Weekly Gauge #4: Oversaturation of Gauge Incentives
Balancer recently joined the cohort of projets adopting the veToken model, with various twists. Instead of pure BAL, LP tokens from the 80/20 BAL/ETH pool will be locked into veBAL. This has the big advantage of keeping BAL liquid (93+M$ of TVL in the pool currently) as well as setting a precedent for other teams to do the same with their 80/20 Balancer pools instead of adopting a vanilla veToken model).
With its 145,000 BAL emitted weekly and 5.6M veBAL, one vote currently directs 0.14$ of emission per week. The number of veBAL grew rapidly with the development of AURA (Convex fork for balancer) which quickly gathered over 25% of the veBAL supply.
At launch, we’ve seen arbitrage opportunities that allowed our PAL/USDC POL and liquidity providers to farm BAL/AURA at a huge rate (up to 1000% APR). The arbitrage is slowly fading as more contenders join the fray and AURA inflation diluted the large veBAL/vlAURA ratio.
https://dune.com/paladin/gauge-weekly
To understand the upcoming shifts in the Balancer gauge, here are a few major points to take into account :
The killing of the CREAM/WETH gauge - The group directing liquidity to this gauge is controlling over 1.6M veBAL, locked for another year, it is highly likely their vote will collect bribes for the foreseeable future ;
The Core Pool Incentive Program - Balancer is now redistributing 25% of its revenue coming from the core pools (yield-bearing pools). This means they are distributing 150,000$+ in bribes on a weekly basis. While this is an excellent plan that benefits both LPs and veBAL lockers, while raising revenue, the current setup is suboptimal as it also means the DAO is paying roughly 0.23$ of incentives per vote and receiving 0.14$ of emissions in exchange. This means that the DAO is accepting a 40% markdown to power its flywheel.
Given the circumstances, we can highlight the need for Balancer to align the behavior of its shareholders to the value-creation tools of the product.
https://dune.com/tianqi/Balancer-Gauge-Bribes & https://dune.com/squidz/Balancer-Revenue
The incentive emission is the most efficient when it is directed toward pools generating the biggest volume and, hence, revenues, due to the associated fees. This implies that there is no conflict of interest between users and governors of the protocol, otherwise, the bribe market can become a threat to the sustainability of the underlying project.
The answer from the community to the Cream case confirms the alignment of users and shareholders of the Balancer DAO. In order to reduce the difference between the BAL inflation and the revenue creation for the LP, we can expect a strong volatility in the emissions /1$ spent on bribe ratio.
To hedge against that, Paladin.vote is about to launch Quest for Balancer, allowing projects and users to create fixed rate bribes and optimize their treasury efficiency. Keep an eye on Paladin’s Twitter account for more updates this week!