Modifying wrapFactor: applying a 0.2 factor to SOFT-pegged pairs

This proposal has been posted by user 5325235235235 on the Balancer forum. The text below is an exact copy of it.

TL,DR

Proposal to apply a wrapFactor = 0.2 to the liquidity of every pair of soft-pegged tokens for the purposes of liquidity mining distribution, in an effort to attract more useful liquidity to the protocol.

Context

The original proposal 2 weeks ago applied a wrapFactor = 0.7 for soft-pegged tokens, i.e. tokens that track the same asset and are naturally highly correlated. These are being called soft-pegged pairs. Example: {USDC & mUSD}.

Liquidity in soft-pegged pairs usually attracts relatively little trading volume on Balancer while at the same time exposing liquidity providers to a lower risk of impermanent loss. Many community members have expressed their concerns about this type of liquidity being unfairly highly compensated by the current mining distribution rules with their less useful liquidity. The introduction of 0.7 wrapFactor did not stop the explosion in size of soft-pegged pools chasing low risk yield on Balancer. Majority of publicity that Balancer recently got was related to sky high rewards for supplying soft-pegged liquidity.

After much debate, it seems that 0.2 is a reasonable compromise. This value could be revised (up or down) at some point in the future, according to community sentiment regarding the practical results observed. This is unlikely to happen within the next month.

The Proposal

For every pair, we analyze:

Is this a hard-pegged pair? If so, wrapFactor = 0.1; If not, is this a soft-pegged pair? If so, wrapFactor = 0.2; If not, wrapFactor = 1.0 (i.e. no liquidity adjustment from the wrapFactor).

Examples of soft-pegged groups: {WBTC, renBTC, pBTC, sBTC, imBTC, cWBTC, BTC++} (all track BTC), {DAI, cUSDT, mUSD, USDC, sUSD, USD++, TUSD, yUSD-SEP20, aUSDT, aTUSD, aUSDC, aBUSD, oaUSDC, aSUSD, USDx, aDAI, yDAI+yUSDC+yUSDT+yTUSD} (all track USD), etc. All the above are pooled on Balancer.

Further Considerations

All liquidity in compliant ERC20 tokens is welcome in Balancer pools, but BAL distribution is a scarce weekly resource (i.e. for an LP to get more BAL, other LPs have to get less). Penalizing soft-pegs is the equivalent of giving an extra incentive for liquidity that has shown itself more useful to the protocol. The 0.2 value has been seen (by most community members) as a reasonable measure, that will be good for the future of Balancer.

We feel that liquidity composition on Uniswap is natural, while the composition on Balancer is highly skewed towards soft-pegged assets due to very generous rewards. We hope that liquidity composition will improve with wrapFactor 0.2.

Many believe that the pools like the extreme examples below are earning rewards that are too generous: WBTC-imBTC-pBTC-sBTC: 1.2m liquidity, $0 24h volume cUSDC-cUSDT: $1.3m liquidity, $0 24h volume cUSDC-cUSDT: 1m liquidity, $0 24h volume cUSDC-cDAI: 200k liquidity, $0 24h volumecUSDC-cDAI: 200k liquidity, $0 24h volume