Economical DeFi


tl;dr: The market responds again. Balancer v2

If you have been paying attention to DeFi at all for the past year or so, you’ve seen the relentless pace of innovation and incredibly high yield offerings. That’s the good part.

The bad part has been the explosion in gas fees, making participation in DeFi increasingly inaccessible for people.

What’s particularly exciting for me to witness is how innovation is taking place in this space.

Since it’s decentralized by nature, there’s no “one big initiative” to solve the problem.

Certainly, some initiatives (like the upgrade to Eth 2.0) or Layer 2 rollups which are bigger than others, but then there are a slew of smaller ones which collectively are chipping away at the cost of doing business.

I touched on one yesterday, in the form of the SingularityDAO DynaSet offering.

The one that has me excited right now is the v2 release of Balancer.

Balancer is not the easiest concept to understand, at least not for me.

What it does, essentially, is create multi-asset pools that reduce the cost of trades between pairs by doing routing through higher liquidity pairs. You can think of it this way. If you live in Wichita, Kansas and you want to fly to Tokyo, you can do it. It’s just really, really expensive because there’s not a ton of demand for that flight.

However, if you fly from Wichita to Denver and then on to Tokyo, it’s much cheaper. What an airline hub does is “pool liquidity” of travelers and create trading pairs (Wichita-Tokyo) that would otherwise be really expensive.

The v1 version of Balancer, however, created separate transactions for each trade.

So, you’d pay once to go from Maker to ETH and again from ETH to AGI, if that was your desired trade. As gas fees rose, though, the cost of executing multiple transactions made trading cost prohibitive. It was like having to buy individual tickets for each leg of the journey with all the associated taxes and fees.

Balancer v2, as I understand it, seeks to become a “one stop shop” for DeFi by efficiently “decoupling the pools’ AMM (automatic market maker) logic from the token management and accounting.”

Now, to continue the airline analogy, they’ve created a Star Alliance/OneWorld type set up where they have access to all the routes in one place and can simply do one transaction ticketing someone through from Wichita to Tokyo, thereby reducing fees and waste.

Whether you understand the particulars of this or not (and I’m not even 100% sure that I do) doesn’t really matter, because the larger point is that, in crypto, the market is responding at light speed to the challenges posed by the system.

In Ethereum, there’s finite supply of space in each transaction and everyone is competing for it. The size, number, and complexity of the transactions determine the amount of gas required. By removing cost and complexity, Balancer has created an appealing option within the market that will capture share.

Whether they will be a “1 stop shop,” is TBD, but it’s cool to see the ongoing composability and ability to take programs to their atomic level continue to take shape.

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