DEX members vote for peace with investor in duel over VE tokenomics
For months, a long-simmering battle has rocked governance practices at Balancer, the #4 decentralized exchange.
On Tuesday, Balancer, which is worth a total of $1.6 billion, passed a peace deal to settle an eight-month dispute with a yield-farming whale named Humpy.
The measure, which was unanimously approved by members of the Balancer community, aims to settle a dispute over a little-understood experiment called Vote-Escrow (VE) tokenomics.
Governance Rights
VE tokenomics separates governance rights from a project’s native token by distributing VE tokens with governance rights to users who lock the native token for a period of time.
Decentralized exchanges use VE tokenomics to issue their native tokens to liquidity providers via “meters”. VE token holders can vote on which meters issue the most tokens, encouraging users to freeze their assets to collect Ve tokens.
Curve, the leading stablecoin DEX, pioneered VE tokenomics in 2021. While the system boosted Curve’s TVL and the price of the CRV token, it also led to the “Curve Wars,” in which rival groups fought for control of Curve’s governance.
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Messari said the approach can create friction between token holders and protocols.
“Without safeguards or a price wall high enough to prevent self-interest accumulation of BAL, the [VE] The system invites parasitic flywheels where actors can use their veBAL holdings to… amass composite voting power while giving little back to the protocol/DAO. Emissions skimming concentrates government power, allocates inflationary spending unproductively, and rewards toxic behavior.”
When Balancer started experimenting with VE tokenomics eight months ago, it caught the attention of Humpy, a whale who amassed 35% of veBAL’s supply. Balancer has since struggled to align Humpy’s for-profit activities with the goals of its DAO, resulting in Balancer’s governance becoming a game of cat-and-mouse between the two companies.
Humpy’s strategy
“Humpy’s strategy was simple: dominate a balancer pool’s liquidity, vote aggressively on the meter, and collect BAL emissions,” tweeted Traver Normandi, a researcher at Messari. “The only problem was that the gauges he used didn’t generate much revenue for balancers.”
In May, Humpy manipulated the veBAL system to funnel $1.8 million worth of BAL over six weeks to a CREAM/WETH liquidity pool they controlled. In contrast, the pool generated around $18,000 in log revenue for balancers over the same period.
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Solar Curve, a Balancer contributor and governance delegate, launched governance proposals to prevent Humpy’s strategy from being applied to low-liquidity pools and closed the CREAM/WETH display. Although Humpy mobilized 44% of the votes cast against the proposals, they passed in July.
Humpy stepped up efforts to develop strategies to maximize profits generated by veBAL. They started using Tetu, a yield aggregator that uses an aggressive approach to optimize veBAL yields by indefinitely locking collateral in balancers.
Humpy discovered a loophole that allowed the veBAL/tetuBAL pool to bypass the illiquid pool limits. They then splashed more than $8.7 million into the pool over 24 hours and voted for incentives to flood the veBAL/tetuBAL ad.
However, the whale misunderstood the code underlying Tetu, with a looper contract consolidating assets deposited in the pool into tetuBAL, and the veBAL/tetuBAL pool being the only way for tetuBAL holders to exit their position.
As a result, tetuBAL now represents 90% of the pool’s assets, threatening to collapse tetuBAL’s bond with veBAL. Humpy claims 80% of the pool’s liquidity.
Two options
“Humpy has two choices,” Messari said. “Either accept that tetuBAL has an illiquid veBAL position or use the illiquid LP investment to farm the meter for rewards. The latter, in turn, would swam BAL token issuance and accept all-out war to defend Humpy’s strategy.
The conflict escalated as Humpy attempted to aggressively accumulate BAL issuance and enact self-serving governance measures. Humpy was able to delegate all of Tetu’s governance to Andrea Cianfriglia, a community member who championed Humpy.
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But the Balancer community has found an ally in Aura, a yield protocol based on Balancer that depends on the success of the exchange for its survival. Aura installed a metagovernance system that allowed him to gather all of his voting power to vote on balancer proposals. Since Aura represents the largest holder of veBAL, the Aura has been an effective counterbalance to Humpy’s ruling power.
However, the governance stalemate continued to worsen, with both sides taking turns defeating the other’s proposals. With neither party willing to back down, a peace treaty was negotiated to encourage both sides to compromise.
Current balancer governance proposals and Humpy’s voting positions. Source: Messari.
The contract will allow Humpy to continue growing BAL, but the yields allocated to the veBAL/tetuBAL pool are capped at 17.5% of the distributed emissions.
Blacklist
Humpy and Andrea Cianfriglia have agreed to withdraw governance proposals aimed at restricting Aura’s voting ability as a unified bloc and blacklisting its multisig from governance participation. Humpy will also use his remaining votes for pools that generate more revenue than they spend in BAL incentives.
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