Remove BALN rewards for loans

Hi. I have seen that we are planning to lower the LTV in order to reduce the supply of bnUSD. That is fine (although I did vote against).

As @benny_options has said in the Discord, if Balanced didn’t have 0% interest rates, then the move would be to raise interest rates considerably.

Why do we still incentivize loans with BALN rewards? Doesn’t make sense, especially given that we are making moves trying to lower the supply of bnUSD. We shouldn’t be “paying” people for taking out free loans anymore.

I would suggest remove them entirely for loans, and redistribute those to people that provide liquidity, specifically in the BALN/bnUSD and BALN/sICX pairs.

I agree the reward for minting is too high overall. However I believe the BALN borrower reward has its role in the system. It is the only incentive that automatically decreases when too much is put in, and increases when too little is there.

In fact, in a perfect world that would be the only incentive. The issue we are facing is that the other incentives are linear scaling with the amount. The counterforce to that also needs to be a force that scales linearly with amount. Obviously, on a normal platform, this would be rising interest rates, which effects the amount borrowed linearly.

However we already have a negative force that effects all the amount borrowed linearly, thats rebalancing. Its okay to pay ‘too much’ if they are constantly rebalanced and in increasing amounts, and we also introduce a drag via the origination fee.

A possible proper way to apply negative force is to set the bnUSD peg to 0.5% for example. The real churn will begin, in a very self managing and free market way to solve the 'too much bnUSD issue. Additionally, the platform will gain real benefit, the benefit of a tight peg on bnUSD. This makes trading more attractive, more fees. Stable LPs more attractive, larger TVL, better trading experiance. These things do not appear to matter at the moment, because Balanced has a near monopoly on DEXes on the the chain. But the reason TVL and a good trading experiance is important is way more clear on ETH chains with their extreme number of dexes.

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I tend to agree with you @cryptomooniac. Although its nice to receive rewards for borrowing, it does provide an incentive for people to mint bnUSD and simply hold it in their wallet, which is adding to the current problem.

I feel that a 0% interest rate is attractive enough and that we should not provide rewards to people for minting bnUSD.

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I think it can be reduced, but cancelling altogether can have bad long-term implications. Maybe there is too much bnUSD supply, but maybe there is just not enough demand. So motivating the supply reduction too much can have a very negative effect if the problem is not supply ( and we do not know for sure, it is all theories for now).

I’m actually thinking that, especially once bnUSD is added to Omm, that incentivizing the minting of bnUSD is a good thing.

Loan rewards don’t incentivize people to dump bnUSD, liquidity-pool rewards in pools like BALN/bnUSD and sICX/bnUSD create an incentive to dump bnUSD for either BALN or sICX in order to earn more BALN as an LP.

By incentivizing just minting of bnUSD through the borrower rewards (then Omm incentivizing lending), we increase the group of people eligible for rebalancing, which spreads rebalancing across more users and make maintaining the peg a less noticeable process for all borrowers.

You may hate me for this, but at this current moment I’m considering a proposal to reallocate some rewards from BALN/bnUSD and sICX/bnUSD back to borrowers and to BALN/sICX for the logic mentioned above.

@arch I definitely think this makes sense as well, tho I am surprised to hear that you think borrower rewards are too high given the importance of maintaining the peg. Borrower rewards are essentially a reward for maintaining bnUSD peg within the threshold we’ve set as a DAO, which as you mentioned, could be tightened more.

Actually minting and holding bnUSD is not part of the problem imo and is in fact a major service to the platform as they are eligible for rebalancing. The main problem is people dumping bnUSD for other assets (remember this post that highlights it’s all about total bnUSD within the DEX, not a specific pair, because of arb traders)

I think total borrower rewards are too high right as this moment, not because of any other reason than, if rebalancing is always happening because of an oversupply of bnUSD, it ‘has to be’ too high. This is inclusive of everything. That is not to say Borrower BALN rewards should be lowered.

I believe:

  1. It is ideal for BALN borrower rewards to be the primary driver of borrower rewards because of the self balancing nature.
  2. However because of the high costs of leverage, that portion of ‘reward’ for minters plus BALN borrower reward plus whatever else, is too high, causing an oversupply of bnUSD.
  3. Because total borrower rewards are too high but BALN borrower rewards are crucial in their role, in a normal system it would be obvious to increase borrower interest rates, but in lieu of that - decreasing the width of the bnUSD peg sounds like a perfect way to both reduce total borrower rewards (by increasing cost) and get a great benefit to the platform.

I would argue this is not the case. It’s not about the supply of bnUSD minted, it’s about the supply of bnUSD on the DEX, specifically, it’s about the amount of bnUSD that has been sold.

Borrower rewards incentivize only minting, while sICX/bnUSD and BALN/bnUSD rewards incentivize people to mint and dump bnUSD.

This hits the nail on the head imo, except for the fact that it’s only the “whatever else” imo. And that “whatever else” is the very high incentive to dump bnUSD to become an LP.

Imagine once Omm is up there is a 10% interest rate on lending bnUSD. You can lend bnUSD at 10%, or you can dump half the bnUSD for BALN, be an LP and earn 62%.

Overall, my thought is to move some sICX/bnUSD rewards and BALN/bnUSD rewards to BALN/sICX and borrowers.

Okay I don’t think I thought about it from that angle but it makes sense.

The total bnUSD on the DEX does seem like a more accurate description of the issue. However I would add that minting with the purpose of leverage long also increase the bnUSD on the DEX. Regardless of the token they go long on. And I believe this group to be the largest group, larger than the portion supplied to LPs.

This only reinforces my thinking that it is not the borrower rewards that are the problem, the leverage is too cheap regardless. Minting to just buy assets is a far larger, I won’t call it a problem, a far larger driver behind ‘mint and dump bnUSD’ than LPs IMO.

Just to tie it back, I don’t think its the

whatever else

I think it is the most prominent borrower reward, the price of leverage. Which we have a clear market evaluation for a minimum of 4200 basis points at this point in time. Just a direct comparison between the omm rates shows that the ‘savings’ in not paying the interest is more than double the positive gains of borrower rewards.

Additional thought: Just looking at ultilisation rates of existing stablecoins on OMM, most of the bnUSD that gets supplied to OMM will also be borrowed, and definitely used as leverage in that scenario, thereby increasing the bnUSD on the DEX. In fact, if all the stagnant bnUSD gets supplied and nothing else changes, that will most certainly make bnUSD fall more, as it turns a portion of those that value bnUSD == 1 USD, the holders, into other borrowers that will definitely dump it.

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Great discussion and love to see all the different angles (some of them make a lot of sense now that are explained). I like the idea of reducing rewards to the mentioned bnUSD pairs and allocate them into BALN/sICX. Let’s see how it goes once bnUSD is on OMM.

However I tend to agree that bnUSD will also be borrowed on OMM and used as leverage for other things. But let’s see.


Agreed @cryptomooniac, good points all around. As for the rewards adjustment, I’d support a proposal in this direction and it would be great to see one from you to get more people involved in making proposals. If you don’t have enough BALN staked to make the proposal, I’d gladly propose on your behave kind of like a “sponsor”.

As a next step, it might be good to create a new thread under “Proposal Discussion WIP:BIP” that references this discussion and has specific proposed allocation adjustments. You can take a look at this thread for a benchmark.

Thanks for the contribution thus far as it has sparked some great discussion

Let sponsor those great idea. gogogo