Key Insights
- ICON is a Layer-1 (L1) blockchain focused on cross-chain interoperability.
- ICON has undergone many iterations since its ICO focus on enterprise use cases in 2017.
- The Blockchain Transmission Protocol (BTP) is an upcoming light client based general message passing bridge that uses ICON as a hub.
- With ICON’s market share and network activity down 90%+ from all-time highs in 2018-19, it will require a successful BTP launch and substantial adoption to reverse its downward trend.
During the initial coin offering (ICO) boom from 2017-18, hundreds of projects collectively raised over $18 billion, according to Statista. While a majority of projects were abandoned, a handful of projects have delivered on ICO promises and are leaders of their respective sectors. The remaining sit somewhere between those two extremes: active projects, but still searching for their market fit.
Smart contract platform ICON fits into that latter group. Following its $43 million ICO in 2017, ICON was a top 25 project by market cap for the first half of 2018. Since then, it has slowly slipped to 142nd. A pivoted focus for most ICON developers and community members – from enterprise use cases to cross-chain interoperability – has given ICON some new life. Reliable cross-chain infrastructure has emerged as a core problem to solve in crypto, with over $2.5 billion lost in bridge exploits in the past two years. If developers can ship ICON’s revised Blockchain Transmission Protocol (BTP) design, ICON could find its footing, over five years after its ICO.
Background
ICON was founded in 2016 by Min Kim, who previously worked as an associate and in leadership positions at DAYLI Financial Group, Tapas Media, and Deutsche Bank. Min Kim is a council member of the Swiss-based ICON Foundation, which conducted ICON’s ICO in Q3 2017. The offering sold half of the total supply of ICON’s native token, ICX, raising 150,000 ETH (around $42,750,000 at the time). ICON launched its mainnet in January 2018, with much of its core technology having been developed by the for-profit company ICONLOOP. After some delays, ICO participants were able to swap the Ethereum-based ICX tokens for ICON-based ICX tokens in June 2018.
In Q4’21, ICON 2.0 went live on mainnet. The upgrade featured major changes, including a new blockchain engine, revised inflationary schedule, optimisations for its interoperability protocol, and a new grant system. The ICON Foundation is the main entity driving development of the project, but there are a host of other independent groups including ICONLOOP, Lydia Labs, iBriz, HugoByte, ICONDAO, ReliantNode, Parrot9, and others.
Technology
Consensus Mechanism
ICON is a Delegated Proof-of-Stake (DPoS) based Layer-1 blockchain. At launch, it ran on a modified Byzantine Fault Tolerant (BFT) consensus protocol called Loop Fault Tolerant. After ICON 2.0, it switched to Tendermint BFT, the consensus mechanism that powers the Cosmos SDK. Tendermint is one of the leading and most battle-tested PoS consensus mechanisms.
To become a validator, one must first burn 2000 ICX ($360 as of Jan. 18, 2023) as a one-time registration fee. Each term (lasting one day), 25 validators are selected to participate in consensus, consisting of the top 22 validators by voting power and 3 randomly selected validators from outside the top 22.
Validators earn 13% of each block reward, proportional to their voting power. Voting power is calculated by adding together a validator’s bond (how much they have personally staked) and their votes (how much delegators have staked to them), and then weighing this by their bond percentage (bond divided by votes). If the bond percentage is 5% or higher, their voting power will be unadjusted. If it is 0% (no personal stake), they will have zero voting power. Between 0%-5%, their voting power will adjust linearly. There are currently no penalties for misbehaving or inactive validator nodes.
Delegators earn 77% of each block reward at a pro-rata share based on tokens delegated, irrespective of which validator one delegates to. This, combined with the fact that non-participating validators can earn rewards, leads to misincentives in the reward system. Validators are not incentivized to participate, and delegators are not incentivized to delegate to participating validators. Ongoing discussions to update ICON’s monetary policy to fix these issues are detailed in the roadmap section below.
Computation
ICON 2.0 features an upgraded blockchain engine that supports smart contract programming in Java, opposed to Python in ICON 1.0. The engine is a wrapped version of the Java Virtual Machine developed by OpenJDK. The wrapping implementation is based on the Aion Virtual Machine, which powers the Aion Network.
Interoperability
Blockchain Transmission Protocol (BTP)
The ICON Foundation detailed an initial design for its light client cross-chain protocol BTP in the 2017 ICON whitepaper. However, the implementation has not been completed, first due to prioritizing enterprise adoption over BTP and then technical hurdles once ICON refocused on BTP.
The aim of BTP is to connect any blockchain with general message passing, using the ICON blockchain as a hub. The protocol uses relayers (off-chain entities that transport messages from the source chain to the destination chain) and light clients (low resource nodes on the destination chain that read the state of the source chain) to transfer and verify information from one blockchain to another.
BTP is similar to Cosmos’ Inter-Blockchain Communication Protocol (IBC), except its implementation is aimed at the smart contract level, rather than the core network level.
In 2021, ICON developers began experiencing two major drawbacks with their initial design:
- Not easily extendable – For a destination blockchain to verify external blocks using a light client, the blockchain must support the hashing algorithm of the source blockchain. This requires a hard fork if it’s not already supported.
- High gas fees – The design required the light clients to update every block to match the state of its respective blockchain, even if no calls were made through BTP. In early 2022, the ICON teams realized the gas fee consumption was way too high and an alternate approach would have to be taken.
In mid-2022 ICON developers released a new BTP whitepaper, which adds “BTP blocks” into the light client design. BTP blocks are bundles of BTP transactions on ICON. Each integrated external blockchain has its own chain of BTP blocks. BTP blocks are not technically blocks – validators do not directly validate them – but their roots are included in ICON blocks.
Instead of ICON light clients on external blockchains tracking all ICON block headers, they can just track the BTP block headers for their chain. This helps solve the two problems:
- More easily extendable – BTP-X blocks use the hashing algorithm supported by Blockchain X, rather than ICON. Thus, Blockchain X does not need to hard fork to support an ICON light client, because it just tracks the BTP-X block headers, which already use its hashing algorithm.
- Lower gas fees – BTP-X blocks are only produced when there’s a BTP message involving Blockchain X. The ICON light client on Blockchain X updates to match new BTP-X blocks, rather than every new ICON block. This reduces gas fees by eliminating wasteful light client updates on external blockchains. However, the design likely does not lower gas fees enough to integrate BTP on blockchains with higher gas fees such as Ethereum. Other teams are working to further solve this light client interoperability challenge by using optimistic (i.e., Rainbow Bridge) or zero-knowledge designs (i.e., Succinct, zkBridge, various zkIBC projects).
The new design also attempts to lower gas fees on ICON by whitelisting each light client to avoid paying gas fees on successful updates. However, verifiers trying to update the light client contracts will still need to post a gas fee in case the update is not successful. This prevents people from being able to spam the light clients.
All non light client updates, such as sending cross-chain transactions through BTP, still require gas fees. Additionally, cross-chain transactions incur an additional fixed fee that is set by the ICON Foundation. The fee includes a relay fee, which goes to relays and is meant to reimburse them on gas costs, and a protocol fee, which is used to buy back and burn ICX.
There is no public timeline for BTP deployment. However, ICON publishes milestones and BTP development updates on a monthly basis (last update posted here).
ICON Bridge
While working on the BTP redesign, ICON developers released ICON Bridge. The bridge is essentially the original BTP implementation, but substitutes in centralized verification by the ICON Foundation in place of the on-chain light client verifiers. The Foundation is also the sole relay operator. Thus far, the bridge has been connected to BNB Smart Chain through Nexus Portal and to SNOW (see ecosystem section for details) through Everest Swap. The open-source implementation is considered complete for its intended purposes. As a result, the team will not commit further resources to the code base and instead focus on BTP.
Tokenomics
ICON’s native token ICX is used for security (validator and delegator staking) and to pay for shared resources (gas fees). Notably, 800 million tokens were minted at launch, and 36 million ICX are minted every year as inflationary block rewards. All transaction fees are burned.
Public sale (50%): The ICON Foundation conducted ICON’s Ethereum-based ICO in 2017. Half of the initial supply was sold at a price of 0.0004 ETH per token, raising 150,000 ETH (around $42,750,000 at the time). Proceeds from the sale went to: token reserve used for DEX liquidity (35%), ICON Foundation business expenses (35%), core team and developer (20%), and strategic partners (10%).
Ecosystem (26%): 16% of the total supply was allocated to a reserve that deployed some tokens for DEX liquidity post-launch, but most remain unused. There are plans to deploy much of the remaining tokens for BTP incentives, with the exact amount still to be determined by the ICON Foundation. 10% of the total supply went to community groups and strategic partners such as developer teams, dapp partners, ambassadors, and influencers post-launch, with roughly a one-month lockup and 12-month vesting period.
ICON Foundation (14%): The ICON Foundation is a non-profit entity that supports ICON and its ecosystem through grants, business and technology advice, and other means. Its allocation had a one-month lockup and no vesting period.
Team and Advisors (10%): Tokens were distributed to early contributors and advisors with roughly a six-month lockup and six-month vesting period.
All tokens from the original distribution have been unlocked since early 2020.
At the end of 2021, governance enacted a new inflationary system ICON Incentives Scoring System (IISS) 3.1. IISS 3.1 fixed the amount of tokens minted per year at 36 million (around 4% inflation). Previously, inflation was more dynamic, depending upon various factors, and could reach up to 20%.
Under IISS 3.1 block rewards go to validators (13%), delegators (77%), and the Contribution Proposal System (CPS, 10%), a decentralized grant system. (See the technology and roadmap sections for details about the validator and delegator distributions).
The CPS is a treasury managed by network validators who register to participate. Anyone can post an on-chain proposal for funding. For a proposal to be moved to voting, a validator needs to sponsor it by posting 10% of the proposed budget as a bond. Proposals then need to be approved by a two-thirds majority of both the validator count and the validator stake.
Funding is not distributed immeditately. Instead, funding allocation requires monthly progress reports, which are also voted on. If the proposal is successfully completed all the way through, the sponsoring validator receives 2% of the funding. If it isn’t, the validator loses their 10% bond. Funding, once distributed in ICX, is now allocated in bnUSD, a stablecoin on ICON. The CPS periodically converts its ICX balance into bnUSD.
Between application and voting periods, CPS cycles take roughly one month. Thus, the CPS receives 300,000 ICX each cycle ($54,000 as of Jan. 18, 2023) and can use any funds left over from previous cycles. So far, 545,000 ICX and 1.4 million bnUSD have been distributed across 74 completed and 9 active projects. The CPS’ treasury is currently valued at $55,400, but constantly changes as it receives funds from daily inflation and gives out funds to applicants. CPS metrics and information can be tracked here.
Network Activity and Ecosystem
Network Activity
Users and Developers
ICON’s network activity peaked in mid-June of 2019 with over 20,000 active addresses and 5 million transactions. Since then, ICX’s market cap rank has fallen from 51st to 142nd. User growth has also slowed significantly, with 67,000 new addresses made this year compared to an average of 205,000 new yearly addresses from 2019-2021. ICON’s network activity has dropped since the first half of 2022, mirroring the broader market, but has stabilized around 10,000 daily transactions and 2,000 daily active addresses.
Stakers and Delegators
There are currently 52 validators eligible to participate in consensus. Together, they stake 420 million ICX, with 380 million of that being delegated to them by 20,000 delegators. The validator network has a Nakamoto coefficient of 6, around the median of chains compiled on nakaflow.io.
Of the 52 eligible validators, six have a productivity of 0%. However, these inactive validators only stake a combined 202,000 ICX (0.05% of total staking power). Notably, 16 of the total eligible validators have bond percentages below 5%; however, they are mostly just below 5%, and so are largely still earning most of their rewards.
Ecosystem
DeFi
In 2022, ICON’s DeFi total value locked (TVL) dropped substantially in USD terms (-87%). However, its TVL has risen slightly in native ICX terms (7.5%), indicating the drop in dollar TVL is largely due to a fall in the price of ICX.
ICON’s DeFi ecosystem is mainly composed of two protocols, which have overlapping development from several teams.
- Balanced – Balanced is an automated market making (AMM) DEX and a CDP protocol, where users can mint its native stablecoin, bnUSD. Balanced has $8.5 million in TVL, and there are currently 3.6 million bnUSD in circulation.
- OMM – OMM is a money market where users can lend and borrow assets. OMM has over $7 million in TVL.
NFTs and Gaming
Craft.network is an NFT marketplace and launchpad. The most traded project in the past 30 days is GangstaBet at 461,000 ICX (almost 9 million ICX in volume traded all-time). GangstaBet is a collection of 5,555 evolving “gangsters and detectives.” Craft is also building a toolkit allowing NFT developers to integrate cross-chain actions through BTP.
ICONbet is an online decentralized casino featuring roulette, dice, and blackjack, among other games. It was the second most used applicationin in 2022 with an average of 2,200 transactions per day.
Enterprise
ZZEUNG is an authentication service developed by ICONLOOP that uses MyID, ICONLOOP’s decentralized identity protocol. In 2020, ICONLOOP announced the launch of several use cases for the application, including facilitating COVID-19 contract tracing on South Korean island Jeju, providing COVID-19 vaccination certificates, and helping with KYC compliance for customers of one of South Korea’s largest commercial banks, Shinhan Bank. In 2022, MyID was the most used application with an average of 3,250 transactions per day.
Broof is a certificate issuance platform also developed by ICONLOOP. In 2020, South Korean university POSTECH used it to issue diplomas and leading South Korean job board SaraminHR used it to verify applicant credentials. In 2022, there were an average of 143 daily Broof-related transactions.
Polkadot Expansion
While the Foundation and core development teams are focusing on BTP and other use cases on ICON, several development teams, namely Web3 Labs, Mousebelt, and Venture23, have set out to extend the ICON ecosystem by creating an EVM-compatible sidechain. During development, this vision expanded to create EVM-compatible parachains ICE (on Polkadot) and SNOW (on Polkadot canary network Kusama).
SNOW is currently live on Kusama, having won a slot in an auction in September 2022. SNOW is built using the Substrate SDK and is starting as a Proof-of-Authority (PoA) network with trusted validators who verify their identity and stake their reputation. The teams plan to migrate to Nominated-Proof-of-Stake, a Delegated-Proof-of-Stake variation used commonly by other networks in the Polkadot ecosystem.
SNOW’s own native token, ICZ, was airdropped (35% of supply) to ICX holders, according to the snapshot taken at the end of 2021. Originally with the general EVM sidechain plan, it was announced that 75% of the token’s supply would be airdropped, but this had to be adjusted to accommodate the parachain crowd loan model. The remaining 65% of the supply is still allocated to the community through crowd loan rewards, liquidity incentives, and ecosystem funds, with no tokens reserved for the team or private investors.
Since launch, usage on SNOW has been very low, with an average of 500 daily transactions and an average of 90 daily active addresses.
The SNOW development teams plan to eventually launch a similar parachain on Polkadot. The Polkadot version will be named ICE, and its native token ICY will also be airdropped to ICX holders.
Roadmap
Technical Improvements
BTP and xCALL: The main focus for most of ICON’s core development teams is shipping the new BTP design. Also, the teams recently announced plans to launch a much broader cross-chain initiative. In the BTP diagram above, the first step of a user starting a cross-chain message involves calling a sendMessage API that then initiates the rest of BTP. The ICON teams are calling their implementation of this function xCall. Rather than only connecting xCall to BTP, they are planning on also connecting it to existing cross-chain verification protocols from other teams and additional verification protocols they plan to implement. They are currently working on implementing IBC on ICON, Polygon, and Archway.
By aggregating many different underlying cross-chain verification protocols under one API, they hope to provide a better experience for developers who can easily switch and change between cross-chain verification protocols through the same set of contracts. A fee will be included in xCall to buy back and burn ICX, similar to BTP.
Inflation and CPS System: Although separate from any formal roadmap, improving the inflationary reward system is also a priority of some ICON developers and community members. Lydia Labs proposed an improvement on ICON’s forum that’s modeled off typical Cosmos SDK validator rewards and penalties. The proposal looks to penalize inactive or malicious validators by having them not earn block rewards and potentially even have their stake slashed. Instead of a global parameter splitting up validator and delegator rewards, validators will set their own commission rates, with the rest going to their delegators. The community is still discussing details of the proposal, but it will likely move to an on-chain vote in Q1’23.
Similarly, some community members have voiced concerns with the CPS and lack of incentives for validators to participate and vote meaningfully. Some have proposed alternate solutions, including opening voting participation to all token holders.
Parameta and HAVAH: ICONLOOP has been building Parameta and HAVAH. Parameta is a blockchain SDK based on ICON’s architecture, including BTP integration. Parameta is not open-source but part of a paid, ICONLOOP services package, which includes other business consulting and technical support. Parameta is live, and the first use of it will be a cross-chain NFT platform HAVAH developed by ICONLOOP. HAVAH aims to be a hub for cross-chain NFT ecosystems using BTP for interoperability.
Growth Strategy
ICON has several different development teams working to further the network. ICONLOOP is set to continue developing HAVAH and working with other teams on Parameta use cases. ICON Foundation, Lydia Labs, and other teams will continue to focus on shipping BTP and bringing more crypto-native applications to ICON.
At the beginning of 2022, ICON Foundation announced a 200 million ICX ($36 million as of Jan. 18, 2023) grant program to incentivize the development (60%) and use (40%) of BTP. The program is funded primarily from the reserves portion of the original distribution. The CPS, which receives 3.6 million ICX per year ($650,000 as of Jan. 18, 2023) from daily inflation, is the other core source of funding for network growth.
Conclusion
ICON has undergone many evolutions since inception in 2017. It has a new consensus protocol, smart contract programming language, and inflation system. Most importantly, it has a new purpose, having shifted from enterprise use cases to cross-chain interoperability. So far, these upgrades have not been enough to thrust ICON back into the spotlight. Since launch, ICX has fallen from top 20 in market cap to mid-100s. ICON network activity is down 90%+ from all-time highs, with only a couple of applications that have some traction. However, if ICON developers are able to successfully launch BTP and it catches adoption, ICON could prove to be more than just an ICO era relic.
