Where are the Index Funds?
First, there are very few times that something actually new comes along in Crypto. Currency, smart contracts, DAO’s, synthetic assets, they each came in and changed the game respectively. The Crypto space is high risk and high reward, there are thousands of Cryptocurrencies. They have value based on being a security, a utility token, a store of value, a representation of a real world asset, etc. As financially dense as the world of Crypto is it is still very financially nascent. Lending is really picking up traction only over the last year, use of currencies in the real world still has a ways to come, and investing in Crypto still takes a good amount of technical knowledge. Also a lot of the traditional structures of finance that exist don’t exist in Crypto. We will focus on one of those now.
A financial instrument we don’t have integrated into the Crypto space is “index funds”. The S&P 500 is likely an index fund you have heard of. It invests in the top 500 companies in America by market cap. You buy a share of the S&P 500 and you instantly own a piece of 500 companies. This diversifies your risk and allows you to set your investment and forget about. The Crypto world has a few index funds (the Crypto 20, multiple bitwise indexes, Coinbase index fund, and much more). However, many of these have exorbitant fees, don’t directly hold the underlying asset, and access to them is difficult (for example the Coinbase index fund is open to those with $250,000-$20,000,000 to invest). For more on index funds and Crypto index funds go here.
However, these traditional funds don’t speak to the ethos of Crypto and decentralized finance. This is supposed to be the people’s money the people’s way (or at least many would hope). Enter Balancer Pool. Balancer Pool is “an automated market maker with certain key properties that cause it to function as a self balancing weighted portfolio and price sensor.” Ok... that made sense. Let’s dig in.
Balancer - A Crypto Index Fund Tool
So here is the gist of what that means, you pick three Cryptos you want to hold (Bitcoin, Ether, XRP, being agnostic just picked the top three coins) and you then create a “pool” on Balancer with these three tokens and pick the weighting. Maybe you love Bitcoin so you go 50% Bitcoin, 25% Ether, 25% XRP (we’ll do 33%, 33%, 33% to keep it simple). You put $1,000 of each token into the pool for $3,000 in all. Let's look at what happens if Bitcoin doubles and Ether and XRP’s prices don’t change over the next week:
One Week Later it would be:
Bitcoin $2,000 (the price doubled so your stack doubled)
But instead, the pool rebalanced and sold $667 dollars of Bitcoin and bought Ether and XRP so that you actually have:
Why is this good? You lost out on having $2,000 in Bitcoin!? Well, if you believe in all the assets what you saw was Bitcoin going up in value and you locked in those gains (you sold $667 of highly priced Bitcoin), you then used that to buy XRP and Ether that hadn’t had gains...yet (hopefully). Now if XRP and Ether rocket up you have more of them and get more gains. With a Balancer you are basically selling high and buying low automatically, let’s look at what happens if Ether halved in value over the next week starting back over at $1,000 each:
One Week Later it would be:
Ether $500 (halved in price, halved your stack)
But instead the pool rebalanced and sold $176.67 of Bitcoin and XRP to buy Ether so that you have:
Again, you sold Bitcoin and XRP that had held their value and bought Ether that was “cheap” (at least that’s the hope). So basically a pool allows you to benefit from the gains of multiple assets, lock in gains and use them to buy other assets you like at lower prices, and ameliorate some losses by buying more of a coin as it goes down (buying low). This is why people love index funds, you automatically sell high and buy low.
What's so great about Balancer Pools?
The genius behind Balancer Pools is that:
- They let you make your own pool (choose whatever assets you want: Link, ZRX, Maker, whatever)
- The pools are used as a liquidity provider for Balancer Exchange that helps your pool to rebalance, this brings together multiple parties (buyers, sellers, holders) into a mutually beneficial environment where the profits and control are decentralized (If someone exchanges Ether for Link, or ENJ for Theta, the Balancer looks at all the pools and swaps out tokens from your pool to that buyer while also rebalancing your pool based on price fluctuations)
- You maintain a claim to your coins and you can verify their location by smart contract (unless Balancer Pools has a catastrophic failure, your coins are safe, although it is important to note this is still a custodial solution, so you don’t maintain the coins on your own wallet)
Now, I’m not going to go into liquidity because it would literally take an entire article to go over this but just know that you can go to Balancer Pools and trade your Ether for Bitcoin (actually Wbtc which is Bitcoin on the Ethereum chain) and the Balancer Pools will look across everyone’s “index funds” and find the best liquidity and price to put Ether into their pool and pull out Wbtc to help that pool rebalance while giving the buyer the best price on Bitcoin. So in the example where Ether goes down in value they would look for someone looking to sell Ether for Bitcoin, they would then find your pool and use your Bitcoin to fill that order, giving you more Ether (you and the seller both benefit, they gave you liquidity to rebalance, you gave them liquidity to trade). If you want a deep dive with math and emojis, go to the Balancer Pools Whitepaper. Put simply, Balancer Pools is an investment platform to create your own custom index fund, while providing liquidity to buyers and sellers, it brings together an exchange with a investment broker: buyers, sellers, and holders all together benefiting each other.
What is also incredible about this is that other people can jump in on your pool. If you create the perfect mix of some top Cryptos people will add to your pool so they can balance their Cryptos the same way. This helps you because the more liquidity your pool has the easier it is to rebalance. You can also look at other people’s portfolios and join in on their's if you like their mix.
When you put in your tokens (Ether, Link, whatever) you get out BPTs (Balancer Pool Tokens) that represent your stake in the pool, if a pool has $5,000 Bitcoin and $5,000 Ether and you have $1,000 of Bitcoin and $1,000 of Ether in it ($2,000 of the $10,000) the whole pool may be 10 BPTs and you get 2 of those BPTs representing your 20% of the pool. That BPT now represents those 2 tokens (50% ETH, 50% BTC) which is interesting, you can actually now trade that BPT and you are actually trading 50% Ether and 50% Bitcoin, this makes adding and taking out liquidity from pools even simpler (rather than buying each of the assets or selling each of the assets you just buy or sell the BPT linked to the pool). This could be the future of Balancer, "labeling" the BPT tokens for resell so you can instantly buy access to a pool, driving more liquidity to the Pool through a "one click" solution. This would be huge if enacted.
Two more benefits of being in a Balancer Pool:
- Balancer is releasing the “Balancer Token” (BAL, not to be confused with BPT). This will be an added bonus paid to people who keep their Cryptos in pools to incentivize more liquidity.
- When someone comes to trade Ether for Chainlink they are charged a small fee (as with every exchange), the pools that get chosen to facilitate that transaction each get paid the fees that the user paid for the transaction (so you get a little Ether or Chainlink on top of the trade and on top of the BAL tokens).
A main limiting factor of Balancer Pools is their need of liquidity to properly balance when fluctuations in the market happen. "One click" or BPT trading could help with this. A key component of all of this is the exchange function, but you need to drive users and eyes to the platform. You need trades to be happening to enable your liquidity to move. You ideally also want to drive liquidity to your specific pool over competing pools. You ideally want a one token access to your Pool (Index Fund) that can be sold on other decentralized exchanges. Just released a couple weeks ago is a possible answer to this bottleneck in the form of a token:
Enter Statera - A Tool to Bring Extra Arbitrage and Utility to Balancer Fund Pools
This post is an intro to Balancer Pools, but next we will dig a little deeper into Statera. It is early days but the Statera token is melding many new and emerging trends in Cryptocurrencies and, possibly, introducing a brand new asset class to the world (and that may not be hyperbole). Read on to find out.
A quick TLDR; Statera is a deflationary token - i.e. it burns itself, 1% of every transaction sent is burnt forever - designed to be an aid to Balancer Pools / Crypto Funds. Statera adds arbitrage trading opportunities when any of the other assets in the pool change in price AND even if price is STATIC it's supply is constantly dwindling, creating arbitrage opportunities, stimulating more trades, thus more liquidity and tighter spreads in the fund, thus more trading. STA can turn a static, illiquid fund, into a liquid, efficient pool, and earn trading fees for the creators and investors in that pool. It also provides a single token someone can buy at Uniswap, Bancor, Kyber, etc. and have instant exposure to your pool.
Full disclosure: I own some Statera and will hold it at least through our next bullrun (if/when that comes). This article is not financial advice and is only my opinions. Statera is, simply put, a deflationary index fund, what is a "deflationary index fund"? Well, read on to find out.