The 8020 Initiative. Dear friends and fellow human beings of Ludwig, | by Beethoven X | Beethoven X | June 2023

The eternal symphony of change and innovation is relentless in this mad DeFi space. When thousands of brilliant minds think at the same time, new technologies emerge and collaboration thrives. A swarm of problem-solving skills buzzes away.

Of course, with knowledge comes progress, and even once-great solutions can become outdated and cumbersome. What was once considered modern and exciting is gradually losing its relevance and in these times it is important to recognize when to pivot, discarding the old and embracing the new.

Today, our journey takes us to the forefront of an efficient and streamlined protocol governance technology: the 8020 initiative. To truly appreciate the new, we must first explore the old.

Most DeFi protocols implement a native one-way token staking mechanism. Governance tokens are acquired and deployed in exchange for governance voting rights and additional incentives. At first glance, the mechanism looks appropriate, but a closer look reveals the first cracks.

While staking incentives successfully increase governance involvement, they effectively reduce the outstanding supply available for swaps as more liquidity is deployed.

As a result, a smaller portion of capital is injected into liquidity pools and this lack of liquidity creates a number of problems:

• Increased slip
• Inability to facilitate larger deals
• Higher price volatility for the underlying tokens

To address these challenges and encourage liquidity supply, protocols often resort to providing additional incentives for their tokens, not only across multiple liquidity pools, but also across multiple decentralized exchanges (DEXs). Getting caught up in an inefficient, expensive, and complicated incentive program.

What is needed is a solution that encourages governance participation, but also provides an efficient incentive program solution while avoiding capital lockup.

Sounds like a dream hey… Say hello to the 8020 initiative.

This is a solution made possible by Balancer’s Weighted technology. Using weighted mathematics, liquidity pools can be configured with up to 8 tokens in any desired weight. 8020 refers to a two-asset pool with 80% of one asset and 20% of another.

So what exactly does this have to do with governance?

The 8020 initiative proposes using an 8020 pooled BPT token as the governance token instead of a single token. With a pool configuration of 80% of the protocol’s native token paired with their chain’s base token or a highly liquid stablecoin such as USDT or USDC.

This model offers a number of advantages, including:

• deep liquidity
• Asymmetric uptrend and reduced impermanent loss (IL)
• Efficient incentive programs
• hedging and price increases

In addition, using the BPT as a governance token opens up new possibilities for additional mechanisms. Examples include Balancer’s ve8020 governance or Beethoven X’s runtime-adjusted model, but more on that later.

First, let’s take a deep dive into some of the benefits of 8020.

As previously mentioned, unilateral staking results in large amounts of a protocol’s token being removed from the circulating supply. This single offering is designed to secure government power and when combined with a voting escrow model, can result in significant liquidity being held out for extended periods of time, sometimes several years!

By using a liquidity pool BPT as the governance token, the 8020 model circumvents this problem. Rather than pledge the token itself, users deposit the BPT pool, allowing the underlying pledged tokens to actively participate in swaps. For the first time in governance history, available trading liquidity increases as the amount of tokens staked increases instead of decreasing.

And high liquidity naturally means:

• Reduced slip
• Ability to facilitate large deals
• Lower price volatility

By removing the limitations of traditional one-way staking, the 8020 model fosters an ecosystem where liquidity thrives, giving users smoother and more efficient trading experiences.

For reference, at the time of writing, the Balancers 8020 governance pool has a TVL of over $208 million. If that isn’t high liquidity, we don’t know what is! Had they implemented the one-way staking model, much of it would have been locked away. Convince yourself here.

Balancer’s weighted technology allows for unlimited pool composability, and an 80/20 split provides the perfect middle ground for native staked tokens.

Since 80% of the tokens provided are protocol tokens, this model offers asymmetric advantages. This means that the upside potential for the native token is far greater than for the base token.

A 50/50 pool is generally avoided for this purpose as it offers limited exposure to the native token and poses a much greater IL risk should the native token’s price explode.

While there is still some inherent risk of temporary loss as shown in the image below, the 80/20 split offers significantly lower risk versus IL while retaining the benefits of high liquidity and risk versus the base token.

By striking the right balance between token composition, the 8020 model maximizes exposure to the underlying native token while effectively mitigating the risk of temporary loss.

In summary, 8020 liquidity providers enjoy the benefits of high liquidity, asymmetric exposure to the base token, and minimized transient loss.

While an 80/20 split helps minimize IL risk, it also gives users access to the underlying asset and acts as a hedge. This risk becomes significant in situations where the price of the underlying asset is rising rapidly or when the price of the native asset is falling. In such scenarios, arbitrageurs have an incentive to rebalance the pool.

In layman’s terms, this means that if the base token increases significantly due to the correlation of the tokens, the native token will also increase in value. This correlation allows users to benefit from the potential upside potential of both tokens.

In 2021, Aave decided to implement a Balancer 8020 Pool BPT in its security module. Increase exposure to ETH while also acting as a safety backstop for Aave liquidity pools should they face cascading liquidation. An exemplary rendering of the 8020 model. Be sure to check out the full story.

Because swaps need to be facilitated, the traditional unilateral model requires incentives for both the stake pool and other liquidity pools. Integrating the governance token into an 80/20 liquidity pool eliminates the need to split and channel incentives to other DEXs.

In essence, the 8020 model consolidates these incentives and eliminates the need to spread liquidity across multiple markets. This concentrates token supply in a primary pool, significantly reducing slippage and providing a simpler, lower-cost incentive scheme.

But that’s not all, using a liquidity pool BPT for governance automatically introduces an additional stream of incentives – swap fees.

Each time a trade takes place across the protocol, a swap fee is charged in the pool’s respective BPT. Each pool has its own swap fee, which is clearly set based on the underlying assets and the AMM logic used. A portion of these fees goes to liquidity providers as an incentive to provide liquidity.

Each time a swap is executed in a liquidity pool, swap fees are charged and automatically remitted to the liquidity providers. This creates an additional source of incentive, allowing users to expand their positions while actively participating in the governance process.

The integration of swap fees as an inherent incentive mechanism in the 8020 model strengthens the entire ecosystem, boosting liquidity provision and allowing users to reap rewards for their active engagement.

Take Radiant Capital as an example. After the introduction of the 8020 model and a TVL of nearly $43 million, the pool facilitated 44,046 swaps and generated 644,744 swap fees in the first 28 days. To date, liquidity providers have earned an additional $751,529, which would never have been possible with a single stakes model. Check out the full case study below.

However, the scope of innovation within the 8020 governance model extends far beyond its initial implementation. Using a pooled BPT as a governance token opens up numerous possibilities and paves the way for various additional mechanisms. Let’s look at two examples: ve8020 and ma8020.

ve8020

ve8020 is a Vote Trust Vesting system developed and implemented by Balancer, based on Curve’s veCRV mechanism. Users lock their 80/20 BAL/WETH BPT in exchange for the governance token veBAL. The blocking period can range from a week to a year, with the amount of veBAL received being directly proportional to the number of blocked BPT tokens and the length of the blocking period.

Why be innovative? Curve’s V-model has gained wide acceptance across the industry, but is it really the most effective way to facilitate governance?

One of the biggest downsides of using one-way governance is the reduction in token liquidity across the market. With users locking their governance positions, trading liquidity effectively becomes redundant.

ve8020 has the opposite effect. Every time users set governance positions, trading liquidity actually increases! By innovating on Balancer’s weighted pools, the more liquidity flowing into an 8020 governance position, the higher the liquidity for the underlying tokens.

But that’s not the only option…

ma8020

With Beethoven X we chose a different path. Rather than rewarding token locking, we encourage position growth over time, with rewards and voting rights increasing with maturity.

Or as we like to call it: A maturity-adjusted position.

Maturity is divided into different stages, each corresponding to different incentive and voting premium distributions. Once the highest level of maturity is reached, users unlock the maximum liquidity mining rewards and governance power.

Users simply stake their 80/20 BEETS/FTM BPTs and receive an evolving financial NFT known as a Relic in place of the receive tokens. This relic tracks position maturity and even unlocks opportunities like secondary markets. Preserve the relic and watch it grow over time!

This is just a very brief overview. Check out the article below for the ultimate insight.

Wow. That was a lot to see!

Bottom line, the 8020 initiative represents a significant advance in protocol governance technology. By harnessing the magic of balancers and using a pooled BPT as the governance token, many of the problems faced by the traditional one-way staking model are solved is. Real innovation.

In addition, new frontiers have been pushed with groundbreaking mechanics like the ve8020 and ma8020! Balancer is constantly pushing the boundaries of what is really possible and we are here to usher in a new era of efficient, streamlined and streamlined governance.

With love,

Beets X

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