On March 31, 2020, Balancer (BAL) – a non-custodial Ethereum-based automated market maker (AMM) that functions as a self-balancing weighted portfolio manager, liquidity provider, and price sensor – was deployed on Ethereum mainnet.
Instead of paying fees to portfolio managers to rebalance your portfolio, they proposed an AMM protocol that enables you (as an investor) to collect fees from traders, who rebalance your portfolio by following arbitrage opportunities.
Said another way:
Balancer enables cryptocurrency investors to earn fees by providing the protocol with liquidity using multiple tokens, which are rebalanced by traders following arbitrage opportunities.
The protocol enables cryptocurrency investors to earn income on their idle crypto assets while staying long on their positions which are continuously rebalanced to maintain a weighted portfolio.
That said, Balancer is a revolutionary AMM protocol that’s described by some as a self-balancing crypto-ETF.
Genesis of AMMs
Bancor website homepage
The first Automated Market Maker (AMM) on Ethereum was introduced by Bancor (BNT) in 2017.
Back then, the notion of an on-chain, order-book-less exchange was novel and experimental. There were many problems to overcome (ie. low liquidity, slippage, impermanent loss) but Bancor took it head-on and laid much of the groundwork for what was to come.
Fast forward a few years to 2020, and there is now a thriving ecosystem of innovative AMMs which have generated billions of dollars in trading volume.
So how did we get here?
First, there was the Bancor v1 AMM model which required liquidity providers (LPs) to contribute an equal or determinate part of Bancor’s native token $BNT and each asset represented in the pool (ie. 50/50: BNT/ETH or BNT/BAT or BNT/LINK, etc.)
This was both an inconvenience and a liability for many LPs who only held one of the assets and/or were only interested in exposure to that single asset.
For instance, if you wanted to contribute to a pool, you would first have to buy an equal amount of $BNT to the token you’re providing liquidity for. So if you didn’t have spare cash on hand, you would have to swap your $ETH or another token for $BNT, which was quite an inconvenience and deterrent to using Bancor’s pools.
However, new AMM models with better solutions would soon arise.
Uniswap website homepage
Instead of using a native token for users to create pools, Hayden designed Uniswap to use ETH as the core swap token users could create pools against, whereas bancor was using its native token BNT.
This proved to be a much better solution as ETH was and still is more liquid and more popular than any other altcoin out there. Therefore, more users preferred to create pools with ETH in it, rather than BNT.
Today, Uniswap stands as the most powerful AMM DEX protocol with around $1.5B billion total value locked (TVL) and a growing ecosystem of DeFi legos plugging into its protocol.
However, the innovation doesn’t stop there. In fact, it’s only getting better.
How Balancer Changes the AMM Game
Balancer website homepage
Balancer is a next-generation AMM protocol that functions as a self-balancing weighted portfolio manager, liquidity provider, and price sensor. It’s so much more than a simple token swap platform like Uniswap as it provides more functionality and flexibility with how you can interact with the protocol.
For instance, Balancer allows users to contribute liquidity to larger pools with up to 8 tokens with any weights, rather than having to deposit an ERC-20 and ETH with equal fixed weights of 50/50 in the case of Uniswap.
That said, Balancer effectively enables users to create and manage their own personalized index fund by creating liquidity pools or investing in existing liquidity pools.
These funds (liquidity pools) are self-balancing, meaning your deposited crypto-assets are exchanged by traders taking advantage of arbitration opportunities. There is no need to exit the liquidity pool and instead of paying a portfolio manager to rebalance your portfolio, the protocol does it for you and earns you collected fees from traders in the process.
That said, Balancer acts as a portfolio manager and also as a source of liquidity.
Now let’s get into details on how Balancer changes the AMM game:
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.
It doesn’t use a hub currency like BNT or ETH in its liquidity pools as seen with Bancor and Uniswap. Instead, Balancer liquidity pools have a weighted 2-8 token exposure, ie (80%/20%) or (95%/5%), or (10%/40%/20%/10%/20%), etc.
For example, you can have a pool made of 25% DAI, 25% MKR, 25% LINK & 25% KNC.
This enables LPs to benefit from having greater exposure to their favorite tokens (they can stay long) rather than selling to buy a native protocol token; BNT in the case of Bancor v1 or ETH in the case of Uniswap.
That said, Balancer’s flexible 2-8 token liquidity pools combined with automated token weight rebalancing and the ability to earn passive income from trading fees, makes Balancer stand out from other AMM protocols.
In fact, it changes the AMM game completely.
How Investors & Community Reacted?
The Ethereum DeFi and Balancer community have been ecstatic about Balancer’s AMM protocol since launch.
People continue to deposit funds into Balancer’s diverse liquidity pools and the protocol currently ranks 12 on DeFi Pulse with more than $288.4 million total value locked (TVL).
Despite a large spike and fall in Balancer’s TVL during the DeFi boom and bust this year, the Balancer protocol continues to grow and capture value.
Moreover, notable investors and big names in the DeFi space expect Balancer to grow much more from where it is now. Just recently on November 9, 2020, Balancer raised a significant seven-figure sum via a $BAL token sale from notable investors, Pantera Capital and Alameda Research:
Alameda Research and FTX founder Sam Bankman-Fried revealed that his firm invested a seven-figure sum, (ie, a minimum of $1 million) into Balancer via the sale of its native governance token BAL.
As for Pantera Capital, they haven’t disclosed their investment amount but did say they were excited to partner with Balancer Labs to build the most flexible & deepest liquidity protocol for tomorrow's financial system:
In addition to the big boys being bullish on Balancer’s tech, Balancer’s AMM protocol is also being recognized by Coinbase as a viable cryptocurrency project as they listed $BAL on Coinbase Pro:
All in all, Balancer is proving to be an incremental protocol in the realm of Ethereum DeFi and it’s still severely undervalued at around rank 100 on CoinMarketCap IMO.
That said, Balancer (BAL) is a project to keep your eye on during this cryptocurrency bull market season.