Smart Treasury (Balancer)
Smart treasury is a mechanism for automatic buyback of project tokens in the DeFi industry.
What Is Smart Treasury (Balancer)?
In traditional finance, share repurchase – or buyback – is a method of transferring profits earned by a company into the hands of its shareholders, an alternative to paying out dividends directly. It is mainly done via purchasing outstanding shares on the market, which then become treasury stock – not entitled to receive dividends and removed from governance participation. It is held by the company and can be later resold on the open market to reacquire capital.
In decentralized finance (
DeFi), projects often use a similar scheme of buying back their native
tokens from the market, which tends to provide a lower bound on those tokens’ valuation and
market capitalization, increasing the overall health of the ecosystem. Smart treasury is a mechanism that automates and optimizes these token buybacks.
Smart treasuries are closely related to automated market makers (
AMMs) – which, in turn, are a result of the emergence of decentralized exchanges (
DEXs).
Smart-contract-enabled
blockchains, such as Ethereum (
ETH), have allowed the cryptocurrency industry to build decentralized exchanges. These exchanges allow market participants to trade assets directly between each other and are operated by computer programs, with little need for human administration.
While an improvement in some ways over their centralized counterparts, DEXs are associated with several inherent downsides, one of them being the problem of providing 24/7
liquidity in an environment devoid of a centralized authority that could pool all the trades. AMMs – smart contracts for the management of crowdsourced
liquidity pools – have been adapted by the DeFi industry as a solution to this problem.
AMMs receive digital assets from
liquidity providers and use those pooled resources to enable constant trading between otherwise
asynchronous buyers and sellers. Liquidity providers usually earn liquidity pool tokens in return for parking their capital at an AMM.
The smart treasury concept, initially proposed by the Balancer AMM protocol, allows AMMs to manage – in addition to the above responsibilities – the process of buying back a project’s native tokens from the market, increasing the efficiency of buybacks. The tokens stored in a smart treasury can also be used as an issuance and liquidity pool, allowing for the eventual reintroduction of the treasury tokens back into the DeFi ecosystem, just as it works with treasury shares in the traditional stock markets.