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 -
- Concern around Impermanent Loss
- Desire to preserve DAO funds (i.e., reduce LM rewards)
- Desire to retain upside exposure
- Desire to single side stake assets
- 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.
- 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.
- 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.
- 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.
- 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.
- 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 -
- Bribing using MC
- 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
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Copyright and related rights waived via Creative Commons CCO
