Balancer Review: Your Comprehensive Guide To Know All About Decentralized Automated Market Maker
Decentralized Finance (DeFi) has witnessed the development of another remarkable project. This project is simply a platform for exchanging cryptos without the need for accounts and order books. It is an Automated Market Maker (AMM) protocol known as the Balancer.
Balancer (BAL) is an AMM project to reduce slippage and transaction cost between various cryptos. It is a decentralized exchange that replaces the traditional market-maker.
The traditional market maker is a third-party platform that enables users to access liquidity to traded digital assets. The Balancer protocol was launched in 2019 September, and it has a native crypto asset known as the BAL.
In thisBalancer Review, we will take a look at what the protocol aims to achieve. We will also discuss its native crypto asset-BAL, how the protocol works, the unique features, and many more. This review is a sure guide to beginners and individuals with the passion of knowing more about the Balancer protocol.
What is Balancer (BAL)?
The Balancer is an AMM protocol base on the Etherem blockchain. It has more than USD2.51 billion as its locked-in value and is also shares a similar feature with Uniswap. It is a renowned decentralized exchange and one of the largest that exists in the Defi ecosystem.
The Balancer is designed as an open and accessible alternative to Centralized exchanges. It permits investors to trade ERC-20 and Ether assets in a permissionless and trustless environment.
It adopts the Automatic Market Maker mechanism in liquidity pools, which comprises various pools of different weightage. With this protocol, users can trade one supported token against another.
They can also create liquidity pools that will be added to the AMM protocol or invest in the already existing pools to earn rewards from the transaction.
The Balancer Labs developed the Balancer protocol in 2018. Balancer Labs is a renowned technological company that specializes in the development of novel products that are based on blockchain.
The Balancer protocol has a utility token known as the BAL. The BAL serves as a governing tool that investors can earn via trading or provision of liquidity on the network.
The protocol made USD 3 million during its launch in Balancer Laboratory in 2020. Investors got 5million BAL tokens in return, and the shareholders and employees of Balancer Labs received 25 million BAL tokens.
The maximum BAL tokens supply is capped at 100 million. Various ‘Decentralized’ trading platforms can use the protocol to ascertain the best trading prices and rates through SOR (a Smart Order Routing). The protocol team launched Balancer finance in September 2019 by Fernando Martinelli and Mike McDonald.
What Problem Does Balancer (BAL) Solve?
The index funds had been in existence since 1972. Anyone who wants to rebalance their portfolio using the index fund will pay some fees to the portfolio managers. The Balancer protocol is like an index fund with better features.
Traders in the Balancer platform pay transaction fees to you (staker) for rebalancing your account. These fees, among other functions, keep the system stable. In addition, Balancer protocol users holding any Ethereum-based assets can stake it to earn fees (rewards).
They are free to deposit all their Ethereum-based portfolios in the Balancer pools. Traders will then trade against these pools and remit transaction fees for the trading.
One can say that the Balancer allows ERC-20 token holders to earn income from their idle Ethereum-based assets.
How Does Balancer Work?
Balancer protocol is an AMM, a modernized decentralized exchange. It makes use of the ratio of the assets distributed in a particular liquidity pool to ascertain the values of the assets.
Each asset’s pools ratio and price changes as investors transact with the tokens from the liquidity pool. Thus, the protocol works similarly to an index fund in the cryptocurrency space.
The protocol does not have any central body that controls it with the smart contracts ensuring the exact ratio of pool: assets. As a result, the Balancer can have up to eight cryptocurrencies in each pool.
Like other known AMM platforms, the Balancer routes trades via any liquidity pools required to secure the best available rate for users.
Hence, swaps or exchange could be either direct (ETH > BAL) or indirect (ETH > USDT > BAL). Users of the Balancer platform can invest or create three kinds of pools, namely Smart, Shared, or Private.
The Smart Pools are pools solely controlled by smart contracts. Shared pools have fixed parameters; they are made open for users who wish to add liquidity to them.
The private protocol allows only the owners of the investment to control the parameters of the pool or add liquidity. The platform accepts wallets like wallconnect, metamask, and other Dapp browsers and wallet solutions supported by the ‘Balancer Smart Contracts.’
However, the Balancer platform adopted 3 major user demographics as outlined below;
- Liquidity providers that contribute to the existing pool or creates their private ones.
- Traders or investors and smart contracts that sources for the liquidity of their BAL tokens.
- Arbitrageurs that capitalize on different price spreads among platforms.
The Balancer liquidity providers are allowed a weekly earning of about 145,000 BAL tokens which are around a 7.5million BAL tokens yearly.
Who Created Balancer?
Fernando Martinelli, with his co-founder Mike McDonald, founded the Balancer protocol in 2018. The protocol design process started as a research project in a consulting firm for software known as the BlockScience.
The project then raised a total sum of 3 million independently. The founders used this sum in 2020to fund the Balancer Labs. Thus, the Balancer had a total token supply of 100 million BAL.
Five million BAL tokens went to investors from this total supply. Twenty-five million BAL tokens went to employees and the shareholders. Ten million tokens were reserved to be sold out to future investors.
Coinbase regulates both the min and max amounts of BAL token a user can withdraw or send across the blockchain. The BAL token minimum withdrawal limit is 0.38 and the maximum to send across the blockchain is 15,000
What Are Balancer Pools?
They are collections of funds supplied by members to create liquidity for transactions and trades. These pools may be summed up to over USD11 million; examples are the BAT, COMP, and USDT pools. Liquidity is given to traders by calling for the collection of funds during trades as a counter-party to that transaction. The different types of pools adopted by the Balancer are;
Controlled/Private Pools: They are created by private users who don’t need outside liquidators like third-party liquidators. A pool is created at a fixed state, and the creator will be the only one to set out any quantity of tokens and weights.
Finalize/Shared Pools: These pools remain open to all actors who wish to create liquidity, and it is a one-way transition. Their parameters are fixed and can’t be amended, unlike controlled pools. Thus, they are usually left for the public to liquidate pools and earn profits.
However, there are other smart pools one can use alongside these main categories of pools above. They include stable coin pools and (LBPs) Liquidity Bootstrapping Pools. The former has no impermanent loss, while the latter builds deep liquidity allowing the team to launch a project token.
What Makes Balancer Unique?
The balancer is one of the exchange platforms that is decentralized. It helps traders and investors provide liquidity or swap their assets without a centralized intermediary.
Its function is similar to that of Sushi and Uniswap, but it has other unique features that set it apart. The level of control and flexibility the protocol guarantees its users is one of the major distinguishing factors.
The Balancer ‘liquidity providers’ (LPs) earn fees anytime the platform swaps tokens through pools they provided liquidity for. This fee is shared following the volume of LPs staked in that particular pool.
The mechanism of the Balancer is rare to get elsewhere. This protocol allows pool managers to set their fees which can be between 0.0001% to 10%.
It also supports multi-asset pools and enables pool owners to add up to 8 various assets in a pool. This multi assets pool feature makes pool managers flexible in developing complete portfolios that traders must rebalance.
Trades in Balancer are not routed via ETH (Ether); unlike in some platforms, this reduces slippage for the traders.
The Balancer is among the AMMs to give a direct reward to members trading on the platform. The users earn tokens according to the ETH/BAL exchange rate and the median gas price at the transaction time.
This initiative started in March 2021 after voting in the ‘BAL-for-Gas’ campaign for removing high Ethereum gas fees. The Balancers ecosystem allocated a total fund of 30,000 to this initiative.
The Balancer community uses the BAL token to govern it. They can also vote on the proposal for the growth of the platform with it. The protocol also ensures that voters do not pay any fee to participate in the voting process.
Why Does BAL Have Value?
The Balancer’s cryptocurrency BAL is required for powering its operations. It does not allow any central party to decide how the platform will operate.
The BAL token also serves as a reward for users who stake their assets into the Balancer pools. These users are given the BAL token in proportion to the volume of their stakes.
In the future, users holding the BALtoken may have the right to vote on the rate at which the team will distribute it weekly. They can also vote for the transaction fees or how to launch the Balancer on various blockchains. However, the BAL token has a limited total supply of 100 million, meaning that only a 100 million BAL will ever exist.
The team shared 15million BAL tokens during the protocol’s inception; the balance of a 65million BAL is given to the platform users who provide liquidity to the platform.
The Balancer protocol plans to distribute a total of 145,000 BAL tokens every week to users. This implies that all the total supply amount must have been given out by 2028.
The BAL Token
The Balancer didn’t have any tokens during its initial launch until 2020 when the company revealed its governance token USDBAL.
They started distributing the token on June 23, 2020, to the liquidity providers on the platform weekly. There is no economic value attached yet to the BAL tokens except using them for governance in the platform.
The BAL token gives its holders the right to contribute to the adjustment and development of the Balancer with weights. In terms of the transaction fees, adopting new features, even contracts on various blockchains, and layer 2 scaling.
The company created a total of 100 million BAL tokens, but 25million of them were allocated to core developers, founding members, investors, and advisers. The remaining tokens are reserved for investors that add liquidity to the protocol to mine as their reward.
The BAL holds a significant position in the market cap global list of the largest cryptocurrencies. It has recorded an all-time high of USD 72.5, an all-time low price of USD 7.88 since its launch.
How to Buy BAL Token
You can buy and trade on the BAL token on many exchange platforms, including Coinbase Pro and Binance. But the easiest means of getting some BAL for yourself is by downloading and using the Balancer app. Next, we will look at buying the BAL using the popular mobile and web wallet -the MetaMask following the steps below.
- Install the MetaMask mobile wallet in your device using your browser and get a reasonable amount of ETH (Ether) stored in the wallet. After that, you can use any other ERC-20 token supported by Balancer to trade.
- After getting enough tokens stored in your wallet, log on to the Balancer ‘ETH/BAL’ trading page to continue.
- Select the crypto asset you wish to exchange with BAL in the top drop-down menu. We will select ETH in this case.
- Then input the amount of the BAL token you wish to get in the empty box at the bottom. The Balancer will then calculate the cost for you and show the exchange rate at that time on the display screen.
- Click on the ‘Connect Wallet’ button to select the MetaMask wallet for the options if the rate above is okay for you.
- You can now choose the wallet you want to use for the transaction to connect it with the Balancer platform. It is the MetaMask in this case, and it may require you to log in first.
- The system will redirect you to the order page once the wallet to Balancer connection is successful.
- Click on the ‘Swap’ button once you confirm that the order details are okay for you. The MetaMask wallet will pop up again to confirm the order details, like the transaction fee.
- Then click ‘Confirm’ to process the transaction. The system will automatically confirm the transaction and drop your BAL token in your MetaMask wallet.
What Is Balancer V2?
As of April 20, 202, it is the first version (V1) of the Balancer protocol that is in operation. The company is currently trying to upgrade the V1 to V2, the second version of the protocol. They plan to launch this Balancer V2 this 2021. The new features that you are to look out for in this second version are;
- The addition of the internal BAL token to optimize the efficiency for arbitrageurs and traders who trade frequently.
- Improvement in gas efficiency to minimize the cost of trading.
- Introduction of new assets managers to increase the total efficiency of the Balancer liquidity.
- Separating the token management from AMM logic to allow the individual pools to be customized.
This Balancer review reveals the unique features that make the Balancer protocol a powerful AMM among its competitors. It positions itself as a strong tool for automatic market making by reducing transaction fees for various cryptos. It takes the lead in the ‘liquidity pool market’ with its ability to develop liquidity pools that are N-dimensional.
The protocol, with its unique formula to negate and discourage high transaction fees, developed a decentralized system. This system can potentially be self-sufficient with the help of its community members. The Balancer has a native token –BAL, which is not yet a financial toke. It serves as a utility token for governing the platform and gives its holders the right to vote.
The Balancer targets to create strong competition with UniSwap and become the leader in the AMM industry based on Ethereum. A lot of people believe that this target is achievable because both AMM shares similar DEX functionality. Also, 1 Uniswap ‘token-to-token’ pool equals the Balancer’s pool with 2 tokens set to 50: 50, or 1:1, value.
We hope you find this Balancer review valuable. We recommend all intending users learn more about this protocol and its token on their official website before investing.