ARC - Strategic Partnership with Balancer Part #2

Governance
1

title: ARC - Strategic Partnership with Balancer Part #2
status: Discussion
author: Llama Community - @MatthewGraham
created: 10-04-2022

Simple Summary

Acquire 100,000 BAL tokens by deploying a Bonding Curve contract. The BAL tokens are to be held in the Reserve Factor until further details relating to Aura emerges and then the Aave community can determine if to deploy BAL to receive veBAL or auraBAL, [1].

Abstract

Deploy a Bonding Curve to acquire an additional 100,000 BAL tokens on market at the chainlink oracle price +50 bps, for a cost $1,708,500 with BAL at $17. This is an additional purchase to the 200,000 BAL token swap being considered.

Aave will become one of eight token holders with 300,000 BAL tokens. All 100,000 BAL tokens are to be retained in the Reserve Factor until such time as further information on auraBAL emerges.

Motivation

The original motivation for performing a token swap with Balancer can be found on the ARC - Strategic Investment BAL Token, [2].

With the additional 100,000 BAL acquisition, Aave would transition from just outside the Top 50 BAL holder to inside the Top 30 holders, [3]. If an additional 75,000 BAL was acquired, totalling 375,000 BAL, then Aave would become a Top 20 holder and this includes three community wallets, one Polygon bridge pool and the main BAL liquidity pool. So really it would be more like the Top 15 holders if another 75,000 BAL was acquired.

With 300,000 BAL tokens, Aave would have the largest BAL holding of any strategic partner Balancer has partnered with. The largest strategic partnership holding to date is the 270,000 BAL position held by Tribe DAO, [4,5]. Having a larger BAL holding relative to Tribe DAO may become a competitive advantage as Tribe DAO seeks to direct TVL to Rari Fuse pools with the use of the new ERC-4626 vault, [6].

With the emergence of ERC-4626, a new type of vault, whereby Liquidity Providers (LP) can deposit their stakes BPT tokens into lending pools and earn BAL rewards whilst using staked BPT as collateral, [7]. This is particularly appealing for staked BPT holdings which have minimal Impermanent loss risk. An example would be to use the staked BPT token for the stable coin Balancer Boosted Pool which uses Aave V2 to generate yield and receives BAL rewards, [8]. Based upon the success of wstETH being listed on Aave V2, this may lead to significant Total Value Locked (TVL) growth for Aave which makes up more than 13% of Aave’s mainnet V2 market TVL, [9].

Having not yet entered in the Curve / Convex tokenomics play, Aave has an opportunity to be an early leader in the veBAL wars. With the emergence of Aura, the Aave community has a choice to determine if the 100,000 BAL to be acquired are to be deployed for veBAL or auraBAL. If Aura is like Convex, then being early and building an Aura holding is worth considering. The first step in both strategies is to acquire a sizable BAL position and as the initial 200,000 BAL is proposed to be deposited into the veBAL contract and locked for 1 year, the 100,000 BAL detailed within this proposal can be deployed into either veBAL or auraBAL contracts.

There are likely to be many more Balancer Boosted Pools that utilise aTokens in the future and the veBAL votes can be used to help bootstrap these pools by directing BAL rewards to those pools. Using either veBAL or auraBAL to vote for BAL rewards towards pools that create TVL for Aave is a strategic advantage. If Aura evolves like Convex did, then the voter locked AURA token will have more voting influence over BAL rewards than one veBAL token. Being prepared and ready for the Aura token launch is going to position Aave to maximise the upside from its investments as rewards often favour early movers.

Implementation

A Bonding Curve deployment utilising Chainlink’s BAL/USD oracle feed with a 50 bps incentive for arbitrage trades to acquire BAL on market and deposit into the contract. Aave will provide USDC to fund the Bonding Curve contract. An example of this type of transaction occurred when Tribe purchased $10M of DPI on market, [10].

The 50 bps fee is to provide an economic incentive for arbitrage traders to attain BAL on market and deposit BAL into the contract profitably by more than offsetting gas costs. This mechanism enables everyone within defi to participate and essentially crowdsources the BAL tokens on Aave’s behalf. Once the BAL has been received it will be transferred to the Reserve Factor.

References:

[1] [Proposal] Allowlist Aura Finance in Balancer VotingEscrow - Proposals - Balancer
[2] ARC - Strategic Partnership with Balancer Part #1 - #15 by MatthewGraham
[3] $17.84 | Balancer (BAL) Token Tracker | Etherscan
[4] [Proposal] Allow Tribe DAO to lock veBAL - Governance - Balancer
[5] Snapshot
[6] FIP-90: Fuse-boosted USD Balancer pool (bb-f-usd) - Proposals - Tribe
[7] EIP-4626: Tokenized Vault Standard
[8] Balancer
[9] Aave - Open Source Liquidity Protocol
[10] Aave: Aave Collector V2 | Address 0x464c71f6c2f760dda6093dcb91c24c39e5d6e18c | Etherscan

Copyright

Copyright and related rights waived via CC0.

7 Likes
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Hi Everyone,

This proposal is currently live on Snapshot. Please do head over and express your opinion.

4 Likes
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Hi Everyone :wave:

A brief update on this proposal. We are currently at the peer review stage with the payload now being reviewed by @bgdlabs. We are using the approach outline in the proposal above that utilises a bonding curve funded with USDC held in the Reserve Factor, that enables BAL to be sent to the Reserve Factor and the reward “BAL/USD Chainlink Oracle plus 50bps” paid in USDC to the sender.

What we are expecting is BAL will be acquired at probably beneath the Chainlink oracle price and deposited / sent to the Reserve Factor generating a profit for the depositor who receives the Chainlink Oracle price plus 50bps.

To help visualise when this may occur, check out the link below. Essentially, whenever the price of BAL dips beneath the BAL/USD Oracle feed, this is when buying BAL at spot and depositing into the Bonding Curve is profitable, excluding the price impact of the trade. Tools like Limit Orders offered by 1inch and Gelato/Arrakis are handy ways of ensuring the BAL are acquired at the right price.

BAL/USD and DEX Trading Price Chart

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Hi @MatthewGraham - before voting on this second part of the Balancer partnership, I’d love to understand more about the current state of the relationship.

Has Aave been voting in Balancer Governance? How is / will this responsibility delegated?

2nd - how has BAL tokens, besides diversification, benefited Aave so far? Would love to better understand the immediate need for more BAL - and why not included in the original ARC.

Seems to be a lot of “ifs” “mays” and “likelys” which can be a bit daunting. It is my understanding via previous discussions this could be used to acquire auraBAL?

Especially with the vulnerability disclosed on May 17th, I struggle to see the urgency for more BAL as the largest pool to benefit Aave is migrated.

I would note Llama holds a significant delegation within BAL and a potential conflict of interest.

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Hi @fig,

I made this quick sketch to try bring it all together. The original post settled on the 300k of BAL quantity and decided to split it into two parts, a) 200k BAL tokenswap and b) 100k BAL on market purchase. We are now mid way through part b).

Screenshot 2022-08-12 at 18.27.08
Screenshot 2022-08-12 at 18.27.081396Ă—728 33.8 KB

There are a few open questions, mainly how best to deploy the 100k BAL portion as the initial 200k is destined for veBAL. The community is still to decide which way to proceed and this will be address in a later governance forum post.

With respect to Balancer governance, only veBAL holders can vote and BAL holders can not. Aave DAO needs to convert BAL to veBAL in order to start voting on BAL emissions and Balancer governance topics. How the DAO best manages this is something that will be addressed in a later post. We are discussing each decision in a separate post to keep the discussion rather focus. My personal view is this likely lead towards a delegation of sorts for ease of execution or maybe utilising Aave’s snapshot to enable AAVE and stkAAVE to vote on how the veBAL holding should vote.

Our current thinking is the veBAL, maybe aurBAL too, holding/s are used to encourage TVL to Aave or liquidity to GHO.

@Llamaxyz does have a veBAL delegation and we have a separate team within Llama that discuss how this holding should vote in the best interest of Balancer. This team like the Aave team has very well connected and in touch with contributors to assist with making high context and well researched decisions.

The sketch is rather rough, hopefully it helps :slight_smile:

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Hi Everyone :wave:

Good news, the 100K BAL purchase payload 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.

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We are supportive of this continued partnership between Aave x Balancer.

While we acknowledge some of the concerns raised by @G-Blockchain @thewatcher and others, we were supportive of this initiative in its infancy and will see it through.

It seems like this is the last of the BAL series of proposals and believe it is the most exposure we need during this time of volatility and uncertainty - unless very salient goals.

In the future, we hope to see increased transparency around the relationship between BAL and Llama.

1 Like
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Before deciding on our position, we had a few questions that we hoped you could answer.

  1. What is the price the BAL tokens will be purchased at? According to the initial proposal, it is $17 while the price today in the market is ~$5.3. If it is indeed $17, the price seems exorbitant and not fiscally prudent, especially in the current environment.

  2. Aave already has 200k BAL tokens (please correct us if we’re wrong). Is it prudent to increase exposure at the moment given the market conditions? Having as strong a treasury as possible is critical right now, so would it be better to wait for the moment?

  3. What is the quantitative risk posed by this purchase at this time? Is there any deeper analysis that has been conducted?

It’d be great if you could clarify these, it’ll help us a lot in making our decision. Thank you!

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I can only comment on 1) as I reviewed the contract.

In essence you can sell bal to the treasury at a 0.5% premium for usdc.
Once a max cap of 100k BAL is reached the contract reverts and no longer “buys bal”.
The contract has a max ausdc allowance of 800k ausdc.

The average price will highly depend on the bal price at the time of proposal execution and the time needed for filling the cap(should be around current market price though).

2 Likes
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Thank you @sakulstra for the explanation for point 1.

With respect to point 2, the Aave DAO has already acquired 200K BAL via a token swap with Balancer DAO. The DAO also earns BAL from the various BAL Reserves.

The desire to acquire the BAL was determined back in May with a favourable Snapshot vote. When this Snapshot occurred, the DAO was discussing the BAL <> AAVE token swap. The resulting veBAL holding is still rather small for a DAO that intends to launch the GHO stable coin with initial liquidity on Balancer. The Balancer There are numerous ideas for how the veBAL is to be used and all considerations are more indirect revenue growth focused than say the price appreciation of BAL.

With 100% of the Interest Payments from GHO going to Aave DAO, the focus should be on how can be best stimulate demand for GHO at launch. Directing BAL incentives towards the bb-a-USD / GHO liquidity pool where Aave DAO could be an early liquidity provider is one example. The recursive loops created from listing BPTs as collateral, via either Balancer or Aura gauges, is another example. A third example whereby AAVE distributed across the Safety Module is reduced and partially replaced with BAL is also being worked on. Depending on how the DAO elects to proceed will determine what the return on the overall BAL (veBAL) strategy will be.

The timeline for GHO and aTokens is also a consideration and do keep in mind the B-80BAL-20WETH step is next and then veBAL. There is still a fair bit of work to be done before the DAO has a veBAL position. Please do read this forum post: [ARC] Deploy BAL to veBAL

1 Like
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Thanks so much for the response Matthew, highly appreciated.

While it makes strategic sense for Aave to purchase BAL tokens and deploy them into veBAL, especially from the perspective of potentially increasing usage/adoption of GHO when it is deployed, there are still open questions around whether it makes sense to execute this purchase at the current moment given market conditions and the need to be prudent with treasury finances. There has also been no deeper analysis conducted on the quantitative risk posed by this purchase at this time. The original Snapshot was passed in May 2022, when market conditions were markedly different, and given the current state of the market, we are not sure whether it is prudent to buy more BAL at the current time and deplete the treasury.

We appreciate yours and Sakul’s responses, with our concern around the price of the acquisition being answered. The intent to stimulate adoption and demand for GHO upon launch is well noted, but this can be done via the 200k BAL that has already been acquired. There is a lack of clarity around the incremental risk/benefit for acquiring more BAL at the moment, especially with current market conditions. There has also been no decision made about whether to go forward with veBAL or auraBAL, which should be made prior to purchasing BAL since it increases clarity for the DAO.

Even though we are supportive of the strategic partnership with BAL and the alignment that is achieved by purchasing BAL tokens and converting them to veBAL/auraBAL, we are choosing to ABSTAIN on this proposal due to the open questions around prudence and risk in the current environment.

1 Like
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Hi @everyone :wave:

As the bonding curve from AIP 115 is still active, 100k BAL Acquisition, @Llamaxyz highlighted to some veBallers the possibility of it being used in response to the Balancer Peace Treaty forum post:

Since then, @solarcurve has presented a proposal whereby Balancer DAO sells BAL directly from the Treasury into Llama’s swap contract (Bonding curve). The motivation behind the BAL to USDC swap is to extend Balancer’s runway until Q3 2023, subject to revenue projections being realised.

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Hi Everyone :wave:

The 100k of BAL purchase is now complete with the Balancer Treasury making the last deposit, 35,127.13 BAL tokens into the contract.

4 Likes