Prime Pools: A Cooperative DAO liquidity management solution
Improving DAO coordination with a veBAL reward optimizer
Vote escrow tokenomics have grown massively over the past year.
First introduced by Curve Finance in August 2020, vote escrow (ve) tokenomics aim to align protocol incentives by rewarding long-term lockers to earn additional protocol benefits.
In March of this year, Balancer went live with veBAL which aimed to increase the productivity of the BAL token and the role it plays in the Balancer ecosystem.
How do veBAL Tokenomics Work?
A quick recap of how veBAL tokenomics function:
• veBAL can be earned by locking b-80BAL-20WETH for a period of 2 weeks to 1 year. The quantity of the locked tokens and the duration of the lock determines the number of veBAL received.
In exchange for locking tokens, veBAL holders earn increased protocol benefits, namely:
- Boost liquidity provision rewards up to 2.5x
- Relative share of 75% of the protocol fee acquired by Balancer
- Voting share in deciding where Balancer liquidity reward emissions flow
- Voting share to influence the BalancerDAO through Snapshot
A full breakdown of veBAL can be found in the official Balancer docs.
Not every Balancer Liquidity Provider has a substantial amount of veBAL to increase their rewards and vice-versa. This imbalance creates an inefficiency in the veBAL market. Reward optimizers soon emerged to benefit from this inefficiency.
“It is great to see a long term contributor to the Balancer ecosystem like PrimeDAO stepping up to create a veBAL boosting system. We have consistently supported ecosystem partners providing veBAL holders with a diversity of options to boost their rewards.” — Fernando Martinelli, Co-Founder and CEO, Balancer Labs
Vote Escrow (ve) Tokenomics Reward Optimizers
Convex Finance was the first project to play into this inefficiency by providing a platform where CRV (the governance token of Curve Finance) holders can Vote Lock (ve) their CRV together through Convex. The substantial control of veCRV in Convex allows Convex to offer boosted returns to Curve LPs in exchange for a cut of their CRV rewards (currently 17%).
In the case of Convex Finance, a native Convex token (CVX) is issued and distributed to users of the Convex platform, further enhancing rewards.
To create value for the CVX token, a share of Curve LP’s CRV earnings is distributed to CVX stakers. The CVX token can also be locked for 16 weeks to earn platform fees and give voting weight for proposals and gauge weight voting.
The gauge weight voting is one of the critical functions of veTokenomics, as it controls the distribution of newly issued protocol tokens to selected pools. In the case of Balancer, every week, nearly 145,000 BAL tokens (worth $1.1M at the current price) are streamed to specific Balancer pools based on gauge weight voting. In addition to controlling this valuable stream, ve tokens also govern the general direction of the protocol through governance proposal votes.
Risks With Current Reward Optimizers
Although widely popular, reward optimizers are increasingly criticized for the negative effects they have on the protocol they optimize rewards for. The current aggregation platforms and the incentives they create put the longevity of AMM protocols in danger.
The introduction of aggregation platforms, each with its own native token, which is distributed aggressively to take over control of the underlying protocol, creates the following challenges for protocols:
Economic misalignment: Aggregation tokens that control ve gauge voting power disincentives for DAOs and individuals who want BAL inflation to be sent to their liquidity pools from acquiring the protocol native BAL token as it’s cheaper to acquire aggregation tokens to earn gauge voting power.
This economic misalignment leads to aggregator tokens accumulating a large share of the potential protocol value. The best example is Convex Finance ($650M), having a larger circulating market cap than Curve Finance ($500M). A sizeable veBAL aggregator that introduced a native token could have a similar effect on the Balancer tokeneconomy.
Governance centralization: A large number of governance votes are controlled by one entity (the aggregation platform) and have to vote in uniformity (all yes or all no) inside of Balancer Governance. This hurts Balancer Governance as centralizing the votes in one location leads to fewer and less diverse participants in the AMM protocols, moving the protocol further away from a resilient and decentralized future.
The combination of a third-party token accruing a substantial portion of the protocol value and the governance centralization that comes with it could lead to the decline of the health of the protocol.
PrimeDAO, as a Coordination Hub for DAOs, and as a longtime partner of Balancer, believes that the current veBAL system can be optimized in a more synergistic way.
Introducing Prime Pools
Prime Pools is a Balancer reward optimizer that aims to empower DAOs to contribute to the Balancer ecosystem by providing additional rewards and control.
Unlike current solutions, Prime Pools does not introduce a native governance token and instead aims to enable current veBAL holders to collectively lock their tokens and provide benefits to liquidity providers to enhance their rewards. By adopting Prime Pools instead of an aggregation platform with a Native token, Balancer can keep the majority of the value created by BAL inside of the Balancer Ecosystem.
How does it work?
In terms of functionality, there is some overlap between Prime Pools and current solutions.
Holders of 20% WETH / 80% BAL can convert their LP tokens to d2dBAL in the Prime Pools dApp. (Converting 20% WETH / 80% BAL to d2dBAL is irreversible; however secondary markets may exist.)
Prime Pools utilizes all 20% WETH / 80% BAL tokens under its control to vote to lock it for the max (1 year) duration in Balancer. The veBAL is controlled by the Prime Pools Common Controller. At the start, the Common Controller will be managed by a 4 out of 7 multi-sig; within four months, the Common Controller will be transitioned to a fully on-chain solution. Unlike current solutions, d2dBAL is the only controlling token in Prime Pools.
d2dBAL holders have the following perks:
- d2dBAL holders earn proportional protocol fees, veBAL inflation rewards, and airdrops from the veBAL managed by the Common Controller (e.g., 10,000 d2dBAL with 10,000 veBAL in the Common Controller).
Balancer Liquidity Providers can benefit from the boosts created by Prime Pools to earn additional BAL rewards while supporting the further development of the Balancer Protocol.
- 10% of the boosted rewards (the portion of BAL rewards above 1x provided to LPs) is sent to the Common Control to enhance veBAL ownership of d2dBAL holders.
- 2.5% of the boosted rewards are sent to the Prime Pools Multi-sig for maintaining and developing the Prime Pools solution.
If, for example, 4,000 BAL in extra BAL rewards has been generated for LPs that use Prime Pools — 400 BAL will be sent to the Common Controller and added to the veBAL lock. If we take the first example — 10,000 d2dBAL will now control 10,400 veBAL. Every d2dBAL holder now receives 1,04x the veBAL protocol rewards and influence.
Every two weeks — d2dBAL holders can vote on BAL gauges by using their d2dBAL tokens as a voting token in the Prime Pools Snapshot. Unlike other solutions, no intermediary token is needed, and all rewards (including Bribing rewards) are sent to the d2dBAL stakers.
Through these mechanisms, Prime Pools aims to add additional value to veBAL stakers and liquidity providers without extracting value away from the BAL token.
What about Governance?
To support effective BalancerDAO governance, Prime Pools will host a Protocol Delegates vote every month where d2dBAL holders can vote on Balancer Protocol Delegates. The poll results will decide the split between Delegates’ shares of the veBAL Snapshot Voting power controlled by Prime Pools.
An important aspect related to ve tokenomics is Bribing. Through Bribing, projects can reward veBAL holders for aligning with their project Gauges & Proposals in exchange for a reward.
PrimeDAO is working closely with Paladin, a platform creating Markets for Influence and Voting Rights across DeFi, that launched on Prime Launch, to integrate their Warden & Quest product into Pools.
More details on the Paladin integration and its added value will come in the following weeks here on our Medium blog.
We’ve never been more confident that DAO2DAO interactions will drive the future of crypto networks — we think the best way to bring this future into being is to build it.
If you’re a DAOoperator interested in building long-term liquidity on Balancer or intend to use any of the other Prime Products — don’t hesitate to reach out via this form!
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