The liquidity mining boom may be upon us.
, the maker of an automated portfolio management tool, has confirmed with CoinDesk it has begun distribution of its BAL token. Following around last week’s debut of Compound’s COMP token, BAL will be the second governance token earned by a decentralized finance (DeFi) app’s most valuable users.
Since June 1, liquidity providers for Balancer’s token pools have, but none of those tokens have been distributed. Balancer’s total value locked (TVL) has gone from $15.9 million on May 31 to $43.6 million as of this writing, . Going forward, earnings will be minted and distributed on a weekly basis, Balancer Labs CEO Fernando Martinelli told CoinDesk.
“By far the most important factor or reason why we are doing that is because we want this thing to be decentralized. We believe in a decentralized, trustless future, and we want Balancer to do that. We need the distribution to be in a healthy way,” Martinelli said.
Giving out governance tokens for putting assets onto a protocol has come to be known as “liquidity mining.” The technique, which amounts to giving users a seat at the table in deciding how to run decentralized applications, has been discussed throughout 2020. In April, IDEO CoLab Ventures, a venture capital fund backed by the design firm IDEO, spelled it out in a Medium post about translating.
But it all got real when collateralized lending startup Compound became the first major DeFi app to some of its governance tokens. Liquidity providers and borrowers started earning COMP on June 15. Since then, Compound became the largest app in DeFi, increasing its available liquidity by 6x.
“I think Balancer is an amazing project in that it creates an AMM [automated market maker] primitive that is extremely flexible for different asset management use cases (exchange, balanced portfolios, certain strategies),” CoinFund founder Jake Brukhman told CoinDesk.
With BAL’s debut in Ethereum wallets the world over, we enter the second chapter of this story.
Of note, the two projects are at very different stages in their life cycles. Compound was announced in September 2018 and was running for well over a year before unleashing the token. At the first disbursement of COMP, Compound users had already committed nearly $100 million in crypto collateral.
Meanwhile, Balancer only went live this spring and has roughly $40 million locked into it. If Balancer were to grow by the same proportion as Compound, it could jump from the sixth position in DeFi to the third, but obviously no one knows what will happen – nor .
Balancer Labs previously ran a , where Accomplice and Placeholder led alongside CoinFund and Inflection. The investors earned equity that was convertible to tokens. The seed round price was $0.60 per token.
Balancer’s core function is it allows users to make pools of tokens that automatically rebalance, and to tokenize those pools. So if a pool was built so that the value was 50% WBTC, 25% WETH and 25% BAT, for example, it would sell some of its WBTC for WETH and BAT if WBTC shot up in value, so that the proportion of value went back in line.
In short, it automates crypto indices.
The smart contract governing BAL provides for 100 million tokens with no inflation, but “those 100 million won’t be minted from the beginning,” Martinelli explained.
So far, 35 million have been minted. Of those, 25 million are designated for the team, advisers and investors, and 75% of that vests gradually over three years, and unvested tokens can’t trade or vote.
The team has control of 5 million tokens for an ecosystem fund, to promote growth in various ways and 5 million tokens for future fundraising rounds, according to Martinelli.
Balancer is currently a team of four and it expects to grow to a team of 10 by the end of the year, Martinelli said, with the ultimate goal of decentralizing the platform.
The remaining 65 million tokens mint at a rate of 145,000 BAL every week, which means it would take about nine years to fully distribute, but because BAL is a governance token the holders could always vote to speed up distribution.
Three full weeks have been completed so a bit over 400,000 BAL are being distributed now to over 1,000 wallet addresses that have accrued balances, Martinelli said (with a few edge cases for BAL earned by external smart contracts that will receive distributions later).
One facet of Balancer’s distribution worth noting is that so much of it exists off-chain.
This allows the team to iterate early on, in collaboration with users, so the team can look for ways in which users are gaming the system and write new rules to undermine those strategies.
For example, on Compound, users are staking assets to borrow assets to stake more and borrow more. There is debate about how valuable is a lot of this activity. Similarly, in 2018 rewarded users with a new token just for making trades, which sent wash trading through the roof.
The Balancer community wants to favor the most valuable behaviors. By tracking earnings in an off-chain fashion and iterating on the rules, Balancer’s community can refine incentives as it goes.
So, when BAL earnings started it was simple: Users earned BAL for supplying liquidity. Depending on what happens next, that may change.
“[The rules] kind of prevent useless liquidity from getting BAL,” Martinelli said. “It’s going to be a very interesting living thing that will evolve.”
These rules are designed to drive volume without directly rewarding volume. One example: Pools that appear to hold two tokens but really don’t – like if one had, say, 50% DAI (the stablecoin generated by deposits on Maker) and 50% cDAI (the token representation of DAI deposited on Compound) – accrue very low BAL rewards.
Building off-chain also allows Balancer to work on a case-by-case basis with startups built to integrate with Balancer that didn’t plan for a token distribution, which is something that has . These are the edge cases mentioned above.
One could imagine a world where these rules become so complex they result in other unintended consequences, but that’s why it’s useful to run them off-chain for now. Balancer’s hope is it finds a solid enough niche in the market so the continuous refinement will no longer be necessary and that a simple set of rules can move on-chain.
If this isn’t obvious already, a visit to Balancer site makes it very clear: The dapp can offer the same DEX functionality as Uniswap, because any single Uniswap is the same as Balancer pool with two tokens set to 50/50, or 1:1, value.
The big question for BAL: Can it catapult Balancer into Uniswap’s place as the AMM of choice on Ethereum?
Balancer currently has $18 million more in TVL than Uniswap, according to DeFi Pulse, but the question is whether this new form of yield will make it more appealing to liquidity providers for that simple DEX use case.
For now, there’s no incentive to trade on Balancer versus Uniswap, but if BAL accrues value quickly enough the idea of earning trading fees as well as BAL could lead to providers moving funds out of the most prominent AMM and into Balancer.
“I think that token distributions, not tech, will play a key role in how these DeFi protocols compete,” said CoinFund’s Brukhman, who noted Uniswap still has not announced any intention to reward liquidity providers with a stake. “Brand does play an important role, but I think we will see that Balancer builds a very successful brand quickly.”