Balancer – the non-custodial liquidity and asset management protocol – launched liquidity mining earlier this week for its native governance token, BAL.
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Welcome aboard, liquidity mining starts this Monday! 🚀https://t.co/P3x6hER3ay
— Balancer Labs (@BalancerLabs) May 29, 2020
What is Balancer?
Balancer is a new DeFi protocol allowing users to contribute liquidity and earn trading fees on their holdings. However, unlike Uniswap which requires users to deposit equal value of two tokens, Balancer pools aren’t restricted by a single token pair. Instead, the protocol supports pools of up to 8 tokens with customizable allocations. As a brief example, the second most valuable Balancer pool today is a 40% ETH, 25% USDC, and 35% DAI liquidity pool.
As a result, Balancer effectively acts as a self-balancing index fund where users are earning trading fees on their assets. This is a stark difference than with legacy financial assets as shareholders typically pay fees when they purchase ETFs and other index funds.
Introducing the BAL – Balancer’s Native Governance Token
While the protocol initially launched without a native token, Balancer Labs is introducing the Balancer governance token (BAL) via the Simple Agreement for Future Governance (SAFG) model. In short, the SAFG is centered around participation and governance. Users who participate in the protocol earn governance tokens that represent the right to vote on future changes.
The key piece to the SAFG is that the underlying tokens are non-transferable and have no economic rights. In turn, the SAFG allows developer teams to quickly and easily launch native protocol tokens as the framework is complicit with regulations in most jurisdictions. The kicker with the SAFG is, that in the future, there’s actually nothing stopping a sufficiently decentralized governance system from lifting the transfer restrictions or implementing economic rights/value accrual mechanisms into the token. Therefore, in the long-run, we may expect to see many of these SAFG tokens evolve into cash flow-generating assets like MKR or KNC.
In order to properly decentralize control over the protocol, Balancer is implementing liquidity mining. Every week, 145,000 BAL will be distributed to users who are providing liquidity to any of the Balancer pools, resulting in 7.5M BAL distributed to LPs every year. With the total supply fixed at 100M BAL, 25M BAL was allocated to founders, advisors, investors, and developers. Assuming decentralized governance doesn’t elect to reduce issuance in the future, the current liquidity mining allocation is set to last the next decade (75M BAL allocation). In order to make the distribution as equitable as possible, Balancer will allocate tokens proportionally to the amount of liquidity each user contributed relative to the total liquidity on Balancer – currently ~$6.4M in total at the time of writing.
Probably the most interesting piece to BAL’s token model and incentive schema is a feeFactor design which encourages liquidity pools to charge the lowest fees possible. The lower the fees, the more BAL the pool receives. The higher the trading fees, the less BAL the pool receives. Ultimately, this creates a rather elegant design as pool creators (as well as liquidity providers) will have to factor in whether they’d prefer to play the short-game and potentially earn higher trading fees or play the long-game by minimizing trading fees to maximize their BAL earnings.
(Above) Rewards model for Balancer trading fees. The higher the feeFactor, the higher the BAL disribution.
Closing Thoughts
With Compound releasing details for a similar token distribution model last week – where depositors and borrowers will earn COMP for using the protocol – it seems that the SAFG model continues to play a bigger and bigger role in DeFi and the proliferation of self-sustaining, open protocols. The coming months for Balancer will act as a pivotal bootstrapping phase with the token distribution taking into effect. With that, it’ll be interesting to see how BAL drives an incentive for DeFi users to contribute liquidity to the protocol and how the fee dynamics will play out in light of the above schema. As it stands today, the most liquid token pool on Balancer is the 75% MKR + 25% ETH pool with $4.2M in total capital followed by the 40% WETH + 35% DAI + 25% USDC pool, aggregating $770K in liquidity.
prediction: @BalancerLabs AUM will flip @UniswapProtocol
not a question of if, but when https://t.co/Gyo12QBAOC
— 찌 G 跻 じ ⚡️ 🔑 (@DegenSpartan) May 31, 2020
Now with Balancer effectively in full gear, we may expect to see some increase in overall liquidity as well as trading activity. We’ll keep an eye out on how that progresses in the future.
If you’re interested in learning more about Balancer or want to stay up to date with the latest developments, feel free to join the Discord or follow them on Twitter!
Analyst at Bankless – one of the leading resources for open finance. Lucas is an active contributor to the DeFi ecosystem with appearances in other notable DeFi outlets including The Defiant and Our Network. He has years of experience working with dozens blockchain and token startups where he focused on token economics, marketing, and growth.