Join the veBAL war on Balancer

Join the veBAL war on Balancer

Abstract

Balancer is one of the pioneer and innovative DEXs which have been deployed on Ethereum, Polygon and Arbitrum. Lido DAO collaborated with Balancer on wstETH-WETH pool boosted in 2021. Now it is one of the most advanced liquidity pools among all DEXs. Balancer has many advantages and weighted pools (https://docs.balancer.fi/products/balancer-pools/weighted-pools) is one of its unique features, which empower LPs more flexibility on exposure control with lower impermanent losses.

On April 7th 2022, Balancer updated it’s tokenomics and liquidity incentive mechanism. The new mechanism has a similar model as Curve(veBAL and Gauges - Balancer). Anyone can lock their BAL-ETH(80:20 weight) lp token on Balancer Vault for a fixed period of time and have the right to vote on the distribution of $BAL among all gauges. They also have the right to share 70% of all protocol gained fees.

There are two Lido DAO related pools joined the incentive gauges.

wstETH-WETH: https://app.balancer.fi/#/pool/0x32296969ef14eb0c6d29669c550d4a0449130230000200000000000000000080

LDO-WETH: https://app.balancer.fi/#/pool/0xbf96189eee9357a95c7719f4f5047f76bde804e5000200000000000000000087

Notes: LDO-WETH pool is an 80:20 weight pool, which enables $LDO holders to hold more $LDO token positions than regularly 50:50 weight pool.

Proposal

The stETH liquidity incentive is the cornerstone of Lido ecosystem building since the protocol was established on Ethereum. We have distributed about 100M $LDO since the very beginning. As we know, this kind of incentive plan will continue until the ETH2.0 merged and staked ETH can be withdrawn freely.

I think Lido is still in its early stage and $LDO is one of the most undervalued tokens among all DeFi protocols. I think many community members have the same view as I have. $LDO was defined as the governance token of Lido DAO, and we still need more time for chemical coalesce to happen. Before that, we need more strong hands participated in our community with lower cost of DAO treasury.

Based on all above, I propose that we use 20% of the flow income(1% of staking rewards, not including the historical rewards) on Ethereum owned by DAO treasury to join the ‘Balancer War’, invest in BAL-ETH lp token and lock for 1 year, frequently(monthly or once every two weeks) increase our holding and use the voting power to support the following pools:

  1. wstETH-WETH pool with 50% of votes.
  2. LDO-WETH pool with 50% of votes.

Glad to have a full discussion on this proposal with all communities.

4 Likes

@vsh @skozin @kras What are your thoughts?

what benefits we can get to incentivize the LPs clearly?

  1. Incentive on wstETH-WETH pool will support more liquidity of stETH and enhance stETH more broadly adopted.

  2. Incentive on LDO-WETH pool will bring more solid hands hold their $LDO with a cash flow($BAL rewards).

  3. This is an investment in a blue chip DeFi protocol. We don’t need to pay $LDO from the DAO treasury. All we need to do is just take some risks of $BAL pricing volatility, which I think is quite low in the long run.

1 Like

The LDO-WETH pool is already heavily incentivized by Balancer, by the way, the pool APY is really high at the moment. Still, it isn’t very deep in terms of liquidity and does not show large trading volume as well. It doesn’t look like further incentives are required there from my point of view.

As for the wstETH-WETH pool, Lido does participate in Balancer bribes via the Hidden Hand, and so far it looks like those are quite effective in terms of impact on the pool APR. However, increasing the APR didn’t result in a significant pool performance increase (it didn’t get much deeper, and the trading volume didn’t increase as well), thus it isn’t clear why we would spend even more DAO funds on incentivizing it.

It’s incentived just because some of the community members, including me, voted in this pool via our $veBAL. My proposal is to support more $LDO holders who play demands hand roles other than speculators. The trading volume is mostly based on the market volatility. In fact, it has already been the deepest pool among all DEXs, and I think it would, should, could be deeper.

Actually, our bribes via the Hidden Hand is for the stMATIC-MATIC pool, not for the wstETH-WETH pool.

Bribe is a kind of mechanism for a short period of boost event. That can not last for a long time unless we keep on bribing with huge costs. My proposal is referring to an ‘investment’ instead of ‘spending budget’ by the DAO treasury, which opens a reasonable risk exposure for potential value increasing.

1 Like

We’ve sent bribes for previous periods on wstETH pool as well, and intend to continue for now.

The 20% of earnings focusing on DEX token purchase sounds significant, and that would be the q of capital efficiency. From our initial research, 1) purchase would be 1.5x more expensive to get the same amount of incentives than just sending LDOs to gauge; 2) bribes on HiddenHand seem to be ~3x more efficient compared to direct incentives.

I totally understand that those numbers are to change with the market (bribes getting lower efficiency with time & BAL price moving), but for now that wasn’t something we were planning to consider short-term.

3 Likes

As stated in the May budget, both wstETH and stMATIC pools should be (and will be) incentivized via bribes mechanism, the reWARDS Committee already initiated transferring 25k LDO to wstETH<>WETH bribe.

Anyways, thank you very much for bringing this up and caring enough to put together a proper proposal, that’s something Lido DAO is often lacking. Let’s see how other community members respond.
I personally used to think of the longtime LDO value as something less relevant compared to the state of Lido’s staking derivatives, and from this perspective increasing incentives for Balancer pools doesn’t make much sense to me.

I agree that the main goal of DAO treasury is to support the long term adoption of Lido protocol, which it is reasonable to focus on the utility tokens(stETH, stSOL, stMATIC etc.). I also like to see that the incentive of $LDO can be more economical. It’s not only about price speculation, it’s also about the expectation of holding $LDO. If we could provide more space, in this case, as a liquidity provider, we may just need less $LDO to make the same effective as we do now.

We have spent about 100M $LDO for the past year and a half. Why not try another way to manage the treasury fund in a diverse way?

totally agree here, but those are two different issues: how the DAO manages income from staking (stETH rewards) & how does it manage incentive budget and the Treasury in general. I would love to have detailed discussion here, but don’t think that tying the two makes sense. If we make participating in Bal wars a matter of “let’s spend 20% of staking fees” than it feels pretty expensive. If we’re discussing “let’s use Bal rewards budget to purchase veBAL directly” — need numbers to make this decision in informed way. Or back-of-the-napkin estimate was like this:

  1. incentives as-is (we’re spending ~300k LDO/month on the pool, which is consistently among the largest on the Balancer);
  2. use incentive budget to acquire veBAL (ops for LPing on behalf of the protocol and all), which got us to “spend 1.5x of yearly pool’s incentive budget to get the same incentive issuance” — may be good, but not a short-term decision;
  3. use bribes on Hidden Hand — currently those get ~$3 worth of incentives for $1 worth of bribe, which is super great.

If you have other estimates — please, share those.

1 Like

Yes, I agree that these are two different paths to managing the DAO treasury. These two paths have their pros and cons:

Spending Budget
Pros:

  1. Specific value of costs.
  2. It is much easier to manage and less further code development is needed.

Cons:

  1. Decreasing the value of the treasury holding.
  2. Inflation impact.

Direct Investment with an incentive entitlement right
Pros:

  1. Potential investment rewards may increase the value of DAO treasury.
  2. Deeper integrated and collaborated with other DAOs.

Cons:

  1. There will be a risk of treasury value losses, and it will bring more uncertainty and difficulty on treasury management.
  2. Further contract coding and managing might be needed.

I think this is a topic we can continue discussing and it’s not in a hurry to make the decision. Now the most emergency topic should be Should Lido on Ethereum be limited to some fixed % of stake? Maybe we can make more broad discussion after that.

Is there a voting delegation for veBAL? We need to separate funds holding (Lido DAO Agent contract) and voting (reWARDS multisig).

While I totally share the pros/cons analysis from your side, we’ll need financial analysis on that one — and, as I said, our previous attempt hadn’t shown significant edge on the scale of, say, 1 year

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As I know, there isn’t a voting delegation for veBAL yet. TribeDAO is issuing a proposal on this kind of integration.
Tribe DAO : boost delegation
I’ll keep an eye on the result of this proposal while it’s ended.

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For more financial analysis, there are two data dashboards we may look over.

veBAL

Balancer V2 LP Revenues

Note that veBAL holders as a whole share 75% of the protocol fee, which is 1/9 of the LPs revenues.

2 Likes

Thank you! Will def take a close look :mechanical_arm:

Got a closer look on those dashboards, but for some reason they don’t include wstETH/WETH pool.

Back-of-the-envelope calculation goes like this:
BAL/WETH pool is $90m (LP-ing there is a first step to get veBAL)
As you point out, veBAL holder fee rate is 75%
Top-10 TVL pools fees weekly estimate ~$200,000 weekly fees
$150,000 weekly veBAL holders fee share
$7,800,000 yearly veBAL holders fee share

That gets us to this sort of deal: Invest $90m (get half of the BAL/WETH pool LP tokens) to get access to ~$4m yearly (that’s roughly what Lido spends in rewards for the wstETH/WETH Bal pool in a year by the current LDO/USD price), and ~4.5% APR — about the same number Lido DAO could get just staking the same $90m worth of ETH. And I must note Lido DAO Treasury doesn’t have those $90m to invest rn.

I’m definitely not talking about a $90m investment here. Actually, it should be called a merge or acquisition.

This proposal is based on putting 20% of the protocol income(about 25stETH per day) to join in the war. That is a 150 $steth( about $240k based on the current price) monthly investment. And the target is not to hold all the veBAL token. There should be a cap. Let’s assume it is 15%. Then the total investment should be:
BAL/WETH pool is $90m (LP-ing there is a first step to get veBAL)
About 68% is locked for veBAL and average locked up time is about 10.8 months
Investment cap = $90m * 0.68 * (10.8/12) * 0.15 = $8m

Yes, that will take 3 years to reach the cap.

The returns will also be in a liner way. By the end of the first year, we may have 5% of the total veBAL and that is $180K annually return. That is about 12.5% APR.

That’s just the protocol fees returns. There also has a $BAL incentive mechanism which distributes top to 10%( currently 2.3%) of the total new issued $BAL(145K $BAL weekly) to all veBAL holders. That’s up to 43K $BAL annually. Based on the current price of $BAL($7), that is about 20% APR.

Just a short note, staking fees going to protocol treasury are about 25 stETH/day rn – so 20% woild be 5 stETH day, and is quitea lot as op cost. In general I’d rather figured out what targets for farming / investing should be and then worked on how to source the funds. Again, doubly-cautios about op costs and fee spending

Ah, and as I understand it’s not how veBAL works: one LPs, so it’s liquidity to be added to the pool (read: the numbers would be worse)