CPS Proposal: Network-Owned-Liquidity

Contribution Proposals
1

Summary

Lydia Labs, in partnership with RHIZOME Labs, proposes to use 50,000 bnUSD of CPS funding in order to acquire Network-Owned-Liquidity for the sICX/bnUSD pair on ICON’s flagship DeFi protocol, Balanced.

This proposal has a number of benefits for the broader ICON community. Here are the objective benefits that come to mind:

  1. The money is not spent - As opposed to every other CPS proposal, this grant is not spent and the value does not exit the ICON ecosystem – while “value exiting the ICON ecosystem” to pay for developers and other costs isn’t necessarily a bad thing, we felt it would be good to mention this. The sICX/bnUSD liquidity could be withdrawn any time at the discretion of ICON Governance.

  2. This proposal generates income for the CPS - As opposed to every other CPS proposal, this grant would earn income back for the CPS and pay for itself over time. The CPS would be earning BALN, locking it for four years, and earning its share of the fees distributed by Balanced. Over time, the cost of the grant, and more, will likely be earned back by the CPS.

  3. Deeper liquidity for traders in the ICON Ecosystem - Increasing the liquidity in the sICX/bnUSD pool allows for more on-chain activity by ICON traders. The deeper the liquidity, the less ICON community traders will need a centralized exchange.

  4. Deeper liquidity for traders outside the ICON Ecosystem - There are traders out there who just care about seeking out opportunities to make profit, and may not know/care about ICON. Increasing the liquidity of the sICX/bnUSD pool allows for a better arbitrage experience between sICX/bnUSD on Balanced and ICX/Stablecoin on centralized exchanges. More volume means more rewards for the CPS.

  5. Better trade execution for the CPS - The CPS itself converts the ICX inflation it receives to bnUSD using the Balanced DEX. The deeper the liquidity on the sICX/bnUSD pair, the better trade execution the CPS will receive.

  6. More ICX burned - Similar to point number three, more trading activity on Balanced leads to more ICX burned from transaction fees.

While all of these points are objectively true, I’d like to emphasize the first two points the most. This grant will actually generate direct returns for the CPS. It will almost certainly pay for itself over time.

Team description

  • Lydia Labs is a top validator in the ICON Ecosystem and actively contributes to many of ICON’s most successful projects. We have been part of the ICON community for nearly 5 years and counting.

  • RHIZOME Labs has been involved in the ICON ecosystem since 2018, and has made various contributions including developing the icon.community website, RHIZOME Tracker, and various open-source tools.

Project description

The implementation details would be developed by the Balanced community and would include the following methods:

  • supplyLiquidity - this method would be external and callable by anybody. It will first check to see if the contract owns both sICX and bnUSD. If it does, it will supply both assets in full (Balanced automatically returns any extra of either asset). If it does not have both assets, it will swap half of the asset it currently holds for the other asset, then supply both assets in full.

  • withdrawLiquidity - this method would be callable by the ICON Governance SCORE. It would withdraw the liquidity back to the CPS treasury in whatever assets it were held in. For example, if it were held in sICX and bnUSD, the sICX and bnUSD would be withdrawn to the CPS.

  • claimBALN - this method would be external and callable by anybody. It would claim any BALN earned from providing liquidity and lock it for 4 years to generate the maximum amount of income for the CPS

  • claimFees - this method would be external and callable by anybody. It would claim the network fees, convert them all to bnUSD, then send it back to the CPS treasury.

  • claimFunding - this will be used to claim the CPS funding assuming the proposal is approved.

  • Various getters - there will be a few getters to allow for easy tracking of the CPS’s holdings.

From an architecture perspective, the CPS funding will be claimed by a smart contract developed by the Balanced community with the aforementioned logic. This contract will have its ownership transferred to the ICON Governance SCORE to protect its integrity.

Roadmap

The contract receiving the funding will be a simplified fork of the Balanced DAO Fund, which already has the aforementioned POL-enabled features. Upon approval of the proposal, the funding will be claimed and supplied as liquidity shortly after. The progress report will provide the proof of transaction and current POL holdings.

Deliverables

The smart contract has been developed in advance and the deliverable will be the transaction hash of the executed liquidity provision.

Maintenance

No ongoing maintenance is required. Any changes to the contract will need to be done via ICON Governance.

Budget

50,000 bnUSD

2

do any price / budget inefficiencies result from the initial CPS behavior of trading from ICX → bnUSD, then buying back sICX?

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can you give examples of precedent for this from other ecosystems? including what were the modes of execution and effects for that ecosystem

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This isn’t addressable via our proposal. The CPS would need to allow disbursement of ICX directly AND allow two-token disbursements (i.e. a proposal to receive 25k bnUSD and 100k ICX, not just one or the other) to solve this, while the current implementation only disburses bnUSD afaik.

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I’m not aware of any other L1 networks that have Network Owned Liquidity, but please feel free to share if anybody else knows of them.

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Some slippage will occur, though

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Two things worth discussing further:

  1. As this, if pursued in a more long-term way, seems like it could provide some price benefits to ICX/sICX, what are the ethics of facilitating that at the Network level? Not expressing any opinions of that at current, just a thought worth discussing
  2. Is there any way that the math of how this theoretically affects prices of ICX/sICX (or even bnUSD) can be presented in a palatable way?
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This is a fantastic proposal in my opinion.

I’m happy to see the vision to attract more traders to Balanced, personally.

Sometimes, we can get tunnel vision with CPS and forget an important aspect of DEFI. :+1:t4:

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So a smart contract will claim the $50k and put $25k worth of each pair: BnUSD/sICX?

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Not only do I think this is ingenious and support this proposal, but I believe this should be a regular occurrence!

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Yep that’s right, assuming the CPS contract supports claims from a SCORE and not limited to EOAs. If a contract can claim, it can be trustless execution from start to finish. @errcsool or @theconnectooor may know for certain. And just to be clear, it would receive 50k bnUSD, swap half for sICX, then supply both assets to the sICX/bnUSD liquidity pool.

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Since this is a rather delicate topic - investing network funds meant for development in specific product, we need to thoroughly take it apart and see who are the benefitors and to what degree, risks and benefits as well as overall conclusion whether this in majority benefits Icon ecosystem and its users or not.

  1. The money is not spent, BUT it is exposed to the impermanent loss.
  2. This proposal generates income for the CPS, BUT is CPS an organisation working on ROI based investments or is it a development fund? Also Balanced takes a big chunk away here.
  3. Deeper liquidity for traders in the ICON Ecosystem, BUT do we have any metric supporting this claim? Of course deeper liquidity results in better price, but how much deeper it would need to be to actually see real effects supporting this claim?
    4.“Deeper liquidity for traders outside the ICON Ecosystem”, I am not even going to elaborate on this one other than: we all saw how “ethical” arbtrageurs were when OMM hack happend. Plus, reward benefit is mostly taken away by Balanced and small amount going to CPS.
  4. Better trade execution for the CPS: we have already shown that using Karma Finance CPS could convert ICX → bnUSD with lesser price impact + new protocols will bring new efficiencies so this claim will become obsolete.
  5. More ICX burned, true - increase in on-chain acitivity always increases burned ICX

Overall conclusions:

  • CPS is not ROI seeking organisation nor it should be. If we start investing in one product we might as well do it for all because arguments are not far away
  • In majority Balanced is the benefitor, making it less justifiable to do it on network level
  • Such an endevour should be multi-signed by each CPS participant on each step/action without SCORE owners being able to upgrade SCORE
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Having deeper liquidity on Balanced is no doubt important but we’d like to raise a few concerns and some suggestions for discussion purposes.

  1. Lydia Labs stated that they will prioritize using the CPS for ICON Network tooling, with exceptions. The team has the freedom to determine what the exceptions are, but we believe that some of the proposals that have been rejected in the past (on the grounds of not being tooling) may have been more beneficial for the network.

  2. We fail to see the benefit of having 50K USD worth of “Network-Owned Liquidity” for a network that is currently worth around 240M USD. We see this benefitting Balanced and Traders/arbitrageurs the most - much more than the ICON Network itself.

  3. Network-Owned Liquidity generated will be used for the sICX/bnUSD pool and generate income for the CPS. We’d like to see some math as @errcsool mentioned to have an estimate of the amount of income this will generate for the CPS.

  4. This being a one-time proposal wouldn’t have any significant long term effect, and it could set a precedent for these sorts of the requests being initiated again in the future by Balanced or other protocols. We do not believe this is the best use case for the CPS.

  5. Balanced already has ongoing initiatives to increase POL and liquidity.

Instead we’d like to suggest that the Balanced Validators collectively dedicate a % of their node rewards which are obtained in exchange for providing a service for the Network, to increase Balanced Protocol-Owned Liquidity aligning these validator’s interest with the health and success of the Balanced DEX.

This approach would have a long-term effect and ensure that much needed funding is not taken away from developing tooling and infrastructure, which are crucial for the growth and sustainability of the ICON ecosystem.

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Regarding @Robi7 and @FRAMD comments, although I am not against this idea. I would suggest a better long term solution for ICON would be to allocate a small % of inflation towards incentives for pairs on a separate dex that rewards (s)ICX/BTP assets. The pairs could also support $BnUSD, which is related to $ICX, so it will have positive affect $ICX price too.

This promotes the bridging over of BTP assets and provides a defi use case for $ICX.

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Hey folks - thanks for all the thoughtful commentary! Happy to address the points raised by @Robi7 @FRAMD and @Ali . I see where you guys are coming from. This is much different from previous CPS proposals so certainly warrants some back & forth discussion.

@Robi7

Yes that is true. It is also true that impermanent loss is a not a fair consideration since all other proposals are a 100% loss via a grant. I want to be as clear as possible when I say that I’m not attaching negative connotations to offering grants from the CPS, just that if you’re comparing this proposal to a grant, wondering about loss of funds is not a fair comparison since the loss is far lower and trust is far less. If we are trying to compare this to other CPS proposals, the point stands true that the original investment is mostly maintained compared to others, mostly dependent on ICX price.

The purpose of the CPS is a deeper conversation that perhaps @errcsool will facilitate at some point. Imho the CPS should be used to increase the value of ICX, albeit directly or indirectly. If the CPS had 100M USD in it, ICX would be backed by 100M USD and objectively have more value. Increasing the value of the CPS directly increases the value of ICX because ICX governs the CPS. The impact of CPS proposals on the value of ICX is a wide range, but generally speaking, if something doesn’t bring value to our blockchain, we shouldn’t fund it imo.

AMM’s work with the constant product formula for pricing (x * y = k). If you’re not familiar this youtube video is excellent. I’m not 100% certain on the relationship between doubling the liquidity and execution prices, but maybe somebody with more of a math background could confirm (@bwhli @andell possibly). My gut feeling tells me it’s linear, but something also feels off about that. One thing is for certain, more liquidity → lower price impact for a given trade size.

Karma charges a 3.3% fee plus a discount to incentivize users, meaning execution is going to be at least a 3.3% discount from market assuming Karma users are economically rational. As for new protocols, this proposal can only operate based on what’s live on main net. If other protocols arise, it may certainly be considered/proposed by those protocols. I’d prefer not to debate how Karma works on this thread, happy to do so on a separate one.

ICON and the CPS benefit greatly from this proposal because of the aforementioned points. The CPS is strongly tied to the ongoing success of Balanced. Over 1.5M bnUSD (A stablecoin maintained by Balanced) has been paid out of the CPS and used to fund grants.

The amount of bnUSD the CPS receives is directly tied to the liquidity in the sICX/bnUSD pool, because that’s where the ICX is programmatically traded. Balanced itself currently owns over 38% of that pool as protocol owned liquidity, which has greatly improved the execution of CPS trades.

I suggested it being owned by ICON Validators via the ICON Core Chain SCORE, which is a suggestion I’d stand by for now. However, open to discussion on why it should be CPS-owned and not Network-Owned.

@FRAMD

Here is the template I use for my CPS responses:

“Outside of a few exceptions, at this point in the market cycle and ICON’s development, we primarily support proposals focused on ICON tooling, ICON documentation, Community Education/growth, cross-chain infrastructure, and support for proven apps using ICON’s tech to go cross-chain.”

This is not an exception. This fits into the final section - Balanced is the primary user of ICON Bridge and will be a significant user of xCall when live.

I’m not sure how else to explain besides me and @bwhli 's original points. If you have any specific counter to any of my points, happy to discuss. Yes, it’s a small amount. That’s because the CPS is small and trying to be mindful of that. Also trying to be mindful of asking for large sums of money the first time. Growing the amount of NOL over time, once proven successful, would be an exciting and innovative use of Layer 1 blockchain network inflation imo.

Based on the Balanced stats page (which uses past 30 days history to calculate), we can make a couple assumptions:

BALN Incentives are ~4.75% right now: 50,000 & 0.0475 = $2,375
Fees generated by LPs are an additional 5.75% = 50,000 * 0.0575 = $2,875
Total Income = $5,250
ROI = 5,250 / 50,000 = 10.5%

These numbers are based on previous 30 days volume of the sICX/bnUSD pool (which is on the lower end of the spectrum compared to a bull market) and do not include any fees claimed by locking BALN, which increase and decrease based on stability fund volume, loan originations, and overall DEX volume.

The primary impact on the ROI of the proposal is ICX price, which is not included in the above. If ICX price goes up, the USD value of this position goes up. If it goes down, the USD value of this position goes down. This is of course the case because we’re taking 50k bnUSD, converting half to ICX, then supplying liquidity. So as a result of that the CPS is long $25k ICX and $25k bnUSD from this proposal, as opposed to paying a grant.

Same thing I said to @Robi7 above I think the purpose of the CPS is up for discussion, how to best manage it, etc. Looking forward to having that discussion, but for now, trying to be objective, the CPS participants (all of us) will decide that for the short term. Happy to adjust this proposal if it gets more people on board as well, but at the very least, will probably submit something to gauge interest in this direction. Will discuss with the co-author @bwhli and continue monitoring/replying on this thread.

@Ali

The only thing I disagree with here is the “separate DEX” part. If there were multiple DAO-owned DEXes like Balanced on ICON, I would support POL on let’s say the top 3 based on some metrics I’d need to think about. Your perspective fits more in “government owned”, and I think this is more representative of a political view than anything else.

Some folks like to see governments contract with private companies (i.e. CPS with Balanced), with the belief that private companies are more motivated to make a better quality product, while others believe it’s better for the government to own and operate the companies themselves (i.e. new ICON/CPS owned DEX). Seems you’re more in favor of the latter here, which is fair, just not something I agree with in most instances.

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I agree that in past funds were not used “optimally”, but things are turning for better and with @errcsool and others making positive movements towards improving transparency, efficiency and accountability things are turning for better. Thus, CPS funds not being used properly should be an exception (not everything succeeds) not a common practice. In the end, it is also not just about direct turnaround, CPS is much more - it is where opportunity and idea can find it’s place to evolve into a product, widely adopted tool, etc… with teams, developers and whole communities behind it.

Karma charges a 3.3% by default. Given the size of CPS trades and regularity, we were willing to accomodate it for 1% because of it’s importance. Also, with Karma we have statistics behind supporting retainmnent of sold tokens. Not saying we should use Karma Bond because this is biased, but just providing info on options.

Agreed. End goal is indeed to grow the value of ICX and Icon chain, but the main question is whether CPS purpose is to start going in dApp investment level or not.
If majority of CPS participants think this is the way part of the CPS funds should be used for, we can put it in one of the brackets for funding

@errcsool .
I do however think this may bring negative bias spiral and may raise multiple doubts and concerns, but I leave myself open to the opinion of majority and the change of heart.

Balanced has been the (and still is) most successful DeFi product on Icon along with OMM (pre-hack) if not the best.
I do believe Balanced has every right to ask for CPS funds and should do so IMO. I would gladly approve ask for deepening liquidity from Balanced side if majority of CPS agrees that funds should also be used for such investments and not only for development/marketing purposes. I just don’t feel like ask should come from CPS/network level.

Overall it should be clear:

  1. Who is making the ask?
  2. Benefitors (real numbers)?
  3. Does CPS community agree that this is the direction CPS funds should be used for?

I am happy you brought this discussion up, because it is an important decision CPS community needs to make.

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I think this is a great proposal.

In my opinion, it is a clear win-win situation. The CPS funds contribute to deepen liquidity for traders on the Icon network while not actually spending (earning actually). The importance of deep liquidity is often underestimated and this (first) step will definitely help and bring value to the blockchain. Therefore, it perfectly fits within the goals of CPS imo.

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My first post, go easy on me…

I find this discussion fascinating and informative.

This proposal has a lot of benefits for CPS and the broader ICON community, however, the most important in my mind is that it supports and nurtures three specific products: sICX, bnUSD, and Balanced. By providing liquidity to the sICX/bnUSD pool, CPS is reducing volatility in those two products. Further, by supplying liquidity, CPS is alleviating friction in Balanced’s continued growth. The genius of this proposal is that it accomplishes this support while also benefitting the CPS.

This isn’t lip service, securing liquidity for LPs on Balanced has been a focus of the DAO. The BALN DAO has been taking steps to address it with Protocol Owned Liquidity and even changing fee distribution to increase our POL buying power. In the last 3 months, BALN DAO has passed these votes that specifically address this issue:

  • Add POL in sICX/bnUSD pool
  • Purchase of ETH and BTC through Karma
  • Increase DAO share of fees
  • Add Protocol owned liqudity to BALN/sICX pool

When I read this post @errcsool, I was reminded of Icon’s partnership with Wintermute. Besides size and scope, the big difference is that the liquidity will be network owned (not loaned), trustless, and transparent. All three differences are pretty advantageous. Along with those differences, NOP in the sICX/bnUSD pool has added benefits of improving Icon’s on-chain ecosystem by limiting the volatility of the sICX/bnUSD pool and creating a more sound bnUSD peg.

Increasing the liquidity in the sICX/bnUSD pool has the benefit of decreasing slippage/volatility. More volume can be traded before the price is unduly impacted. This is a benefit regardless of the timeframe.

As to the ethics of it. I believe ICON’s announcement of the partnership with Wintermute illustrates that Network level involvement is ethical. However, doing it in a trustless and transparent way by providing liquidity on ICON’s network adds a layer of clarity that partnering with a Market Maker is unable to achieve.

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I think ultimately it’s up to the members of the network to decide what are the priorities of the network, including how to use the decentralized, public funding pool. That would be what separates this from a closed organization with private interests.

@Robi7 It would be interesting to know more about the different DeFi options for pursuing something like this, including what are the potential benefits of diversifying the liquidity among multiple different providers. I also want to emphasize my agreement with point 2 that you’ve made: "“Benefitors (real numbers)”. A projection of the benefit of 50k + the benefit over time if more liquidity were to be added, and what ways would the different types of users benefit. Some users only care about technological development, some care about starting businesses, some care about trading, some care about branding and ideological discussions, etc.

It is also important to consider the timing. If something like this were to be pursued, given that market conditions are down, funding is limited, and 50k would possibly not have a huge benefit, what would be the best option for using funding during this specific cycle?

@awaxjago Thanks for the post!

Do you know of other Network Owned Liquidity examples from something like NEAR, Polygon, etc? I’m curious to know if you think providing liquidity like this should be the responsibility of the network as a whole, or whether it should be from some organization in the network, and for what reason?

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Just chiming in with a few thoughts. I decided to partner with @BennyOptions_LL on this proposal because I think it’s interesting and potentially innovative.

Why I think this proposal makes sense:

Balanced is hands-down the most important app on ICON right now. Others may disagree, but I believe this to be the case for two reasons:

  1. It is responsible for the best stablecoin on ICON, and this will remain the case for the foreseeable future. IUSDC is reliant on Orbit Bridge, USDS is trying to be USDC but will never get there, BUSD is in trouble, so bnUSD is ICON’s best shot at having a stablecoin that can be reliably used as a store of value and payment solution. Anything that makes Balanced stronger and furthers the utility of bnUSD is something I support.
  2. Balanced is the only dApp on ICON that gives access to revenue-generating primitives that can be used in a “set it and forget it” way. Someone can come in, learn how to write a bot to arbitrage sICX/bnUSD and ICX/USD on a CEX, keep it running, and walk away. This isn’t possible on another dApp like Craft where one must pay attention to various Discord communities in order to gauge the value of NFT collections. I believe this is a key advantage of Balanced, and one way to make this advantage more apparent is to increase the liquidity of sICXbnUSD. Thus, I support this proposal.

I don’t have much time at the moment, but just wanted to respond to some comments:

  1. We fail to see the benefit of having 50K USD worth of “Network-Owned Liquidity” for a network that is currently worth around 240M USD. We see this benefitting Balanced and Traders/arbitrageurs the most - much more than the ICON Network itself.

I wouldn’t pay so much attention to market cap in crypto. It’s just last price * supply, and isn’t really a good way to gauge liquidity. If the price of ICX dropped 10x to a market cap of $24M USD, would that suddenly make this proposal 10x more beneficial? I don’t see the logic there. Take a look at the daily volume on reputable exchanges (Binance, Bithumb, Kraken) and the market depth (I think CMC displays ±2% depth), and it becomes clearer why $50K of additional liquidity could make a difference.

This proposal generates income for the CPS, BUT is CPS an organisation working on ROI based investments or is it a development fund? Also Balanced takes a big chunk away here.

This is the beauty (or downside depending on how you look at it) of decentralized governance. We can go back and forth about what CPS is as an organization all day, but neither of us would be right or wrong. I participate in the CPS and don’t see an issue with it generating incoming by providing liquidity. Others may see it differently, and I don’t think it’s productive to talk about what CPS “is” when there’s no right answer and it’s an answer that will naturally make itself clear through the decentralized governance process.

Do you know of other Network Owned Liquidity examples from something like NEAR, Polygon, etc? I’m curious to know if you think providing liquidity like this should be the responsibility of the network as a whole, or whether it should be from some organization in the network, and for what reason?

I’m not aware of any other network that does this, but I also don’t think we need a precedent to act. Also, I’m 100% on the YOLO bandwagon when it comes to ICON. We are such a small project. I sometimes wonder if too much thought is being put into things that may not matter in the grand scheme of things. I think being small isn’t a bad thing, and gives some wiggle room to experiment without thinking too much, especially when it’s not a huge amount of money on the line. The way I see it is “the ICON network wants to invest in the ICON network, cool let’s do it”.

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