Hey guys :) I’m back with another comprehensive Q&A piece, this time for the popular DeFi DEX protocol – Balancer (BAL).
Balancer is one of the latest DeFi project that made headlines in Q2/Q3 2020 and currently it's ranked number 5 in terms of locked USD value in its smart contracts. That said, Balancer and its native BAL governance token are turning heads everywhere.
Hope you enjoy!
The list of Q&A is kind of long so first comes the list of questions that I have prepared the answers to:
- What is Balancer?
- Who and When Created Balancer?
- Differences & Similarities Between Balancer and Uniswap
- How to Receive $BAL Tokens and What is it Used For?
- In short, how to make money with Balancer?
- What is the Difference Between Private and Shared Pool?
- Why Pools of Mixed Token Weight are such a Big Deal?
- Where to Store $BAL?
- Where to Buy & Sell $BAL?
1. What is Balancer?
Balancer website homepage
Balancer is a powerful DeFi framework that encompasses a number of operations including an automatic portfolio manager, a liquidity provider, and price sensor to provide a flexible and trustless platform for programmable liquidity.
In other words, Balancer is an Automated Market Maker (AMM) protocol that allows users to contribute liquidity and earn a portion of the trading fees collected from traders who utilize your liquidity pools.
Balancer essentially takes the concept of an index fund and flips it on its head. Instead of paying portfolio managers to rebalance your portfolio, traders rebalance your portfolio by following arbitrage opportunities and you collect a portion of their trading fees.
Balancer Use Cases
There are three main categories of users who can benefit from the Balancer protocol:
- Liquidity Providers - people who own Balancer Pools or contribute to Shared Pools
- Traders - people who use pools to trade
- Smart Contracts
Anyone holding 2 or more ERC-20 tokens can become a Balancer liquidity provider and start earning fees. A minimum of 2 tokens is requires to create a pool and Balancer allows up to 8 different tokens in a single pool.
Also, Balancer liquidity providers can be portfolio managers who want exposure to different assets without worrying about complicated and/or expensive rebalancing procedures.
Balancer traders can be conventional traders simply exchanging one token for another or arbitrageurs seeking profit.
Ethereum smart contracts seeking liquidity for a variety of other use cases, such as relayers.
2. Who and When Created Balancer?
Balancer founder, Fernando Martinelli
Not much is known about McDonald as he keeps a low profile, but we do know that he’s been involved in crypto for at least a few years and helped to create the popular MakerDAO tracking tool MKR.tools.
As for Martinelli, he’s an alumnus of Pantheon Sorbonne University and a serial entrepreneur who has founded three companies; Basil Mate, PrepLounge, and Balancer Labs.
Moreover, the Balancer platform and protocol itself didn’t officially launch until March 2020 and the protocol’s native BAL token only began trading in June 2020.
That said, Balancer is a relatively new DeFi project compared to many of the others.
3. Differences & Similarities Between Balancer and Uniswap
Both Balancer and Uniswap are sophisticated Automated Market Makers (AMMs) to power the decentralized exchange of tokens and they both allow their users to do two things:
1) Quickly swap between any ERC-20 token
2) Earn fees by supplying the underlying protocol with liquidity
While Balancer and Uniswap offer their users essentially the same things, there are various differences regarding the protocol’s technicalities and features.
- Doesn’t have a native token
- Liquidity pools must contain 50% ERC-20 token and 50% ETH.
- ETH is the protocol’s hub currency
- One type of pool
- Has a native governance token - $BAL
- Liquidity pools have a weighted 2-8 token exposure, ie (80%/20%) or (95%/5%), etc.
- Does not have a hub currency
- Two types of pools: shared and private (both of which act as self-balancing index funds)
- $BAL token is earned atop of trading fees
Now to emphasize the main difference between Balancer and Uniswap:
Balancer’s powerful DeFi framework generalizes Uniswap’s bonding curve to a multi-dimensional surface to allow Balancer token pools to hold several different tokens, each of which with its own defined share of the total value in the pool.
4. How to Receive $BAL Tokens and What is it Used For?
Balancer (BAL) logo
Balancer’s BAL token is the native crypto to the Balancer protocol and it has two primary use cases:
- Reward liquidity providers for providing liquidity in Balancer pools.
- Act as the protocol’s governance token by enabling holders to vote on proposals.
Reward Liquidity Providers
If you want to receive BAL tokens without buying them from an exchange, you must become a Balancer liquidity provider. Anyone with ERC-20 crypto assets idly sitting in their wallet can be a liquidity provider by adding liquidity to a Balancer pool.
As of June 1, 2020, each week, 145K BAL tokens is awarded to users with liquidity in Balancer pools. The amount of BAL tokens distributed to liquidity providers is based on how much liquidity they contribute to the protocol. The liquidity incentive program is planned to last the next 4 years.
Also, it should be noted that the BAL rewarded to liquidity providers is earned on top of the trading fees, which occurs whenever someone performs a trade that utilizes the pool’s liquidity.
Balancer Protocol Governance
BAL is the governance token of the Balancer protocol.
Therefore, BAL token holders have the power to determine the future of the Balancer protocol by voting on various proposals which include the implementation of new features, potential protocol fees, scalability implementations, and so forth.
Moreover, the distribution of BAL to Balancer liquidity providers makes perfect sense because the people actually using the protocol are the ones who should be able to influence its future.
5. In short, how to make money with Balancer?
Balancer is a powerful DeFi framework that allows users to put their idle crypto assets to work by providing the protocol with liquidity and getting rewarded in return.
Balancer liquidity providers make money in three different ways:
- They earn a portion of the trading fees from the protocol.
- They are rewarded with BAL tokens for providing the protocol with liquidity.
- They benefit from a free self-balancing index fund.
Earn Trading Fees
When you contribute liquidity to a Balancer pool, you earn a portion of the swap fee, which occurs whenever someone performs a trade that utilizes the pool’s liquidity. The swap fee can vary between pools and can be any number between 0.0001% and 10%.
Earn BAL tokens
145K BAL tokens are distributed to Balancer liquidity providers every week, totaling 7.5M BAL per year. The amount of BAL tokens distributed to users providing liquidity is based on how much liquidity they contribute.
Self-Balancing Index Fund
When a user contributes liquidity to a Balancer pool they can contribute any weighted percentage amount of 2-8 ERC-20 tokens to the pool, ie. 20% ETH / 30% BAT / 10% LINK / 40% ZRX or some other combination.
In this example pool above, Balancer’s mathematical properties will ensure that the value percentage of each token in the pool will stick closely to the weight even as the market prices of the tokens vary.
In other words, a Balancer pool is a self-balancing index fund that is automatically rebalanced for free.
To put this in comparison, in a conventional index fund the investor has to pay fees to a manager for rebalancing their portfolio, but with Balancer this is done for free and the liquidity provider earns trading fees and BAL tokens as well.
6. What is the Difference Between Private and Shared Pool?
Balancer has two types of pools 'shared' and 'private', each with different parameters.
Shared pools have fixed parameters and are open to everyone. Any crypto user can add liquidity to a shared Balancer pool and earn BAL token rewards and a portion of the pool’s trading fees.
Once a pool is created, the pool creator cannot change the parameters of the pool in order to protect the interest of all of the pool’s liquidity providers. That way the pool creator cannot indirectly steal liquidity from other liquidity providers.
Private pools have very flexible parameters and are funded solely by the pool's creator. With private pools, the creator/pool’s liquidity provider can add/remove tokens, change the weighted token exposure, adjust the swap fee, pause trades, and more.
Private pools are for private actors who don’t want outside liquidators. For example, someone with a large quantity of cryptocurrency might start a private pool to put it to work while remaining in full control of the pool’s parameters. An example of a private pool would be if one decides to use the Balancer's mechanisms for its own relayer or a Dapp.
7. Why Pools of Mixed Token Weight are such a Big Deal?
Balancer liquidity pools, which are collections of user-supplied funds that are used to provide liquidity to trades and transactions, are kind of revolutionary in the realm of Ethereum DeFi.
Most DeFi protocols offering liquidity pools such as Uniswap require a 1:1 ratio of ETH with each token pool. Therefore, a user must have an equal value amount of ETH as the token they want to provide liquidity for.
This can prove to be troublesome for some users as they must convert half of their stack to ETH if they want to provide liquidity. With Balancer, however, users who contribute liquidity to Balancer pools can do so with uneven allocations of 2 to 8 tokens.
For example, you can contribute 30% DAI, 20% LINK, 40% BAT, 5% USDC, and 5% BNB, or any other combination of tokens as long as the token weight is between 2% and 98%.
An example of a weighted pool consisting of WBTC, cUSDC and COMP:
This provides liquidity providers with much more flexibility and makes their lives easier as they can put up to 8 idle crypto assets to work without converting any of them to ETH. That way users can benefit from sitting on their increasing asset prices while also providing liquidity to earn BAL tokens and fees.
8. Where to Store $BAL?
Balancer (BAL) is a relatively new ERC-20 token residing on top of the public Ethereum blockchain. That said, you can store BAL in any ERC-20 token supported wallet.
- MyEtherWallet (MEW) (web)
9. Where to Buy & Sell $BAL?
Balancer (BAL) can be bought and sold on a peer-to-peer (P2P) basis but the most popular way to buy, sell, or trade Balancer is through cryptocurrency exchanges.
You can buy BAL with cryptocurrency or fiat at the following top exchanges. In most cases you will be able to buy BAL with ETH and DAI.
In addition to the exchanges listed above, Balancer (BAL) is also traded on an array of other exchanges and platforms that enable people to buy, sell, or trade cryptocurrencies.
Hope you enjoyed that read :) Let me know if I have missed something in the comments.