Noticing the shift in the governance tokenomic tides, we are witnessing a new governance paradigm rapidly evolving. With the adoption of multiple notable protocols such as Radiant, Aave, Alchemix, Paraswap, and Timeless Finance, it’s time we broke down the next stage in efficient and streamlined protocol governance technology: 8020.
The majority of DeFi protocols implement a native token single-sided staking mechanism, with governance tokens acquired and staked in return for governance voting power.
While incentivizing staking successfully increases governance participation, it also (un)effectively reduces the circulating supply available for swaps. As a result, a smaller portion of capital is supplied to liquidity pools, and this lack of liquidity leads to several issues:
- Increased slippage
- Inability to facilitate larger trades
- Higher price volatility for the underlying tokens
To address these challenges, protocols must provide additional incentives for their token, not only to multiple liquidity pools but also across multiple decentralized exchanges. This fragmented system leads to protocols entangling themselves in an inefficient, expensive, and complicated incentive program.
To make matters worse, protocols often implement a vote escrowed position, rewarding users with increased voting power and liquidity mining boosts the longer they lock their position. The issue? A vast majority of the token supply is locked away from Liquidity Pools. As users lock their governance positions, that liquidity is made redundant for trading leading to fractionalized liquidity, inefficient swaps, and volatile tokenomics.
By leveraging Balancer weighted math, liquidity pools can be configured with up to 8 tokens in any desired weighting. 8020 refers to a two-asset pool with 80% of one asset and 20% of another. The 8020 initiative proposes using an 8020 pool BPT token as the governance token instead of a single token, with a pool configuration of 80% of the protocol’s native token paired with their chain’s base token or a highly liquid stablecoin.
This model hosts a range of benefits including:
- Deep Liquidity
- Asymmetric upside and reduced impermanent loss (IL)
- Efficient incentive programs
- Hedging and price appreciation
What’s more, utilizing the BPT as the governance token unlocks a new realm of possibilities for additional mechanics.
As mentioned before, single-sided staking leads to large quantities of token liquidity being removed from the circulating supply. When combined with a vote escrowed model, it results in a vast portion of liquidity being removed from circulation for extended periods, spanning multiple years!
Harnessing a liquidity pool BPT as the governance token, the 8020 model circumnavigates this issue. Instead of staking the token itself, users stake the pools BPT, allowing the underlying liquidity to actively participate in swaps.
For the first time in governance history, as the sum of staked tokens grows, the available trading liquidity increases rather than decreases.
And of course, deep liquidity means:
- Reduced slippage
- Ability to facilitate large trades
- Lower price volatility
By addressing the limitations of traditional single-sided staking, the 8020 model fosters an ecosystem where liquidity thrives, enabling smoother and more efficient trading experiences for users.
For reference, at the time of writing, Balancer’s 8020 governance pool hosts a TVL of over $208M, leading to BAL being one of the most liquid tokens in DeFi. Check it out for yourself here.
Efficient Incentive Programs
With the need to facilitate swaps, the traditional single-sided model necessitates incentives for both the staking pool and other liquidity pools. If protocols integrate the governance token into an 80/20 liquidity pool, the need to split and direct incentives to other DEXs is eliminated.
In essence, the 8020 model consolidates these incentives, removing the need to fractionalize liquidity across multiple markets. As a result, the token supply is concentrated in one primary pool, vastly reducing slippage and offering a simpler, more cost-effective incentivization program.
But that’s not all; by utilizing a liquidity pool BPT for governance an additional stream of incentives automatically presents itself — Swap Fees.
Each pool has its swap fee uniquely set based on the underlying assets and AMM logic used. With Balancer technology, protocols can dynamically set their swap fee to their own unique position, with a portion of these fees flowing to liquidity providers as an incentive for providing liquidity.
The integration of swap fees as an inherent incentive mechanism within the 8020 model strengthens the overall ecosystem, promoting liquidity provision, and enabling users to reap rewards for their active engagement.
Take Radiant Capital as an example, after adopting the 8020 model and drawing in a TVL of almost $43M, the pool facilitated 44,046 swaps with a swap fee of 0.5% and generated $644,744 in swap fees in the first 28 days. To date, Liquidity Providers have earned an additional $751,529 that would never have been possible with a single-staked model. Check out the full case study below.
Balancer on Twitter: “In less than 1 month,@RDNTCapital unlocked a governance position with over $40 million in liquidity generating $644,744 in swap fees for LPs, with $327,771 in protocol fees recycled back into the pool as incentives.This is the power of #ve8020.A 🧵 pic.twitter.com/tIjl9QlxWR / Twitter”
In less than 1 month,@RDNTCapital unlocked a governance position with over $40 million in liquidity generating $644,744 in swap fees for LPs, with $327,771 in protocol fees recycled back into the pool as incentives.This is the power of #ve8020.A 🧵 pic.twitter.com/tIjl9QlxWR
Asymmetric Upside and Reduced IL
Why 8020? Balancer’s weighted technology offers unbound flexibility in pools, and an 80/20 split represents the perfect middle ground for native staked tokens.
With 80% of supplied tokens being the protocol token, this model offers asymmetric upside, meaning the upside potential is far greater for the native token as opposed to the base token. A 50/50 pool is generally avoided for this purpose as it offers limited exposure to the native token while posing increased IL potential should the native token appreciate substantially.
While there is still some inherent risk of impermanent loss, as illustrated in the figure below, the 80/20 split offers substantially reduced exposure to IL, while retaining the benefits of deep liquidity and exposure to the base token.
By striking the right balance between token composition, the 8020 model maximizes exposure to the underlying native token, with liquidity providers enjoying the advantages of deep liquidity, asymmetric exposure to the base token, and minimized impermanent loss.
Hedging and Price Appreciation
While asymmetrically skewed to the protocol’s native token, 8020 also provides exposure to a base asset that can act as a hedge for the position. This exposure becomes significant in situations where the price of the base asset experiences a rapid increase or if the price of the native asset declines. In such scenarios, arbitrageurs are incentivized to rebalance the pool.
In layman’s terms, this means that if the base token significantly increases, the native token will appreciate alongside it due to the correlation of the tokens. This correlation allows users to benefit from the potential upside of both tokens.
In 2021, Aave opted to implement a Balancer 8020 pool BPT into its safety module. Increasing exposure to ETH, whilst also acting as a safety backstop for Aave liquidity pools should they face cascading liquidations. An exemplary display of the 8020 model, be sure to check out the full story.
The realm of innovation within the 8020 governance model extends far beyond its initial implementation. By employing a pool BPT as the governance token, a multitude of possibilities opens up, paving the way for additional mechanics.
ve8020 is a vote-escrow system created and implemented by Balancer which draws from Curve’s veCRV mechanism. Users lock their 80/20 BAL/WETH BPT in exchange for the governance token, veBAL. The duration of locking can range from one week to one year, with the amount of veBAL received directly proportional to the number of locked BPT tokens and the locking period duration.
Why innovate? Curve’s ve model has seen widespread adoption across the industry but is it the most effective way to facilitate governance participation?
As stated, one of the major drawbacks to single-sided governance staking is the reduction in token liquidity across the market. As users lock their governance positions that liquidity is effectively made redundant for trading. ve8020 has the opposite effect; every time users lock into governance positions trade liquidity increases! Through the innovation of Balancer’s weighted pools, the more liquidity that flows into an 8020 governance position, the deeper the liquidity becomes for the underlying tokens.
Additionally, a ve8020 position provides protocols with an ever more focalized point of incentives — Lockers. Via incentivizing lockers, protocols increase the liquidity of their token without having to directly incentivize the DEX, harnessing a means to reduce the dilution of incentives flowing to mercenary farmers. Liquidity Providers who do not wish to lock will automatically earn swap fees alongside some additional opportunities made possible by the 8020 Initiative.
Beethoven X opted to go down a different path. Rather than rewarding token locking, the protocol incentivizes the growth of positions over time, with rewards and voting power increasing with maturity, hence the name maturity adjusted (ma). This mechanism rewards those actively participating in the protocol for the longest duration with the greatest voting power.
Maturity is split into various levels, each of which corresponds to different incentive and voting power reward distributions. Once the highest maturity level is achieved, users unlock the maximum governance power and liquidity mining rewards.
Additionally, the underlying technology utilizes fNFTs as receipt tokens to unlock an additional level of composability. Users stake their 80/20 BEETS/FTM BPTs but in the place of typical ERC-20 receipt tokens, userss are issued an evolving financial NFT known as a relic. This relic tracks position maturity and even unlocks opportunities such as secondary markets, where mature positions can trade at a premium.
Alongside the multitude of benefits that a ve8020 or ma8020 position brings, protocols looking to join the initiative unlock some exciting opportunities with the ability to choose one of the routes below to ensure incentives flow to the LP position on the DEX.
- Balancer 8020 LaunchPad
- Core pool designation
The 8020 LaunchPad
To help facilitate the initial growth and development of protocols adopting this evolved governance position, Balancer offers a BAL grant to bootstrap adoption. The initial grant available is 25k BAL; if all milestones are met, the cumulative grant available is 250,000 BAL.
The grant application is dependent on:
• Project track record
• Circulating market cap
• Trading activity
This grant ensures protocols can grow their liquidity with an evolved governance position while simultaneously unlocking a steady stream of incentives for LPs. If a project is looking to apply for the launchpad grant, they can complete the following form to get in touch with Balancer
Core pool designation
A system that takes center stage in the balancer liquidity flywheel is the Core Pool mechanic. Until recently, core pools are pools in which 50% or more of the underlying assets in the pool are Yield Bearing. These pools have 65% of the protocol fees the pool generates recycled back into the pool as voting incentives, allowing the LP to fuel its own efficient and growing incentive program. With the introduction of the 8020 initiative, 8020 pools now also qualify to gain this status unlocking further benefits for protocols looking to implement the next stage in governance tokenomics.
The 8020 model represents a significant leap forward in protocol governance tokenomics; Increased liquidity, incredibly efficient incentive programs, asymmetric token exposure, minimized IL, and token hedging.
With a growing collection of prominent teams beginning to implement this technology, the 8020 Initiative is an interconnected and growing collective of protocols ushering in the next stage of efficient governance.
Are you looking to find out more? Jump into the notion pack below and join the initiative today.