongHash Ventures is a Web 3 investment fund and accelerator actively collaborating with founders to navigate the crypto landscape in Asia and build their Web 3 model. In January 2021, we launched a DeFi-focused fund and invested in projects such as Balancer. We also invited Balancer to join our Asia DeFi Network initiative, as part of which we worked together with Balancer Labs over the course of 12 weeks through our venture building program to support them with the development of a decentralized governance model, liquidity mining for Balancer V2, and community building in China. We wrote this proposal as a follow on to the work we did on governance as a natural first step and enabler towards a decentralized governance model.

This proposal builds on the forum discussion “[RFC] Staking of BAL for Economic and Governance Benefits” that can be found here: [RFC] Staking of BAL for Economic and Governance Benefits - #12 by StefanoBury_LongHash for which we got very valuable feedback and input to help shape this proposal from @DavisRamsey, @Andrea81, @bakamoto20, @Fernando, @Greg, @felix_macht, @iyvy, and @delitzer, whom we would like to thank for their contributions.

Governance token staking has been adopted by DeFi protocols, such as Uniswap and Curve. It is a way to provide an incentive mechanism for token holders to actively participate in the governance of the protocol. It is also beneficial for the protocol as it rewards BAL holders that take a long-term view, and incentivizes them to actively participate in the governance and future development of the protocol.

As the governance of Balancer begins to shift from Balancer Labs to a more decentralized model that is led by the community, staking of BPT from the BAL/WETH pool can act as a mechanism to incentivize token holders to actively participate in the governance of the protocol.

We have taken inspiration from the staking model of Curve, Idle Finance, and Pickle Finance for this proposal.

Proposal

We propose a staking program and mechanism for the BPT of the BAL/WETH pool to have economic and governance benefits, as part of a broader effort to formalize the decentralized governance framework that will govern the Balancer protocol.

Economic benefits of staking BPT

Boosting of BAL rewards for Liquidity Mining

In Balancer V2, Liquidity Providers can earn BAL tokens from the liquidity provided into specific pools eligible, based on their proportional share of liquidity of those pools.

Liquidity Providers could stake BPT from the BAL/WETH pool to boost their Liquidity Mining rewards, based on the period of time the tokens are staked for. For example, Liquidity Mining rewards could be boosted by X (multiplier) if BPT tokens are staked for Y (time period). Note that this staking mechanism does not change or impact the amount of weekly BAL allocated to the pool, but rather changes the proportion of the allocation of those BAL rewards to the LPs depending on their share of the pool and whether they have staked their BPT and the duration of staking.

Governance benefits of staking BPT

Voting on proposals

As Balancer embarks on a journey towards decentralization of how the protocol is run, a key enabler of this will be for the ability of BPT holders to vote on proposals. Staking of BPT would allow addresses that staked to vote on Balancer protocol governance proposals as long as the BPT remains staked/locked.

Features of BPT staking

BPT token holders would have the option to stake their BPT into a smart contract and lock it in for a period of between 1 month and up to 4 years, in monthly increments, e.g. 1 month, 2 months, …, and 48 months. The UI/UX would be intuitive for less experienced users, for example with a “slider” feature with monthly increments, from 1 month to 48 months, that can also show the LP what the rewards booster is for each lock up period.

In return, BPT token holders who stake their BPT receive vBPT, a token that enables them to claim economic and governance benefits outlined above. Those who stake BPT would receive vBPT on a 1:1 basis regardless of the locking period. The boost to liquidity mining rewards depending on the locking period is outlined in the table below:

BPT staking locking period Boost to liquidity mining rewards
1 month Up to 0.05x boost
2 months Up to 0.1x boost
1 year Up to 0.6x boost
2 years Up to 1.2x boost
3 years Up to 1.8x boost
4 years Up to 2.4x boost

Note that BPT holders who stake their BPT will not be able to withdraw BAL from the BAL/WETH pool for the staking period of BPT, e.g. if a BPT holder stakes BPT for 12 months, they will not be able to withdraw BAL or WETH from the BAL/WETH pool for 12 months. However, BPT holders who stake their BPT have the option to unstake their BPT tokens for a 50% penalty, i.e. they will only receive back half of their BPT tokens and in turn they will only be able to claim back half of their liquidity provided into the BAL/WETH pool.

The formula for rewards boosting would work, conceptually, as follows:

[LP’s share of pool] x [Multiplier] / [Sumproduct of LP’s share of pool and multiplier] = [Share of BAL rewards]

Simple example:

LP Share of pool Staking Duration Boost Boost x share Share of rewards
LP A 30% No N/A 1 0.3 17%
LP B 20% Yes 4 years 3.4 0.7 39%
LP C 50% Yes 1 year 1.6 0.8 46%

Conclusion

This proposal for a staking mechanism to give economic and governance benefits to BAL holders can be a benefit for Balancer on two fronts:

  • It provides a rewards mechanism for BAL holders who take the long-term view
  • It is a starting point for Balancer to shift to a decentralized governance model

We think it is best to start with the features outlined above for the staking mechanism. In the future, additional features or modifications / scope can be proposed and added to it, such as:

  • Staking BPT from BAL pools other than BAL/WETH
  • Distribution of protocol fees to vBPT holders
  • Vote boosting feature to provide additional voting power to BPT holders who stake for longer periods of time
  • Staking mechanism for L2s

Voting

Voting will be up on Snapshot shortly (@rabmarut please help us to put up on Snapshot) and will be open to all BAL and BPT token holders. We will have three options for the vote:

  1. Implement staking of BPT from BAL/WETH pool as articulated in this proposal
  2. Implement a different version of staking of BPT (go back to the drawing board)
  3. Do not implement staking of BPT
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Also would like to thank @neo-renaissance, @icinsight, and @TangFeng who contributed to the discussion (the Forum limited the number of people I could tag in one post).

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Now that the Fire Eyes proposal was approved and their team wanted to help with tokenomics, I would love to hear a more structured feedback on this proposal by @Coopahtroopa, @0xLucas, @James and @Callum. I think we should vote this soon as there seems to be a lot of support in favor of it, I’m just worried about getting all the details right so we don’t need to vote again and again on it.

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Something I may have misunderstood from here (and perhaps I still am) is whether this applies to all pools? My vision was that if you stake 80/20 BAL/WETH for e.g. 4 years, you’d then get a boost on all pools you’re in. The more you stake, the more of your liquidity in $ across all your pools qualifies for a boost.

In effect, it means that LPs end up having to stake BAL/WETH to earn maximum APYs on their other pools. Does this make sense?

Reading this to me it seems a bit different, as if the boost only applies for the BAL/WETH pool?

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Something I may have misunderstood from here (and perhaps I still am) is whether this applies to all pools? My vision was that if you stake 80/20 BAL/WETH for e.g. 4 years, you’d then get a boost on all pools you’re in. The more you stake, the more of your liquidity in $ across all your pools qualifies for a boost.
In effect, it means that LPs end up having to stake BAL/WETH to earn maximum APYs on their other pools. Does this make sense?
Reading this to me it seems a bit different, as if the boost only applies for the BAL/WETH pool?

Yeah, the idea is that this proposal would first apply to BAL/WETH pool’s BPT as a starting point, and future proposals can propose to extend the staking mechanism to other pools.

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Thanks @Fernando for the suggestion. Happy to hear what the folks from Fire Eyes think of the proposal above @Coopahtroopa @0xLucas @James and @Callum . Also good if you read through the RFC discussion for additional context and to read the input from all the community members that participated in the discussion.

My suggestion would be once we hear from Fire Eyes, we can make any final tweaks (although in my view the proposal is fairly straightforward, since a lot of additional features we have chosen to leave for future proposals), then let’s put this up for voting on Snapshot to get the mandate to work out the technical details of the proposal.

WDYT?

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Question, what happens to the BPT the holder is not able to claim, does it stay in the pool for 12 months and then is burned at the end? or does it get burned straight away upon withdraw? Also, the other half of the BAL they submitted to the BAL/WETH pool, is that locked up forever?

When the locking period ends for staked BPT, the boost is no longer there but the BPT tokens will continue to earn liquidity mining rewards at the normal rate of unboosted bal/weth BPT. At least thats my understanding of it.

In regards to the second part of your question, I am also curious where the 50% penalty would go. Based on the proposal I think it would make sense for the fee to get distributed amongst vBPT holders. @StefanoBury_LongHash Can you confirm this?

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Unless you re-locked for another 12 month or whatever time period, correct?

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Yes. Once it’s unlocked you can do whatever you want with it–be it relocking it or withdrawing out of the pool completely.

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repost of a conversation started on the Discord, as Mike suggested, adding it here

If we figure the people we want staking are those who think BAL would far outperform, ETH/WETH, then we are bringing about an adverse selection problem : only people whose predicted performance of BAL vs. WETH is less than the rewards rate will enter into the pool [maybe you need to add a value for enhanced governance]

To keep the math simple, let’s assume

  • four year term
  • x = rewards rate inclusive of lockup bonus plus any trading fees
  • 50:50 pool (though I suppose the same logic applies if it were 20:80
  • BAL = 1 ETH today
  • e = difference in performance between ETH and BAL with the rewards rate

In four years, 1 BAL = (1+x+e)^4

If e>0, I lose by puttin git into the WETH:BAL pool. For every unit of BAL in the liquidity pool I would get in ETH units
(1+x)^4 [eth side] + (1+x+e)^4 [BAL side]
while if I’d just kept it all in BAL I would get 2 * (1+x+e)^4

So if I’m most optimistic about BAL’s prospects and think it would outperform ETH by more than the reward rate, I have an incentive to not to put it in the liquidity pool and instead to lend it out on AAVE or just keep it in my wallet.

If there were an IL protection built into the staking, that would mitigate that adverse selection (i.e. the most bullish people stay out of the pool).

What does everyone think about building in some IL protection into the pool: lower base rewards rate but with a top-up if BAL outperforms WETH. It could be hard to implement unless we have fixed observation datetimes for all expiries (e.g. all expiries are on the first of the month at noon UTC regardless of when in the month you enter). There might be other ways of doing this too. It might also make sense to keep this only for those who stake longer time periods (a year or more?).

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If i’m thinking about this correctly the LPs have already made conscious decision to deposit BAL. This proposal is to find an added use for the BPT LP token that would otherwise go idle. I think what you are trying to solution is on more of the fundamental side of the BAL/WETH pool. Specifically trying to build in some type of IL protection.

The other added benefit of providing claimed BAL to the BAL/WETH pool is to increase the liquidity for BAL trading. I haven’t done too much investigation of BAL/WETH pools on other platforms, but it would make sense for Balancer to be the premier liquidity pool for that combo.

Yes, but I tend to not put into these kinds of pools the tokens that I’m especially bullish on - unless the rewards exceed the potential growth rate of the tokens over the other assets. Maybe I’m thinking from my own experience where winners turned out to be mediocre and losers wound up dragging the other token down with it.

If we want people who are bullish on BAL to participate in governance and get rewards, we should create that kind of option for them where they don’t lose out.

Of course I say this not knowing the rates on offer which could exceed all our expectations.

They’re not decentralizing in the correct way. This way you’re limiting decentralization to just ppl that are lp pool therefore even smaller group and prob made up of mostly whales. When they should just have plain token holders get rights to vote. That’s equal decentralization instead of making ppl own a second asset and then risking IL. Plus using a smart contract to create LPS then a second contract to lock LPS multiplying exploit risks. Not to mention you’re going to hurt the little guys that have pay gas fees twice to use both contracts. Then you double your chances of exploits from using 2 said contracts.
Also the penalty shouldn’t be 50% loss of LP tokens. Sometimes emergencies happen and even the most devote believers may need the funds. The penalty should be derived from the rewards. The bonus rewards from the boost should remained locked until staking time ends. You withdraw early you lose the boosted rewards. Not to mention there’s no mention of what happens to missing 50% of liquidity rewards.
Thirdly you have multiple chains that balancer uses so you need LP providers on each chain to to have voting rights as well in this system or you’re just centralizing more.
Lastly making someone purchase an external token like eth to give them rights isn’t proper decentralization
nor does it make sense. Capital is a limited resource and splitting it up into 80% eth 20% balancer just to get voting rights is difficult for some ppl.
I understand that you want to reward ppl that support the project but it’s far simpler and fairer solution to have ppl lock BAL tokens to get voting rights instead making ppl own another token to do so.
And there’s plenty of liquidity already for Bal eth pool.
If anything you should make it balancer stable token lp

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I tottally agree with this

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I tend to agree with these point the most. I think BAL should be used for the locking mechanism since it is the incentive token for the platform and already utilized by the other pools. You also don’t need to come up with a future solution on how to implement the BAL/WETH functionality across all the other pools. Also, this proposal does seem to be forcing people into being exposed to ETH where they may not want to be.

Now I can’t speak to the point on the BAL/WETH liquidity and what would happen to that (if anything) if BAL locking was created, but I do wonder if added liquidity outweighs some of the other priorities of the platform and/or this locking initiative. I do think a vBAL token may make more sense. I had made some points on another thread about the benefits of decreasing BAL in circulation.

This is my personal opinion; it is not necessarily the opinion of Balancer Labs.

I agree with @JayHay and @lauro in that I think a 50% loss of LP tokens is pretty outrageous. I’m fine with some penalty, but that’s extreme.

I think more reasonable would be a total loss of bonus and some other smaller penalty. It should also have some time dependence. If you say you’re going to lock for 4 years and take it out after 3y6mo, you have still provided a substantial locking period. The penalty for that should be far far less than locking for 4 years and leaving after 1 month.

If there were to be some BPT % that an early-withdrawer does not get to keep, I’d propose it goes to the Balancer Treasury.

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My concern with this is that people just unlock during periods where e.g. BAL price is lower, if it’s very easy to unlock and all that is lost is the bonus then it defeats the purpose of having a locking mechanism.

The less like an “unbreakable” locking period, the less the mechanism facilitates alignment.

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Sure I’m not saying let them get away with no penalty, just that 50% seems very high to me.

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Great discussions all around!

We had some time to chat with @StefanoBury_LongHash and the rest of the team from Longhash on the proposal earlier today. From our perspective, the main concern is around the 50% penalty for withdrawals. We all agreed that this feels pretty harsh on the surface. After discussions, we came to some conclusions on how to optimize for this:

  1. Implement a 7 day cooldown period for those looking to unstake. Users will have the ability to withdraw their BPT stake at any point following the 7 day window (unlike Aave which automatically restakes if you don’t withdraw on the 7th day).

  2. Shift the penalty to 50% of unclaimed BAL rewards rather than the total principal. This still provides a moderate disincentive to withdraw while not creating an overly harsh penalty for those looking to unstake. To start, we’re proposing that all penalty fees will accrue to the community treasury. In the future, if the protocol fee is turned on, the penalty fees can accrue to that pool to be redistributed back to BPT stakers.

With the above in mind, curious to hear everyone’s feedback on these two changes but generally, we felt like it was a happy medium based on the above responses.

All said and done, this proposal has been through a significant amount of discussion over the past 3 months.

Assuming core community members are happy with these changes, we’d be happy to champion this proposal to Snapshot for formal voting later this week (or next week if there are still ongoing discussions!)

:fire:_ :fire:

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