Balancer is an automated market maker (AMM) platform based on an N-dimensional invariant surface, a variation in design to the formula used by Uniswap, that allows for multi-asset pools that balance, like an index fund. This has many implications for mitigating impermanent loss , asset management, and certain trading strategies.
In this article, we will provide a review of Balancer where we will dive into the team behind the protocol, its design, and the ecosystem supporting it. By doing this, we hope to better assess the impact of Balancer on the rest of decentralized finance (DeFi) and Crypto at large.
In this analysis of Balancer, we will cover 5 different sections, as follows:
Balancer was founded by Fernando Martinelli , a Brazilian serial entrepreneur and longtime Maker () community member, as a project of Balancer Labs. Since early 2018, the fundamental design of Balancer was being tested as a project on BlockScience. Martinelli and former Maker technical partner Nikolai Mushegian published the Balancer Whitepaper in late 2019. The team then brought Mike McDonald, creator of `mkr.tools` (deprecated), to build the platform. In it, they detailed how a Balancer pool would build on the constant product market maker of Uniswap with a constant value market maker capable of functioning as a self-balancing weighted portfolio and a price sensor.
Balancer did not do an ICO. They simply launched their product in early 2020. In March 2020, they raised a $3M seed round by Placeholder and Accomplice. In June 2020, Balancer followed Compound () in launching a governance token, , becoming the second-ever DeFi project to do so. Before the launch of , Balancer had $40M in total value locked (TVL). Today, Balancer is the fourth-largest DEX after Curve (), Uniswap, and SushiSwap and over $600B in TVL.
Balancer has been fully audited in total, three times: by Trail of Bits, ConsenSys, and OpenZeppelin.
Purpose & Functionality
The goal of Balancer is to provide a flexible platform for programmable liquidity. In Balancer, anyone can create a pool with several assets, potentially simulating their whole portfolio. Instead of paying fees for portfolio managers to use rebalancing strategies and actively manage the fund, the pool balances itself. At the choice of liquidity providers (LPs), they can set up a pool with up to 8 tokens and specify any custom percentage distribution to maintain, or add their liquidity to an existing pool. Moreover, LPs can also set their fees for their pools. LPs can even set up a fully private pool, where only they are allowed add liquidity. At this point, it helps to compare Balancer with Uniswap , a very straightforward DEX that’s also based on the AMM model.
|Max no. of supported tokens per pool||2||8|
|Relative weight of assets in pool||1:1||custom|
|LP token purpose||bookkeeping||functional ERC-20|
|Pricing mechanism, internal||trade-based||trade-based|
|Pricing mechanism & adjustments||relies on arbitrageurs||relies on arbitrageurs|
|Trading fees||0.30%||set by LPs, per pool|
The Balancer Protocol was launched without a native token. LPs received fees that traders paid when using the DEX. No other intermediate steps were needed. This is an optimal tokenomics design, without the need for adding an additional token for “internal payments” when none is needed.
can be found with the most liquidity in Balancer, unsurprisingly. Check the exchanges where you can find with the most volume and liquidity.
|Binance||/, /, /, /|
Here is a snapshot of the most popular pools on Balancer , according to Pools.fyi.
Balancer has a vibrant and engaged ecosystem. As a DEX, its classical ecosystem players are traders who use the service and liquidity providers (LPs) who make the market. However, Balancer is also an increasingly more decentralized protocol so $BAL holders are an important constituency. Finally, Blockchain devs, DeFi architects , and others who ` buidl ` are important to the rest of the Balancer community as the protocol is also a DeFi primitive, a permissionless component whose functions can be composable or made to work together with other DeFi apps.
Balancer Ecosystem Fund
A total of 5M tokens have been set aside for strategic partnerships. This fund is currently valued at over $100M. At the moment, no grants or withdrawals have been made from it and there haven’t been announcements as to its future use. Given the background of the founding team with Maker, we can probably expect a cohort-like approach to grant-making.
There is a detailed explanation in the Balancer docs of core concepts, as well as coding examples and instructions for working with the Balancer protocol, whether through smart contracts or its DEX trading interface via API. The mathematics behind Balancer pools and the smart order routing of the Balancer DEX is also described therein, as are the functions of Balancer pool tokens and the security of the protocol.
Partnerships & Community | Governance | Roadmap
Balancer considers its current version its Bronze release. The Silver release with optimized gas usage and a few architectural improvements for more flexible use cases is planned for the end of the year. It is unclear what the Golden release will entail since the design is ongoing and the DeFi landscape is continuously evolving.
The Balancer team is trying hard to decentralize as many decisions on governance as possible. Albeit the share of controlled by the community at the moment is not significant, the level of involvement is high.
Balancer provides a new substrate for DeFi pools with varied and unique use cases. For your run-off-the-mill LP, it gives the option to adjust his exposure to the market while he makes fees. For the average user, it provides a way to make a self-balancing Crypto index of sorts, and invest in it while earning fees. Its DEX also provides a different way of price discovery and thus affordability and low slippage. That’s a lot of programmabilities, in a protocol that’s only been live for a few months. Expect more from the talented team at Balancer.