[ARC] Deploy BAL to veBAL


Title: [ARC] Deploy BAL to veBAL
Status: Discussion
Author: @llamaxyz, @Dydymoon and @MatthewGraham
Created: 11-09-2022


Simple Summary

This proposal presents two options for deploying the approximately 100k BAL tokens being acquired by the [ARC] Strategic Partnership with Balancer Part 2 proposal, [1].

Abstract

After a positive Snapshot vote, an AIP for acquiring approximately 100k BAL tokens (depending on BAL price) will soon be presented to the community for an on-chain vote, [2]. This proposal will determine how to deploy this BAL holding, with the overall objective of maximizing the growth potential of Aave Pools and GHO.

The Aave DAO can choose between two options, each of which has varying degrees of complexity and represents different means of achieving similar goals.

Option 1) veBAL
Option 2) Staking auraBAL

Option 1 is the simplest and clearest way forward. Option 2 represents a higher yield investment strategy with added complexity.

This proposal discusses the two options and a community Snapshot/comments below will determine the forward direction of the DAO. Llama suggests that Aave proceed with Option 1 on the basis that there is a more immediate need to bootstrap GHO and create TVL for Aave Pools via Aave Boosted Pools.

Motivation

This BAL holding has been acquired by the DAO with the goal of supporting Aave lending market adoption. In pursuit of driving growth to the Aave markets, the BAL holding needs to be deployed and utilized.

Aave has already obtained 200k BAL from the first part of this strategic partnership and holds aBAL in its Reserve Factor; the DAO will deploy this BAL with WETH to achieve a veBAL position as detailed in [AIP 87] Strategic Investment Part 1 - BAL <> AAVE Token Swap, [3]. This proposal will focus on how best to deploy the approximately 100k BAL to be obtained from the [ARC] Strategic Partnership with Balancer Part 2 proposal + ~6400 BAL from the RF, which is soon to be shared as an AIP for voting and implementation, [4].

Option 1) veBAL

The Balancer Liquidity Mining system is an automated program which governs the minting of all BAL tokens based on on-chain voting by veBAL holders. veBAL is obtained by joining the canonical 80/20 BAL/ETH Weighted Pool and then locking the Pool shares token (often called BPT, for ‘Balancer Pool Token’) for a time duration. The longer the 80/20 BPT is locked for, the more veBAL and voting power is obtained.

In Option 1, Aave DAO converts all BAL (incl. Redeem aBAL for BAL) with sufficient WETH to B-80BAL-20WETH. The B-80BAL-20WETH token is then deposited into the VotingEscrow veBAL contract and locked for the maximum duration, 1 year. The Ethereum Reserve Factor will hold the veBAL holding, which will then be used to vote BAL rewards across Balancer V2 pools on supported networks.

By maximizing the veBAL holding and using over 306.4K BAL with the proportional amount of WETH (336) for a combined worth of $2,869,800 at the time of writing, Aave DAO would receive an estimated 153,920.38 units of B-80BAL-20WETH. Converted to veBAL, the 153,920.38 units would represent approximately 1.37% of the BPT liquidity and 1.63% of the veBAL supply. Aave DAO would be the tenth largest veBAL holder, [5].

With 145,000 BAL tokens currently being minted and distributed each week across four networks and Aave holding 1.37% of veBAL supply, this is equivalent to controlling the distribution of 1986,5 BAL per week, or $14,859 per week ($772,669 per year, assuming a BAL price $7,48).

When Aave deploys assets from the Reserve Factor to earn yield, such as stables into bb-a-USD or bb-a-USD / GHO, it will receive boosted BAL rewards due to its veBAL holding. The boost amount received depends on the value of the funds deposited and the relative sizing of the veBAL holding. Option 1 will provide sufficient veBAL to receive the full boost on around $2.66M of deposits into the Balancer Boosted Aave Pool, [14].

As part of the ongoing treasury management strategy, Llama will present a proposal to the community detailing the types and quantities of each asset to be deposited into various Balancer liquidity pools. This discussion will occur via a separate forum post and, for the purpose of this proposal, the directional commit is worth considering.

Note: depositing into the Aura gauges will mean that the veBoost from the veBAL position is not utilized. However, the veBoost can be sold on secondary markets like Warden when enabled, [6].

Option 2) Staking auraBAL

Option 2 first involves obtaining the B-80BAL-20WETH position as per Option 1. After the B-80BAL-20WETH position is obtained, Aave DAO will deposit it into Aura Finance’s auraBAL contract to earn yield in the several forms (2.36% stables (bb-a-USD), 25.52% in BAL and 38.78% in AURA). The images below provide a high level overview of the strategy.

The yield received from the auraBAL holding can be compounded to earn additional yield.

  • BAL yield (25.52% of 66.65%)
    • Paired with WETH or directly deposited into the B-80BAL-20WETH pool, then staked, to add to the auraBAL holding.
  • bb-a-USD (2.36% of 66.65%)
    • 75-80% of the pool’s TVL deposited into the Aave v2 Pool, [12, 13].
    • Deposited into the Aura gauge to earn 5.56% in (0.01% swap fees, 0.60% bb-a-USD, 1.97% BAL, 2.98% AURA).
  • AURA (38.78% of 66.65%)
    • Deposited into the VoterLocked contract and used to vote where AURA incentives will be directed.
    • The vlAURA position itself generates around 4.66% of yield in the form of platform fees as well as gives vote weight for proposal and gauge weight voting.The AURA is locked for 16 weeks and 3 days.
      • The goal is to grow the vlAURA position over time to increase the amount of AURA incentives which can be distributed across gauges, driving TVL to Aave markets.

Utilizing the incentives as outlined above creates several recursive feedback loops that compound over time to grow the vlAURA, auraBAL and bb-a-USD holdings. Depositing the B-80BAL-20WETH into auraBAL will grow the veBAL holding at a rate faster than Option 1, as the APR of auraBAL exceeds the veBAL APR whilst enabling Aave to gain vlAURA voting influence. If the 106.4K BAL are used in this manner, the benefits of depositing into the veBAL contract and voting BAL incentives will be lost. However, the auraBAL token can be swapped for B-80BAL-20WETH or WETH which will enable the community to exit this strategy and extend the veBAL holding or simply unwind to WETH.

With 200K BAL from the token swap + WETH are to be deposited in veBAL and 106.4K BAL + WETH into the auraBAL contract, Aave DAO will own 53,459 auraBAL and 100,487 veBAL. The veBAL holding will provide sufficient coverage to receive full 2.471 boost on around $1.74M of deposits into the Balancer Boosted Aave Pool, [14]. This is $0.92M less than Option 1. Do note, Aura Finance currently offers 1.18x boost on the Balancer Boosted Aave Pool, [15].

By depositing 53,459 units of B-80BAL-WETH into the auraBAL contract, Aave DAO will receive an expected 53,869 units of auraBAL, which represents approximately 2.45% of the auraBAL supply, [7]. By staking 100% of the auraBAL holding, Aave would make up roughly 3.47% of the staked auraBAL supply, [8]. At the time of writing, 1 vlAURA controls 0.3105 veBAL, [9]. Aave will be much better off in the short term by proceeding with Option 1 due to the immediate effect of BAL incentive emissions, especially with GHO coming to market soon.

Option 2 encourages Aave to deposit any Protocol Owned Liquidity position funds into the Aura gauges to continue earning AURA rewards. However, if Aave does this, the veBoost obtained from veBAL will not generate any boost for Aave as veBoost only applies to deposits into Balancer gauges. Aave DAO will need to weigh up the benefits of depositing into Balancer gauges versus Aura gauges based upon the difference in boost and AURA rewards being received. Another consideration is the option of monetizing the veBoost value by leasing out the veBoost on a platforms such as Warden, [17].

Also, if the veBAL voting power is not enough, we could consider creating Quests to get more veBAL holders to vote on Aave pools gauges, [16].

Commentary

To help with the decision making, the table below presents some pros and cons of each approach. The TL;DR: veBAL has an immediate impact whilst auraBAL is a longer term, higher return strategy that compounds over time.

Llama suggests Option 1 as it is simpler and will generate more immediate benefits… If, at a later date, vlAURA has better liquidity and 1 vlAURA > 0.5 veBAL in rewards, we recommend that Aave consider purchasing AURA, [10]. However, there is a more immediate need to support GHO and Aave Boosted Pools, which will generate revenue through GHO borrowing rates and drive TVL to Aave.

There are several more advanced strategies to which Aave could deploy assets to grow its auraBAL and/or AURA holding over time and which have a higher direct investment ROI. However, these strategies take a long time to acquire the voting influence required to drive meaningful rewards across pools that generate TVL or revenue. An alternative strategy is to deploy funds from the Reserve Factor to farm BAL and AURA rewards to acquire a holding in vlAURA.

As an additional point of consideration, Aave can also use its aBAL revenue to further lean into either strategy. It is reasonable to think that, in time, AURA could be listed as collateral on Aave, generating aAURA revenue which could also be used to bolster this strategy. The compounding effects of using the DAO’s revenue stream presents Aave DAO with a unique opportunity to become and remain a big player in how BAL and AURA incentives are distributed.

Implementation

Upon a successful Snapshot and the approximately 100k of BAL being acquired, all of Aave’s BAL and aBAL holding (redeemed for BAL) will be paired with WETH and converted to B-80BAL-20WETH and then locked for 12 months inside the votingescrowBAL contract.

This will be achieved by enabling all BAL and a pro-rata amount of WETH to be exchanged for B-80BAL-20WETH via a Bonding Curve. The book value of the B-80BAL-20WETH token will be calculated using Chainlink oracles.

Arbitrage traders will acquire B-80BAL-20WETH on behalf of the Aave DAO and then exchange it for BAL and a pro-rata amount of WETH. Arbitrageurs will be encouraged to complete these transactions on Aave’s behalf for a 50 bps reward relative to the calculated book value of the B-80BAL-20WETH token.

The payload will be peer reviewed by @bgdlabs.

It would become uneconomical for an actor to move the price of B-80BAL-20WETH by way of manipulating the BAL price such that the Chainlink oracle updates at a higher price. Other actors would arbitrage BAL prices across CEXs and DEXs, making it very expensive to manipulate the BAL price with intention of movingthe B-80BAL-20WETH price higher.

Future Considerations

A separate forum post will be shared with the community to determine how the veBAL metagoverance will be managed and how the DAO will vote to allocate the BAL incentives across the various pools.

In addition, a separate forum post will emerge with a proposal to enable aBAL and aWETH to be redeemed for BAL and WETH on an ongoing basis. This will enable BAL + WETH to be continually converted to B-80BAL-20WETH at the same rate as aBAL is redeemed for BAL. The Bonding Curve will enable all BAL + a pro rata amount of WETH to be converted to B-80BAL-20WETH and whenever BAL exists in the Ethereum Reserve Factor. Llama will seek to list BAL as collateral on Aave Pools when there is suitable liquidity on the respective network and periodically transfer BAL from other networks to Ethereum for conversion into B-80BAL-20WETH. There will be an opportunity to further discuss if this ongoing accumulation of B-80BAL-20WETH is deposited in veBAL or auraBAL.

References:

[1] ARC - Strategic Partnership with Balancer Part #2
[2] Snapshot
[3] Aave - Strategic Investment Part 1 - BAL <> AAVE Token Swap
[4] ARC - Strategic Partnership with Balancer Part #2
[5] veBAL Holders
[6] Warden | Claim
[7] Ethereum Transaction Hash (Txhash) Details | Etherscan
[8] Aura BAL (auraBAL) Token Tracker | Etherscan
[9] Aura Finance Dashboard
[10] Balancer
[11] Creative Commons — CC0 1.0 Universal
[12] AaveLinearPool - Developers
[13] Balancer
[14] Balancer Tools
[15] Aura Finance
[16] Warden | Claim
[17] Warden | Claim

Copyright

Copyright and related rights waived via CC0, [11].

4 Likes

Hi All :wave:

We are now proceeding to scope out and start working on the bonding curve for this deployment.

With regards to the 100K BAL purchase payload, this has been through peer review once and will be resubmitted for a second review shortly, before being submitted for on-chain voting. We are >95% complete and expect to have this submitted within the next fortnight.

3 Likes

Hi Everyone :wave:

We just want to highlight the Aave Ethereum Reserve Factor has been added to Balancer DAO’s whitelisted VoterEscrow contract. Llama worked the proposal through Balancer’s governance process back in April 2022 in preparation for what was to come.

B-80BAL-20WETH is intended to be deployed from the Reserve Factor.

3 Likes

veBal is from a strategic standpoint for both the safety module & GHO critical.

Balancer & Aave DAO worked together since day one, it’s completely clear IMHO that this proposal reinforces the synergies with the balancer ecosystem and I’m expressing my support for it.

3 Likes