In this episode of Bell Curve, Mike, and Jason are joined by Chris Burniske and Balancer Labs CEO Fernando Martinelli to discuss how to build sustainable, value-accruing protocols, evolving fee markets, the efficacy of airdrops, rewarding labor vs capital, the problem with a fixed token supply and more!
Read our notes below to learn more.
Balancer: Self-Sustaining Infrastructure
Fernando
Drawn to crypto because of the idea of separating money from the state and because of smart contracts on Ethereum.
Got involved with MakerDAO while exploring the concept of stablecoins and had some MKR tokens.
Became concerned about being overexposed to $MKR because it was not very liquid and the value fluctuated a lot.
Got the idea of creating an index fund-like pool using AMMs which would allow for a continuous rebalancing of assets and the ability to create a custom basket of tokens.
That led to the development of Balancer V1, which allows for the creation of index funds that are more flexible and give fees to liquidity providers instead of charging them.
Balancer is a decentralized exchange platform that allows users to create and manage their own pools of tokens, which they can then trade with others on the platform.
Balancer V2 allows teams to create their own tools and prototypes with their own invariants, using a common vault that holds all the tokens from all the pools.
Balancer V2 also optimizes gas costs and security, making it easier for teams to quickly innovate on top of the platform.
The goal of Balancer V2 is to be a piece of infrastructure for developers and other protocols, rather than an end-user application.
Aims to generate revenue from swap fees and other sources and to be self-sustaining without needing to inject money from investors.
Hyperscaling
The differences between a company and a protocol are in terms of how they operate and are supported.
A company relies on a team to maintain its operations, a protocol can continue to function even if the team behind it walks away.
In bull markets, people are more willing to spend money on protocols, but in bear markets, people are more focused on getting their money back.
The open discourse in protocols can lead to different viewpoints being heard.
How Will Fee Markets Evolve?
There are different ways in which fees can be charged in a protocol.
Good composability and cross-chain communication is required for Balancer to move to an app chain.
There is a trade-off between the amount of fees going to validators and token holders.
In order for fees to go to zero, creation needs to become costless.
On the company side, protocols will charge market-based fees and will constantly be undercutting each other to reach the lowest marginal fee rate while sustaining operations.
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On the protocol side, there will always be economic and fee innovation, preventing fees from reaching zero.
Transaction fees are the explicit fee that users are aware of, and MEV is the implicit fee that users may not be aware of.
There may be an inverse relationship between the decrease in explicit fees and the increase in the effort to extract value from implicit fees.
MEV marketplace will become more competitive, and at a zero percent APR, the yield from transaction fees and MEV will reach the cost of validators running the infrastructure.
Cosmos ecosystem has app chains or sector-specific chains with their own preferences and value sets.
Users and token holders will only want to pay for things that align with their values and preferences.
Capital Allocation Decisions
The differences between a tech startup and a protocol lie in how decisions are made in a decentralized manner.
Open source code and community involvement are vital for the success of a protocol.
DAOs and service providers should have a say in the decision-making and funding for the protocol.
Having a strong engineering team in the early stages of a crypto project including a strong business development (BD) team is important to effectively compete in the market.
It is important to adjust marketing strategies depending on the market conditions, with a focus on consumer marketing during bull markets and developer marketing during bear markets.
Airdrops, Identity Solutions, and Rewarding Labor
The problem with airdrops is that people tend to immediately sell the token and to combat this, some projects are implementing mechanisms that reward users for holding onto their tokens, such as increasing rewards based on the age of the capital.
There is a need for more professionalization and consideration of user behavior in the mechanism design of airdrops and yield farming.
There is a potential for using cryptocurrency to pay workers in a combination of dollars and tokens, if capital is enriched without addressing labor, socio-political change will not be significant.
There has to be innovation in identifying sybil attacks.
The use of grants and delegation could be used to compensate labor and align governance power.
Liquidity mining has been groundbreaking and will continue to be used in the future to compensate labor and support the protocol.
Pushback Against VCs & Insider Allocations
Public markets are currently more attractively valued than private markets.
100% of the allocation to insiders is not a good idea because insiders cannot help but be biased in their allocation.
Allocation should be made to the permissionless public.
Moving Away From A Fixed Token Supply
Fixed supply assets are rare and inflexible which can be a weakness for some projects.
Bitcoin is a specific type of asset for the world and most other projects are more like capital than a store of value like Bitcoin.
Projects need to spend when necessary and follow the discipline to make sure to have a buffer to continue spending.
Having a fixed token supply in a cryptocurrency protocol is important as it provides more certainty and protects against potential governance attacks in the future.
Returning Capital To Token/Shareholders
Communities should focus on reinvesting in the opportunity to improve underlying infrastructure.
Investing in the long-term vision and future potential of the platform is a better use of resources than trying to maximize short-term gains.
Balancer has struck a good trade-off between giving back to token holders and investing in growth and creation for the ecosystem. Token holders have to lock their tokens for up to a year to be able to vote and receive their share of the protocol's revenues.
75% of the revenues go to $BAL token holders and 25% goes to the treasury of the Dao to be used for grants, service providers, or coordination. This provides stability for protocols built on top of the baluster to be sustainable.
Building Moats In Crypto
Building moats in an open source in the crypto environment is difficult.
Different protocols rely on the same infrastructure, making it difficult for competitors to create a thriving ecosystem.
Composability, while projects work together, is important to achieve combinatorial utility.
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