veBAL Pt.2 — Bribing and BIP19’s Free Bribes
Part two of our veBAL series dives into bribing, BIP19’s free bribes, and how protocols use voting incentives.
A Multilayered Incentive Economy
In part one of this series, “veBAL- How to Increase your Benefits,” we saw how veBAL is a powerful tokenomics method for protocols looking to increase liquidity. We also looked at how gauge voting allows governance control over financial outcomes.
For those that need a short recap, projects have two main options to increase their liquidity. One option is to reward liquidity providers with their native tokens. The second option is via veBAL votes, assuming the tokens are in a Balancer Gauge (Pool). To incentivize veBAL votes, any project can add voting incentives / ”bribes” to a Gauge. Through incentives, protocols try to influence the voters to decide in favor of their Liquidity Pool, such that the Pool gets more rewards. This has led to competition for bribes. The more BAL someone locks in, the more power they get over the emission of BAL, along with boosted rewards. Projects are luring BAL holders via attractive returns for staking in their Pools.
One protocol that uses voting incentives is Aura Finance. Aura locks up BAL tokens for a full year and issues auraBAL to users in return. AuraBal is a tokenized liquid wrapper of veBAL. It can be staked on Aura to receive a share of Balancer’s revenue from the underlying veBAL and AURA tokens. Users who lock veBAL on Aura lose the voting power that Balancer’s governance token brings. Instead, Aura governance controls this voting power. Users who lock AURA tokens get vlAURA (vote locked AURA). Holders of vlAURA can take part in Aura governance.
As Aura grows, other platforms may wish to use it to direct BAL rewards, leading to a multilayered incentive economy. Protocols now compete in bribing AURA holders to vote for their Pools.
BIP19 — Free Bribing
BIP19 — “Incentivize Core Pools and L2 Usage” introduced a new fee distribution on interest-bearing Core Pools. A Core Pool is a Pool that contains at least 50% yield-bearing tokens that Balancer earns a fee on.
Metastable Pools (Pools that contain tokens with correlated but non-pegged prices) are the only Pools on which Balancer collects fees. On Ethereum, Core Pools get fees they generate used as bribes for them in the next cycle after the DAO takes 25%. On L2s such as Polygon and Arbitrum, all fees earned are bribes for the Core Pools on each network. Instead of going to Balancer, this revenue goes towards bribes. The goal is to incentivize the liquidity of yield-bearing tokens such as wstETH or stMATIC. The 50% protocol fee for the yield on these tokens also increases the protocol’s revenue.
Bribing through external projects will remain effective, but now, such projects will have to compete with Core Pools. Almost any Pool can convert to a Core Pool via Boosted Pools. Boosted Pools allow most tokens with a lending market to create a yield-bearing Pool. By transforming their Pools into Core Pools, more projects can start to earn “free” bribes. This is another powerful reason to bring liquidity to Balancer.
Another project that uses bribing is Lido Finance, a liquid staking protocol. Besides incentives in its native token (LDO), Lido also benefits from BIP19. The wstETH-WETH and LDO-WETH Pools qualify as Core Pools since they contain at least 50% yield-bearing tokens on which Balancer earns protocol fees. Thus, each Pool gets back for bribes the fees that it produces after the DAO takes 25%.
In this two-part series, we explained the benefits of veTokens and looked into bribing and how this affects different protocols within the Balancer ecosystem. Protocols try to increase their voting power by bribing veBal holders. The more power a protocol has, the more liquidity it attracts. From the protocol’s perspective bribing veBal holders is a cheap way to enhance liquidity. For users, bribing offers boosted rewards. After the introduction of the BIP19, bribing became even more competitive, and almost any Pool can now convert to a Core Pool to start earning free bribes.
Communications from Balancer Labs OU are intended solely for informational purposes, and should not be construed as investment or trading advice and are not meant to be a solicitation or recommendation to buy, sell, or hold any tokens mentioned. All figures are estimated and unaudited unless otherwise noted. As a technology company, Balancer Labs OU provides access to software.