Balancer Protocol is an automated portfolio manager and liquidity provider that transforms the concept of an index fund so that instead of paying fees to portfolio managers to rebalance a portfolio, users can collect fees from traders who rebalance their portfolio by taking advantage of arbitrage opportunities.
The platform runs on the Ethereum network and seeks to incentivize a distributed network of computers to operate an exchange where users can buy and sell any cryptocurrency. It is an emerging decentralized finance (DeFi) protocol that utilizes a combination of cryptocurrency assets to provide this service, enabling trading without a financial intermediary like an exchange.
With Balancer, users can adjust allocations to suit their particular needs, effectively allowing them to add liquidity without being exposed to the price of Ethereum (ETH). Additionally, users can earn interest from the fees generated on the Balance Exchange. Even though the highest returns in lending are usually sourced in high demand for a specific asset, users of the platform can see a considerable return on an asset that is typically in low demand as a result of arbitrage opportunities or a desire to mitigate slippage.
Developers can use Balancer as an open-source platform to create new treasury management systems, opening up possibilities for dynamic fees and enabling the creation of liquidity bootstrapping pools (LBPs). These pools can be used, for instance, to launch a new cryptocurrency token. “Token” refers to a generic asset: Balancer's first implementation was a contract system that managed ERC20 tokens on the Ethereum network.
According to the company, its mission is to become the primary source of decentralized finance liquidity by providing the most flexible and powerful platform for asset management and decentralized exchange.
Balancer is based on a particular N-dimensional surface, which defines a cost function for the exchange of any pair of tokens held in a Balancer Pool. Balancer claims that it had independently arrived at this definition by imposing the requirement that any trade must maintain a constant proportion of value in each asset of the portfolio. The company applied an invariant-based modeling approach described by Zargham et al. (see the Further reading section) to arrive at this solution. According to Balancer, its approach to market making has been proven viable by the Uniswap decentralized application (dapp).
Some of the key aspects of Balancer include:
- A native exchange that uses smart order routing to mitigate price slippage across various trading pairs.
- Swap fees earned from portfolio rebalancing, decentralized exchange (DEX) trading, and arbitrage opportunities.
- The ability to create a Balancer Pool with asset makeup and fees selected by the user.
- Pools that are automatically rebalanced and can be entered using one token.
- Pools that support up to 8 different tokens that can be weighed by percentage and rebalanced automatically.
Smart Pools are a feature of the Balancer platform. They are dynamic liquidity pools with parameters that can be adjusted through smart contract code. Pool owners can specify who can join the pool, and users are free to build on Balancer’s open-source code. A smart contract-controlled pool can emulate a finalized pool in entirety, while simultaneously allowing complex logic to readjust balances, weights, and fees.
Balancer has introduced a native governance token, BAL, that is used by users to vote on protocol upgrades, including supported collateral, fees, and incentives. BAL can be earned through the Liquidity Mining program, which rewards users with tokens for providing liquidity to Balancer pools.
Balancer may be thought of as a type of index fund, where users create funds based on the cryptocurrencies in their portfolios, known as Balancer pools. Users provide liquidity to pools by depositing an asset in them and earn a portion of the trading fee paid to the network for the use of their funds. These deposits are essential to the network, providing the liquidity required for users to trade cryptocurrencies on the platform.
Balancer has to incentivize both sizes of its market in order to operate—crypto users who might wish to make some of their holdings available to be traded, and traders seeking the best possible price for an asset. In this way, Balancer operates similarly to other decentralized exchanges (DEXs), such as Uniswap (UNI) and Curve (CRV). However, Balancer offers some additional features, such as the ability to bundle up to eight tokens into pools.
In the same way that an index fund can be composed of different stocks, Balancer pools can be composed of up to eight different cryptocurrencies. Every pool’s value is determined by the percentages of each token within it, and in the case of public pools, the weight of each type of token is set before they become operational.
Balancer offers private and public pools to suit users with varied risk tolerance. Public 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 altered, meaning they may be useful for users with smaller holdings looking to earn fees from the most popular and most liquid pools.
A private Balancer pool, on the other hand, only allows the pool's creator to add or withdraw assets. The user can also adjust all the other parameters of the pool such as fees, weightings, and the types of assets it accepts. Private pools may be useful to asset managers with a large portfolio seeking to earn fees on their specific assets.
Smart pools are a type of private pool owned by smart contracts. This feature allows pools to be programmed to perform additional functions, such as changing weights, or creating an index fund that tracks a property portfolio.
Balancer uses custom programs called smart contracts to ensure that each pool retains the correct proportion of assets even as the prices of individual coins in the pools may vary. If, for instance, a Balancer pool begins with the proportions of 25% ETH, 25% DAI, and 50% LEND, and at some point the price of LEND doubles, the pool will automatically reduce the amount of LEND held so that it continues to retain 50% of the pool’s value.
Balancer Labs raised $3 million in funding in 2020 in a seed funding round during which some 5 million BAL tokens were sold to investors and 25 million tokens were awarded to shareholders and employees (out of a total supply of 100 million tokens). An additional 10 million BAL was set aside, with half of that amount being reserved for a fund used for contributors to the Balancer ecosystem and half reserved for sales to future investors.
A State-Space Modeling Framework for Engineering Blockchain-Enabled Economic Systems
Michael Zargham, Zixuan Zhang, Victor Preciado
July 3, 2018
Balancer - Whitepaper
September 19, 2019
Balancer BAL token EXPLAINED | What is Balancer token? (Part 2)
November 4, 2021
Balancer Finance (BAL): what you MUST know about this DeFi platform
July 9, 2020
February 3, 2022