Governor Note: The veBAL Wars

Key Insights

• Balancer introduced vote escrow tokenomics to align tokenholders with the protocol's success and revenues. While the veBAL experiment has attracted partners, it’s also attracted a whale, referred to as Humpy, who has amassed control of 35% of veBAL.
• Over the past eight months, Balancer has struggled to align Humpy’s activity with DAO objectives through incentives, instead being driven into a cat-and-mouse game to control the whale’s profit-seeking activity through governance.
• Stuck in an illiquid position in the 80BAL/20WETH/tetuBAL Balancer pool, Humpy opted to double down on protecting their extractive strategies against Balancer governance. The result has escalated the conflict across the Balancer ecosystem.
• A recent peace treaty aims to reach a gentleman’s agreement and de-escalate the conflict, allowing Humpy to continue to farm their most aggressive gauge strategy at a 17.5% gauge limit in exchange for Humpy’s alignment with DAO strategy in all other positions.

Introduction

Source: Balancer Forum

It’s a story of two factions of voters, each with conflicting views and intentions, fighting for control over the future of the Balancer protocol.

On one side, we have the Balancer stakeholders (comprising vested BAL holders), core community and team members, and strategic partner Aura. These stakeholders uphold an idealistic vision for the Balancer protocol and aspire to align Balancer token voters with protocol revenue generation.

On the other side lies Humpy, the veBAL whale, Tetu (Layer-2 liquid locker), and a Balancer community member named Andrea. They are agnostic about protocol revenues but astute players within the veBAL game. They leverage the veBAL incentive framework for personal gain by executing clever, possibly harmful, strategies.

On Dec. 1, 2022, Balancer published the Peace Treaty proposal, an attempt to reconcile the escalation of each party’s actions in what has become an engrossing power struggle and an imperative case study in DAO governance, tokenomics, and design incentives.

A veBAL Primer

Vote escrow tokenomics is an incentive alignment mechanism introduced by Curve in 2021. In early 2022, Balancer adopted a version to attract liquidity providers (LPs) to the protocol and align tokenholders with the protocol's success through a revenue share.

veBAL is the governance token of Balancer and is obtained by locking 80BAL/20ETH Balancer Pool Tokens (BPTs). veBAL holders can direct BAL emissions to LPs or themselves, obtain governance rights, and accrue a portion of protocol revenue.

In theory, the vote-escrow incentive structure creates an incentives flywheel in which partners can create a stake in the Balancer community (veBAL) to direct liquidity to their token’s LP via token emission incentives. In turn, trading volumes for those projects generate revenue for Balancer and other veBAL holders.

Section 1: No Bad Actors, Only Bad Designs

In practice, veBAL is morally agnostic.

Unaligned actors who aggregate veBAL can direct emissions to themselves (up to 10%)  or unproductive liquidity pools. Further, BAL emissions in Q3 were over 10x the value of the revenue share sent to veBAL holders. Without safeguards in place or a high-enough price wall to deter BAL accumulation for self-interest, the system invites parasitic flywheels in which actors can leverage their veBAL holdings to direct emissions toward their own LP position in illiquid and low-volume pools. This allows them to amass compounding voting power while returning little to the protocol/DAO. If successful, emission siphoning concentrates governance power, unproductively allocates inflation spending, and rewards toxic behavior.

This has created a whack-a-mole dynamic within Balancer governance as Balancer stakeholders have raced to create proposals, incentives, and strategies to limit extractive behavior from misaligned parties.

The BAttLe of CREAM

The Balancer Discord has monitored a particular veBAL whale, Humpy, since they first emerged as a large liquidity provider on the Badger/WETH pool. It wasn’t until May 2022 that the whale’s actions in the CREAM/WETH pool confirmed the whale’s intent.
Understanding the dynamics of the veBAL system, Humpy leveraged their veBAL to execute an extremely profitable yield strategy. The strategy involved amassing a position in CREAM, creating a CREAM/WETH pool, passing a CREAM/ETH gauge proposal, and setting the pool trading fees to 10%. Once created, Humpy deployed their veBAL holdings across multiple addresses to direct BAL emissions to the pool’s gauge.

Over six weeks, Humpy used the veBAL system to direct $1.8 million of cumulative BAL emissions to the CREAM/WETH gauge and, therefore, back to Humpy. While the gauge was profitable, the pool failed to align with Balancer’s goals, as the pool only generated $17,846.47 in protocol revenue over the same period.

Solar Curve, a community contributor to the protocol and Balancer delegate, recognized Balancer’s oversight in allowing this strategy to take place on low-revenue pools. To address the issue, Solar Curve proposed BIP 19 to more closely align the veBAL design with Balancer revenue. This proposal would have the DAO re-invest 75% of the fees generated on pools with yield-bearing tokens (which Balancer inherently earns a fee on) as bribes on those pools.

With a new incentive program aligned with protocol revenue, Solar Curve proposed that the DAO go one step further and kill the CREAM/WETH gauge to realign the veBAL system with Balancer’s profitability and demonstrate the DAOs intolerance for unaligned behavior.

Understandably, Humpy deployed nearly 1.6 million veBAL in objection to the proposal, including one of their largest addresses which comprised 44% of the votes. Despite Humpy’s efforts, the proposal was passed, and the CREAM/WETH gauge was retired. The battle would start a meaningful turn of events in Balancer governance, the veBAL wars.

This Means War

While the Balancer stakeholders had thwarted the CREAM/WETH gauge, they continued to deploy defensive maneuvers by approving the Gauge Framework V1 and striking down a bid to reinstate the CREAM/WETH Gauge. The new framework opted to install emission caps for low revenue and small market-cap pools, effectively limiting the amount of BAL emissions these pools could claim.

With their strategy stalled, Humpy began to consolidate their positions. They chased low-volume pools that fit the yield strategy and matched gauge votes with LP positions across wallets. Humpy’s LP positions directly reflect this strategy, moving to new pools to reflect their gauge votes.

Section 2: No Way Back

The following events escalated the tensions from a battle to a war as both Humpy and Balancer doubled down on their positions.

TetuBAL: A Whale Trap

As Humpy continued to optimize strategies, the whale turned to Tetu, a veBAL liquid locker on the Polygon chain. TetuBAL operates as a yield aggregator with an aggressive approach that permanently locks the token indefinitely by relocking deposited assets into Balancer’s veBAL contract.

Source: Tetu Docs.

Tetu created the 20WETH/80BAL/TetuBAL pool on Balancer to provide liquidity for tetuBAL users who wish to exit their position. Observing the Balancer Gauge Framework, Humpy identified a loophole in the pool’s conditions that would set it outside the requirements for capped gauges. Because tetuBAL is a freely mintable token, Balancer had decided to calculate the market cap of tetuBAL as equal to the entity that minted it, or Tetu itself, allowing the tetuBAL pool to surpass the MarketCap threshold for capped emissions.

Recognizing the opportunity, Humpy began depositing into the veBAL/tetuBAL stableswap pool on October 19. With an aggressive investment, Humpy raised the pool’s TVL from around $80,000 to $8.8 million overnight. It wasn’t long before BAL inflation rewards poured into the 80BAL/20ETH/tetuBAL pool.

What Humpy failed to realize was that the Tetu community had created a looper contract for the pool, designed to increase the amount of locked tetuBAL80BAL/20ETH positions, convert it to tetuBAL, and re-deposit the tetuBAL into the pool. This resulted in an extremely unbalanced pool, with only 8% of the existing liquidity comprising the 80BAL/20ETH BPT, and over 90% comprising tetuBAL. The result has ruinous implications for both Humpy and potentially the tetuBAL peg. Since Tetu automatically re-locks its veBAL, the 80BAL/20ETH/tetuBAL pool represents the only opportunity for tetuBAL holders to unwind their position. Given Humpy comprises around 80% of the pool’s total liquidity, Humpy’s over $8 million position is essentially locked as illiquid tetuBAL.

As a capital allocator, Humpy has two options: Either accept the tetuBAL has an illiquid veBAL position or leverage the illiquid LP investment to farm the gauge for rewards. The latter would, in turn, sponge BAL token emissions and accept total war to defend Humpy's strategy in Balancer governance.

On the Defensive

With Humpy doubling down to protect their gauge strategy position, tensions between the Balancer Stakeholders and Humpy came to a head. The aggression culminated in a slew of contentious proposals from both parties. Feeling the pressure, Humpy helped orchestrate the delegation of the Tetu’s entire governance power to Andrea Cianfriglia, an existing Humpy delegate and an ex-Llama and Balancer contributor (who adopted the moniker ilconsigliere.eth). Cianfriglia would advocate for Humpy on forums, proposing sympathetic strategies and debating with Balancer stakeholders.

As Humpy’s political maneuvers evolved, the Balancer stakeholders had their backs against the wall. To maintain firepower against the whale, they would need to fight back.

Aura: Always a Bigger Fish

Aura is the leading veBAL liquid locker in the Balancer ecosystem, and its success is contingent on the success of Balancer. Recognizing the dire situation, the Balancer community would likely need to tap into the Aura wallet’s potential to stand up to Humpy’s behavior.

Aura had mapped each voter's vlAURA holdings to their underlying veBAL to allow vlAURA holders to vote independently on Balancer proposals. Despite the ability to vote, vlAURA holders' participation in Balancer governance was unsurprisingly low. As the largest holder of veBAL, Aura’s governance influence far underweighted its power. As a bloc, Aura’s veBAL holdings would represent over 22% of the total veBAL supply.

Recognizing the growing threat of Humpy’s veBAL position to Balancer stakeholder interests, on November 15, Aura voted to install a direct metagovernance system. The proposal aimed to capture Aura’s governance weight en masse, allowing the Aura DAO to conduct metagovernance polls for each Balancer Snapshot vote and deploy their consolidated power as a bloc. While the proposal took place on Aura’s snapshot, a Humpy wallet unsuccessfully voted against this proposal.

However, for the strategy to take place, accommodations had to be made by Balancer’s governance. BIP 112, ​​which aimed to give Aura voters enough time to conduct metagovernance votes, was effectively shot down by nine Humpy wallets (and one delegate). When BIP 113 was put to a (loosely veiled) re-vote, the discourse that followed encapsulated the highest aggression and intensity to date, with Humpy and Cianfriglia raising questions about the power of the Balancer governance council. Specifically, Balancer had taken multiple proposals to revote after Humpy successfully shot them down (BIP 7, BIP 8, and BIP 30). In the end, BIP 113 would pass, and an informal alliance between Aura and the Balancer stakeholders would form.

Section 3: Let’s Stay Together

Humpy and the Balancer stakeholders have faced off in numerous votes throughout the saga. And while it’s made for a fascinating recap, it’s certainly not productive to the health of the protocol and DAO.

To avoid further escalation, the two parties have established peace terms. The Peace Treaty proposal aims to achieve a balanced outcome in which both parties agree to de-escalate their positions in Balancer governance. The treaty allows Humpy to farm their tetuBAL position in peace. In exchange, Humpy promises to temper their gauge farming strategies and concedes Aura’s right to leverage their governance power in peace.

TetuBAL: The Compromise

To avoid further stalemates and opposition, the parties agreed to concede Humpy’s tetuBAL farming strategy but limit Humpy’s tetuBAL gauge votes to 17.5% and all other gauge votes to 17.5% in the future. This effectively ensures the tetuBAL gauge will function as a whale-sized hole capturing 17.5% of all future BAL emissions.

In practice, the Balancer stakeholders will also agree to no longer support a proposal authored by Bobby Bola of Stablenode, which aimed to address the issue of Humpy’s tetuBAL gauge strategy by limiting Stableswap emissions at 5%. The proposal was met with rife opposition from Cianfriglia and Humpy, likely because Humpy’s financial fate is directly tied to the 80ETH/20BAL/tetuBAL LP.

The Hopes of the Kingdom Lie with Aura

On November 20 and 22, Andrea Cianfriglia created two proposals that aimed to 1) limit Aura’s ability to vote as a bloc and support “winner take all” strategies and 2) blacklist the Aura multisig for governance due to a potential double-voting concern between vlAURA holders and Aura’s AIP 17. The Peace Treaty ensures neither proposal proceeds to vote, thus confirming Aura’s ability to vote as a bloc on Balancer proposals.

While Aura has aligned with the Balancer stakeholders to date, the concentration of power held by Aura certainly introduces new governance risks. Suppose Aura were to fall to a 51% attack. In that case, the captured Balancer voting power capture could sit around a quarter of the veBAL supply, presenting a significant threat to the Balancer ecosystem.

A Gentleman's Agreement

As a measure of trust, Humpy has committed to using their remaining votes in favor of pools that are “beneficial to the long-term growth of Balancer.” They have also agreed only to use voting incentives where the bribe cost per veBAL is greater than the dollar value of emissions per veBAL. This aims to ensure that the cost of liquidity for that gauge is greater than the value of BAL incentives and not the other way around. As part of the agreement, Aura agreed to build custom allocation scripts for Humpy to optimize their vote allocation.

De-escalation Phase

To avoid a 51% attack on both parties, Balancer Stakeholders and Humpy the whale have agreed to unwind approximately ~750,000 veBAL across several wallets each.

Given Balancer’s off-chain governance, it’s important to note the execution of proposals lies strictly with the Balancer multisig. While the core team may express their commitment to respect the DAO’s wishes, this final stopgap adds a centralization vector to Balancer operations and the DAO’s risk profile. In the event of a 51% attack, centralization may prove to be a feature and not a bug.

After AURA/BAL unlock periods, Humpy has agreed that Aura/Balancer will have 14 days to assist him in finding an OTC deal within 10% of the market price (comparable to the OTC veBAL deal conducted between Aave and FEI following FEI Unwind).

Call Off the Messengers

As a final barb, Humpy has agreed to withdraw their delegation from Andrea Cianfriglia, and the proposal requests that Tetu do the same.

Conclusion

The temporary peace restored to the Balancer community represents a chance for reflection and evolution. There are lessons to be learned both in the design and execution of veTokenomics and the nature of token governance.

Vote escrow tokenomics are often considered the leading solution for aligning governance tokenholders with a protocol. In retrospect, it’s fair to question whether the DAO’s aggressive actions following BIP 19 provoked Humpy to double down, further exacerbating the whale’s activity and eventual stake in veBAL. Whether the DAO had relied strictly on design mechanics and less on punitive games of whack-a-mole, it’s clear that veTokenomics is far from a “set-and-forget” solution. In the case of veBAL, it requires an active governance role to defend a defined North Star, lest personal interest incentives leave the protocol without a growth engine.

While an agreement appears to be made, questions loom around Humpy’s role in Balancer moving forward. With free reign over 17.5% of BAL emissions, it seems likely that the whale will continue to consolidate their power over the long term. It remains to be seen whether Humpy will continue to re-lock their BAL into the veBAL system or aim to unwind and realize the rewards. Regardless, the sheer size of Humpy’s stake in veBAL means their actions will certainly have future implications in the Balancer ecosystem.

Author Note: A review of wallet categorization for all data and charts can be viewed here.

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