For those unfamiliar, users who provide liquidity to Balancer earn weekly rewards in the form of BAL governance tokens. The project has undergone a suite of changes to better balance this distribution through a variety of factors like fees, wrap, cap, pegs and ratios. In short, the protocol has looked to issue the 145k BAL rewards to the most “useful” liquidity, all of which have resulted in stronger community engagement for Balancer liquidity.
More recently, Balancer added a balFactor which gave BAL liquidity a 1.5x higher return on BAL rewards. Now, that buffer has been boosted even more through the passing of Liquidity Staking.
With the new vote, 45k BAL out of the 145k total weekly distribution will be allocated directly to BAL-based pools which are paired with uncapped ‘useful’ tokens like WETH, USDC and DAI.
“The main goals are to significantly increase liquidity on key BAL pairs and to allow non-shareholders to compound their BAL holdings at a much faster pace, accelerating protocol decentralization.”
With this new change, BAL-based pools are netting upwards of 300% APY, by far the highest Return on Liquidity (ROL) of any Balancer pool today.
A community member put together a great site – pools.vision – allowing users to keep tabs on Balancer pool returns at any given time.
The shift in sentiment towards BAL-favored rewards goes to show that the Balancer community is rallying around protocol decentralization, albeit at the benefit of those who already hold BAL.
Looking at this from the perspective of someone who does not hold BAL, this move could very much be seen as empowering those with the deepest BAL holdings already. Thankfully, this proposal made sure to exclude shareholder addresses from rewards, making this distribution as community-oriented as possible.
The passing of Liquidity Staking comes in tandem with 3 other proposals, all of which passed with the following changes:
Increase the MKR capFactor from $10M to $30M
Decrease the RPL capFator from $10M to $3M
Remove DZAR from the whitelist
This is a great signal that Balancer governance is quickly heating up, due in large part to the snapshot-based voting in which users can vote without having to pay a ~$10 transaction fee as with virtually all other governance systems on mainnet today.
In the lastest BAL governance poll, tokenholders voted on whether or not to reduce the penalty for soft-pegged pools (sETH/wETH, USDC/DAI, wBTC/renBTC, etc.) to further incentivize useful liquidity. In the last round of votes, the community passed a vote to change the factor of soft-pegged pairs from 1 to 0.7 – effectively reducing the amount of BAL a soft-pegged pool would earn.
Today, the latest vote passed, shifting this factor down further to a 0.2x multiplier. As illustrated in the proposal:
“Liquidity in soft-pegged pairs usually attracts relatively little trading volume on Balancer while at the same time exposing liquidity providers to a lower risk of impermanent loss.”
Despite the last round of changes, it was not a drastic enough effect to see liquidity moved out of the protocol. Now, this latest round looks to make the sting on soft-peg LPs a bit harsher by reducing their rewards be another 50+ percent.
“We feel that liquidity composition on Uniswap is natural, while the composition on Balancer is highly skewed towards soft-pegged assets due to very generous rewards. We hope that liquidity composition will improve with wrapFactor 0.2.”
Why Does This Matter?
Interestingly enough, this pool ended up being one of the more contentious votes to date. Despite a final passing ratio of 94% Yes to 6% No, the majority of the voting period was spent on the fence split at 50/50 sentiment.
To paint some context on the opposing side, many (including myself) argued that a blanket wrapFactor harms useful liquidity pairs like sETH/WETH which are fundamental to maintaining Synth pegs in crucial DeFi protocols like Synthetix.
Btws I’m on the fence of whats best for Balancer. I can understand BAL rewards need to be allocated to those LPs risking more impermanent loss, not in the soft-pegged pools.
But, soft-pegged pools are important liquidity as well.
However, many countered that the vast majority of soft-peg pairs see little to no volume and that this proposal is more meant to address them instead of penalizing strong pairs like sETH/WETH.
Additionally, select community members voiced interest in shifting the penalty to be volume-based – meaning that the wrapFactor would be applied to soft-pegged pairs which accrue less than a certain threshold of fees. This too was countered by people suggesting this system was easily gameable and as a result, it seems clear that the vast majority of BAL holders are in favor of the new penalty.
BAL Governance Evolves
Taking a step back, this discussion shines a promising light on the future of Balancer and their liquidity mining distribution. We’ve now seen close to 10 different tweaks to the BAL distribution factors, all of which are honing in on the optimal allocations to pools which are truly benefitting the wider DeFi ecosystem in the most ways.
After seeing a constant decline since it’s listing price of ~$20, BAL seems to have found stable ground near the $10 mark, with new proposals like the BAL factor encouraging users to hold their BAL in exchange for a 1.5x multiplier when allocating it to any given BAL-based pool.
Next, we’re eager to keep an eye on where else BAL can offer added benefits to mitigate the amount of dumping from yield farming. If nothing else, the idea of continually tweaking the distribution model using BAL-holdings as a proxy is a promising step in the right direction of the now leading liquidity protocol holding over half a billion dollars in cumulative capital.
Half a billion!
Excited with this significant milestone that we would never have expected to achieve only 4 months after launch.
The work is only beginning to better integrate Balancer liquidity and increase volume/liquidity. We will get there!