Many decentralized applications (dApps) have been built on top of Ethereum as a blockchain, many of which are attempting to alleviate some of the difficulties that have arisen in the cryptocurrency field.
However, because crypto is such a new business, there is a slew of unique projects springing up all the time, some of which have completely transformed the market.
Balancer is one such initiative, and today we’ll go over all you need to know about it so that, by the conclusion of this post, you’ll be able to make an informed choice regarding its worth as a possible investment.
What is Balancer?
Balancer is Ethereum-based software that encourages a distributed network of computers to run an exchange.
Balancer is a Decentralized Exchange (DEX), Automated Market Maker (AMM), and Liquidity Pool protocol designed exclusively for transferring ERC20 tokens without relying on central institutions. It’s a permissionless platform, so anyone with a crypto wallet that supports it can use it. Instead of the bid-and-ask mechanism used by centralized exchanges, it utilizes an algorithm to manage orders.
Balancer has a locked-in value of about $2.19 billion, according to DeFi Pulse statistics. As a result, it is one of the most powerful participants in the decentralized finance (DeFi) field.
While the concept was launched in 2018 by Fernando Martinelli and Mike McDonald, it really took off in 2020 when investors committed $3 million to Balancer Labs. This indicates that, despite the fact that Balancer is a new project, it has already proven its ability to attract both users and investors in its short time on the crypto market. They did, however, get a total of 5 million BAL tokens. The total number of BAL tokens available is limited to 100 million.
What Problem Does Balancer (BAL) Solve?
Since 1972, index funds have been available. Anyone who wishes to use an index fund to rebalance their portfolio will have to pay some fees to the portfolio managers. The Balancer protocol functions similarly to an index fund, but with more capabilities.
Traders on the Balancer platform pay you (staker) transaction fees to rebalance your account. These fees, among other things, keep the system running smoothly. Users of the Balancer protocol who own Ethereum-based assets can stake them to earn fees (rewards). They can deposit all of their Ethereum-based assets in the Balancer pools at their leisure. Traders will then trade against these pools and remit trading transaction fees. The Balancer, in a sense, enables ERC-20 token holders to profit from their idle Ethereum-based assets.
How does Balancer work?
AMM, or a modernized decentralised exchange, is the Balancer protocol. It determines the asset values by calculating the asset distribution ratio in a specific liquidity pool. As investors transact with tokens from the liquidity pool, the pools ratio and price of each asset change. As a result, in the bitcoin world, the protocol functions similarly to an index fund.
The protocol is controlled by smart contracts rather than a central authority, which ensures that the pool: asset ratio is precise. As a result, each pool in the Balancer can contain up to eight different cryptocurrencies. The Balancer, like other well-known AMM platforms, routes trades via any necessary liquidity pools in order to provide users with the best possible rate.
As a result, exchanges or swaps could be direct (ETH > BAL) or indirect (ETH > USDT > BAL). Balancer platform users can invest in or build three types of pools: Smart, Shared, and Private.
Smart Pools are pools that are fully managed by smart contracts. Shared pools have predetermined characteristics and are made available to anyone who wants to add liquidity to them.
Only the investment owners have access to the private protocol, which allows them to change the pool’s parameters and add liquidity. Wallets supported by the ‘Balancer Smart Contracts’ include wallconnect, metamask, and other Dapp browsers and wallet solutions.
The Balancer platform, on the other hand, embraced three key user demographics, as shown below:
- Providers of liquidity who either contribute to an existing pool or develop their own.
- Traders or investors, as well as smart contracts, are sources for BAL token liquidity.
- Arbitrageurs profit on pricing differences between platforms.
What Makes Balancer Unique?
- Balancer seeks to help investors and traders who want to swap assets or provide liquidity without relying on centralized intermediaries as a decentralized exchange platform.
- It is comparable to platforms like Uniswap and Cosmos in terms of functionality, but it has a few unique characteristics that set it apart from the competition. The degree of flexibility and control it gives pool owners is one of the primary differentiators.
- When swaps are executed through pools for which Balancer liquidity providers (LPs) offer liquidity, they earn fees, which are dispersed proportionally to the LPs stake in the pool. Balancer, on the other hand, is unique in that pool administrators can establish their own fees, which can range from 0.0001% to 10%.
- Multi-asset pools are also supported, allowing pool owners to add up to eight different assets to their pool. Pool managers can design comprehensive portfolios that are automatically rebalanced by traders using these multi-asset pools. Trades do not need to be routed through Ether (ETH), unlike some other platforms, which helps traders reduce slippage.
- The BAL token, which can be used to vote on Balancer improvement proposals on the Balancer voting platform, is utilized by the community to control the platform. To tally votes, Balancer employs a simple message signing function, ensuring that users do not have to pay transaction costs to participate in governance.
Pros and cons
| PROS | CONS |
|---|---|
| Balancer is a system for fully decentralised market making. | For newcomers to cryptocurrency, the concept of the platform and linking another wallet is tough to grasp. |
| On any given token, anyone can create liquidity; | Because it is a DEX, malicious transfer tokens can still be added. |
| Gas prices are lower; | More teaching materials might be made available so that users can learn how to use the platform in a step-by-step manner. |
| Custom AMMs | |
| A balancer multi-asset pool allows pool owners can add up to eight different assets to their pool, increasing diversification. | |
| Pool managers can create complete portfolios that are automatically rebalanced by traders using multi-asset pools. |
Closing thoughts
Finally, Balancer is a well-known decentralized exchange platform that is quickly establishing itself as a new generation of cryptocurrency trading interfaces that completely eliminates accounts and order books.
The new automated market maker, in contrast to controlled exchanges, provides an open and freely accessible alternative. Balancer, like many other AMM platforms, routes trades through whichever liquidity pools are needed to get the best rate for the customer, therefore swaps can be direct or indirect.