State of the Balancer Treasury: Q4 2022

Service Providers
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Disclaimer: I am currently a Balancer Maxi, member of the board of the Balancer foundation and former Balancer Grants grantee. Because of my engagement in the community, I am abstaining (and have abstained) from any SP Proposal voting.

Introduction

The Balancer DAO is in the process of full decentralization by funding core entities through the Service Provider framework. Orb Collective and Balancer Maxis are a prime example of successful Service Providers adding value to the protocol under the umbrella of the Balancer foundation.

Now, a funding proposal for OpCo has hit the forum giving us a near complete picture of expected quarterly expenses while providing services covering the full spectrum of marketing, partnerships, legal council, front-end development, protocol governance and much more.

As active community members, it is important to have a clear picture of our net income and spendings, as I have written in the last treasury-roundup which you can read here. In this article, I want to give an objective and concise overview of the status of the Balancer DAO treasury, our income sources and spendings as well as describe possible scenarios for Q1 ‘23.

Status of the DAO Treasury

I will use the Balancer DAO Treasury dashboard as well as the service provider budgeting positions as the main sources of information. You can interact with the dashboard here (note: I am running a custom, non-released version off of the official balancer subgraph).

Revenue streams

The DAO treasury had a constant stream of protocol fee income despite the recent market downturn.

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At the current rate, we are generating roughly $7.48k in USDC for the treasury per day. The main driver is of course protocol fees as well as fees from LBPs via Copper:

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Since the tokenomics overhaul and collection of protocol fees (50% of collected fees from LPs) in April of this year we roughly obtained ~$1.5 Million USDC which results in an average rate of $12.7k a day. This is a decrease of $1.8k a day from the previously analysed shorter time-frame in Q2 ($14.5k a day).

At the current rate, we can expect roughly $381k USDC per month on average net USDC income from protocol fees and Copper.

Treasury Reserves

Our treasury still consists of more than 87% of BAL tokens which make up roughly $32.8 Million USD at the time of writing.

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In total our Treasury net worth increased slightly from $36 Million USD across all chains to roughly $42 Million as of today. Of course, the main driver in this change is the price appreciation of BAL despite the overall market downturn.

The treasury will soon exchange Fei for USDC, as approved by the latest snapshot vote Snapshot

We will therefore increase our USDC allocation slightly to roughly 8% of our treasury assets.

Actively used Assets

The DAO took initiatives to generate more income with our treasury reserves. We took rather conservative routes: providing liquidity for bridges (which is not earning any fees currently) as well as selling calls against a small position of BAL on Ribbon Finance. As of today we made 52,413 USDC and lost 3,470 BAL on those selling calls.

Key Takeaways

  • Our projected yearly income at the current rate is set to approx. $2.73 Million USD
  • The main income source are protocol fees on mainnet
  • Our treasury currently holds approx. $42 Million USD in assets
  • Our main wealth comes from BAL, making up $32.8 Million
  • 60k BAL is deployed on bridges and is therefore not showing up directly on the Balancer Treasury balance sheet.

Treasury Spending Sources: Service Providers (SPs)

Our main source of spendings are Service providers. The DAO currently funds following entities

  • Orb Collective
  • Balancer Maxis
  • Balancer Foundation

Following new SPs are planned to be funded:

  • OpCo

Effective USDC Spendings in Q3

Based on the current configuration of SPs we had following spendings:

Orb Collective Foundation OpCo Maxis Grants
Personnel cost $477,336.00 $22,316.00 - - $60,000.00
Non-People costs $254,998.00 $10,415.00 - - -
Administrative - $210.00 - - -
Other / Products - - - - -
Totals $732,334.00 $32,941.00 $0.00 $0.00 $60,000.00

We see that more than 80% of our USDC spending rate is for Orb Collective.

Putting our Q3 spendings into perspective:

We are spending roughly $275k USDC a month for Service Providers opposed to roughly $220k USDC in protocol fee revenue, resulting in a net negative runway of roughly $55k a month.

Current Spending Rate of Active and Planned SPs for Q4 ‘22

I analysed the projected spendings in terms of USDC and BAL for Q4, including OpCo as a possible 4th Service Provider:

Projected USDC Spendings:

Orb Collective Foundation OpCo Maxis Grants
Personnel cost $684,816.00 $64,689.00 $246,456.00 - $60,000.00
Non-People costs $288,597.00 - $108,526.00 - -
Administrative - $3,230.00 $63,709.00 - -
Total $973,413.00 $67,919.00 $418,691.00 $0.00 $60,000.00

Projected BAL Spendings:

Orb Collective Foundation OpCo Maxis Grants
Grants - - - - 101,500.00
Vesting 99,631.75 - 29,169.50 20,625.00 -
Other - - - 12,000.00 -
Total 99,631.75 0.00 29,169.50 32,625.00 101,500.00

Based on these projected spendings for all SPs we can project a quarterly outflow of funds to be

  • $1.52 Million USDC
  • 263k BAL

for Q4 of 2022.

These spendings would correspond to a yearly footprint of

  • $6.08 Million USDC

BAL spendings are variable and cannot be easily projected. Maxis and the Grants team would approximately request 536.5k BAL per year.

Outlook and Projections

Let’s make some basic assumptions about the DAOs spending rate. Based our current footprint, including OpCo and our BAL spendings we can project the following:

Cumulative cost Cumulative income Delta USDC reserves BAL Spending BAL in Treasury
Q3 22 $675,000 $675,000 $3,315,682 5494868
Q4 22 $825,275 $1,350,000 $524,725 $3,165,407 134,125.00 5,360,743.00
Q1 23 $1,650,550 $2,025,000 $374,450 $3,015,132 134,125.00 5,226,618.00
Q2 23 $2,475,825 $2,700,000 $224,175 $2,864,857 134,125.00 5,092,493.00
Q3 23 $3,301,100 $3,375,000 $73,900 $2,714,582 134,125.00 4,958,368.00
Q4 23 $4,126,375 $4,050,000 -$76,375 $2,564,307 134,125.00 4,824,243.00
Q1 24 $4,951,650 $4,725,000 -$226,650 $2,414,032 134,125.00 4,690,118.00
Q2 24 $5,776,925 $5,400,000 -$376,925 $2,263,757 134,125.00 4,555,993.00
Q3 24 $6,602,200 $6,075,000 -$527,200 $2,113,482 134,125.00 4,421,868.00
Q4 24 $7,427,475 $6,750,000 -$677,475 $1,963,207 134,125.00 4,287,743.00
Q1 25 $8,252,750 $7,425,000 -$827,750 $1,812,932 134,125.00 4,153,618.00

However, we can only assume that spedings will ramp up as described in the Orb and OpCo proposals (more FTE per Service provider, more subscription costs etc).

Update: As FEI was successfully converted to USDC, we have (as of August 24th) $3.3 Million in USDC reserves. With the current burn down rate, we should have acceptable reserves until 2024

Protocol Fee on Yield as an additional Income Source

There is another proposal currently underway to set protocol fees on yield to 50%. This is an important piece of additional income for our protocol fee collector. As outlined in the core pool proposal and the revamped gauge framework, we would be able to accrue a significant amount of fees from the yield of yield bearing token pools. This is the reason why we want to focus on this new class of pool to increase our USDC income significantly. The wstETH/ETH pool is a prime example of a high-performance pool as it generates most of our protocol fees from yield!

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At current TVL of $216,909,500 and 1.37% staking yield, we can project roughly $4k of fees daily from this pool only with setting 50% fees on yield as per the pending proposal! The impact of such pools is massive. Given our $7.5k total daily income, it is safe to assume that our treasury generates more than 50% in fees from the wstETH/WETH pool alone! This will scale massively as we introduce more pools of this type!

Conclusion

  • The Balancer DAO was able to accumulate a respectable amount of USDC despite the difficult market situation.
  • Our spending rate will exceed our net inflow - especially in terms of USDC if the OpCo proposal passes
  • A relief in market conditions in combination with upcoming income on yield bearing tokens can potentially mitigate net negative USDC spending for the DAO
  • The DAO should focus on building a healthy USDC reserve so that it can fund all Service Providers in the long run while protecting its BAL stack as best as possible. Strategies in that regard are up for discussion.
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thanks for this detailed write-up. it helps put a perspective on things as well as shed light on where things stand.

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Appreciate the insight.

All of the SPs are doing great work and are necessary to the long-term success of Balance, so our options are to focus on increasing the amount of USDC within the treasury. Using this report and other sources, we should make some key decisions for the treasury sooner rather than later.

Sell BAL on the market, swap BAL with another protocol/VC for USDC (partnership style) or income earned to be converted to USDC.

Edit: To clarify - Reducing spending costs is a better pathway, along as the SPs are open to this and know that it’s necessary for the longevity of the DAO. Reduce spending > Selling BAL

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Thanks so much for this super insightful post @Xeonus!

It’s clear that unfortunately the gap is still quite large between revenues and costs. I’d suggest all SPs to carefully think through ways to cut down costs asap so the DAO can avoid having so sell BAL to keep funding SPs. Hard times call for some sacrifices/compromise.

We should not count on a big increase in revenues to break-even, but hopefully that will happen and we can then reassess.

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If we must sell BAL then it is what it is, but I would not vote for that without measures also being taken on the spending side.

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It seems to me, that with the amount of money being spent on Orb, there should be some clear metrics/KPI’s in place that somehow relate back to revenue generation for the treasury/DAO and that these metrics should be assessed against predefined targets when voting on future funding.

Maybe this is true for everything, but Orb seems the biggest spender with the least clarity around exactly how the value they are adding is realised by the DAO.

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The report is very well presented.

The data seems to clearly indicate that the Orb collective is not sustainable from an economic point of view.

@gerg in a different post you told me that there are multiple SP, can you please explain me what you were referring to? I see only the Foundation, which is not a service provider, but a non-profit entity

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Do you propose having no marketing, business development, integrations engineers, design, legal, people ops? Would you prefer the protocol and ecosystem sit stagnant instead of paying people to further it? In my personal view, the part that is “not sustainable” is 75% of protocol fees going to veBAL holders instead of the DAO treasury.

The Maxis, for one: Balancer Maxis August 2022 Update

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Maybe I can help you here. Currently, Balancer DAO has 5 service providers working for Balancer, which were approved and funded by the DAO through veBAL voters:

Also, veBAL holders voted against the SP proposal on [BIP-21] “Ecosystem Ops and Development Squad” and “Balancer Community Group” dropped its intent before it went to a proposal.

So, as you can see, these entities are paid by the DAO to operate and provide services under their scope presented under the BIPs. That absolutely doesn’t mean they control the DAO, or vice-versa. You can read more about the SP framework here on [BIP-1].

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I posted this on another forum post earlier, I’m not too active here at the moment but I will share it here as it might be more relevant.

I’ve said things like this before and I’ll say it again - Balancer is essentially a tech startup with a Web3 wrapper. Costs will likely exceed income until true PMF has been found and while it’s getting closer I think we’re still some ways out. In the interim, just like a typical startup, funds will have to be created (somehow). Whether that’s via selling more equity (BAL) to VC’s or by creating enough capital through some form of band-aided revenue stream (wstETH yield pools).

Web3 is extremely competitive. Even though it sucks to see a cash flow deficit, due to that high level of competition Balancer needs to have the best talent. I’ve been very happy with the work I’ve seen lately, both on the tech and business side of things. So to me it makes sense to continue as they are, when investing in any company a certain level of trust has to be had in the leadership and my trust is currently there based on the results and decisions made.

For me the above statement rings true here. Balancer, like many startups in Crypto, is operating at a cash flow deficit. Meaning Costs > Income. This is also the case for many startups outside Crypto. Usually there’s a “5 Year Rule” where if a startup has been operating at a cash flow deficit for 5+ years and still cannot find Product Market Fit, than it is generally deemed a failure (there are obvious exceptions to this, as there are several companies in the S&P 500 that operate at a net loss in spite of having been in business for 5+ years).

What I would highly recommend to every veBAL voter and contributor here is to realize this fact. This unprofitability will likely continue for the foreseeable future (for a variety of reasons, one major reason being the proliferation of Blitzscaling) and finding the path towards profitability can sometimes be grueling. The major plus side to me here is that Balancer is operating at an extreme level of transparency, with more eyes on the day to day than the typical startup. So lets give them some grace and instead of focusing solely on costs lets focus on how we can create a path towards profitability over this next year.

EDIT: Something to add on here that I just realized after thinking more on @gerg 's statement is - Continuing down the comparison to a Web2 Company, you would never suggest the company fully cut their Engineering, Marketing, Integrations, Legal or Business Development teams in a situation like this (you may suggest that they make some cuts - however never fully remove). You would likely suggest they find a way to make some money. So just to I guess hammer the point home.

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