Recent reports of FTX exchange ‘gaming' the Balancer Labs governance token, BAL, issuance raised a vote to quickly fix the platform to prevent “useless liquidity” from gaining rewards. However, the conduct of the vote on the Balancer Labs Discord group has raised questions on the centralization of the process.
“Liquidity Mining:” Distributing protocol governance tokens to users who provide liquidity assets into the protocol.
The “liquidity mining” boom has grown to unseen proportions as the launch of Compound's COMP token, followed by the recent launch of Balancer Labs governance token set has the crypto community discussing Decentralized Finance (DeFi) more and more.
The launch of these two tokens differs significantly. COMP token, for example, launched a year and a half after Compound began back in September 2018, with about $100 million users' funds locked on the platform. Balancer, in comparison, launched in April with the BAL token distributed months later, with about $40 million in users' assets secured on the platform.
Balancer's platform allows users to create pools of assets that automatically rebalance to keep the value in the line. For instance, a portfolio of two assets, BTC and ETH, each holding 50% would rebalance automatically if either of the coins goes up, e.g., if BTC goes up, Balancer sells some BTC and buys ETH.
The market reception to both coins has been impeccable, COMP gaining over 400% since launch, and BAL setting a 200% increase a day after launch. But there is a problem with the latter protocol.
FTX Accused of ‘Gaming' BAL Incentives
A tweet posted on Thursday showed that FTX Exchange – one of the top crypto exchanges – tried to game the BAL distribution by inflating their numbers. Here's how.
To effectively rebalance the portfolios, the platform uses Coingecko's price feed to calculate liquidity in pools. The BAL tokens are then minted according to the cash provided and distributed every week.
To increase its BAL profits, FTX gamed the platform to create assets and price them highly, boosting their liquidity pool and was on pace to receive over half of this week's total rewards.
Balancer's Quick Response to Exploitation
Balancer Labs set the distribution of the BAL tokens to existing pretty much off-chain at its launch. The distribution allows the team to iterate early on, in collaboration with users, so the team can look for ways in which users are gaming the system and write new rules to undermine those strategies.
Soon after the news broke on Balancer's exploitation technique, Balancer Labs raised a vote on their Discord community group, reaching a consensus solution to solve the exploitation. In a move to stop the distribution of BAL tokens to FTX, the community decided to split the rewards into two, block # 10331138 separating the reward system.
Additionally, a whitelist of available tokens to stake in the liquidity pool will be released to restrict distribution to “useless liquidity” will curb big players from trying to game the platform while preventing a retrospective update on the platform.
However, sections of the community, led by FTX CEO and Founder, Sam Bankman-Fried, have called out the vote claiming it undermines the overall use of a governance token. Sam wrote on his Twitter:
“Voting was done on discord, not by BAL tokens. So that undermines the governance of BAL and makes it seem more like a generic person-driven decision-making system to modify the project.”