All successful DeFi projects must accomplish two things -first, they must attract capital, and then they must retain that capital. With $500 Total Value Locked (TVL), Badger DAO has attracted capital. The next major step for our community is a discussion of how best to retain TVL locked and ensure that long-term capital is rewarded.
The current Ethereum economy and the cost of transactions favors large asset holders against small investors. For example, a small investor might have to spend $45 to move and stake $500. On the other hand, a whale will spend the same $45 to move and stake $20,000. The whale only needs marginally better returns to cover the switching costs, while the small investor needs very large returns. These economics makes protocol switching very expensive for small investors and very cheap for large investors.
While whales always have a big incentive to move, small investors have a strong incentive to stay with the protocol. The cost of entering and exiting the position means that significant capital appreciation must occur within the protocol to make the investment worthwhile.
Many of the current debates in our community reflect this tension. Whales are under constant pressure to switch protocols to pursue the optimal ROI, while small holders are under constant pressure to stay with the protocol until ROI surpasses both entry and exit costs.
Whales push for a Badger emission increase to the liquidity pools to match the APY of competing protocols. At the same time, smaller stake holders prefer that the capital is re-invested in the Badger pools. Essentially whales are driven by APY, while the price of the asset drives smaller investors.
To be successful as a community we need to recognize that this tension exists, and discuss how our long-term economic structure rewards both types of stakeholders.
Our current system of determining staking rewards based on time-locked in the protocol is a great first step. Generous Badger emissions support both large and small investors. Badger DAO currently does the best job of ANY DeFi protocol of attracting and rewarding investors of all sizes
We should have a longer discussion of how our long-term economics and incentives are designed to attract and retain capital.
I would be interested to hear what people think about this problem, and what potential compromises we can create that ensure maximum community success, wealth creation, and badger dominance.