Yesterday afternoon, the rising automated asset management platform Balancer faced its first growing pain as a leading centralized exchange FTX looked to take advantage of a BAL yield farming loophole.
.@FTX_Official is currently gaming $BAL distribution (on pace to receive >50% of this week's distribution).
Balancer uses @coingecko price feed to calculate liquidity in pools. Big players can create assets & price them as they wish to inflate numbers.https://t.co/zIESmky3NO pic.twitter.com/YE7tGV0Av4
— Predictions Exchange (@PredictionsExch) June 24, 2020
For those who missed it, Balancer started distributing its native governance token – BAL – for the first three weeks of liquidity mining. Upon listing, BAL was trading at extremely favorable rates – reaching upwards of 20x above its seed price $0.60/token.
This multiple drew in the attention of huge players eager to take advantage of the hottest yield farming trend popularized by last week’s COMP distribution. In this case, Balancer saw a leading exchange FTX play their hand at participating in liquidity provisions in a less than ideal fashion.
In short, FTX created two tokens – USDTBEAR and USDTHEDGE – and supplied $100M worth of liquidity to a Balancer pool which features the two assets representing leveraged shorts on the USDT stablecoin. Given that these tokens are listed on CoinGecko and that they were split 50/50, the pool has the highest possible earning Factor while simultaneously being eligible for BAL liquidity mining. This meant that in less than 24 hours, FTX was on track to capture more than 50% of the week’s upcoming 145,000 BAL allocation.
What was more fascinating was that the FTX team was extremely open about this play, with the CEO of the company sharing this fascinating tweet thread to justify the move.
1) Some thoughts on @BalancerLabs / $BAL:
— SBF (@SBF_Alameda) June 24, 2020
Balancer Community Response
When wind of this broke in the Balancer Discord, many were quick to suggest that the entire pool should be discredited from receiving any BAL rewards. However, given the fact that the pool was in line with liquidity mining eligibility, FTX technically broke no rules.
In fact, SBF was quite vocal in the Discord during these whole situation panning out, ultimately amounting to a very rough poll which looked to add a temporary solution.
This soft poll in parallel with hours of back and forth discussion amounted to the following decision:
According to community consensus reached over at our Discord:
The current week will be divided in 2 parts for mining distribution, separated by block 10331138.
Before: everything as expected.
After: a whitelist of eligible tokens will be implemented until the end of the week.
— Balancer Labs (@BalancerLabs) June 24, 2020
In light of this decision, SBF proposed a hat tip of allocating the FTX-earned BAL to a community of Balancer’s choosing.
We'll also be donating roughly 2,000 BAL to the charity of @BalancerLabs's choice <3 https://t.co/WQoVuGrRKB
— SBF (@SBF_Alameda) June 25, 2020
Now, whether this actually happens or not is still up in the air, but the fact the team was so vocal and active in the discussion was just about the best possible outcome for Balancer given what could have happened should FTX dump their entire stack on the incredibly scarce token supply.
Balancer Governance Sentiment
Many were quick to dunk on Balancer for using Discord to achieve soft consensus despite BAL being launched specifically for governance. Community Representatives like @rabmarut have pointed out that Balancer governance is still in the early stage and that there are currently no onchain tools in place to execute the vote properly.
Other yield farmers have suggested this hasty decision was less than ideal, as their collective on-chain voting weight would have likely pushed to issue FTX no BAL at all, rather than the 2000 BAL they are set to earn from the rest of the week.
Regardless of where you fall in terms of whether FTX should have received BAL or not, this development was a fascinating trend of how DeFi liquidity mining primitives can invite in actors of all shapes and sizes.
Every single incentive Synthetix has designed has been gamed in some way, it’s why we do small scale trials then iterate. This is good long term for Balancer provided they don’t retroactively change rules and don't make a knee jerk move that is detrimental long term. https://t.co/fpcEy2DcXt
— kain.eth (@kaiynne) June 25, 2020
Next Steps
As a final reparation to the above-mentioned issue, the Balancer community is now creating a whitelist that will look to provide better clarity on which tokens are eligible to be displayed on the Balancer front-end. While it remains unclear whether or not tokens NOT listed on this whitelist are still eligible for BAL rewards, there’s no denying the community has rallied around ratifying token guidance.
If one thing is for sure, yield farming has reinvigorated exciting experiments regarding token distribution. While many have openly shamed FTX for their initiative, it’s fascinating to consider the collective DeFi power users stack up against their centralized goliaths.
After all, this is open finance, and with that in mind, that indicates that ANYONE should be able to participate using the resources at their disposal – regardless of their intentions. Now, will they actually be able to – or will governance actually start having real value?
Find out next week as the yield farming saga continues!
To stay up with Balancer, follow them on Twitter or join the conversation on Discord.
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Cooper is the Editor of DeFi Rate. He is an ambassador of Set Protocol and an active contributor to MetaCartel where he seeks to find emerging consumer-facing applications that propel the Ethereum ecosystem. He often works with projects as the Director of Fitzner Blockchain Consulting where he coauthors the weekly publication Token Tuesdays.
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