Balancer is celebrating its first veBAL anniversary next week. This milestone has been nothing short of eventful. Balancer had to navigate through a tumultuous market and experienced several black swan events that challenged its resilience.
However, Balancer's innovative approach to DeFi protocol design, specifically its implementation of the voting escrow mechanism, has helped the platform thrive. Following in the footsteps of Curve, Balancer has become one of the major hub for Yield Bearing tokens.
Currently, the price of a BAL-ETH BPT is 16.5$, taking the decay in voting power and the average lock duration theactual price of a veBAL is 17.6$. We can observe from the graph above that almost all liquidity in this pool is being locked as soon as it is supplied, showing a great alignment of LPs to the flywheel.
As we have introduced in Weekly Gauge #32, Balancer’s governance has expanded a lot on Polygon yet there is still a lot of room for development on Arbitrum or Optimism. This is explained by the creation of liquid lockers on Polygon such as Tetu, while Aura has not deployed on Arbitrum or other L2s. Note that this demonstrates again the important role of liquid wrappers to the development of governance participation.
Our hottest take on this chart is the consistency between major holders to acquire almost all their veBAL during the very first days of accumulation, however, we can observe among those major holders the biggest tends to slowly increase their power over time while the smaller ones seem to lose dominance. We can deduce that liquid lockers have a very good bootstrapping design but are less effective during the growth phase.
Although its liquidity depth almost doubled since early Q4 2022, the percentage of BPT locked into veBAL seems to flatten around 90%, moreover this pool benefits from the core pool voting incentive program which increases its sensitivity to mercenary farmers. This data indicates a great compounding rate from the liquidity providers, thus a great alignment between holders and users.
On March 22nd the Balancer emission schedule will enter a new year, thus the liquidity mining emissions, dedicated to bootstrap the protocol’s liquidity, will reduce from 145,000 $BAL per week to 121,930 $BAL which represents a 16% decrease.
Reduction of the inflation rate on cryptocurrencies can serve various purposes, in the same fashion that Bitcoin POW emits new tokens according to the difficulty for a miner to resolve a new block and is designed to halve its inflation rate every 4 years, the objective of $BAL bonding curve is to encourage protocol usage while influencing $BAL fair value by its increasing scarcity for farmers.
$CRV price against USD and ETH since the last emission cut. (src = Coingecko)
$FXS price against USD and ETH since the last emission cut. (src = Coingecko)
Beyond asset pricing, this emission reduction is bound to redistribute the card for vote incentives. A very large number of projects have been moving their incentive campaigns to Balancer in order to optimize for efficiency of their campaigns. However, the large inflow of incentivizers combined with the cut of emissions should lower the efficiency of Balancer campaigns vs those on Curve.
Historically, emission reductions are very good triggers for positive trends shift on crypto markets. As we’ve learned from Curve (August 15th) and Frax inflation cut (December 20th) 2022, this event is more likely a good opportunity for traders with strong risk-reward standards.
Finally, the value of $BAL total emissions being reduced for a temporary period during which price action will arbitrage the changes in APR for LPs on the platform, we can expect the voting incentives for veBAL and vlAura holders to go through a period of higher volatility.