This proposal appears on Balancer’s forum

Authors - BLABS Business Development (@curtis, @Jared_Balancer and @alan1) + @solarcurve

Proposal:

Approve a “dry powder” allocation of up to $2MM BAL for Tokemak bribe acquisition in connection with BLABS biz dev efforts to grow integrations with Tokemak

What is Tokemak?

Tokemak can be thought of as a generalized liquidity layer that sits above DEXEs. Users can both LP and direct where the liquidity will go via TOKE voting.

Tokemak has two types of reactors - reactors can just be thought of as a place users can single side stake their assets to earn yield, then the assets are directed via TOKE voters to determine its pair(s). There are pair reactors, those can be thought of as the assets that are generally paired with protocol tokens - being ETH/USDC/DAI/FEI/etc. Then there’s the token reactors, which are voted on and added during a "CoRE’’ vote - namely SUSHI/FOX/FXS/etc.

Up to this point TOKE has been distributed via LM incentives for their toke/eth pairs on Uni and Sushi. As well as from staking TOKE to reactors to incentivize Liquidity Direction (and some token swaps).

The ideal future state for Tokemak is most if not all TOKE is being vied for by AMMs/other protocols to direct liquidity towards their token or platform while Tokemak controls a large bag of protocol owned assets that are earning fees and being utilized to stand up other protocols liquidity.

Summary

Tokemak currently provides options for four different DEXes users can direct their liquidity - Uniswap, Sushiswap, Curve and Balancer. Of the four, Balancer is by far the lowest performing. For reference:

• FXS Reactor
  • $514k/$175.2MM directed towards Balancer (0.29%)
• ALCX Reactor
  • $709.80/$32.1MM directed towards Balancer (0.002%)
• FOX Reactor
  • $0/$22.2MM directed towards Balancer (0%)

As of writing this proposal Tokemak controls $905MM worth of assets that TOKE holders are directing to the above mentioned DEXEs. Balancer is currently commanding less than $1MM of that.

Every 5-6 months a new CoRE vote goes live to determine the next round of projects that will launch their own reactors. As of writing this piece this is by far the lowest cost barrier to entry for a CoRE vote to date. The last CoRE vote reached a peak of ~$0.75/vote, while the highest bribe on Hidden Hand is commanding just ~$0.07/vote.

Reactors provide several benefits, namely those being

• Ability to stake a protocol’s assets to farm TOKE, which can then be staked to direct liquidity to Balancer.
• Opens the doors for a token swap with Tokemak to allow Balancer to kickstart Liquidity Directing, currently the best deal on this is FXS where one TOKE can direct up to $114 of FXS
• Makes all future partnerships and integrations infinitely easier due to the Balancer community showing some support for Tokemak
• Pending the launch of the reactor, the reactor could potentially be prewired to deploy to gauges to veBAL and further incentivize a TOKE/ETH 80/20 pool (Liquidity is deployed in cycles). Attracting further liquidity for TOKE/ETH providers away from Sushi/Uni.

Cost-Benefit Analysis

The below Cost-Benefit Analysis assumes 10% TVL utilization at 30 bps and a $4MM token swap is performed with Tokemak. This does not include if any BAL was staked in the Balancer Reactor. The top row shows different scenarios based on a WACC varying from 10%-20% for BAL. As can be seen from the Net Cost Benefit section, this would result in a positive $1.46MM-$1.66M benefit to Balancer, as well as $35.26MM in TVL captured.

	10%	15%	20%
Bribe Cost	$2.2MM	$2.3MM	$2.4MM
Swap Amount	$4MM	$4MM	$4MM
TVL Captured	$35.26MM	$35.26MM	$35.26MM
Annualized Fee Revenue	$3.86MM	$3.86MM	$3.86MM
Net Cost Benefit	$1.66MM	$1.56MM	$1.46MM

*TVL captured is found by utilizing the info in the FXS reactor, where 1 TOKE = $114 of liquidity available to be directed. 1 Toke = ~$13

It is also worth noting that TOKE has shown only a 0.14 correlation with ETH while BAL has shown a 0.50 correlation with ETH.* This effectively acts as a way for the Balancer Treasury to diversify out of assets directly correlated with ETH while simultaneously providing the benefits listed above.

Plan of Action

Tiered Bribe Deployment

The average cost for one TOKE via bribing last CoRE vote was ~$0.75, each TOKE equals six votes. To qualify for a Reactor last CoRE vote, 12 million votes were required. As of writing this proposal only one protocol has deployed any bribes and that is LUNA, who have deployed ~$257K worth of bribes and accrued ~4.4MM votes. This is far less than $0.75/TOKE.

What we propose is instead to send out tiered bribe amounts, starting at $0.35/TOKE and scaling to $1/TOKE utilizing $2MM of BAL to bribe with.

Reactor Farming + Potential Token Swap + Biz Dev Efforts

As illustrated in the above Cost-Benefit analysis, securing the BAL reactor + token swap would lead to a net gain in all scenarios plus the additional benefit of TVL captured.

We propose that after the bribing period Balancer engages in a Token Swap with Tokemak to seed the initial reactor and allow for Balancer to start directing TVL to it’s platform. Currently the best deal is FXS, however we can deliberate on that post CoRE vote.

This is also part of a holistic discussion that the biz dev team is working on with Tokemak, which includes:

1. Developing default 80/20 pools for deployment on each reactor, which will help differentiate Balancer from other DEXs + raise awareness on their benefits for LPs
2. Working with Tokemak to explore veBAL program as an alt to veCRV on Toke/WETH
3. Discussing boosted pools and stable pools as an option for their exchange assets to increase capital efficiency when retained in the PCV account
4. Balancer reactor as a means to acquire TOKE for Balancer as an LD

BLABS Biz Dev believes that Balancer is in a unique position to compete with LDs globally on Tokemak to acquire TVL for our long term growth. The CBA proves that under conservative assumptions. Tokemak is heavily interested in this as well (for their growth), but finds it even more interesting if it helps bootstrap the flywheel for their involvement in veBAL. There are a number of synergies to be had here with both assets serving as productive for Tokeamk and Balancer.

Targeted veBAL Education

As a way to dissuade Hidden Hand users from instantly dumping the BAL, run an educational campaign on the value of veBAL. This could come in the form of an AMA with the Tokemak/Redacted communities and/or targeted Twitter Threads.

Risks

• Bribe is insufficient and BAL used is lost, this is highly unlikely considering the current bribe market and protocols involved. For additional context all Tokemak voters are highly aware of Hidden Hand and utilize it to auto deploy their votes. Most voters have not delegated as they are waiting to see how much will be deployed to Hidden Hand.
• Smart contract risk - Hidden Hand exploited during the bribe period, Tokemak exploited. However this is also highly unlikely and is a necessary risk when deploying funds anywhere in DeFi.
• Risk can also be mitigated by purchasing Insurance cover via InsurAce (https://app.insurace.io/Insurance/BuyCovers)
• Both projects have been audited multiple times (Tokemak Audits, Hidden Hand Audits)

Specification

If approved, $2M BAL at the prevailing market price when the vote ends (~155k BAL at time of writing) will be sent from the DAO Multisig 0x10A19e7eE7d7F8a52822f6817de8ea18204F2e4f to the LM Multisig 0xc38c5f97B34E175FFd35407fc91a937300E33860