[RFC] Closing Year 2 Funding Gap

[solarcurve]

Introduction

After BIP-1 was passed back in June Balancer DAO transitioned to a service provider (SP) model, where SP’s submit funding proposals to the Balancer ecosystem and voters decide whether to approve them. Now that some time has passed we can analyze the funding proposals we’ve gotten to extrapolate a reasonable forecast for DAO expenses. Similarly, we can analyze protocol revenues over the last six months to extrapolate a reasonable forecast for DAO income.

I’ve prepared this simple spreadsheet which shows this exercise. Based on the last two quarters, Balancer DAO has an annual income of $3M and an annual funding requirement of $5.6M. It is important to note this is an estimate - there are other minor sources of revenue (Ribbon BAL call selling vault, Fjord LBP rev share, etc) and it is possible SP’s like Orb might realize further cost savings in the next few months.

Taking into account current stables on hand in the Treasury and projecting the last six months out over the next year, we end Year 2 (end Q2 ‘24) at negative $68k. Applying a downside scenario of revenues declining 30% compared to Year 1 and we arrive at negative $1.4M. I believe it is prudent for the community to address the funding gap before approving Year 2 funding proposals. We should be very careful in approving funding proposals where even a baseline projection indicates we will be unable to fund them without some future action. I’d further argue we should comfortably be able to fund them in a downside scenario.

Possible Solutions

There are three high level actions the DAO could take to close this funding gap:

• Sell BAL for USDC
• Adjust the veBAL revenue split
• Further cut costs

Other more exotic solutions like taking on debt exist as well but won’t be discussed here. If there’s a desire for this path I encourage someone else in the ecosystem to present a proposal ASAP.

Sell BAL for USDC

The treasury holds 4.8M BAL or $26M at current prices. To cover a downside scenario of revenue going -30% year over year we’d need to sell ~280k BAL at $5.35, which is a little under 6% of BAL in the treasury. We might find DAO’s willing to do some or all of this (swap BAL for stables), if not there is the option of market selling through OTC desks.

It’s possible this would only be a temporary solution and additional selling in the future would be required if market conditions deteriorate further. However, there is a significant amount of locked BAL/WETH liquidity so the market impact from such sales will be minimal.

Once BAL leaves the treasury there is a good chance it will remain in circulating supply forever. We could implement a buyback program when the market recovers but it would be pretty painful to “sell low” then start “buying high”.

Adjust the veBAL revenue split

Balancer applies a 50% protocol fee to swaps and yield on Balancer Labs developed pools. Custom pool factories made by third parties do not necessarily pay these fees. At the inception of veBAL it was decided the DAO would get 25% of protocol revenue and veBAL holders the other 75%. This was not decided using any data driven analysis that I’m aware of.

Adjusting this split to 50/50 would lead to an ending stable balance of ~$1.7M in a downside scenario of revenues declining 30% in Year 2. There could be additional requirements applied such as requiring a proposal every six months that outlines the current financial picture so the community can make an informed decision on if the split should be adjusted.

Taking revenue from veBAL will hurt the value proposition of new capital entering the system. It will reduce confidence after the precedent is set that such an important parameter could be changed by voters at any time. However, veBAL’s claim on revenue is secondary to the power to direct emissions which I believe is the biggest value driver. The fact that veBAL’s revenue is worth far less than the emissions veBAL controls supports this.

I’d also argue most of Balancer’s revenue is in the future. We’re very early in Balancer’s life cycle. veBAL voters remain in full control of adjusting the revenue split, thus they retain full control on all of Balancer’s future revenue. The value proposition from having a claim on revenue would not change if the revenue split is adjusted.

Further cut costs

I believe Orb Collective deserves credit for the steps they’ve taken to reduce costs in response to concerns from the community. Jeremy outlines in this post cost saving measures taken across the org, while Meghan and the marketing team have completely foregone a Q1 marketing budget. Reducing costs remains a top concern across the entire ecosystem.

The community could insist on further cuts. I work closely with many members of Orb, OpCo, and Balancer Labs and I believe forcing deeper cuts (firing folks probably) would be a mistake. I’ve been critical of high spending or poor spending in the past and I believe actions taken over the last few months have addressed those concerns. We’re better positioned than ever to execute on the technical side given the additional staff on the integrations and front end teams. This is a competitive advantage we should take advantage of rather than sacrifice.

I fully support a discussion on cost cutting so don’t interpret the above as making any cost concerns irrelevant. Simply my view that this is not the solution to fully rely on.

Proposals

Proposal A

After assessing all of the above I believe the best course of action is adjusting the veBAL revenue split to 50% DAO, 50% veBAL. Initially I dismissed this because of the impact on veBAL’s value proposition, however the fact that the ability to direct emissions is unquestionably the main value of veBAL and veBAL remains in full control of adjusting the fee split means that the market impact of this change is likely to be muted. Conversely, sending the signal that we’re willing to market sell BAL at all time lows in the depths of a bear market would have a larger negative impact on market sentiment in my view. It all but guarantees future selling if market conditions fail to improve.

All veBAL holders would also be permanently diluted as BAL leaves the treasury with no clear plan/timeline on when or if a buyback plan would ever be implemented. I’d argue that we can support BAL’s market value better by limiting dilution as much as possible.

As part of the proposal to adjust the fee split I’d include a requirement that every six months a proposal must be presented about the fee split and voted on, otherwise it would automatically revert to the current 25% DAO, 75% veBAL.

In the downside scenario of -30% Year 2 revenue, a 50/50 fee split leads to an end Year 2 stable balance of $1.7M.

This is my preferred path after considering this issue for the last several months but I believe it’s important that the entire ecosystem has an opportunity to make their voice heard. Hopefully the data presented above provides all the information and context needed for community members to have an informed discussion. I’d like to set a soft target for having a finalized plan of action by the end of January (arguably we’ve already waited too long).

Proposal B

An alternative approach could see both options utilized.

• Sell 250k BAL to DAO’s for stables or OTC
• Adjust veBAL revenue split to 35% DAO / 65% veBAL

Assuming a $5 sell price, 250k BAL would add ~$1.25M to the treasury’s stable balance. In the downside scenario of revenue declining 30% in Year 2, adjusting the fee split to 35% DAO would lead to an end Year 2 stable balance of -$158k. Adding the additional stables from the BAL sale, we get an end Year 2 stable balance of ~$1.1M.

Conclusion

Thoughts, feedback, additional proposals beyond the above - any and all community discussion is welcome as we head into a vote towards the end of January. It’s worth noting that setting protocol fees to 0 on many pools last week will impact revenue projections. My best guess is a 30-40% reduction in protocol revenue and even if fixed this week would still impact all of January since the migration will take time. I won’t bake this into the numbers in the spreadsheet - just keep in mind, we should lean towards solutions that provide plenty of downside protection.

I envision this vote being the following:

• Proposal A - revenue split would immediately change to 50/50 DAO/veBAL

• Proposal B - revenue split would immediately change to 35/65 DAO/veBAL. A follow on proposal to sell 250k BAL to an OTC desk (to be market sold) will be made as soon as the Balancer Foundation completes KYC onboarding. Any DAO wishing to do a stable to BAL treasury swap can also make a proposal to take some/all of the 250k.

• More Discussion Needed (do none of the above)

[immutbl]

In strong support of Proposal A.

I think the 75/25 split was chosen as a best guess estimation when starting off the veBAL system, during a time when Balancer as a project was operating very differently and the markets were in a very different place as well. Today, unlike before, Balancer depends on the DAO treasury to compensate core contributors (mostly in stables) who are pivotal in keeping the project running.

A 50/50 split of protocol revenues is an equitable way to ensure the financial sustainability and longevity of the project. That has to be priority #1 for anyone who holds BAL and wants to see Balancer thrive.

[gerg]

Reinvesting protocol fees in further building Balancer is a no-brainer. Strong support for Proposal A.

[Jubi]

Thanks for putting this up.

I don’t have a strong opinion on which proposal is best. However, I’d honestly lean towards B but amend the split to be 40/60 DAO/veBAL. Proposal A provides no guarantee that the runway will be covered and is highly dependent on market dynamics, which maybe sometime in the future we end up back here and have to sell BAL anyway.

Proposal B provides more security and while it’s a decent chunk of the DAO’s treasury, overall its a small % of the current market cap. Securing a large chunk of runway now will also allow the protocol to be more nimble with fee splits in the future

[solarcurve]

I’d argue Proposal B provides no higher guarantee that the runway will be covered, since you still rely on revenues to make up the lion’s share of next year’s funding requirements. Not to mention that it makes follow on proposals for selling BAL more likely since we’re not moving the fee split very much.

I’d kinda prefer going to 100% DAO / 0 veBAL before market selling BAL at all time lows. Most of Balancer’s revenue is in the future. Sacrificing near term revenue is a better outcome for BAL (and veBAL) holders than market selling at all time lows and permanently diluting the circulating supply.

Most of veBAL’s value is in directing emissions. imo market selling at all time lows will hurt price more than adjusting the rev split. Price determines the value of emissions.

[rEgULaToRycLaRiTy]

Revenue should be spent on gaining market share rather than paying out token holders. The DAO has shown so far it manages the treasury with caution . I support proposal A but I would also think about supporting a possibility to increase the DAO’s percentage above 50%

[Xeonus]

Disclaimer: I am a Balancer Maxi and member of the board of directors of the foundation

First of all I have to state that a few months ago I would have had a hard time with such a proposal. But as it currently stands this is the only viable option for us to move forward without sacrificing some of our BAL reserves - which I still think - we should protect at all cost!

I am in strong support of Proposal A for the following reasons:

1. Service Providers have shown commitment to save as much costs as possible while providing value to the DAO. So I would say our burn rate is as best optimized as it can be.
2. The current market situation forces us to look into options as the current fee split just isn’t good enough. I will elaborate on this point further below
3. we need an additional runway of $1 Million USD for legal protection at some point for the DAO / foundation for the eventuality that legal action will be taken against the DAO. The foundation will draft up a proposal in the future to address this demand
4. The fee split was never a set in stone ratio but is here for the DAO to adjust. I strongly believe that veBAL holders will see the benefits it brings for the survivability of the DAO while having rather little impact to most of veBAL holders.

So let me dive into point 2 a bit as I have been working on analytics tools to visualize this data.

Strongest driver of protocol revenue are yield-bearing tokens and not necessarily fees per se
I have built following fees dashboard showing what is going on (note that the yield-bearing metrics are rather conservative compared to what we earn in real yield):

Balancer Analytics

Let’s look at pure swap fee revenue first for the last year (mainnet only):

We see a clear and rather steep decline in swap fees although we have more aggregator integrations set up!

Which pools perform best in the last year in terms of pure fees?

Basically all our blue chip pairs and yield-bearing token pools. Now it is getting spicey: yield from yield bearing tokens to the DAO!

We see most protocol fee drivers for the DAO are tokens like wstETH, rETH and bb-a-USD.

Now comes the bummer: fee cut with 25% currently looks rather dim for the DAO:
note this metric is very conservative and takes the last 7d average trading acitivty

Note: fee collector is the contract that collects fees which then are distributed to veBAL holders, bribes and the DAO.
My tool currently underestimated yield-bearing tokens streamed to the feel collector. However, given the current exploit situation we can estimate the revenue to go even lower as @solarcurve has stated.

If we adjust the cut to 50:50 we would have much more sustainable reserves in the long run, even with the current bad market situation.

Feel free to play with the tool yourself in conjunction with @solarcurve great spreadsheet to get an idea of the situation.

So from an analytical standpoint from what I can do is give the following recommendation:

• adjust to at least 50:50 split
• re-evaluate fee-split ratio every quarter given clear constraints.
• If the DAO has enough runway (e.g. 2 years) including insurance fund reserves, we can reassess
• impact to veBAL holders is rather small. However impact for bribes will be bigger
• we should not increase our cost footprint just because we would get more revenue cut!

So we all should consider - for the health of the DAO - to “sacrifice” some of the fees to keep Balancer innovating as it is today. One could say we are doing rather great given this bear market. So let’s continue to outpace the competition with great DAO initiatives and integrations by our talented service providers!

Additional resources:
Treasury dashboard: Balancer Analytics
Service provider dashboard: Balancer Analytics

[0xDanko]

Disclaimer: I am a Balancer Maxi and member of the board of directors of the foundation

I am going to echo @xeonus and @solarcurve brilliant assessments of the situation, highlighting a few things important to me here:

• We are forced to examine options, and arguably should have done it sooner.
• The current fee split is not set in stone, and could/should be revisited periodically by veBAL holders
• There are unconsidered potential losses here (such as the insurance fund and recent pool issues) as well as potential further savings on SPs. It would be safe to say any potential losses to the DAO will def be bigger than these savings.

[ZenDragon]

Firstly, i need to admit I was wrong about this initially. I strongly believed that veBAL holders should hold paramount the value proposition that is their revenue share. While people have locked under certain conditions and “agreements” I would argue that runway for crucial teams to stay active is even more important to the future of Balancer. Long story short, I support Proposal A, I would also be willing to push the split further in favor on the DAO if push came to shove with poor market conditions.

[LuukDAO]

In strong support of Proposal A - In the current stage of BalancerDAO, it’s critical to retain cash to accelerate the development of the ecosystem. As a veBAL holder, I would even support a larger share of rev going to BalancerDAO (80/20?).

[santinomics]

After carefully reading this excellent assessment, Proposal A (adjusting the revenue split) appears to be the most logical solution. I agree with the analysis provided by @solarcurve and would like to add a few additional points for consideration.

1. The key decision to be made here is whether or not to change the current revenue split between veBAL holders and the DAO. This is a binary decision, and once that line is crossed, the exact value set for the split is not as important. In fact, even setting it at 100% for the DAO and 0% for veBAL holders could be a viable path if market conditions continue to deteriorate.

2. Since the primary incentive for veBAL holders lies in bribes, I do not anticipate a strong negative market reaction to this decision.

3. In light of the current market conditions, sacrificing short-term gains for a sustainable long-term future is a reasonable approach. I would expect most veBAL holders to be fully supportive of this strategy.

4. A 50%/50% split is not unusual in the market, as competing protocols currently have similar or even more favorable splits for their DAOs. For instance, a proposal was recently passed by Sushiswap that redirects 100% of the trading fees to the DAO. It’s important to note that this is not to suggest that Balancer should blindly follow other protocols, but to highlight that this is not a unique decision and there’s evidence to support this split.

[Zeb]

In support of proposal A.
Sacrifice token holder revenue now in order to keep revenue coming long term.
It’s like the marshmallow experiment. Have 1 now, or have 2 in 10 min.

Also good to keep in mind, loads of trad companies do not pay out dividends at all during bear markets, instead investing in their company. We in crypto sometimes forget how early stage investors start getting returns.

[Matt_Alfalfa_or_Span]

With the current snag in terms of boosted pools and IB yield no longer being collected by the protocol for the foreseeable future, how are either of these options likely to close the burn rate gap in 2023?

[solarcurve]

whatever is ultimately decided now will be revisited in 6 months, that’s my plan. we’re working to mitigate the revenue impact of the recent issue, but you should still assume the numbers in the sheet are now trending towards optimistic assumptions. The longer the issue remains outstanding, the more that is the case.

[Franklin]

Good morning, friends! We wanted to chime in w/ a few thoughts/counterpoints here, as we also care deeply about Balancer’s sustainability and longevity.

Less protocol revenue will most likely mean less bribes which will mean less TVL on the yield bearing pools that are providing most of the DAO’s revenue. Reducing current revenue/bribes could also hurt future revenue, which will most likely hurt future price as well.

BAL price is almost 6; that’s 600M FDV. Selling the 25bps would be sufficient to cover the gap in this year’s runway w/ minimal impact–it’s roughly equivalent to just 3% of current emissions. If price impact is the worry or the visuals of selling, then perhaps a gradual sell program, such as a weekly limit order on Cowswap, could be a consideration. Selling now guarantees money in pocket, which seems to be more reliable than relying on volatile future revenue especially given the protocol fee collection issues.

An aggregate of all three options (cost cutting, OTC, and fee split) is probably a good middle ground given the market conditions. However, if just A or B go to vote, our preference would lean towards option B as it would cause the least change from the current model and provides more certainty in current market conditions.

[solarcurve]

open to other proposals beyond A and B.

B is effectively an aggregate of all three options, because SP’s will continue to cut costs as much as they can. The only way to take that a step further I can see is saying “Total funding for year 2 cannot exceed $X”. If you had something in mind beyond what I wrote for B feel free to expand further, happy to add that as a voting option.

[Franklin]

Thanks, brother! We don’t have anything specific to propose at the moment, but let me get back to you on this. Have a great weekend!

[elbagococina]

Hello everybody! In my opinion, the best way to build the Balancer protocol is proposal A: Adjust the veBAL revenue split.
I agree with this idea that Solarcurve wrote: “I’d also argue most of Balancer’s revenue is in the future. We’re very early in Balancer’s life cycle”. The basis for this decision is to consider that the current situation is Balancer needs to grow in this early stage. If Balancer is successful, then it makes sense to distribute the profits between the veBAL holders in the future, not now. Even, the distribution could be 100% DAO / 0% veBAL holders. I’d also argue most of Balancer’s revenue is in the future.

[LongJuanSilverado]

(A) is a good approach, I’d likely be in favor of that.

Re: selling BAL, we likely shouldn’t market sell – agreed. Although, I don’t think we should take this off the table.
We should put out a bat signal that the treasury is willing to enter a deal with a x% discount for y-time lockup.
We should get the terms of such deal approved by governance in advance and then shop around for buyers privately.

[Bobbay_StableLab]

In favor of proposal A. Its a more sustainable option and I prefer the option of revisiting this every 6 months. It’s not too frequent and allows us to make more informed decisions based on the current conditions. Furthermore, based on @xenous analysis, It seems more suitable to opt for Option A.

Balancer SPs have already done their part; I don’t think it would be fair to request further cuts. At this point, it would be a detrimental effect on Balancer.