What is Balancer(BAL)?
Balancer calls itself an automated portfolio manager and decentralized exchange in the world of cryptocurrency decentralized finance (DeFi). We call it a futuristic form of the traditional index fund and a decentralized exchange (DEX) rolled into one.
Balancer protocol is now considered one of the top ten largest DeFi platforms and DEXs on Ethereum. More than CAD $2.31 billion worth of assets is currently locked up in Balancer.
What makes Balancer such an exciting platform in the world of Decentralized Finance(DeFi)? Let’s look at the underlying fundamentals to understand more.
What are Balancer and DeFi?
Balancer is a combination of a Decentralized Finance (DeFi) service and a DEX. Both are accessible with Balancer.
Balancer’s DeFi service automatically balances a user’s portfolio, generating yield (interest) without needing to have a user manage trades. In a similar fashion to a traditional Index Fund,
Balancer will automatically invest in various cryptocurrencies, aiming to generate the highest return on investment for a user.
But Balancer is also a DEX, which uses automated market making (AMM) as an underlying protocol to coordinate the flow of trades between buyers and sellers.
To understand what an AMM is, we first need to have a better grasp of traditional financial systems that help make markets move.
Traditional Financial Markets
As a start, in conventional financial systems, the centralized exchange acts as a middleman when overseeing the operation of trades. These exchanges provide an automated system that matches trading orders (buy orders and sell orders) together, at a cost.
These centralized exchanges are both centralized and regulated, so the fees to transact are often quite costly. Investors shouldn’t be surprised to spend anywhere from $9-39 to execute a trade.
In the world of DEXs, these middlemen and the associated regulatory bodies are absent. Automated market makers (AMMs or DEXs as they’re known) manage the flow of trading orders with smart contracts and programs. Balancer does exactly this.
Here, the protocol pools liquidity (cryptocurrency that has been locked or staked by other users) into smart contracts. This liquidity pool is then what another trader would buy or sell to. In essence, users are not technically trading against other buyers and sellers – instead, they are trading against the liquidity locked inside the smart contracts. Thus, you’ll often hear these smart contracts referred to as liquidity pools.
As mentioned above, these facilitate trading and lending functions, and are an essential fuel for DEXs.
The Balancer protocol was developed by Balancer Labs and founded by Fernando Martinelli and Mike McDonald in 2018. Balancer has its native utility token, known as the Balancer token (BAL). This is used for participating in the governance of the Balancer Protocol. One can earn BAL coins by providing liquidity or trading on the platform.
In its whitepaper, published in September 2019, Balancer describes the protocol as “a non-custodial portfolio manager, liquidity provider, and price sensor.”
Fernando Martinelli, the Ceo of the Balancer protocol, shared in an interview recently:
“My motivation was to find ways in which AMMs could be serving as an index fund mechanism or protocol. So how can an AMM not only be an exchange? I had the idea of Balancer even before Uniswap was launched, but then Uniswap took more the exchange side of things. So I had the idea of having more flexibility to allow people who are providing liquidity to use the AMM as a portfolio management tool. So this is more or less how Balancer was born.”
What does Balancer Do?
Balancer is an automated framework where different digital assets are pooled together and traded based on their liquidity levels. It also issues its BAL token as a representative of the index of assets.
Just as an index fund consists of different stocks, Balancer pools comprise up to eight different types of digital assets or tokens. They can be selected based on the trading fees of the specific liquidity pool.
The Balancer protocol ensures that every pool retains the correct proportion of crypto assets, even if the individual coins or token prices vary. For example, consider a Balancer pool with 30% ETH, 25% DAI, and 45% AAVE. If the price of AAVE doubles at some point, the pool automatically reduces the amount of AAVE it holds so that it can retain 45% of the pool’s value.
The protocol automatically analyzes the best available price from the range of open pools. It makes sure that each trade achieves the highest yield considering the amount traded, fees, and gas costs.
The different kinds of Balancer liquidity pools include the following:
- Public pools – Any user can provide liquidity(add and withdraw assets). One cannot change the rules or parameters before its launch. They are considered suitable for users with smaller risk appetites who want to earn fees from the most liquid pools.
- Private pools – Only the pool creator can add or withdraw digital assets. The creator can adjust all the pool’s other parameters, such as fees and the types of assets it accepts. These are considered best for users with bigger risk appetites.
- Smart pools – These are private liquidity pools with additional features. One can create pools with changing weight ratios or one which tracks a commodity or property portfolio.
Why is Balancer Important to Investors?
The value Balancer offers to investors is the ability to create a pool with custom fees (ranging from 0.00001% to 10%). This fee is shared with those who invest crypto assets/tokens into the pool, called liquidity providers (LPs).
Traders can leverage any of the Balancer pools to swap cryptocurrencies. To exchange cryptocurrencies, the traders have to pay a fee. Traders can choose from different kinds of pools. Each presents a unique set of investment opportunities and challenges through its particular configuration of tokens, weights, and fees.
Usually, in index funds, the investors pay a fee for rebalancing their stocks/shares in a fund. However, in a Balancer liquidity pool, the liquidity provider gets paid for providing liquidity to the protocol. Thus, they earn fees even while their funds are continuously rebalanced for them.
Investors can use the liquidity pools on Balancer to profit in two ways :
- They can deposit assets/tokens and earn money from the pool’s trading fees (BAL tokens), or
- They can trade and use the pools via the Balancer DEX to exchange tokens.
Liquidity providers can earn up to 145,000 BAL tokens every week, which amounts to around 7.5 million BAL tokens in a year.
In short, the Balancer protocol is one of the leading AMMs, allowing investors to make money from their idle digital assets or for traders to swap assets without KYC. In a nutshell, the BAL token may be an opportunity for investors to diversify their portfolios, supply liquidity, and earn decent passive income streams.
In a lot of ways, the Balancer protocol shifts the whole financial model on its head. Especially index funds, which are considered the hallmarks of traditional finance. Automation and decentralization offer a revolutionary economic model, where practically anybody can invest and profit.
Does any other financial model create such remarkable value for investors? The DeFi model is slowly moving towards regulation, governance, ownership, and profit, which will provide more value to the average person trading in them.
This has resulted in explosive growth and innovation in the DeFi space, which is grabbing the attention of big banks and institutional investors.
Like many other cryptocurrencies, the supply of BAL tokens is limited, meaning there will only ever be 100 million BAL. While 15 million BAL were distributed or saved during Balancer’s inception, the remaining 65 million tokens are distributed to Balancer users providing liquidity to the protocol.
Balancer plans to distribute 145,000 tokens a week to users, meaning that the total supply will be distributed by 2028.
If you’re interested in learning more about Balancer, you can visit the links below. Or trade Balancer on the Coinberry platform.
The websites, articles, and content that was used to make this article: