Proposal: govFactor

This proposal is also on Balancer's Forum

Summary

Introduce govFactor, an on-chain voting factor of 1.1 for Balancer Liquidity Providers.

If passed, the govFactor will initially be implemented as a 3 month trial with voter participation acting as the key success metric.

Background

🔥_ 🔥 (FireEyesDAO) has been actively working with the Balancer team over the past few months in an effort to develop a robust suite of governance mechanisms to complement the upcoming launch of Balancer V2.

One of the issues we concluded on: consistent voter participation has historically been an issue for many DeFi protocols. Whether it results in proposals not reaching quorum or only having a small number of participants involved, it’s become obvious that protocols need to drive meaningful voter participation across a diverse group of users.

The govFactor creates a simple incentive mechanism for liquidity providers (LPs) to actively participate in governance.

Motivation

As it stands, Balancer liquidity mining encourages passive participation. Liquidity Providers (LPs) simply deposit capital into the protocol and earn BAL. Despite the significant subsidy LPs receive in the form of governance tokens, there’s no expectation or requirement that they actively participate in governance.

This ultimately represents a misalignment as LPs have no incentive to vote despite constantly accruing voting weight. If the suppliers are subsidized by the protocol with governance power, they should be willing stewards of the protocol as well.

This does not mean that LPs MUST participate, but instead they should have an incentive to participate. Therefore, it may be worthwhile to incentivize those that service the protocol to help govern it as well, aligning their participation with additional weighting to their weekly liquidity mining rewards.

Specification

The govFactor is an on-chain voting incentive for LPs that affects BAL liquidity mining allocations depending on whether or not an address voted on the last governance proposal. The implementation multiplies BAL amounts each LP gets by their govFactor (1.1 for those who voted, 1.0 for those who did not) and then normalizes all amounts so that the sum is still 145,000 BAL per week.

The govFactor will operate as an “on/off” switch where LPs that voted on the most recent proposal by signing a transaction turn “on” the factor.

Providers that did not vote on the last proposal by signing a transaction have their govFactor “off”, forfeiting the factor and in turn, receive lower LP rewards than those that voted on the last proposal. This dynamic will remain “off” until the next on-chain proposal is open for voting and ratified on-chain.

If all LPs vote, then the rewards remain the same as if no one votes.

To make calculations as simple as possible, govFactor would be applied after all other factors.

GovFactor looks at addresses who have voted on the most recent proposal featured on Snapshot and references to see if the address is also providing liquidity to the protocol. If both variables are met, the protocol includes a factor to their weekly BAL liquidity mining allocation.

It’s important to note that this reference happens entirely on-chain, meaning there’s no need to cross-link any addresses to a forum or public username.

Ultimately, the govFactor creates a unified incentive for those that service the protocol to become active governance participants as well and should be considered by the community as a simple mechanism for encouraging governance participation from the protocol's supply-side actors.

Drawbacks

Some points to consider surrounding the GovFactor:

• The end result could be a lot of non-engaged voting, coming from LPs who don't hold meaningful amounts of BAL (even if being large LPs) and who don't really care about Balancer governance, putting little to no effort in the decision process behind their votes.
• The GovFactor encourages LPs to vote through their liquidity mining address, which could pose some issues for opsec conscious users. However, Snapshot now enables delegation from cold wallets which would mitigate this issue.
• The cadence between different governance proposals is likely to differ. This means that someone who votes on the last proposal preceding a large time gap to the next proposal may see increased liquidity rewards despite not actively participating in governance discussions.
• The state of Balancer Governance is relatively idle and therefore implementing a governance incentive isn’t currently necessary for the success of the protocol.