Proposal to Lower Stability Fund Fees

Proposal Discussion
#1

Hello everyone.

I would like to discuss the potential benefits of lowering the Stability Fund Fees.

With the recent integration of ICON and Balanced, alongside the introduction of USDC from other blockchains, it has become more feasible to maintain the peg of bnUSD through arbitrage between Balanced and centralized exchanges (CeX).

Currently, the costs associated with these arbitrages, excluding gas and xCall fees, are as follows:

  • When an asset is cheaper on Balanced, the arbitrage cost is 0.4%.
  • When an asset is cheaper on a CeX, the arbitrage cost is 0.9%.

Examples:

AVAX Cheaper on Balanced (Total Cost: 0.4%)

  • Buy AVAX on Balanced using bnUSD (0.3% fees)
  • Sell AVAX on Binance for USDC (0.1% fees)
  • Swap AVAX USDC to bnUSD using Stability Fund (no fees)

AVAX Cheaper on Binance (Total Cost: 0.9%)

  • Buy AVAX on Binance using USDC (0.1% fees)
  • Sell AVAX on Balanced for bnUSD (0.3% fees)
  • Swap bnUSD for AVAX USDC using Stability Fund (0.5% fees)

Current Stability Fund Fees:

  • USDC/hyTB → bnUSD: 0% fees
  • bnUSD → USDC/hyTB: 0.5% fees

Proposal:

I propose lowering the Stability Fund fees for swapping bnUSD to USDC/hyTB to 0%. This adjustment would reduce the cost of arbitrage to 0.4% in both directions, significantly increasing arbitrage opportunities.

Benefits of Lowering Fees:

  • Enhances the alignment of asset prices on Balanced with real market prices.
  • Tightens the bnUSD peg to $1.
  • Increases trading volume, thereby generating more fees from swaps (0.3% per swap).

Lowering these fees would foster a healthier arbitrage environment on Balanced, benefiting the entire ecosystem.

Please let us know what you think about this proposal. Your feedback is really important!

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#2

Hey thanks for good post!
It’s hard to imagine what effect this will have.

Long term the stability fund will be a core thing offered by balanced allowing users swap assets to and from USDC and ofc that would preferably be something we charge for. Since it is more beneficial if the instead want to stay and use bnUSD. But even for this 0.5% might be a bit to high and could see us going to 0.3% or 0.1% like other stable pools, but is odd since it does not have slippage.

Not sure if this makes sense, but lowering this fees gives a bigger edge to arbitrbagers with less invested on ICON, which is also something to consider.

“When an asset is cheaper on a CeX, the arbitrage cost is 0.9%.” If an arbitrager is liquid enough to handle a couple of swings in the market it could still take profit at +0.4% until it runs out of assets on ICON or stables on their counter party market.

Then a couple of choices. wait until the price is de pegged by 0.9% then start arbing the other direction to re balance stack.
If profit of the smaller swings are enough, exit anyway and pay fees with profits
Wait for the price to swing up again and let other arbitragers take the circular arb.

However 0.5% might be a bit to high/risky so lowering can still be valid.

Not sure if i am thinking of this right, but i feel like lowering to 0% might be a bit to aggressive. I do like the incentivisation of being very liquid on ICON.

2 Likes
#3

Thank you for opening the discussion, Andell!

General Thoughts on the Stability Fund

The Stability Fund is a valuable service provided to ICON users, and it is understandable to charge a fee for this service. However, the issue extends beyond simply rendering a service.

Entering the bnUSD ecosystem is straightforward, but exiting is considerably more challenging due to the following reasons:

  • Utilizing the Stability Fund, which incurs a 0.5% fee.
  • Using ICX, which entails a 1% fee for instant unstake or a 7-day waiting period.

While it is clear that Balanced/ICON aims to encourage users to remain within the ecosystem, this poses a significant risk for potential new users, as exiting is not as flexible.

In contrast, on other well-known chains, unstaking is free and instantaneous, making it easier to exit. Users typically have funds across multiple blockchains, and allowing them to exit quickly during high volatility events (e.g., for margin calls) reduces their risk and can attract new users to Balanced.

Considerations for a 0% Fee

I acknowledge that reducing the fees from 0.5% to 0% might be too aggressive. A more measured approach would be to trial a reduction to 0.1% or 0.3%. This allows us to assess the impact on both the DAO and its users and, if necessary, revert to the original fees.

Liquidity Requirements for Arbitrage

CeX/DeX arbitrage demands significant liquidity and involves considerable risk. The liquidity required on both sides is often locked solely for this purpose, meaning it does not generate any yield. Additionally, managing this liquidity entails hedging costs and management expenses.

To provide some perspective on liquidity requirements:

  • To fully arbitrage ICX on 23/05/2024, an arbitrager would have needed $300K locked between ICON and a CeX.
  • To fully arbitrage AVAX on 23/05/2024, an arbitrager would have needed more than $60K locked between ICON and a CeX, for a profit of $100.

These figures assume a 0% fee on the Stability Fund, exclude gas/xCall fees and 1 re-balance per day. Such liquidity levels can typically only be achieved by professional arbitragers, and the current incentives are insufficient for these actors.

Frequent Rebalancing Reduces Liquidity Needs

Lowering the Stability Fund fees allows arbitragers to rebalance more frequently, which in turn reduces the amount of liquidity needed for arbitrage. When fees are lower, more actors can participate in arbitrage activities because the cost barrier is reduced. This increase in participation can lead to a more balanced and stable ecosystem, benefiting all users.

Challenges with Waiting for De-pegging to Rebalance

Waiting for a significant de-peg to rebalance is not feasible, as other actors may execute the arbitrage before the de-peg is sufficient to rebalance. This means arbitragers must wait until all other actors are out of funds to have a chance to rebalance, which is impractical.

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#4

Thanks good response.
The sICX/ICX unstaking is a issue on itself that also needs discussion i think. It is a bit to steep fee there as well, but perhaps for another discussion.

For exiting the ecosystem previously it was only that 1% fee. But for regular users a exit via any of our POL tokens will be a pretty good deal (eventually). With Avax or the stability fund you can now exit for 0.3% or 0.5%. Being a huge improvement already. With that said i do think lowering the fee on stability fund would in the long run earn us more money. But interested what thought others have.

Yeah the liquidity amount are quite huge, but i am still a bit curios.
How is this calculated? and does it account for swings up and down within the day?
This day also had quite huge swings i think, so it’s not unreasonable that we depeg by 0.9% in these environments. so the arbitrager could potentially have a lower stack to optimize apy? (however won’t be optimal for balanced, since we would miss out on fees).

I can see this being a problem, for attracting arbitrageurs, the gains on balanced would be very dependent on other entities which i imagine would be impractical.

#5

Regarding your suggestion, I would be happy to make a proposal. A viable solution could be the creation of a WICX token, similar to WETH or WBNB, which would be redeemable 1:1 and instantly for ICX. While the token itself should be straightforward to develop, converting all sICX pools to WICX pools could be a challenging task. However, let’s focus on the current topic.

Realistically, it’s 0.5% using the stability fund. Using a regular swap, it’s 0.3%, but swapping 1000 bnUSD for AVAX incurs a 0.5% slippage. However, I agree that reducing it from 1% to 0.5% is already a significant improvement. Additionally, the amount of work Balanced has done this year is truly impressive.

It’s calculated from our own data, which is unfortunately private. Yes, it does account for both upward and downward swings within the day.

Yesterday did experience some volatility, but it was far from a truly volatile day. From our perspective, it was relatively uneventful compared to typical days during the previous bull market.

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#6

Good discussion in here all around. Thanks for raising this @Algochain. Having read the back and forth here, I’d propose that we lower the stability fund fee from 0.5% to 0.3% to be inline with other swap pools right now, then potentially revisit this in a couple months with more data.

I think I’d be willing to go lower, perhaps to 0.1% or 0.05% similar to other stableswap pools, but would likely be against free bnUSD redemptions.

#7

I don’t think creating Wicx would be easy, because Sicx is product of OMM team and it’s separate from Balanced

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#8

With more thought, I actually think going for 0.1% will make the most sense. Definitely worth a try to see what impact it might have. It just a vote away to change back if it does not work out and we have tight rate limits so nothing dangerous in trying really.

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#9

Thank you for continuing this discussion. We have compiled some data that highlights the impact of different fee rates on arbitrage volume and overall fee accruals.

Data Analysis for AVAX on 23/05/2024 (Assuming 1 AVAX = $36)

With 0.5% Fees:

  • Number of Arbitrages: 94
  • Total bnUSD swapped for USDC on Stability Fund: 10,164.63 bnUSD
  • Fees accrued by Stability Fund: 50.82 bnUSD
  • Total bnUSD swapped in the AVAX pool: 20,999.70 bnUSD
  • Total bnUSD fees accrued by LPs: 62.99 bnUSD
  • Total AVAX swapped in the AVAX pool: 263.94 AVAX
  • Total AVAX fees accrued by LPs: 0.79 AVAX
  • Total Fees Accrued in USD: $142.25 (50.82 + 62.99 + 28.44)

With 0.3% Fees:

  • Number of Arbitrages: 108
  • Total bnUSD swapped for USDC on Stability Fund: 11,918.41 bnUSD (+17.25%)
  • Fees accrued by Stability Fund: 35.75 bnUSD
  • Total bnUSD swapped in the AVAX pool: 24,263.27 bnUSD (+15.54%)
  • Total bnUSD fees accrued by LPs: 72.78 bnUSD
  • Total AVAX swapped in the AVAX pool: 309.43 AVAX (+17.23%)
  • Total AVAX fees accrued by LPs: 0.92 AVAX
  • Total Fees Accrued in USD: $141.65 (35.75 + 72.78 + 33.12)

With 0.1% Fees:

  • Number of Arbitrages: 131
  • Total bnUSD swapped for USDC on Stability Fund: 14,471.50 bnUSD (+42.37%)
  • Fees accrued by Stability Fund: 14.47 bnUSD
  • Total bnUSD swapped in the AVAX pool: 28,959.08 bnUSD (+37.90%)
  • Total bnUSD fees accrued by LPs: 86.87 bnUSD
  • Total AVAX swapped in the AVAX pool: 375.58 AVAX (+42.29%)
  • Total AVAX fees accrued by LPs: 1.12 AVAX
  • Total Fees Accrued in USD: $141.66 (14.47 + 86.87 + 40.32)

Our overall conclusion is that lowering the fees to 0.1% can significantly increase arbitrage activity and trading volume, effectively compensating for the reduced fee rate. This will enhance protocol-owned liquidity (POL) and could attract more users by lowering exit costs.

We obviously leave you to consider this data and make the best decision, as you know your protocol better than us.

#10

For this day we do not see a loss in fees, but neither a significant difference. Which in a way makes quite a lot of sense.
But increased volume and better user experience with the same efficiency should be considered good.

It’s also worth from a marketing perspective one of the most used metrics are volume and this change will rank us higher.

I think something that is hard to account for is smaller swings in the market. periods when the prices swing under 1% up and down, we can’t really get any benefit from.

I’d vote we test 0.1%, and see how it does.

#11

Thanks for the answer @Andell.

Here is the data on the May 25th, which was a pretty boring day for AVAX with 2.66% amplitude :

With 0.5% Fees:

  • Number of Arbitrages: 3
  • Total bnUSD swapped for USDC on Stability Fund: 249.56 bnUSD
  • Fees accrued by Stability Fund: 1.24 bnUSD
  • Total bnUSD swapped in the AVAX pool: 517.21 bnUSD
  • Total bnUSD fees accrued by LPs: 1.55 bnUSD
  • Total AVAX swapped in the AVAX pool: 6.545627476882431 AVAX
  • Total AVAX fees accrued by LPs: 0.019 AVAX
  • Total Fees Accrued in USD: $3.47 (1.24 + 1.55 + 0.68)

With 0.1% Fees:

  • Number of Arbitrages: 9
  • Total bnUSD swapped for USDC on Stability Fund: 805.89 bnUSD (+222%)
  • Fees accrued by Stability Fund: 0.80 bnUSD
  • Total bnUSD swapped in the AVAX pool: 1325.08 bnUSD (+156%)
  • Total bnUSD fees accrued by LPs: 3.97 bnUSD
  • Total AVAX swapped in the AVAX pool: 21.09 AVAX (+222%)
  • Total AVAX fees accrued by LPs: 0.06 AVAX
  • Total Fees Accrued in USD: $6.93 (0.8 + 3.97 + 2.16)

It seems that the volume is way more increased in days of low volatility.

#12

Thanks, that should indicate also that lower fees will scale better with more liquidity as well.

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#13

With more liquidity in the pools, I expect way more volume as the arbitragers will need more money to re-peg the price.

BIP 77: Lower stability fund fee to 0.1%
#14

Good work here folks - was going to vote against it tbh but this analysis helped. Would have preferred to start at 0.3% to keep consistent with other pools, but ill take it. Can always raise it again.

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#15

Most Dexes does have stable pools at a lower fee. But yeah it’s aggressive, but will also be faster to evaluate the impact with a lower fee. If it has basically no impact of keeping it this low long term. I’d say we then go for 0.3% just to keep consistent with other pool and slightly tighter arbitrage.

But interested to see the impact of this. And we do have tight limits on USDC so nothing can runaway like crazy, neither is the stability fund making any significant gains atm so we are not losing to much there either