Our current system of having a fixed re-balancing threshold value and gradually having it lowered is starting to show signs of weakness since re-balancing is occurring more frequently as the peg tightens. According to on-chain data, users who took out loans had nearly 50% of their loans removed in the last month alone.
A better solution to this problem would be to change the re-balancing threshold from a fixed value to a variable one. When Balanced was first launched, we had a re-balancing threshold of 5% and users were re-balanced infrequently. However, now that we’ve reduced it to 2.5%, re-balancing has become so frequent that the total amount of bnUSD minted has fallen significantly according to stats.balanced.network.
It’s evident from the last 6 months of observations that a tighter peg leads to more frequent re-balancing. Therefore, I’d like to propose that we make the re-balancing threshold that constantly changes from 4% to 0.25% back to 4%, by checking the value of the block height every time the rebalance method is triggered.
For example, in a typical week, we can have 3 days with a peg of 4%. After that, for the next 12 hours, the smart contract would set the peg to 0.25%. Once the 12 hours has passed, it would change back to 4% again. Rinse and repeat. This ensures that Balanced users have the opportunity to swap their tokens with bnUSD at CEX (Centralized Exchange) prices at least twice a week, while borrowers are re-balanced less frequently.
I believe this proposal would satisfy the following parties:
- Users who like to trade at CEX prices will have the ability to do so at least twice a week.
- Arbitragers will still have the ability to trade (which generates a significant amount of network fees for BALN holders).
- Users will be more willing to mint bnUSD due to less frequent re-balancing.
There is likely an even better solution to this, but this will be the easiest and quickest proposal to address re-balancing concerns since the amount of coding required to implement this is minimal as it only requires one additional check of the block height to determine the threshold value.
Thanks for reading
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sirs.