Introduction
With the recent launch of the Archway connection, the first of many xCall use cases, it became clear that the success of Balanced and ICON are intertwined more than ever. In order to grow and scale Balanced, Balanced needs resources to sustainably fund long-term development, bolster safety and security for users, and gather deeper liquidity to support more trading volume. Meaningful liquidity for upcoming cross-chain connections is especially important for faster growth. Fortunately, ICON has access to such resources.
Throughout the history of Balanced, ICON has contributed in a number of ways. ICON funded the recent Balanced contract development related to xCall, provided financial assistance during systemic risks (e.g. Prime Trust bankruptcy), and provided liquidity in several pools (most recently the sARCH/bnUSD pool). ICON recognizes that Balanced is not only an ideal application to showcase xCall, but a critical component of the ICON ecosystem.
I and other contributors to both Balanced and ICON discussed how to best align incentives and concentrate efforts that benefit both respective communities. After many months of discussions between Balanced and ICON contributors, we believe a full and complete merger of the respective teams and communities is the optimal solution to position everyone for future growth. We believe this direction would prove that the sum value of both projects working together on a shared vision is greater than the value of each of them separately.
Strategic Rationale
Tying the growth of Balanced to the burning of ICX sets a flywheel in motion that unlocks additional value for both projects. Specific benefits are highlighted below:
Benefits to Balanced
- Access to new users through cross-promotional efforts with other chains as ICON builds network-owned liquidity in cross-chain assets and Balanced integrates other chains
- Ongoing funding for development ensuring long-term development support for Balanced, enabling Balanced to build new features and improve/maintain existing ones
- A purchase of BALN at a premium to market price in exchange for a more liquid token that is still tied to the success of Balanced
- Ongoing incentives contributed by ICON Foundation and the ICON Network (“economic enshrinement”) as discussed in more detail in a separate ICON proposal
- Liquidity for sICX/bnUSD and cross-chain token pairs (e.g. sARCH/bnUSD) to increase trading revenue
- Incentives to boost the yield on the bnUSD savings rate to increase demand for bnUSD, which enables Balanced to generate revenue from purchasing RWAs (e.g. US government bonds)
- Incentives to provide liquidity on the Balanced DEX to drive LP engagement, increase liquidity, and increase trading revenue
- Funding for an insurance fund to mitigate losses in the case of an exploit
Benefits to ICON
- Access to new users through cross-promotional efforts with other chains as ICON builds network-owned liquidity in cross-chain assets and Balanced integrates other chains
- Flagship user-facing product to pioneer ongoing utility of the xCall general message passing service, which generates additional fees that burn ICX
- Minimum of 50% of the fees generated by Balanced will be used to buy ICX on the Balanced DEX and burn it
- Balanced developers and designers will contribute to the growth and implementation of xCall, ICON products, and other ICON initiatives
- The ICON community gets a user-facing application to rally behind and showcase xCall as a robust interoperability solution
- The establishment of ICON as cross-chain liquidity hub through Balanced powered by xCall
Proposed Terms
BALN-to-ICX Exchange Ratio - We propose ICON to purchase all circulating BALN at a fixed price of 0.5 ICX per BALN, a ~40% premium to the current trading price of BALN (as of January 11th, 2024).
Settlement - The transaction is to be executed via smart contracts developed by Balanced contributors that will only be available on the current Balanced website (https://app.balanced.network). Exact instructions will be provided at a later date.
Lock Up - In order to compensate for the premium while also keeping incentives aligned during the transition, the ICX received will have a one (1) year linear vesting period after a three (3) month cliff starting from the execution of the transaction. While vesting, all ICX will be held as sICX so everybody earns constant staking rewards.
Governance - The governance of Balanced will eventually be transferred to the ICX community. Contract upgrades would likely be voted on by ICON validators via network proposal, while ongoing operational decisions, such as changes to parameters, would be governed by individual sICX holders.
Development - ICON will continue funding development of Balanced as part of ICON’s core mission. All existing Balanced contributors will work alongside the ICON team.
Ongoing Incentives - ICON aims to provide network-level incentives (economic enshrinement) to scale trading activity and liquidity, as discussed in a separate proposal on the ICON forum.
Use of Fee Revenue - Balanced will use, at minimum, 50% of all fees generated by Balanced (and any features developed in the future) to programmatically buy and burn ICX, while the other 50% would be used for discretionary incentives, funding development, and increasing ICON’s network-owned liquidity. Using fees generated from Balanced to buy and burn ICX adds clear metrics to track deflationary pressure, in addition to the current network-fee burning mechanism and the planned xCall fee-burning mechanism. The percentage dedicated to burning ICX may increase over time, but never drop below 50%, and would be adjustable via the governance system.
Conclusion
This idea was not born from nothing. There are other protocols doing similar things to achieve similar synergies. As mentioned previously, I call the concept “economic enshrinement”. Here are a few examples:
Injective - uses some portion of the fees generated by their economically enshrined DEX to buy and burn $INJ
CANTO - has an enshrined stablecoin called NOTE as well as other enshrined DeFi protocols, but does not have the same buy-back-and-burn mechanism as far as I can tell
MakerDAO’s endgame proposal - MakerDAO is making their own chain focused on MKR and its initiatives.
Kujira - Kujira has several enshrined DeFi applications, such as the USK stablecoin, money market, and other DeFi primitives.
Vitalik Buterin - Vitalik discussed the concept of enshrinement at the code level for certain Ethereum applications (e.g. liquid staking).
I have been looking forward to sharing this with the Balanced and ICON communities for quite some time. It feels good to get it out there for all to review and comment on. I feel confident that this proposal is the right path forward for the Balanced and ICON communities. Looking forward to any and all feedback.