With the explosion of interest in decentralized finance (DeFi) that began in late 2019, decentralized exchange (DEX) platforms have become increasingly popular as a way to exchange crypto assets and earn passive income.
With the rise of DeFi, many famous DeFi protocols such as Uniswap or Curve emerged. They are all Automated Market Makers (AMMs) that use algorithms to define rules to match buyers and sellers to facilitate transactions. An Automated Market Maker (AMM) is essentially a platform that uses an algorithm to manage orders, rather than the bid / ask system that most centralized exchanges like Binance or Coinbase use.
In 2019, a team from a blockchain consulting company known as BlockScience sat down to create a new AMM platform on Ethereum. The result of their work is Balancer Finance acting as an automated portfolio manager, liquidity provider, and price sensor.
What is Balancer Finance?
Balancer Finance or Balancer Protocol is a group liquidity, AMM and DEX protocol that can be used to exchange ERC-20 assets without the need for a centralized entity such as an exchange. Balancer Labs, behind the development of the Balancer Protocol, released the Balancer whitepaper in September 2019. The Protocol went live on the mainnet on March 31, 2020.
The Balancer website describes it as a programmable liquidity protocol. Balancer does not use order books when settling trades. Instead, it introduces a concept known as 'Balancer pools', which are essentially pools of between two and eight different cryptocurrencies that provide the liquidity required by traders.
A Balancer Pool is an automated market maker with certain key properties that make it function as a weighted portfolio and a self-balancing price sensor.
According to its Whitepaper, Balancer is a kind of index fund where users create funds based on cryptocurrencies in their portfolios. These index funds are called Balancer Pools in this project. Just as an index fund can be made up of different stocks, Balancer pools are made up of up to eight different cryptocurrencies and anyone can provide liquidity to a pool simply by depositing an asset in them.
The token available in these groups of balancers is used to facilitate exchanges. The proportion of tokens in the groups is set when creating a group. For example, a pool of balancers can be made up of 25% ETH, 25% Tether (USDT), and 50% WBTC.
As each Balacner group is an AMM, it functions as a weighted portfolio and a self-balancing price sensor. At Balancer, instead of paying fees to portfolio managers to rebalance their portfolio, users charge fees to traders, who rebalance their portfolio by following arbitrage opportunities.
What is the Inside Balancer protocol?
Two categories of users can benefit from the Balancer Protocol : liquidity providers, users who own Balancer Pools or participate in shared pools, and Traders, users who buy or sell the assets of the underlying pool on the open market.
This means that Balancer Pools and Balancer Exchange are two main parts of Balancer Finance.
Balancer Pools
Liquidity providers use Balancer pools to provide liquidity to the protocol. There can be two types of liquidity providers: portfolio managers, who want to have controlled exposure to different assets without complicated and expensive rebalancing, and investors, who have inactive ERC20 tokens in a wallet and would like to put them to work for passive profit. . fee income.
There are three types of Pools in the Balancer protocol: Shared, Private, and Smart Pools.
Shared pools
Public funds allow any user to provide liquidity by adding or withdrawing assets. Parameters such as exchange rate, weights, and asset types for public groups are set prior to launch and cannot be changed after launch.
Shared pools have the largest liquidity market capitalization in the Balancer Protocol. They are useful for users with smaller shares looking to earn rates from the most popular and liquid groups.
Private Pools
As the name suggests, only the creator of the group can add or remove assets to these groups. The user can also adjust all other pool parameters at any time. Private groups are useful for users with large portfolios looking to earn fees on their specific assets.
Smart pools
A very powerful feature of Balancer is the concept of Smart Pools . Smart pools are a type of private pool owned by smart contracts. According to the documentation provided by Balancer:
"A group controlled by smart contract can fully emulate a finished group, while allowing complex logic to readjust balances, weights and fees."
Fernando Martinelli, founder and CEO of Balancer, describes smart groups as "Uber for liquidity pools." Various types of smart pools can be created in Balancer.
Balancer exchange
Balancer Exchange allows users to exchange ERC20 tokens simply by connecting any Ethereum wallet such as Metamask. Merchants also earn BAL tokens by trading between eligible tokens.
Trades are processed through an Intelligent Order Router (SOR), linear off-chain optimization of routing orders through groups for best price execution.
SOR takes as input the desired amount of any token that will be exchanged for another token and returns a list of groups / amounts that need to be exchanged in a way that maximizes the amount of tokens returned.
How does Balancer work?
Users who want to create a Balancer group or investors who want to add liquidity to a shared group can simply visit the group management panel. Traders looking to exchange ERC 20 tokens can go to the Balancer Exchange.
When a user initiates an exchange on the Balancer Exchange, the Balancer system will automatically calculate the best available price from the range of available groups. This is done through an intelligent order router (SOR) that ensures that those operations achieve the highest performance, taking into account the amount traded, the rates and the gas costs.
After the exchange, the group is automatically rebalanced, which is called self-balancing. Balancer's AMM algorithm is similar to Uniswap's x * y = k formula, but a bit more complex, since Balancer groups support 2-8 assets. The documentation says:
“The pools are efficiently rebalanced through a multidimensional invariant function that is used to continuously define the exchange prices between two tokens in a pool. Essentially, it is an n-dimensional generalization of the Uniswap formula x * y = k.
But what happens when the price of the token changes? When this happens, the pool as a whole is continually rebalanced to maintain each token's share of the total value. For example, a group of balancers can start with 50% WETH, 25% MKR, and 25% DAI. Suppose the price of WETH has doubled. At this point, the group automatically reduces the amount of LOAN it has in order to retain 50% of the group's value. Balancer smart contracts will make this excessive WETH available to traders looking to buy WETH as prices rise. Therefore, pool managers do nothing but collect fees.
What's special about Balancer is that users don't need to create an account to use the platform or complete any verification steps. To start with, they only need Ethereum. Unlike many other AMMs, pool operators can set their own interchange fees which must be between 0.0001% and 10%.
This means that liquidity providers earn in two ways at Balancer: interchange fees and pool rebalancing fees. Rather, traders benefit in two ways: high liquidity allows for low slippage in trades, and arbitrageurs can directly benefit from price changes in the external market.
Governance Token (BAL)
BAL, the native ERC20 token of the Balancer Protocol, is a governance token that can be used to vote on proposals and direct the direction of the protocol. There will be 100 million BAL tokens.
Of these 100 million tokens, 15 million BALs were distributed or saved during the Balancer startup, the remaining 65 million tokens are distributed to Balancer users that provide liquidity to the protocol. Each week, BAL 145,000, or approximately 7.5 million per year, are distributed to liquidity providers. This means that the total supply will have been distributed by 2028.
Balancer V2
Balancer Labs introduced the second version, Balancer V2, of the Balancer protocol in February 2021. Balancer V2 is expected to launch in March 2021
Balancer V2 will feature a protocol vault, a single vault that contains and manages all assets added by all Balancer groups. This will separate the AMM logic from token management and accounting. The vault performs token management / accounting, while the AMM logic is individual for each group.
Other highlights of the Balancer V2 include improved gas efficiency, customizable AMM logic, the addition of "instant and resilient" oracles, and community-governed protocol fees. According to the team, Balancer V2 will implement three different types of protocol-level fees that are controlled by governance: trading fees, withdrawal fees, and flash loan fees.
Links about Balancer
Website: https://balancer.finance/
Whitepaper: https://balancer.finance/whitepaper/
Documentation: https://docs.balancer.finance/
Balancer Pool Management Dashboard: https://pools.balancer.exchange/#/explore
Balancer Exchange: https://balancer.exchange/#/swap
Twitter: https://twitter.com/BalancerLabs