Balancer is a decentralized automated market maker (AMM) protocol built on the Ethereum blockchain.
It’s a unique platform that allows users to exchange tokens and provide liquidity to pools in a decentralized and permissionless way.
Balancer has been described as a self-balancing portfolio and price sensor. In a way, it turns the concept of an index fund on its head.
Instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders, who rebalance your portfolio by following arbitrage opportunities.
What is an Automated Market Maker (AMM)
An Automated Market Maker (AMM) is a type of decentralized exchange (DEX) protocol that facilitates the trading of digital assets without the need for a traditional order book.
Instead of matching buyers and sellers, AMMs use smart contracts to create liquidity pools, allowing users to trade directly against these pools.
Advantages of AMMs:
- Continuous Liquidity: By allowing trades against liquidity pools, AMMs provide consistent market liquidity without the need for traditional buyers and sellers.
- Decentralization: AMMs operate through smart contracts on blockchain networks, eliminating intermediaries and enabling permissionless trading.
- Inclusivity: Anyone can become a liquidity provider by contributing assets to a pool, earning a share of the transaction fees generated.
What is Balancer (BAL)?
Balancer is an Ethereum-based Automated Market Maker (AMM) protocol that functions as a decentralized exchange (DEX) and a “self-balancing” portfolio management tool.
Balancer’s AMM provides traders with liquidity for their ERC-20 tokens.
Its smart order routing feature also minimizes gas fees while its decentralized nature means that traders keep the private keys to their tokens.
Meanwhile, liquidity providers (LPs) that build liquidity pools with their tokens have more flexibility using Balancer than other AMM protocols.
For instance, Balancer allows LPs to (a) add up to eight assets per pool, (b) customize token ratios, and (c) customize token fees. AMM competitors like Uniswap and SushiSwap only allow up to two tokens per pool, a 50:50 ratio on the two tokens, and an established fee structure.
Including more assets and customizing token weights also allows LPs to manage portfolio-like liquidity pools that can track indices or tokenize a group of assets.
How does Balancer work?
Balancer operates through the use of “liquidity pools.” These pools are collections of different tokens that users can deposit into and withdraw from.
When users deposit tokens into a pool, they receive “liquidity provider (LP)” tokens in return. These LP tokens represent their share of the pool and entitle them to a portion of the trading fees generated by the pool.
Balancer offers three main types of pools:
- Public pools: These pools allow any user to provide liquidity by adding or withdrawing assets. The parameters of public pools are set before their launch and cannot be changed. This makes them suitable for users with smaller holdings seeking to earn fees from the most popular and liquid pools.
- Private pools: These pools are created and managed by a single user or entity. They offer more flexibility in terms of pool parameters and asset allocation.
- Smart pools: These pools have flexible parameters and exist as an intermediate between public and private Balancer pools. They allow for more sophisticated strategies and are often used by experienced liquidity providers.
When a user wants to trade tokens on Balancer, they interact with a liquidity pool that contains the tokens they want to exchange.
The Balancer protocol uses a specialized mathematical formula to determine the exchange rate between the tokens.
This formula ensures that the pool remains balanced, meaning that the value of the tokens in the pool remains relatively stable even when trades occur. Unlike traditional AMMs that typically allow only two tokens per pool with a 50:50 ratio,
Balancer allows for up to eight assets per pool and lets users customize the token ratios. This weighted pool approach allows for more diverse and complex financial instruments to be created within the Balancer ecosystem.
For example, imagine a pool with three tokens: ETH, DAI, and USDC. The pool creator can set the weights of these tokens to 40%, 30%, and 30%, respectively.
This means that the pool will always hold these tokens in the specified proportions.
When a user trades ETH for DAI, the Balancer protocol automatically adjusts the amounts of ETH and DAI in the pool to maintain the 40:30:30 ratio.
Team background
The Balancer protocol was developed by the engineering and research firm BlockScience in 2018 before splitting off the project to Balancer Labs in 2020.
Balancer Labs co-founder Fernando Martinelli is a serial entrepreneur who recruited security engineer Mike McDonald to co-found the company and become CTO.
Martinelli and McDonald remain CEO and CTO at Balancer Labs. They work with Kristen Stone – who was Coinbase’s product manager and Balancer Labs’ COO – and 30 or so other members to increase adoption, optimize the use of AMMs in portfolio management, and introduce DAO features into the project.
History of Balancer
Balancer was launched in 2020 and quickly became one of the building blocks of the DeFi space.
It has gone through several iterations, with V1 being the initial release and V2 introducing improvements in gas efficiency and flexibility.
Balancer is set to launch its V3 protocol, focusing on:
- Simplified Custom Pool Creation: Enhancing the ease of developing custom pools to foster innovation within the ecosystem.
- 100% Boosted Pools: Introducing pools that allocate all underlying liquidity into lending markets, optimizing yield for liquidity providers.
- Improved Developer Tools: Providing next-generation tools to support and streamline development on the Balancer platform
What is the BAL token?
Along with trading fees, liquidity providers can earn Balancer’s BAL tokens.
BAL tokens are mainly used as governance tokens, so their value is mainly derived from users’ interest in participating in the direction of the protocol.
BAL token holders can vote on proposals that affect the future development and operation of Balancer, giving them a voice in shaping the direction of the platform.
This governance mechanism ensures that the Balancer protocol remains community-driven and responsive to the needs of its users.
Also, liquidity pools with BAL in them currently receive more BAL than other pools to accelerate decentralization.
BAL can be traded at major exchanges such as Binance, Kraken, Huobi, and OKEx and is supported by Ethereum-compatible wallets like Ledger, Metamask, and Coinbase wallet.
What are the benefits of using Balancer?
Balancer offers several benefits for both traders and liquidity providers:
- Decentralization: Balancer is a decentralized protocol, which means that it is not controlled by any single entity. This makes it more resistant to censorship and manipulation.
- Flexibility: Balancer allows for the creation of pools with up to eight different tokens and customizable token ratios. This gives liquidity providers more flexibility in how they manage their assets.
- Low fees: Balancer has relatively low trading fees compared to some other decentralized exchanges.
- Security: Balancer utilizes a strong security model and undergoes regular third-party audits to ensure that users can manage their assets safely.
- Efficiency: Balancer’s weighted balance system makes it more efficient than other DEXs that use a constant product formula.
- Smart order routing: Balancer’s smart order routing feature minimizes gas fees, making trades more cost-effective for users.
What are the risks of investing in BAL tokens?
Like any cryptocurrency investment, there are risks associated with investing in BAL tokens:
- Market volatility: The price of BAL tokens can be volatile, and investors could lose money if the price drops.
- Smart contract vulnerabilities: Although Balancer undergoes regular audits, there is always the risk of smart contract vulnerabilities that could be exploited by attackers.
- Impermanent loss: Liquidity providers on Balancer may experience “impermanent loss” if the price of the tokens in their pool changes significantly. Impermanent loss occurs when the value of your tokens deposited in a liquidity pool is less than what it would have been if you had simply held the tokens outside the pool. This happens due to the AMM’s automatic rebalancing mechanism, which adjusts the token ratios in response to price fluctuations.
- Limited tokens: While Balancer allows for up to 8 tokens per pool, which is more than many other AMMs like Uniswap (which allows only 2), the number of tokens supported is still limited compared to the vast number of tokens available in the DeFi space.
- Limited development: While Balancer is constantly evolving, there are still relatively few features developed that are useful or accessible to users compared to some other DeFi protocols.
- Other risks: In addition to the risks mentioned above, it’s important to be aware of other potential risks associated with DeFi protocols in general, such as toxic token risk (risks associated with tokens that may have malicious code or hidden vulnerabilities), DeFi composability risk (risks arising from the interconnectedness of different DeFi protocols), and DAO governance risk (risks related to the decentralized governance process and potential for conflicts or inefficiencies).
Token Metrics:
- Circulating Supply: 61,570,481 BAL tokens.
- Total Supply: 66,755,349 BAL tokens.
- Maximum Supply: 96,150,704 BAL tokens.
Notable Investors:
Balancer Labs has attracted investments from several prominent entities in the cryptocurrency and decentralized finance (DeFi) sectors.
Here are some notable investors:
- Alameda Research: A quantitative cryptocurrency trading firm and liquidity provider founded by Sam Bankman-Fried.
- Pantera Capital: One of the first U.S. institutional asset managers focused exclusively on blockchain technology and cryptocurrencies.
- Three Arrows Capital: A Singapore-based cryptocurrency hedge fund known for its significant investments in the digital asset space.
- DeFiance Capital: A DeFi-focused investment fund that combines fundamental research with an activist investment approach.
- Blockchain Capital: A venture capital firm specializing in blockchain technology and the crypto ecosystem.
- FinTech Collective: A global venture capital firm focused on technology startups transforming financial services.
- LongHash Ventures: A global blockchain accelerator and venture capital fund building the native Web 3.0 economy.
- Fenbushi Capital: One of the first venture capital firms focused on building world-class blockchain-enabled companies.
- Continue Capital: An investment firm specializing in blockchain technology and digital assets.
- Kain Warwick: Founder of Synthetix, a decentralized synthetic asset platform.
These investors have contributed to Balancer Labs through various funding rounds, including a $5 million investment from Three Arrows Capital and DeFiance Capital in February 2021, and a $24.25 million token purchase from multiple investors in May 2021.