Today, I am going to write about Rebalancing which has been one of the important topics in DeFi ecosystem of ICON.
Rebalancing has been one of those concepts which most of us have wondered as a mystery box even as the early users of the BalancedDAO platform. Let us discuss how it began and why it is one of the crucial aspects of BalancedDAO, the defi bank everyone has been talking about in ICON.
Let’s start with a short intro to BalancedDAO.
BalancedDAO is Decentralized Autonomous Organization that represents a decentralized bank in the ICON ecosystem. It was the first DeFi platform developed on the ICON blockchain. The bank is owned and operated by BALN Token holders so BALN is the governance token of this decentralized bank.
BalancedDAO lets users mint Balanced Dollars aka BnUSD after depositing ICX. The stable coin BnUSD can be traded against other assets in the BalancedDAO platform as well. BnUSD as a stable coin is always pegged to 1 USD like USDT (Tether). However, the pegging mechanism for BnUSD stable coin is different than other stable coins and that’s where Rebalancing comes in.
Since BnUSD is minted in BalancedDAO and backed by ICX, Rebalancing helps to keep the value of BnUSD pegged to 1 USD. This is done by maintaining the buying and selling pressure on the open market. Keep in mind Rebalancing only occurs if the value of BnUSD is below or above the Rebalancing threshold which is 2.5% as of this writing. That means the value of BnUSD should be under $1.025 and above $0.975 for the Rebalancing to not occur.
How does Rebalancing work?
Consider a scenario where the value of BnUSD falls to less than 1 USD by 2.6%.
With BalancedDAO having access to the two assets, ICX, which has been locked up by the user on the platform, and BnUSD, which is backed by ICX and minted by the users as a loan, BalancedDAO can manage the amount of these tokens such that there is more buying pressure for BnUSD asset.
BalancedDAO uses the locked up ICX of the users to buy more BnUSD increasing the buying pressure. Once it’s done, the platform also pays for the BnUSD loans burrowed by the user and thus burns them in the process.
Additionally, BALN token holders can vote to lower the Loan to Value ratio (Here, the ratio of BnUSD to the collateral ICX) and stop the additional minting of BnUSD. However, LTV management is a manual process.
Consider a scenario where the value of BnUSD rises above 1 USD by 2.6%.
Unlike the case earlier, BalancedDAO now increases the borrower’s loan and sells it for more collateral to be added to the borrower’s collateral balance. This way more BnUSD is introduced to the market which will increase the selling pressure.
Additionally, BALN token holders can vote to increase the Loan to Value ratio to allow borrowers to mint more BnUSD.
The transaction fee for Rebalancing is a small ICX transaction fee that is used from the borrower's wallet to send a transaction like any other transaction on ICON.
Now that you have seen how Rebalancing works, you might be thinking — Why take away my precious ICX? Is there any other way to reduce the effects?
Well, the answer is yes but to some extent. Rebalancing is inevitable when the pegged value is under or over the rebalancing threshold. With Rebalancing the collateral from the borrower is used against the sICX/BnUSD pool. So maintaining percentages of the liquidity pool and total loan, the borrower’s position in the sICX/BnUSD pool can help to oppose the effects. Also, there have been multiple plans in the works to make the rebalancing less frequent. Some of them are:
- Adding more collateral types and pairing them with BnUSD helps to spread the burden of rebalancing and maintain the BnUSD peg across more and more pairs/borrowers.
- Another idea is to incentivize pools that don’t encourage minting of more bnUSD over the pools that encourage the minting of more BnUSD. As an example focus on incentivizing BALN/sICX pool rather than pools with BnUSD combined pairs.
- Active management of TLV with the help of proactive community members and token holders.
Though I have tried to cover most of the things here, you can find more about Rebalancing on this link — https://gov.balanced.network/t/rebalancing-bnusd-supply-and-dao-management/448 .
BalancedDAO has a very supportive and growing community. ICON Foundation with other public representatives has always been proactive to bring new initiatives like this to the ecosystem. I would also like to thank Benny Options who has been leading this effort with all the team members who have been working on BalancedDAO.