Overall I’m thinking the future pitch of Balanced would be “free leverage in exchange for maintaining stability of ICON’s algorithmic stablecoin”
I would be comfortable with 0% origination fees at some point depending on DEX trading volumes
This is already going to happen
Unfortunately this doesn’t accomplish anything, it just incentivizes them to borrow and hold bnUSD, which does little to nothing for the success and growth of Balanced/bnUSD.
We need to guide people to be LPs in the sICX/bnUSD pool to hedge themselves against rebalancing, though still testing the correct proportions to make this happen
Remember we are talking about changeing fees for a very limited time:
From a user perspective:
Why are you taking a loan right now when your loan is rebalanced by approx. 5% a day and you are losing money every day rebuying your sICX?
The answer is: you want BALN rewards. You could name some other reasons but it is safe to say 90% of users think that way and won’t take a loan to cash out and buy a real life asset like a car.
Now BALN price is highly correlated to the daily fees. Right now you get pretty much 20% APY on your BALN in daily fees (pretty low already, considering this is a super high risk investment, a lot of potential future upside is already priced in).
If we cut daily fees by 23%, BALN price will plummet by approx. the same amount.
Now regarding your argument that lower origination fee will overcompensate the loss of daily fees: Are you really saying that by reducing origination fees from 1.15% to 0.5% we will see loans go up by a factor of >2.3x? If we lower the fees for 1-2months? You don’t believe that yourself? Never. Ever.
Not with such a huge limiting factor such as ICX price and overall pretty low market cap.
People will just immediately see the lower loan APY: Now 25.37% - down to 19.5% and will stop taking loans even more and a lower origination fee doesn’t overcompensate that at all.
Oh and just another side note: OMM launched on august 24th, around the same time fees were bumped up to 1.15%. That is the reason why the money went over to OMM and loan volume decreased. The 0.15% didn’t change a thing. OMM did.
I think the loans on balanced might be more analogous to selling a pair of options than a traditional loan. I don’t pay a fee to sell someone an option - I generally get paid. This platform does pay you, in the form of BALN. I just think the goal of 0 fees eventually feels natural.
That said, it will reduce the value of BALN. This should be tiered in IMO, alongside a few other changes to help double down on the dex. Most of the revenue right now comes from the DEX, and I think even more of it could with a few upgrades.
1 Like
I don’t think we have enough data at the moment to support this statement. I’m not convinced there is an absolute correlation between the fees and BALN price – e.g. I don’t think a 23% cut in fees = a 23% reduction in BALN price. If that were the case, wouldn’t it work the opposite as well? A 100% increase in BALN price should also come with a 100% increase in fees? BALN was hovering around $3.00 a while back, but the fees did not increase by 100%, so why not?
The reality is that BALN is a low-market cap coin right now, where a single player running arbitrage trades (check the circle_arb contract on ICON) can move BALN price up 100%, and this is completely external from fee percentages set on the network. With this in mind, I’m definitely not convinced that reducing origination fees will automatically cause BALN price to fall in equal amounts. If that does end up being the case, then great – hardcore supporters can buy in at an even lower price.
Just want to make sure I understand. When you say “this should be tiered” are you referring to tiered fees based on some metric? If so, I think a system like that would be perfect for bBALN holders, where long term stakers of Balanced get access to reduced fees.
Oh, I used the wrong verb, I meant loan fees gradually phased down towards zero. I do like the idea of tiering based on BALN holdings though, it’s proven to work for BNB, and also on places like serum.
I’ll pretend that wasn’t a semantic error and it’s what I meant all along.
2 Likes
What is the value of owning BALN?
a) earning fees
b) voting rights
c) speculation
Of course BALN price is highly correlated to the fees earned. I am not saying that a 23% reduction will exactly reduce BALN price by 23%, but it will go down significantly!
BALN price goes down → loan APY goes down → less people will take a loan.
Please do NOT propose this vote or at least be honest in the description that BALN owners will be voting on slashing BALN prices.
If we limit fee reduction by a predetermined time frame of max. 1 month, it wouldn’t be that bad, but still I am very much against it because it will have no real positive effect.
I believe we should focus more on the points raised by @penne_options (great name btw).
Borrowers on Balanced provide an essential service to the platform, keeping the peg of our algo stablecoin. They make sure the purchasing power of bnUSD remains relatively stable.
Overall we need to work toward a model where borrower fees are not a key source of income to the platform, because borrowers need to freely mint and burn bnUSD (aka maintaining supply/demand aka helping keep the peg stable) without concern of paying more fees.
Low origination fees means more likely to mint bnUSD, but also more likely to burn. There’s too much bnUSD right now, it’s getting soaked up by people using it to buy ICX and that’s breaking the peg.
We need to let people comfortably sell their ICX at a premium, pay back their debt, then reopen their position when the peg is back in line.
Right now, nobody would do that strategy. it would result in an insane annualized interest rate on your debt
I want to tie my post back to some of my points in this Lowering Loan Rewards - #4 by arch
To relate them to this dicussion, I think reducing the origination fee should be related to the factors I listed in that post, if it is, then reducing the orignation fees has value.
One of those sources of value that might hopefully address @Uglyrage points is, the friction we are also reducing is for more than just the people that repeatedly undo rebalancing. Its also less friction for the broader market to participate. I think theres still untapped market out there that if it was encourage to participate could act as a additional peg maintaining force. If outside market can trivially mint bnUSD and trivially destroy bnUSD, they might do it more.
With the dicussion around platform revenue <> orignation fee, I think looking at the orgination fee % versus collateral TVL is wrong. Halving origination may not double TVL but it CAN double origination volume. From the perspective of origination revenue, we don’t want people sitting on the loans, we want participants that will mint a lot, and burn a lot. Reducing that friction can increase the volume of that, and that activity keeps bnUSD pegged.
Tying that back to the points in the other posts, we can increase churn by reducing orignation (which helps peg) and reduce total net gain by borrowers by reducing the rewards in tandem(or by whatever ratio we decide).
EDIT: To also talk about the point point made by @Uglyrage in his proposal to tie it here. It may be the net value of 0.5% + 0 borrower rewards + Value of leverage is indeed enough to keep a healthy TVL. I wouldn’t be able to say if it is or isn’t. It probably was when Balanced was the only leverage platform, but now there is a second. We can maybe derive the value of leverage on ICX chain by looking at other products? But whatever the ‘gain’ is, that has a relationship with TVL and I am not confident calculating the current total net ‘APY’ or all 3 factors of supplying collateral to ratio it against TVL other than it must be too high, because it keeps causing bnUSD to break peg.
Thanks for explaining. Especially @benny_options & @arch.
Points below are just my thinking, i dont have any numbers to back them up.
I believe we have the following goals:
- Optimizing for maximum total platform fees
- Keeping bnUSD as stable as possible
- Doing the above with a minimum of rebalancing (as rebalancing is percieved as bad).
I think we can achieve above goal if we find a way to get as much bnUSD in circulation, where people trade bnUSD - ICX actively, preferably with a bit more going to ICX when the peg is broken to the upside, and more going to bnUSD when the peg is broken to the downside. Lets call this voluntary rebalancing.
There are a couple problems here…
- Our investors are all bullish on ICX & bearish on the dollar.
- ICX has a ton of “utility” (for example: FIAT offramp through cexes, most trading pairs in ecosystem, excellent yield opportunities). bnUSD has none of that.
- We incentivise the minting of bnUSD, but not the hodling of bnUSD.
both 2 and 3 are further reinforced by 1.
assuming the above is true we can conclude that to strengthen the peg, we need to address the problems stated above.
Good:
- bnUSD getting listed on OMM
- Lowering Loan rewards
- Attracting outside investors
- incentising bnUSD pools
Bad:
- Loan rewards
Neutral:
- Lowering LTV
- Changing Loan origination fees
As allways, i am looking forward to being corrected.
@arch: please take this as a challenge 
Also, some more random thoughts:
People burning bnUSD does absolutely nothing to help the peg. It actually makes rebalancing worse (same result needed, shared by less bnUSD). The only thing that helps keep the peg stable, is to have enough bnUSD in circulation to absorb the pressure that is caused by trading bnUSD - ICX. I believe we could even say that there isn’t enough bnUSD in circulation to absorb the bnUSD - ICX trading volume at the moment.
As long as people mint bnUSD only to buy ICX, there is nothing we can do to keep the peg.
Theres not much to disagree, increasing demand will naturally help the peg(at least the floor).
Also theres nothing saying zero rewards will not still have enough incentive to support the peg. However given that a implosion of collateral will be hard to correct and the system of 'collecting fees <> ‘minting arbitrary token’ is a common model to support the value of a token, I would say removing it entirely would be tricky.
I want to bring attention again to the 3 factors I was talking about. Fundamentally your point is, the value of leverage is so high, we don’t need to give out rewards for it. That may be true, but your categorisation of the points of Bad > loan rewards, neutral > orignation does not accurately reflect on all 3 factors being part of the total net cost/gain of borrowing. That net of orgination(minus) + rewards (plus) + value of leverage (plus) for the borrower, is really a single value. For Balanced the ratio between the 3 do not really effect the TVL nor its effect on the peg nor effect demand of bnUSD only supply, but have other functions. For exact topic at hand, lower orignation can increase fluidity of positions letting the market NOT on Balanced atm exert more force on keeping the bnUSD peg and also not directly lose out on revenue.
A second thing I disagree with is people minting bnUSD and sitting on it doing nothing. It is still increasing the accessible pool to rebalance from which does have some effect on the ability to maintain peg. Additionally, holding bnUSD is a form of demand. It doesn’t seem intuitively seem like that, but if someone is willing to just sit on it, thats the best outcome.
I also disagree with burning bnUSD doing nothing to help the peg. I believe your statement may apply to parties just straight holding bnUSD, but nominally thats neutral with regards to keeping peg. However you can also have people selling sICX to get bnUSD to repay their loan when it is off peg. This portion increases bnUSD buy pressure. With your point of it increasing the magnitude of rebalancing per bnUSD, it will be conteracted by an increase in the borrower reward.
On that note (because I forgot about it myself previously) I want to point out an important feature of the borrower reward. Of the 3 factors, only the borrower reward does not depend on the amount the user has or total TVL. The value of leverage is directly related to the amount borrowed, and the orgination fee as well. While the borrower rewards seems the same, it is subtlely different. Similar to LP rewards, Balanced does not set the borrower reward APR. Balanced pays a flat amount to decide ‘how much’, and the market decides ‘what price’. This has the very useful property of increasing borrower rewards if the other factors, which are flat on amount borrowed suddenly decrease. It also will decrease rewards as too much borrowing occurs.
I think your fundamental argument of demand is totally on point. But I do not think the factors that effect supply matter much (thats orignation/LTV/borrower reward etc). I am not saying they don’t matter, I am saying I think trying to address it from supply will have limited effect.
Also ultimately purely in terms of peg, there is no issue if lower orignations cause people to repeatedly increase their position again and buy sICX again causing more rebalancing. Whether that is good or bad depends on your opinion on rebalancing. But even if that happens the peg will be fine. Maybe they get more annoyed and that limits their participation.
On that @benny_options , I agree in principle with the lower origination/lower reward concept. However if you just think about it practically, if origination is zero/zero rewards, there is only the value of leverage remaining. And since that is always some positive value, we should see near infinite demand for minting bnUSD, causing constant rebalancing or broken peg. I know thats not the proposal at hand but the closer we get to that the more risky it is.
Am I the only one thinking theres too much reaction to rebalancing. It happening semi frequently is healthier than rampant contraction which is what would be needed now to have it not happen. The people that dislike will never like it (honestly don’t understand why they keep doing it). I personally don’t see the value in trying to satisfy the participants against it. Having rebalancing be as annoying as possible to those parties is the easiest way to have the supply fall.
@bwhli just to pop in here real quick if this is getting close to voting, I’d like to suggest a more gradual drop in origination fee rather than jumping straight down to 0.5%. I’ll suggest 0.75% for your consideration.
I’ll give a more thoughtful response to @arch and @Uglyrage in a separate reply
Will put up the vote today. Can start with 0.75% and see how it affects metrics.
1 Like
I think this is a good proposal. The way I see it is that the reduced initial fee makes short term borrowing more viable. It gets cheaper to migrate expensive debt on OMM (or other platforms) to Balanced when the rates increase and so could be good for overall bnUSD volumes.
It makes a lot of sense in the short term at least until we get bnUSD listed on OMM.
2 Likes
Definitely agree here. Though rebalancing isn’t inherently bad, having a strong peg without the need for rebalancing is the ultimate goal.
This all makes sense as well, nothing to debate here.
This is where you start to lose me a bit haha. I’m actually realizing the increasing Borrower rewards can be good for the peg because it’s a deeper rebalancing pool. Even if people simply mint and hold bnUSD then they are contributing in a meaningful way, which is something I’ve only recently realized thanks to @arch.
Also, LTV has a very meaningful impact on bnUSD supply and therefore a meaningful impact on the peg. Imagine bnUSD was below 1% then we set LTV to 0, no more new bnUSD could be minted which would help increase the purchasing power of the remaining bnUSD.
This I’d have to disagree with just based on supply and demand. If there’s too much supply of bnUSD, that means the peg will break more often. Burning bnUSD, through the rebalancing mechanism (or through selling sICX for bnUSD to repay your loan) helps the peg. I guess more specifically, what helps the peg is increasing/decreasing the amount of bnUDS in the sICX/bnUSD liquidity pool based on what the ratio should be according to the oracle pricing feed. That’s essentially what rebalancing does, it increases/decreases the amount of bnUSD in the sICX/bnUSD pool using the positions of borrowers.
This is certainly true
This is an excellent point, and I think it would be great to collaborate on a proposal that moves more rewards toward borrowers in order to incentivize people to mint more bnUSD, hold onto it, and therefore lessen the effect of rebalancing across the board.
This is a good way of thinking about it. If the other factors effecting the value of leverage from balanced result in less value, then people will pull collateral from Balanced, which will then increase the APY to compensate for those other factors.
In that same vein, increasing borrower rewards would increase TVL assuming the other factors remain constant, and also provide a higher “floor TVL” to achieve what the market demands for an APY.
I still need to think it through more, but I’m starting to lean more toward borrower rewards as a way to increase the pool of capital available for rebalancing
Haha this is true but it does result in lower TVL for the borrowing side of the product.
This is one thing I don’t quite understand. Can you elaborate more on this point?
This is just a theorethical scenario with 0% origination and 0% rewards, so any bnUSD minting is based on the value of leverage. That will almost always have some sort of value. If we assume the broader ICX market to be much larger than collateral TVL, this should imply a near infinite demand on minting bnUSD. The only thing that would stop this, and probably a factor today even with current orignation, is that the peg is 3% off.
To continue the scenario, without the friction of origingation fees, we should expect the peg to be under intense pressure, causing large amounts of rebalancing, and since theres no origination fee that pressure will probably be constant.
Perhaps rebalancing can be the 4th factor and the second negative(when peg is tight) factor alongside origination fees. Atm, and previously, I personally do not view rebalancing as negative at all, in fact quite positive. However with a near perfect peg, which is the goal/ideal, the benefits of rebalancing will start to fall. The problem at hand is atm the psychological effect of rebalancing is much higher than the true economic inpact.
I am wary of increasing the rewards to match the ‘perceived’ negatives of rebalancing. That said that may ‘wastage’ of BALN inflation may be something worth it in the long run? That’s something I can’t really guess a good outcome of. Perhaps the 2 choices are:
a. overcompenstate borrowers for reblancing and set a tight peg (this is indirectly like using BALN minting to back bnUSD)
b. Keep the looser peg against a smaller pool of borrowers where rebalancing itself is also part of the gain of borrowers.
Both are of course temporary while building out demand for bnUSD and both should converge as the equilibrium bnUSD mcap increases.
Perhaps most changes are not particularly meaningful and we should see how the LP adjustments effect demand on bnUSD. The best way to increase the total amount of bnUSD should all be driven demand side and not by increasing supply. Playing with supply parameters is more ‘tweaking around the edges’, and perhaps it should be more centered around any other outcomes that are not related directly to keeping the peg/frequency of rebalancing. Whether its revenue from origination(which suports BALN), the perception of rebalancing, the marketing value of a nice round number for origination, or any number of other factors that I can’t come up with.
Something very powerful would be figuring out a way to directly quantify the effect of rebalancing from a historical/actual outcomes aspect this is useful even if/when rebalancing is negative to weigh it against everything else.
That said, tighter peg == actually less favourable rebalancing+higher frequency (worsening perception) so that will always be at odds.
EDIT: Currently there is also a phantom 3rd negative factor, which is the size of the gap in the peg. With that as the main use of bnUSD after minting that gap surely has an effect on the net value of minting. It certainly sounds like many factors point to more borrower rewards helping but it is also true that the current minting net gains must be too high, because there is too much bnUSD.
One day after the vote is enacted, we reached 1.6 USD BALN price, even faster than predicted… And BALN fees are at all time lows.
1 Like
Are you sure it’s not at all correlated with the market-wide dump, which caused people to sell their coins to bnUSD to pay off loans? Also today’s fees were not low at all…
3 Likes