Tomorrow, Saturday 1st of August, at 16h UTC, a voting will be active on the proposal to reduce the wrapFactor for soft pegged token pairs from 0.7 to 0.2.
The voting will end 24 hours later, on Sunday 2nd of August, at 16h UTC.
— Balancer Labs (@BalancerLabs) July 31, 2020
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.
And not all soft-pegged pools are the same.
— ⟠ DeFi Dad ⟠ defidad.eth (@DeFi_Dad) July 31, 2020
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!
— Balancer Labs (@BalancerLabs) August 2, 2020
For soft-peg LP’s, please note that this proposal will go into effect starting tomorrow, August 3rd.
Cooper is the Editor of DeFi Rate and an active contributor to leading DeFi media outlets like The Defiant, DeFi Pulse, and Bankless. He works with early-stage teams through Fire Eyes DAO to incubate governance models and grassroots community development. He is an ambassador to Set Protocol and an author of a weekly publication called Token Tuesdays. To stay up with Cooper, follow him on Twitter.