This article is part of an informational content series on ICON’s DeFi ecosystem. The series comprises short video explainers and in-depth articles for each of ICON’s DeFi platforms.

You can also check out the other articles in the ICON DeFi ecosystem here:

Have you heard a lot about “DeFi”, or “decentralized finance”, but aren’t quite certain where to start? Or perhaps you’re ready to dive in, and you’re looking for a concise intro guide? This ICON DeFi educational series is for you. Today, we’re starting things off with a deep-dive look at Balanced, a decentralized exchange on the ICON blockchain network. This short intro video explains all the basic concepts you’ll need to know, and the below article dives into everything in a bit more detail:

What is a Decentralized Exchange?

You may have bought cryptocurrency on a centralized exchange, sometimes called a CEX — Binance is a good example of this kind of exchange. A CEX acts as a middleman for the user to exchange funds from one cryptocurrency to another, with the biggest CEXes offering fiat purchases of crypto and linking to users’ bank accounts so they can convert crypto back to fiat again. CEXes also usually have an on-site wallet for users to hold their funds on the exchange itself (although this does run the risk of theft by hackers). For this reason, it is usually necessary to create an account on a CEX, which often requires a somewhat lengthy identity verification process.

Decentralized exchanges, or DEXes, also allow users to trade cryptocurrencies, although fiat on/off ramps are rare (note to readers: ICON’s Omm DeFi protocol does support fiat!). The main difference is that instead of acting as a middleman, a DEX instead provides direct access to peer-to-peer trading via smart contracts. Users trade cryptocurrencies by accessing currency pools provided by liquidity providers. DEXes are also usually set up to connect directly to external hardware, mobile or browser extension wallets, so users can rest assured that their funds are always safe. (Liquidity providers do face certain risks, mind you — more on this later.)

Why Use Balanced?

If you want to swap ICX with another ICON-based token, Balanced is a very fast, cheap and efficient place to change your crypto. Balanced also has their own stablecoin — the Balanced Dollar, or bnUSD — which is likewise easy to purchase on their site (along with other stablecoins). You can also take out a collateralized bnUSD zero-interest loan with zero paperwork and instant approval. Lastly, you can provide funds to liquidity pools in exchange for potentially high rewards.

Getting Started With Balanced

You do not need to make an account to use Balanced. All you need is a compatible ICX wallet and you can log in directly with that. Balanced works with the ICONex and Hana Chrome browser extension wallets and the MyIconWallet mobile app. If you prefer a hardware wallet, Balanced can also connect with a Ledger wallet.

All of the funds you use on the Balanced site will come directly from your ICX wallet. There is no need to connect with a credit card or bank account, as Balanced does not support fiat.

Swapping Cryptocurrencies

You will find that trading crypto on Balanced is extremely straightforward — just head on over to the Trade page and you’ll see straight away what to do. One important thing to understand is that every transaction involves a “trading pair” – two cryptocurrencies contained in a liquidity pool. Available trading pairs can change at any time, as it depends entirely on what trades liquidity providers are offering.

At the time of writing, the following cryptocurrencies are available on Balanced (in various trading pairs):

  • ICX (ICON)
  • sICX (Wrapped ICON)
  • METX (Metanyx)

The following governance tokens are available:

  • BALN (Balanced)
  • FIN (Optimus Finance)
  • OMM (Omm)
  • CFT (Craft Network)
  • GBET (Gangsta Bet)

And the following stablecoins are available:

  • bnUSD (Balanced Dollar)
  • USDS (Stably USD)

Take Out a Loan

Taking out a loan on Balanced is easy — no frustrating paperwork required. The only thing you do need to have is ICX to be offered as collateral. A small 0.75% fee is paid on top of every loan, but there is no interest on loan repayment. As Balanced loans are paid out in bnUSD — a stablecoin pegged to the US dollar — it is easy to convert this loan to any other cryptocurrency.

One important thing to keep in mind is that Balanced loans do come with a certain degree of risk. If the price of ICX suddenly drops below the value of your collateral, your collateral will be liquidated. As such, it’s probably a good idea to ensure you are able to offer up enough ICX as collateral to keep your level of risk at a safe level. You’ll also want to check in on your loan’s risk ratio often, and try to pay back the loan as soon as possible.

We asked Balanced founder Scott Smiley to explain how the risk ratio works:

“You get liquidated at 85 percent loan-to-value (LTV). An 85 percent risk ratio means that you’ve borrowed $85 against $100 of collateral, and once that is the ratio, you’re liquidated. The platform allows you to borrow up to a 67 percent LTV, and then from there your collateral will be locked,” Smiley said.

Farm That Yield

Another important thing to keep in mind is that Balanced loans aren’t really meant to be used to fund big vacations or make commodity purchases. Rather, most people borrow bnUSD from Balanced to engage in an investment strategy known as “yield farming”:

As long as you’ve borrowed over 50 bnUSD, you’ll also earn BALN tokens as a reward. Yield farming is when people borrow on DeFi protocols such as Balanced purely for the governance token rewards, which they can then sell or hold on to in hopes that the token’s value will appreciate over time.

Yield farming entails risk due to price volatility (among other factors ). Please make certain that you fully understand the risks involved when borrowing funds on any DeFi protocol.

If you do want to try “yield farming” with a loan on Balanced, Smiley has suggested the safest way to go about it:

“The best practice would be to pay an upfront fee to borrow on Balanced and then just deposit all the bnUSD you minted onto Omm. You’ll start earning interest and, based on a five percent interest rate (roughly), you should make your money back within around two months just by leaving your money there and taking little risk,” Smiley said.

He does offer a serious word of caution though: “There is always the rebalancing risk that you need to pay attention to.”

About “Rebalancing”…

“Rebalancing” is an important part of how Balanced maintains the US$1 peg for its bnUSD stablecoin. The way it works is, when changing market conditions affect the price of bnUSD, pulling it away from that $1 peg, the value of your loan or collateral is changed to repeg the bnUSD back to $1:

  • If the price of bnUSD is too cheap (under $1), some of your collateral will be sold for bnUSD, which is used to reduce your loan.
  • If the price of bnUSD is too expensive (over $1), your loan is increased and used to buy more collateral at a discount.

Due to the way rebalancing works, your loan on Balanced may have a high chance of becoming liquidated if market conditions suddenly become extremely volatile. As such, always make sure to pay attention to the market when you have a Balanced loan out.

On Becoming a Liquidity Provider

The money swapping feature of the Balanced DEX is made possible by liquidity pools put up by Liquidity Providers (LPs). An LP puts assets into a trading pair — say ICX and bnUSD — and other users can then dip into that pool to make exchanges between those two assets. The LP then earns fees on transactions performed in that trading pair.

Being an LP can be quite lucrative, but comes with a lot of risk — even more than taking out a loan, if you’re not careful. This is due to a concept known as ‘Impermanent Loss’, which can happen when market conditions change after you’ve invested in a liquidity pool. If you lock up some assets in an ICX/bnUSD liquidity pool and the price of ICX suddenly drops, you’ll have impermanently taken a loss on your investment — but that loss becomes permanent if you cash out.

We’ve written up an in-depth explainer about impermanent loss that we very strongly recommend all potential Liquidity Providers to read. This video also explains the matter quite well:

With that in mind, Scott Smiley also has a very different take on impermanent loss — that it’s just a regular part of investing. Here’s a lengthy and very informative Twitter thread he posted with his views on the matter a few months ago.

You can sign in to the Balanced app on their website from your computer. You can also keep up with new developments by following Balanced on Twitter, Reddit or Discord.