Balancer Doubles LP Revenue Using Gauntlet

How Gauntlet’s Platform Helps Manage Stable Pool Amplification Factors and Swap Fees and Increases Capital Efficiency 10x

Automated Market Makers like Balancer, Uniswap, and Curve are wildly innovative technologies that form a cornerstone of all activity on DeFi, with billions of dollars being traded every day.

But without swap fees, those billions of dollars in trade volume would never have taken place. Swap fees reward Liquidity Providers (LPs) for providing capital to pools; without incentives, rational LPs would have no reason to make these trades possible.

In March, Balancer joined with Gauntlet to leverage our platform to optimize fees for their new Balancer V2 weighted pools. We’ve been managing swap fees for many V2 pools since their launch back in May, and have written before about our initial approach and our later insights into the process.

Since then, we’ve expanded the pools under our management to include Balancer’s STABAL3 USD and STABAL3 BTC pools. Today, we leverage the Gauntlet platform to manage both swap fees and amplification factors in order to increase LP returns, boost volumes, and maximize capital efficiency.

In this Medium post, we’ll show you how to think about dynamically managing swap fees and stable swap amplification factors, and how Balancer has increased their capital utilization by 10x and doubled LP returns by using Gauntlet.

Swap fees

Swap fees are one of the ways LPs earn a return on the capital they provide, which means that swap fees help enable decentralized market making. Higher fees are a boon to LPs when they are able to provide additional revenue to LPs.

At the same time, low fees can be a very good thing. As some of our own research has shown, the best fee for tracking off chain prices is the lowest fee. That’s because when fees are zero, the spread between prices on centralized exchanges and prices on-chain goes to zero as arbitrageurs keep prices inline. If on-chain prices are too far removed from prices off-chain, the utility of on-chain swaps diminishes for many users.

And of course, low fees lower transaction costs for traders — every trader would prefer to pay less in fees, all else being equal. If pool fees are too high, transaction costs will prevent traders from trading at all, which will drive fee revenues to zero. Higher fees will lower volume and decrease swap fee revenue as fees are raised past a certain threshold.

Setting swap fees is a delicate balancing act between optimizing LP returns, maximizing trader utilities, and ensuring that prices are competitive enough for on-chain trading to be possible at all. Throw in the fact that every AMM protocol needs to understand how their parameters are affected by parameters on other protocols, and you begin to see how thorny fees really are.

Amplification Factors

But fees aren’t the only parameter we have to worry about; the amplification factor (or A) controls the bonding curve for stable swap protocols like on Curve or Balancer’s stable pools. The technical details can be found in the Curve whitepaper and Peter Zeitz’s writeup of a now patched Curve vulnerability, but we can illustrate how A works with an example: Given $100M stable liquidity pool with two tokens each with $50M and a 3 basis points (bps) swap fee, you can see how much money you lose to slippage and fees at different amplification factors and trade sizes below:

Larger values of the amplification factor decrease slippages for larger trades. But even though this is a stable pool, pool imbalance still can make a big difference when trades occur in unfavored directions. Here are the transaction costs for trading a more liquid token for a less liquid token on a 3bps fee pool with 83.3M:16.7M (5:1) liquidity balance:

Although it’s clear that higher amplification factor values decrease transaction costs, notice the change in the z-axis above: the transaction costs for trading 1000 USD have increased from 3 basis points to 13 basis points even with an A value of 2000. This might not seem like much, but it could mean that traders end up taking their trades elsewhere.

Because large trades can cause pool imbalances that increase transaction costs for certain trade directions, even for smaller trades, high amplification factors can potentially have drawbacks. Setting the amplification factor very high could lead to larger trades, which then result in larger pool imbalances that increase transaction costs for other traders down the line.

If you want to understand how to govern stable pools, you need to carefully consider not just the transaction costs for a pool at its current liquidity, but also how future trades might affect future transaction costs.

Using the Gauntlet Platform:

Simulating many possible future histories for a pool is exactly what the Gauntlet platform allows us to do. In order to understand what might happen to Balancer’s stable pools, we consider thousands of possible scenarios to determine the best parameters for Balancer.

To do this, we simulate how a 1inch style router would route stable swaps to existing liquidity pools. We consider trajectories involving thousands of trades at many different parameters in order to evaluate how much volume will be routed to Balancer’s pools, and how much fee revenue will be generated in turn.

Our simulation platform lets us model what swaps are likely to take place based on historical data, how they will be routed, and what transaction costs (slippage, gas) will be in every transaction. It also lets us account for arbitrageurs, who constantly look for profitable transactions to rebalance pools at every time step.

For example, we can model how imbalanced pools might become over the course of two weeks of trading:

And how much volume balancer might see:

Impact

Gauntlet pushed out a new set of stable pool updates for amplification factors and swap fee on October 11th, and since then Balancer’s USD pool has seen amazing performance. Here we can see how much Balancer’s stable USD volume increased since we began managing pools in late September:

STABAL3 USD Volume

Volumes have spiked, and now pool utilization has increased by at least 10x, offering some of the best capital efficiency for any stable pool around:

STABAL3 Liquidity Utilization Compared to Curve 3Pool

Meanwhile, LPs have made more than 2x as much in the past month as they had since the pool’s inception.

(source)

LPs have also added millions in liquidity, rising in 34% in the week after our updates in response to these new changes in volume, swarming in soon after the initial changes:

As new liquidity enters, this will enable more volume to take place as slippage decreases, further increasing the total fee volume raised by the pool. And because of Balancer V2’s brilliant Vault design, this stable coin liquidity also helps to lower transaction fees on many other swaps that can be routed through this pool without incurring additional gas costs.

Today, Balancer Protocol’s STABAL3 USD pool performs better than ever thanks to the Gauntlet platform. We’re excited to see how much more it can grow.

Thanks to Hsien-Tang Kao, Nicholas Cannon, Fernando Martinelli, and Megan Gardler for invaluable feedback!