CoinMarketCap takes a deep dive into one of DeFi's largest automated market makers.
In the last few years, we have seen the emergence of a new type of cryptocurrency exchange platform that completely forgoes accounts and order books — they’re known as automated market makers or AMMs.
Balancer is one such platform and it’s been kicking up a storm in recent months. Here, we take a look at what all the fuss is about.
What Is Balancer (BAL)?
Balancer is a prominent decentralized exchange platform built on the Ethereum blockchain. It’s designed to provide an open, accessible alternative to centralized exchanges, by allowing anybody to trade Ether and ERC-20 assets in a trustless, permissionless environment.
Balancer allows users to trade supported tokens against one another, create liquidity pools to add liquidity to the balancer protocol or invest in pre-existing pools to earn a yield from trades. It has been in development since 2018 and the bronze release of Balancer launched in 2020. Since then, it has risen to become one of the top 15 DEX platforms on Ethereum by trading volume and one of the ten largest Ethereum DeFi DApps by locked value.
The Balancer Protocol is being developed by Balancer Labs, a technology company that develops novel blockchain-based products. The two founders, Fernando Martinelli and Mike McDonald, have a long-storied history of building and developing successful companies, and work alongside an accomplished team with extensive experience in the blockchain space.
Like many modern DeFi applications, Balancer features its own native utility token, known as the Balancer token (BAL). This is used for participating in the governance of the Balancer Protocol and can be earned by providing liquidity or trading on the platform.
How Does Balancer Work?
Balancer is a modern form of decentralized exchange, known as an automated market maker. This means it uses the ratio between assets shared in a liquidity pool to determine each asset’s value. As users add or remove liquidity from one side of a pool by conducting trades, this changes the pool ratio, and hence the price of each asset.
Like many other AMM platforms, Balancer will route trades through whichever liquidity pools necessary to secure the best rate for the user. Therefore swaps may be direct (e.g. ETH > BAL) or indirect (e.g. ETH > USDT > BAL).
Balancer currently allows users to create or invest in three types of pools: Shared, Smart or Private. In a private pool, only the owner can control the pool parameters and add liquidity; shared pools are open for anybody to contribute liquidity to and have fixed parameters; smart pools are controlled by smart contracts.
The platform can be accessed through MetaMask, WalletConnect or several other wallet solutions and DApp browsers which are used for interacting with the Balancer smart contracts.
Broadly, the platform has three main user demographics: 1. Liquidity providers, who create their own pool or contribute to existing pools.
2. Traders and smart contracts that look to source liquidity for their tokens.
3. Arbitrageurs who capitalize on the price spread between exchange platforms.
What Makes Balancer Unique?
As a decentralized exchange platform, Balancer aims to serve investors and traders that want to swap their assets or provide liquidity without relying on centralized intermediaries.
It offers similar functionality to platforms like Uniswap and Sushi, but includes a number of unique features that set it apart from the competition. One of the main differentiators is the amount of flexibility and control it provides to pool owners.
Like most AMMs, Balancer liquidity providers (LPs) earn fees whenever swaps are conducted through pools they provide liquidity for — this fee is distributed in proportion to the LPs stake in the pool. However, Balancer is rare in the fact that pool managers can set their own fees, these can range from 0.0001% to 10%.
It also features support for multi-asset pools — allowing pool owners to include up to eight different assets in their pool. These multi-asset pools give pool managers the flexibility to create complete portfolios that are automatically rebalanced by traders. Unlike some other platforms, trades do not need to be routed through Ether (ETH), helping to reduce slippage for traders.
Balancer is one of the few AMMs to provide a direct incentive for trading on the platform. For eligible swaps, users earn BAL tokens in proportion to the median gas price and the ETH/BAL exchange rate at the time of their transaction. This feature was added in March 2021, after the Balancer community voted in the so-called "BAL for Gas" campaign to help offset high Ethereum gas fees. In total, 30,000 from Balancer's ecosystem fund was allocated to the initiative.
The platform is governed by the community through the BAL token, which can be used to cast votes on Balancer improvement proposals on the Balancer voting platform. Balancer makes use of a simple message signing feature to tally votes, ensuring users do not need to pay transaction fees to participate in governance.
What Is Balancer V2?
As of writing, Balancer is in its V1 release. The team behind the project is currently developing an enhanced version, known simply as Balancer V2. This is slated to launch in 2021 and will bring with it a number of improvements and changes, some of which include:
- Improved gas efficiency to reduce trading costs;
- Separating the AMM logic from token management — allowing individual pools to have custom AMM logic;
- Introduction of asset managers which are used to increase the capital efficiency of Balancer liquidity;
- The addition of internal token balances — optimizing efficiency for high-frequency traders and arbitrageurs.
For a more in-depth look at what will be included in V2, check out a recent overview written by one of the founders.
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