[AIP-42] Maximizing Value of Aura LP Incentives & Bootstrapping L2s

Authors: Lamentations, 0xMaha, Fry

Summary

This proposal makes reward distribution to L2s more efficient, and brings AURA LP incentives in house, by (i) near immediately distributing AURA pro-rata to the gauges voted on on the bi-weekly snapshot votes, (ii) reducing the baseline number of AURA that is minted per BAL for all LPs, and (iii) favouring distributions of AURA to more-aligned parties more likely to participate in Aura governance.

Background

Aura currently emits AURA rewards indiscriminately towards all Balancer LPs that use the Aura protocol. In exchange, Aura DAO directs a share of the BAL earned by these LPs toward Aura stakeholders. This has allowed Aura to represent a large share of Balancer mainnet TVL, along with over 60% of all BAL emissions.

The current system allows Balancer stakeholders that are not aligned with Aura DAO to acquire large amounts of AURA, without providing direct value to the protocol. An opportunity now exists to optimize AURA distribution in order to entice users to increase vlAURA accumulation and spend on voting incentives, increasing participation in the Aura DAO and the governance utility of AURA itself.

Even with the current fee take, LPs on Aura earn 1.5-to-2 times the amount of incentives LPs on Balancer earn.

Aura DAO can vote to reduce the AURA minted per BAL earned for all pools, resulting in a significant decrease in new AURA float. To compensate for this reduction in emissions, Aura DAO can leverage the AURA allocated to the treasury and direct it to pools pro-rata based on their share of vlAURA gauge weight each voting cycle.

In tandem, these two changes will have the effect of:

• Bootstrapping L2 gauges faster - Currently, there is a 2 to 3 week lag between a gauge going live and getting vote weight on L2s and reaching a steady-state of expected yield. With this change, AURA is allocated to the gauges near immediately and helps to bootstrap the BAL.
• Decrease the overall AURA emission - allowing for less dilution of vlAURA votes
• Increasing voting incentive capacity for vlAURA, enabling further onboarding of pools of prominent assets from protocols like Stargate, Synapse, Rocketpool, Swell, Raft, Morpho, etc. This has become increasingly important as Aura has begun its push onto L2s, resulting in large amounts of demand for voting incentives but not enough capacity
• Utilizing the currently untapped AURA treasury budget, while maintaining budget for other potential expenses like grants or bootstrapping other Aura Service Providers
• Distributing governance power to “better aligned” LPs

This model is predicated on the assumption that Aura will continue to boost a large share of Balancer liquidity into the future. In our opinion, this assumption is fair for the following reasons:

• i) under this proposal yield on Aura will remain strategically higher than yield on Balancer directly, even after any fees to Aura stakeholders
• ii) Aura’s L2 launch should allow it to continue to grow its share of BAL earned, as prior to the L2 push, Aura was unable to capture emissions directed to other-chain gauges
• iii) Aura continues to maintain dominance in business development / partnership discussions such that TVL, incentives, and co-marketing efforts are focused on Aura vs. Balancer directly

Terms

The two levers—a reduction multiplier on AURA minted and use of AURA to ‘boost’ vlAURA-aligned gauges—are flexible on what governance decides. Based on our analysis of the current yield landscape and factoring in Aura DAO’s needs, we believe this setup makes the most sense:

• Set the RewardMultiplier on all pools to 0.4, meaning a 60.0% reduction in baseline AURA minted
• Allocate 180,000 AURA from the DAO treasury every voting cycle to be distributed pro-rata to pool LPs based on their vlAURA gauge weight
• Reduce AURA/ETH voting incentives, as per AIP-26, from 40,000 AURA in incentives per epoch to 30,000 to factor in increased yield from the above two changes. Keep extra tokens in treasury
• This proposal should be revisited and re-ratified 6 months after implementation to assess spend on treasury and the market landscape

Assuming this passes in the forthcoming voting cycle, these changes would come into effect for the next vlAURA gauge voting round between Aug 17-21, with multipliers being changed on the 23th and AURA distributions from the treasury from the 24th onward. This is in line with the existing Balancer epochs.

For clarity: the AURA minted against BAL on the auraBAL single-sided staking pool will not change.

Outcomes

This should resulting in the following changes per our estimations, assuming existing system parameters such as % of BAL earned by Aura:

• An increase in voting incentive capacity by ~15%, or approximately $60,000 worth of voting incentives per cycle
• A decrease of net AURA supply being distributed by ~33,000 a week or 1,750,000 AURA a year
• Effectively capping AURA minted against BAL much lower than 50,000,000 units, as specified in the initial tokenomics.

Illustratively, this would have the following effect on pool yield as of numbers gathered in early July:

• ‘Aligned’ rETH/ETH pool: 4.7% APR (current, once yield/TVL ramps back up) to 5.28%
• ‘Unaligned’ BADGER/rETH: 26.4% APR to 19.21%

It is important to remember that under this proposed program, all LPs—even those in pools without vlAURA gauge weight—would still yield more than they would directly staking on Balancer.

Regarding use of treasury funds, the treasury will still have a large amount of AURA balance, especially factoring in the 1.5m AURA of protocol-owned liquidity in the 80/20 AURA/ETH Balancer pool that could be recovered by moving to a 50/50 pool.

Implementation

• Code
  • GaugeVoteRewards
  • ChildGaugeVoteRewards
  • StashRewardDistro
  • Fork test
• An Aura incentives multisig will be transferred 180,000 AURA per voting cycle (in batches to reduce overhead), that will then be allocated to the newly deployed GaugeVoteRewards contract which handles pro rata distribution to gauges for each epoch
• The Aura Protocol DAO will:
  • Call setRewardMultiplier on the Booster for all pools to update the reward multiplier from 1.0 to 0.40
  • Call setVoteDelegate on the BoosterOwnerSecondary contract and set the voteDelegate to the newly deployed GaugeVoteRewards contract that will handle the pro rata AURA distributions by wrapping the call to vote_for_gauge_weights
• The setup process for the GaugeVoteRewards is as follows:
  • Set the reward per epoch to 180k
  • Call setPoolIds with a start value of 0 and end value of Booster.poolLength()
  • Add veBAL, veLIT and veUSH as no deposit gauges
  • Set dstChainId to 110 for arbitrum gauges
  • Set dstChainId to 111 for optimism gauges
  • Set dstChainId to 109 for polygon gauges
  • Set the childVoteReward contracts for each chain
• To ensure that earned rewards are not effected by the reward multiplier reduction A script will run to claim existing rewards on behalf of all users with 5 BAL or more of rewards to claim. It will loop through all holders on every reward pool and call BaseRewardPool.getRewards(holder, true)
• The parameters will be reviewed 6 months following the first gauge vote