Deploy New Staking Module to a Balancer 80/20 Pool

Title

Deploy New Staking Module to a Balancer 80/20 Pool

Authors

Alan & Curtis from the Balancer Partnerships Team

Summary

Alan and Curtis here from the Balancer Partnerships Team. We were part of the birth of Merit Circle and helped the team conduct a successful LBP on CopperLaunch, which ended up raising a record breaking $100M. Since then, we’ve been following the project’s path and this discussion very closely, believing that Merit will become the backbone of the blockchain/p2e gaming industry in the coming years.

We had a few thoughts based on the recent commentary in the forum post discussing the revamp for the Merit Circle Staking v2 Program. First of all, for those unfamiliar with Balancer, here’s a quick primer:

Balancer is a community-driven protocol, automated portfolio manager, liquidity provider, and price sensor that empowers decentralized exchange and the automated portfolio management of tokens on the Ethereum blockchain and other EVM compatible systems.

Balancer Pools contain two or more tokens that traders can swap between. Liquidity Providers put their tokens in the pools in order to collect swap fees. Balancer’s fully flexible design space opens the aperture of possibilities for all types of liquidity providers and their respective considerations.

Balancer has also recently launched veBAL. The construct is similar to veCRV, but an 80/20 BPT of BAL/WETH is staked (rather than CRV or BAL) and has a maximum boost staking period of 1yr (rather than 4 years). This helps foster deeper liquidity in BAL on Balancer, showcase the 80/20 pool construct and democratize the distribution of BAL liquidity mining every week. By moving the LM governance to the ecosystem the incentives have been tokenized.

In Version 1 of Merit Circle’s Staking Programme users could either stake $MC or the MC/ETH LP token from UniV2. While this helped grow awareness for Merit Circle and helped sustain liquidity for the project, it left some things to be desired. Most notably was the incredible cost to the Merit Circle DAO in the form of LM incentives and cost to LPers in the form of Impermanent Loss. [add data]

What we propose is to instead provide the option for users to stake an 80/20 Balancer Pool Token in the same model as Aave’s staking module and veBAL. This would both create sustainable liquidity for Merit Circle but also help to subsidize some of the liquidity mining rewards by utilizing veBAL bribes, which have shown to be significantly more capital efficient when compared to traditional Liquidity Mining incentives.

Abstract

When going through the thread that was about reforming Staking V2 for Merit Circle there were a few key narratives that users seemed to be bringing up, they were -

  1. Concern around Impermanent Loss
  2. Desire to preserve DAO funds (i.e., reduce LM rewards)
  3. Desire to retain upside exposure
  4. Desire to single side stake assets
  5. Desire to create usable liquidity

What we propose is rather than utilizing Uniswap V2 or V3, to instead shift the Liquidity Pools over to Balancer in an 80/20 pool format, similar to Aave’s Safety Module or veBAL. We believe that using an 80/20 pool is the best solution to the above questions/desires posed by users.

  1. Concern around Impermanent Loss

80/20 Pools have repeatedly shown to offer greater Impermanent Loss protection when compared to its 50/50 counterparts.

Above is a table showing the assumed price change for the below IL calculation. This excludes any swap fees and assumes an arbitrary amount of time has passed.

The above table shows the IL data used.

In the above scenario MC appreciates in price +500%, while USDC remains as is. As can be seen if MC/USDC were put into a typical 50/50 pool, IL would negate 30% of the gains, while in an 80/20 pool that IL is cut in half.

  1. Desire to retain DAO funds (reduce LM rewards)

According to a recent study done by Lido Finance, bribing is 3.5x more capital efficient when compared to LM rewards in growing liquidity. Rather than Merit Circle directing a portion of it’s MC reserves to promote liquidity for MC/USDC, funds could be used up to 3.5x more efficiently bribing veBAL holders to vote for MC pools. This could result in huge amounts of saved capital for Merit Circle and is a mutually beneficial relationship for Balancer. Additional MC rewards could be distributed to users but still at a more efficient rate than what is currently proposed.

As a reference, Lido (in the second week of May 22) is getting 11.2% of emissions which means (16,240 BAL * ~$12 = ~$194,880), and they’ve spent $39,711 on the bribing campaign, meaning that Lido is getting roughly 5x in BAL as their ROI. Another good example is QiDAO. During the first week of Polygon and Arbitrum gauges (last week of April), they got 2.11% of emissions for Polygon and 0.18% for Arbitrum for 2.29% total. They received a total of 3,320 BAL * ~$14 = $46,500, and they spent $14,500 in bribing, obtaining an ROI of 3x.

More info on veBAL here.

  1. Desire to retain upside exposure

The 80/20 pool has shown to preserve greater upside for holders while simultaneously allowing for adequate price depth on trades.

As shown by the above scenario, 80/20 pools both preserve greater upside in high upside scenarios, while simultaneously protecting investors from experiencing too much IL, but it also provides substantially better Break Even yield in all scenarios.

  1. Desire to single side stake assets

Due to the nature of 80/20 pools, less capital is required to either be supplied by Merit Circle or the user in order to achieve balance. In order to achieve a pool with ~$100MM of assets supplied, only $20MM of USDC would be required from Merit Circle, swapped from MC to USDC or provided by users. Also due to the reduced IL, Merit Circle itself would do less subsidizing of yields to provide IL protection.

  1. Desire to create usable liquidity

While 80/20 pools have higher price impact when compared to its 50/50 counterparts, this can easily be offset by increasing the pool size and is quickly negated on multi-hop trades due to Balancer’s Vault architecture. In addition to this, recent analysis has shown as much as 80-85% of trades are routed through swap aggregators, Balancer’s 80/20 pools have already been integrated on all swap aggregators and should show no issue in drawing volume.

Deploying an 80/20 BPT that could be used for governance capabilities is fairly simple to launch. 80/20 weighted pools can already be created by anyone interacting with Balancer and additional support in creating the governance structure could be provided by the Balancer Integrations Team.

Motivation

Obviously as a member of the Balancer Partnerships Team we have a strong motivation to help other protocols see the value that Balancer provides. However in this case we helped Merit Circle through their initial LBP process and want nothing more than for Merit Circle to thrive long term. With a Bear Market looming on the horizon creating sustainable economics for the MC token is of utmost importance. Spraying token revenues to create liquidity is OK to do during a Bull Market but during this Bear the most cost efficient methods should be utilized. We believe utilizing a Balancer 80/20 Pool is the #1 method for that option.

Budget

Pending how Merit Circle decides to implement this it should be minimal. If anything the budget should be significantly lower than providing LM incentives due to the above mentioned efficiencies presented by bribing.

There are two main methods this could be completed -

  1. Bribing using MC
  2. Accumulate veBAL (price is currently depressed with the rest of the market)

These two options could be discussed in another proposal.

As a reference, Lido (in the second week of May 22) is getting 11.2% of emissions which means (16,240 BAL * ~$12 = ~$194,880), and they’ve spent $39,711 on the bribing campaign, meaning that Lido is getting roughly 5x in BAL as their ROI. Another good example is QiDAO. During the first week of Polygon and Arbitrum gauges (last week of April), they got 2.11% of emissions for Polygon and 0.18% for Arbitrum for 2.29% total. They received a total of 3,320 BAL * ~$14 = $46,500, and they spent $14,500 in bribing, obtaining an ROI of 3x. - Copied from Point 3 of the Abstract

Rationale

Pros:

  • Less IL suffered by users
  • Less LM rewards required by the Merit Circle DAO
  • Increased Upside Exposure for MC holders
  • Custom Swap Fees (Can be increased or decreased during volatile times)
  • New veTOKEN model for Merit Circle, aligning the incentives of community members by locking tokens and the added benefit of creating usable liquidity
  • More gas efficient swap pairs thanks to Balancer’s Vault Architecture
  • Merit Circle can be on the forefront of the emerging 80/20 BPT veTOKEN model; several other projects have inquired about this model.

Cons:

  • Additional education for MC members to explain a new veTOKEN model
  • More price impact on large trades, however based on the data we’ve collected large trades are very rare ($100k++)

Poll

For / Against Utilizing a Balancer 80/20 Pool for Staking V2

For / Against Utilizing a veMC model for governance

For / Against Bribing for additional LM incentives

For / Against Accumulating veBAL

Copyright

Please add the following sentence

Copyright and related rights waived via Creative Commons CCO

4 Likes

Hi,

After the Terra debacle, I don’t think we need to expose our main liquidity to unproven protocols during these critical times. Uniswap v2 is more than plenty for MC’s upcoming Staking V2.

1 Like

Hey AdmiralErik!

Completely understand that sentiment but Balancer is a top 3 DEX by TVL and trading volume, has never been hacked/exploited and is one of the DeFi OGs. Not sure if the unproven protocol moniker fits!

Also Aave has been using an 80/20 Pool for their Safety Module for the past year+!

Henlo,

Thanks for writing the proposal.

I’ll have to vote no. Uniswap v2 is working fine, and I agree with @AdmiralErik. Not interested in experimental protocols when we have the standard already.

Don’t want anything to do with BAL tokens or whatever either.

Honey
honey-with-wooden-barrel-vectors

3 Likes

Hey Curtis, sticking with my phrasing. Too critical times dealing with unproven protocols. We like to keep it simple. MC-USDC LP on Uniswap v2. No need to change. Impermanent loss is a literal meme, and we don’t need a ponzi built on top of that.

Imagine waking up one day reading on CNBC or Coindesk “Balancer got hacked, you lost all your money”. Not the time, not the market, not the interest.

Not worth it.

Voting a hard “NO”.

Not sure where you’re getting your information from but these comments seem ludicrously misinformed and misguided.

I would suggest others take these comments lightly and research and understand this proposal themselves.

2 Likes

Hey Notawhale, thanks for your opinion and welcome to the forum. Much appreciated. Others can do as they see fit, just stating my own opinion and my intended voting decision. That’s what a DAO is for, after all.

1 Like

Hey MC familia,

I’m Alan from Balancer Labs. Happy to provide more information about Balancer and why statements like “unproven” protocol might be misleading the community. Balancer’s longevity is similar to Uniswap, both were born in 2018, and our contracts are battle-tested across multiple chains and integration partners. DefiSafety gave us a score of 94/100 https://www.defisafety.com/pqrs/362 (For reference Yearn received a score of 93/100, Curve 93/100 and Sushi 63/100) and by doing some upgrades we will expect to increase our score by +4 or even have the highest score of all. Merit Circle utilized Balancer’s tech for conducting a successful LBP that we all enjoyed. We all felt that it was great and a safe tool.

As for talk about using an 80/20 BPT for voting or governance, projects like AAVE built their safety module Safety Module - Aavenomics using Balancer’s tech securing millions of dollars and the safety of the Aave protocol. The perception of Balancer as one of the safest defi protocols is very common among Defi native users and we are happy to provide all the necessary information for the metaverse community too.

I would love now to focus on the economic advantages that this transition will have for Merit Circle. Balancer launched veBAL (a voting-escrow model) that allows for emissions to be directed by governance. Merit Circle is “wasting” tons of MC tokens to attract or retain liquidity providers, affecting the dilution of the tokens and exposing LPs to impermanent loss. Both things can be addressed by deploying a Balancer pool as outlined in @curtis’s original post.

Below is a quick example showing the money that could be saved by utilizing a Balancer Pool for MC/USDC and either acquiring veBAL to direct incentives or bribing veBAL holders to vote:

LP Method Cost of Liquidity Incentivization Method
50/50 UniV2 Pool $200,000,000.00 Staking Incentives in MC
80/20 Balancer Pool Token $57,142,857.14 Bribing in MC
80/20 Balancer Pool Token $20,000,000.00 veBAL Acquired

The above calculation assumes the staking APY remains steady (200% - Current APY shows 371% on MeritCircle) and ~$100MM of capital is used over the course of one year. Bribing is also assuming the 3.5x efficiency as found by LIDO DAO remains steady. However, the current numbers for Balancer are significantly higher (7-10x more efficient than LM). This also does not take into account the 17% APY earned/year in Balancer Fees + BAL LM for holding veBAL.

Looking forward to hearing more thoughts and all constructive feedback is welcome :slight_smile:

1 Like

Just to add one additional point here -

The whole concept for us around proposing the use of a Balancer 80/20 Pool as opposed to any 50/50 Pool variant is mostly to save money (in less IL, 80/20 Pools always have at least 50% less IL when compared to a 50/50 variant) and preserving more upside for the user.

Any additional talk around LM and Staking can also be subsidized with $MC rewards if users would rather have that as well.

1 Like

How does it change anything if we still have huge amount of liquidity in uniswap pool? ICorrect me if Im wrong but isnt it just creates ability for people to arbitrage both pools. Then whats the point? I would understand if we had ONLY balancer pool than your statement makes sense, but not with spreaded liquidity.

I will be voting no on this proposal as I don’t see any benefits for us but balancer team.

Hey Alan, I’d advice you to do more research on MC before calling the liquidity incentives a ‘waste’. It’s disrespectful and a disgrace to have a team say that. Shill elsewhere, thanks.

1 Like

Hello,

Thank you for the post. I personally do not see this a superior choice versus Uniswap v2, which has served the DAO pretty well already. I am not in favor of changing something that already works as intended, nor do I wish to inherit additional risks.

Thanks,
AS

1 Like

Meow,

Welcome, and thank you for helping the Merit Circle team with the LBP on Copperlaunch. We appreciate you taking the time for writing up an alternative to our current staking & LP system.

As of this moment we’re not inclined to move away from Uniswap v2 nor changing the weighting from the original 50/50.

Signed with right paw,

Mrs. Witty Kitty
Sad Cat Capital

Hi @SpeedyG,

Thanks for the reply. The idea is to shift the liquidity pool from UniV2 to a Balancer 80/20 pool, ending any incentivization for a UniV2 pool (which would cause users to migrate over, LPing at Balancer is not any different from LPing at UniV2 except you can stake a single asset at Balancer and the position auto adjusts).

The cost savings argument is in BAL rewards could subsidize MC rewards (Currently MeritCircle is diluting it’s own users by spraying LM rewards on users who stake MC or the LP token) or in creating sustainable liquidity in an 80/20 pool used as the governance locking token (Similar to Aave).

Thanks everyone for responding.

I am surprised by the lack of openness here for something providing dominant AMM tech. From a technical perspective both Balancer and CRV are superior to Uniswap v2.

Not too long ago Merit Circle launched its token using a Balancer Pool, a liquidity bootstrapping pool, clearly the best option on the market for the purpose. That being said I don’t think any claims against security or being “unproven” are valid.

The real benefits for a merit circle user are optimization of incentives. You can give less MC to receive more BAL (in terms of usd) and no one I stopping you from selling the BAL for other tokens.

Swap fees on Uni are fixed where, Balancer allows a dynamic value so bumping it up when the market gets turbulent makes LPs profit greatly while defending the tokens price point.

Just a few reasons, but I respect the communities decision regardless. It would be nice to have a project who was born from Balancer consider its roots a bit more seriously.

Thanks.

1 Like

Hey Zen,

I’m just one guy having an opinion. The DAO should vote whatever the DAO should vote. I appreciate the Balancer team taking the time to write this proposal out, and I don’t think anyone disagrees that they loved the Copperlaunch at a very critical time.

However, especially due to the Terra/Luna/UST event, I am very afraid of another such event. Yes, not quite the same, but the point remains - what we have now works safely. Some prefer stability within the 50/50 reasoning, and some put existing security over everything else. I do not want BAL tokens, yes I can sell them and create additional tax and accounting issues, but I rather just stick with what we have.

But again, the DAO decides what the DAO decides.

I stick by my vote of “no”, as Uniswap v2 and a 50/50 pool is just fine as it is.

1 Like

Hi All,

I am writing this as a personal opinion and it does not (and should not) be read as an opinion from the team.

Having said that; everyone is entitled to their own opinions however opinions should not be read as facts.

Calling Balancer “unproven” is not factual (period, full stop). Using the word “ponzi” is even worse if you ask me. Experimental is an easy word to throw out that could apply to anything in blockchain.

It is correct that Balancer might not be as well known or have the same amount of TVL as Uniswap but they have existed for a long time and are, if anything, a proven product within crypto (that is; if you would consider Uniswap proven).

The reasoning for wanting to stay with Uniswap is reasonable and understandable and that is up to everyone to make an educated decision on for themselves.

Anyway; I would urge everyone who partakes in these discussions to perhaps be a bit more respectful and also understand their position in this DAO. There are a lot of people looking up to some of you and that should come (in my opinion) with some responsibility in the way you frame certain responses.

Thank you for considering my point(s) and have a wonderful weekend.

Gr,

Kraken

P.s. I use uniswap, balancer and more on an almost daily base and don’t have a strong opinion for one or the other.

1 Like

Uniswap v2 is indeed working fine :slight_smile: not sure with the other concerns of the author… Tho some have points too. But for now, it is a NO for me too…

3 Likes

Thanks Balancer team for this excellent proposal.

A 80/20 pool would be cool, but I’m not sure about all the other added complexity.

1 Like

Greetings,

Does @MeritLtd have an opinion on this proposal before it closes? Any input would be appreciated.