Aligning Incentives between ICON and Balanced through enshrinement

Proposal Discussion
#1

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.

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#2

Hey Scott,

Thanks for your well researched proposal. I will reply at greater length when I have more time, but for now, I’d just like to give an endorsement. I expect there will be many who are nervous about letting go of their BALN, as I was, but upon further reflection I think it makes sense to consolidate efforts with ICON. I know from experience that your judgement regarding timely action in the rapidly evolving blockchain space has been far better than mine.
I am also confident that this does not mean you will be leaving leadership of Balanced; it is just your best vision for the path forward after weighing all the variables. The combination of Balanced and ICON will sharpen the focus of our efforts and increase the chances of success as we are entering a new bull market. Let’s go!

6 Likes
#3

Ola @benny_options !!,

Your proposal is intriguing (this understatement is intentional).

Firstly, I want to express my understanding of the problem you aim to solve. I’ve pondered this issue before (link) and acknowledge that it’s neither fair nor sustainable to expect the Balanced team to sustain this project without funding for any length of time.

My current understanding is that the objective is for the ICON network to acquire Balanced, with the P-reps governing Balanced (through the NPS/CPS). (More information)

I believe the proposed change could be a net negative for both ICON and Balanced, assuming a proposal is accepted by both parties. It’s difficult to envision that the intended benefits couldn’t be achieved in some other manner. For now, I’m inclined to view any disadvantage for Balanced without a corresponding benefit for ICON as a net loss for both, considering that (small) part of ICON’s value seems to be derived from Balanced being an exceptional product.

From the perspective of Balanced, I foresee several areas where this could be a step back:

Synergy:

While I am not opposed to the foundation and acknowledge their past support, this has typically involved the foundation using its own funds, not ICX through governance. Additionally, I believe we are already well-aligned. Balanced, Craft, and the promise of BTP appear to have kept the ICX price above $0.01, so seeking further synergies makes sense. Our failure to secure funding through the CPS could be seen as a governance issue. Being acquired would further entrench us in this governance model.

Community:

One of Balanced’s strengths is its intelligent, engaged, and active community, as evidenced by voter turnout and participation in forums/discord. While theoretically these aspects could be maintained, I fear that the Balanced community might be diluted within the larger, and perhaps less engaged, ICX community, resulting in a net loss. This situation is akin to individuals being more dedicated to local sports teams, like the Chicago Bulls or New York Knicks, than to a larger entity like the NBA.

Leadership:

Balanced has benefited from exceptional leadership. While an acquisition doesn’t necessarily mean a loss of leadership, it would subject us to network governance, which has shown to be less flexible. Aligning P-reps on any issue seems improbable, and governance cycles are too lengthy for implementing significant changes.

From a personal (voter) perspective, I might support the 40% premium. :wink:

I hope to have said something usefull

3 Likes
#4

As an extremely large BBALN holder I hoped for a better end for the token BALN as my cost basis is more along the lines of .75 of an ICX as I started buying BALN when it was worth more than ICX. Then continued buying it over the years.

Which means I coulld have utilized my loss for tax loss harvesting through the coming years.

I’m not totally against the idea but think .5 of ICX is too low. It should be .65 or higher to fairly compensate long term Balanced investors.

The small premium does not offset future gains that BALN could have.

3 Likes
#5

Thanks for the reply @Uglyrage. I’ll also take this opportunity to share some key messages from the conversation on Discord.

Key takeaways from Discord (lmk if missed anything)

  • Some are not ok with the current ~43% buyout price
  • Some would prefer to keep BALN token around, and have it control 25% of fees, while 25% go to DAO FUnd and 50% go to burning ICX (Discord)
  • Some want a shorter vesting period

Lots of great discussion on Discord overall and highly recommend people to skim through the General Chat.

Validators would only control contract upgrades, which is actually far more secure than it is right now. The plan for other parameters is to use sICX as a governance token of Balanced (e.g. adding new assets as collateral)

This is actually my point lol - if we were aligned it would have passed, that’s like the definition of alignment. It didn’t pass because people were like “well what about other projects or other tokens or other cross-chain initiatives for ICON, why support balanced?” It’s a constant pitch - now the answer is clear, because ICON and Balanced are one and the same.

There will be no narrative more powerful for our respective communities than

Balanced success = ICX BURN - I can see the Jaba tweets now

Your point on the community is a fair concern but imo mostly addressed by the latest idea for Balanced governance to function the exact same way it does now, but using sICX (or “bsICX”) as the token. That’s one of the main reasons that governance of balanced won’t go to ICON validators, only contract upgrades. This way, the community has the opportunity to remain engaged.

But I won’t claim I know some objective truth when it comes to community here, it could go either way. However, if this does work out well for ICON/Balanced, I’m sure it would lead to community growth simply from a stronger narrative, clearer vision and cross-promotional efforts as ICON connects to other chains.

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#6

Noted ur feedback on buyout price, appreciate the input.

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#7

As a average $BALN and $ICX holder, I strongly favor the idea of adopting $ICX as the Balanced Protocol Token and Balanced subsequently carving out some DeFi market share, powered by ICON’s xCall.

I can also see how larger $BALN holders might have differing opinions, though at the end of the day I think Balanced and ICON would both come out stronger with aligned incentives :+1:

2 Likes
#8

Thanks,

Obviously I would rather keep BALN for tax loss harvesting. Remember BALN market cap was 40 million at one time. ICON was able to raise and sell a lot of BALN at a very large price to loyal investors and now they are buying it back for under 4 million. Great deal for ICON to acquire the best technology that ICON put together over “3” years, but a pitiful deal for a long term investor.

I know it is not ICON’s intention for a “bait and switch,” but it can be perceived this way. Believe me when I say I know ICON is one of the respected teams in Crypto and I am not saying they are baiting and switching here, or they used the BALN token as a great fundraiser from the ICX investor for a lot of the core Balanced team that is very similar to the core ICON team.

If we have to switch to SICX, a very bare minimum the buyout should be .6 of an SICX. An SICX is worth more than an ICX for readers that may not understand what SICX is. Also since the switch will be paid out in SICX that seems to be the very very least ICON should offer.

If ICON truly wanted to look out for their greatest long term supporters that hold BALN the payout, in my opinion, the buyout should be closer to 1 to 1. But that would have to be BALN that was owned by wallets between BALN inception to 1/10/24 as we are just rewarding new BALN holders taking advantage of the current premium instead of actually rewarding long term BALN holders.

Long term holders already knew the connection between ICON and Balanced and that is why we bought BALN all the way down, for a future successful project. We don’t want our BALN to be sold at all time lows and switched back to SICX unless we have a fair premium and .5 ICX is not fair given our investment over the years.

Also, only the BALN that was staked by January 10th 2024 should have the option to vote on this procedure. Recent BALN staked should not be allowed to vote as it can sway the outcome from true long term BALN stakers. I will be voting no at the current offer but if the SICX is raised to a fair level I will vote yes as I think it will be good for Balanced.

2 Likes
#9

Hey guys

I’m in favor of this proposal.

However, my only question is the vesting period. One year with a three month cliff seems kind of short.

Does anyone else feel this way?

1 Like
#10

Thank you for the well-researched and thoughtfully crafted proposal. I believe that the proposal is sensible and recognize it as a logical step towards furthering the development of Balanced. The benefits you’ve outlined are clear. However, I can’t hide my slight sorrow, as I took pride in my BALN tokens and the partial ownership they represented in the DAO. As an ICON user, I can now be proud of Balanced’s addition, but it won’t feel exactly the same. At this moment, I do not have sufficient insight to judge whether the proposed commission is fair, but at first glance, it appears to be a generous compensation. Particularly for new BALN holders, but I understand BALNSupporter’s point that long-term holders might prefer to retain their tokens even with a commission. Given a choice, I would likely opt to keep my tokens, although I acknowledge this could complicate matters and may not be in the best interest of Balanced’s long-term growth. Maintaining the BALN token might only serve to keep investors content without benefiting the DAO, aside from investor satisfaction (which, of course, could be a consideration). More tokens means more maintenance and vulnerabilities.

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#11

Thanks for sharing your perspective @Chiel, much appreciated. I understand the emotional aspect of this, but would indeed encourage everybody to fight past it, as this is inherently a more financial decision.

To help with this, I’d encourage everybody to consider the question:

“if I were starting this idea/system from scratch, how would I do it?”

I think you’d be hard pressed to say that the best economic design, best technical design, etc. would be for a two token system, where one token gets 50% of revenue for burning, and the other token gets some amount of fee distributions and governance. I’m not seeing how a 2 token system makes the most sense when I look at it this way.

It seems the argument for a two-token system / keeping BALN is primarily based on emotion from what I’ve seen.

The key negotiation points are mostly around the purchase price and the vesting period.

1 Like
#12

Yes, I agree that a two-token system is not practical. My previous comment might have been somewhat vague on this matter, but I intended to conclude with the thought that retaining BALN tokens is not an effective approach.

I think the proposal is well crafted as it stands. A commission is fair and necessary for the vote to pass, but anything extraordinary does not make sense and raises the likelihood of rejection from the ICON side.

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#13

Actually, we need to remember long term investors that have been with Balanced since the beginning are better off with a $BALN value of “0” and to be able to choose when to sell in the coming years to offset future gains in other investments (tax loss harvesting). That is why your long term investors deserve close to a 1 BALN to 1 ICX exchange rate because this transfer will show one really bad loss for the current tax year and there is no benefit to us. The tax benefit we currently have (being able to trade BALN) is greater than the .5 of an ICX offer.

#14

I disagree, I feel the offer is a slap in the face, and would get the same monetary benefit of selling BALN at zero.

#15

Can you share the math of why selling at a 100% loss is better than a 40% premium to market. I’m struggling to understand your logic. Would be helpful if you can provide a full walkthrough example comparing both scenarios.

Let’s say you have 1,000,000 BALN tokens purchased at an average price of 1 ICX per BALN for simplicity.

Scenario 1: Selling 1M BALN at 0.5 ICX

Scenario 2: Selling 1M BALN for 0.001 ICX (crashing DEX price as close to 0 as possible)

#16

Because I can choose to sell my BALN over many years when I have gains in other coins? Have you really not tax loss harvested before. This tax year you may have no gains to offset, next year could be a different story where there are gains you can offset.

The benefit I am describing outweighs a forced sell and a humongous loss in one year.

Your longest, loyal, supporters are getting the same benefit as being able to sell for “0” over many years as they are getting from ICONs first offer.

1 Like
#17

Got it ok, you’ll likely be able to do this regardless. Will confirm with @Andell but I believe the design of the buyout would work in a way that you could always just keep ur tokens and sell them into a nearly empty liquidity pool for 0.

#18

Well before the vote please 100 percent confirm that we can dispose of our BALN at our discretion so we can take advantage of tax loss harvesting over the next 5 years or so.

Thank you!

1 Like
#19

Yeah the baln token will still exist and the liquidity pool will not be removed.
You will most likley also be able to swap to icx via the deal for a long while

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#20

Hard to see a better path forward. With big capital injections Balanced has a shot at competing with much bigger protocols.

Reality now is that revenue is thin and slippage is high, hard to accept but without taking action things won’t change, despite the passion and hard work.

Respect for Balanced core team for the hard and consistent work, and also for the community, which has been always constructive and passionate.

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