V2 Liquidity Mining
This post is meant to be a kickoff point for ideas around liquidity mining in v2. All of this is still up for discussion and is purposely not polished. Even the Balancer team has not read this as our goal is to start having more discussions in public to also bring in community members in the process. I encourage the community to take an active role in helping shape the new liquidity mining program.
Liquidity Mining Purpose
Before diving into the details about a revamp of the liquidity mining program it is important to first look at how and why liquidity mining exists. Liquidity mining is first and foremost a token distribution mechanism for BAL. This has been the idea since the beginning and will continue for years to slowly distribute BAL to users of the protocol. The goal is to have the widest distribution possible across users and time in order to achieve a decentralized ownership and therefore governance of the protocol. Liquidity mining did not come as an afterthought where BAL token supply was inflated at the expense of existing holders in order to boost stats. And because this was the plan all along, Balancer is in a unique position in that it has an extremely powerful incentive war-chest that can be used to capture liquidity, users, and ultimately value to BAL holders.
Below are some general thoughts about the evolution of v1 liquidity mining, trends in the defi space, and goals we are looking to capture as part of the new program.
The original goal with v1 liquidity mining was to be as open and welcoming as possible to all types of tokens and liquidity. By having a more open set of tokens the process was obviously gameable and evolved to include different factors over time to align BAL distributions with the most useful liquidity. This included fee factor, ratio factor, wrap factor, etc. More details can be found here: Liquidity Mining - Balancer
All of those factors were necessary and after a couple months of tweaks did a pretty reasonable job of preventing gaming and encouraging healthy liquidity. Although we found that each additional factor increased user misunderstandings and complexity of the scripts. Ex: scripts can only be run once a week because aggregate data is necessary in the calculation and therefore its difficult for users to estimate or keep track of BAL earnings until they claim. Not only that, but understanding the calculations can even be confusing for those who built it and it became a difficult process to explain to new users how everything mapped from liquidity → BAL
GOAL #1: Simple. The liquidity mining process should be dead simple to understand and at any point an user should be able to see an accumulating tally of their BAL for liquidity.
Along the same lines above about the calculation scripts, this also meant everything has to be run offchain. While this was an okay process in the beginning, the idea is to move onchain so the process can be more automated and continuous instead of weekly intervals.
GOAL #2: Automated. Liquidity mining should be calculable and distributed onchain allowing users to withdraw accumulated BAL at any point in time.
Taking a step back and looking at the broader dex space, one thing that has become clear is how fast narratives and interest shifts in the Defi ecosystem. In any given week new sets of tokens make up for massive % of overall trading volume. There was the uniswap & yfi fork phase, the algo stablecoin phase, and many more.
The idea with liquidity mining is to incentive liquidity that is healthiest for the protocol. And because accrued fees is how the protocol may capture value, real trading volume is the metric to try and align BAL incentives to. By being open in V1 to all tokens, incentives get spread incredibly thin when trading volume follows a long tail distribution. This means Balancer loses out on a lot of trading volume when it does not have competitive liquidity for the hot tokens.
GOAL #3: Agile. Liquidity mining should be agile to target high volume tokens
Lastly, there have been dozens of teams building and integrating Balancer protocol in interesting and novel ways. These projects and respective tokens if any should feel welcomed and aligned with Balancer as a partner.
GOAL #4: Strategic. LBPs and projects building on top of Balancer should be more closely tied into the BAL mining process
We believe teams that choose Balancer’s LBP to launch their project tokens should have a head start in terms of competing to get BAL incentives for their pool. This should though only happen if they keep the liquidity of their LBP on Balancer after the LBP finishes the weight switching (which is the period where the project tokens are being actively sold). A good example of a project that did that is Perp.fi. They have been great partners to Balancer and generated a lot of trading volume on Balancer.