update 19 August 2021

Balancer: An Overview of the ETH-based DeFi System

During the turn of the decade, the use of cryptocurrencies immensely shot up. A massive shift took place in how financial systems are utilized and perceived. The shift from the traditional, centralized financial systems to the new decentralized peer-to-peer exchange system, i.e., DeFi, occurred. This system is facilitated by innovations adapted from the Ethereum blockchain.  

The growth of DeFi is driven by liquidity. Reliable liquidity pools, in turn, became integral to the functionality of most of the dApps in the market. Balancer, a non-custodial generalized market maker (AMM), is the most exciting innovation from the pool liquidity space. Balancer stands apart from other AMM models, given the generalized design makes it suitable for all sorts of needs.

Objectives of Balancer

Managing Portfolios

Through the various features encompassed in Balancer, many primary functions are made available to users. These features ease the control of resources and allow the users to experience freedom levels freshly. The new system allows users to have multiple tokens split in varying ratios. It also provides different pools that can be optimized for the specific case according to user preference. On top of being an efficient system, users can also earn more by adding liquidity to the platform.

A Decentralized Exchange

The Balancer was introduced into the market on June 1st. The spanking new system is designed as a tool in the pool liquidity space, adding a layer onto Ethereum’s decentralized finance ecosystem. The AMM works through algorithms that define the rules utilized in trades. Through the combination of Ethereum with AMM’s, everything becomes decentralized, the assets in the market, the ability to create a market, and the algorithms all become decentralized.

Addition of Liquidity

The users of this system can deposit supported assets into pools. This act serves to provide liquidity to the users of the pool mentioned above. Balancer allows any token holder to provide liquidity with 100% of their assets by immediately turning their whole portfolio into a Balancer pool or adding it to existing pools. The pools allow up to 8 tokens with any custom distribution value for each. The deposited assets can earn from trades in the pool. Due to volatility and a myriad of other factors, there exist several cases where providers can lose some of their assets in the pool.

Token Allocation

On its initial launch, no native token was present. After the latest update, the Balancer Protocol Governance Token (BAL) was introduced. Out of the total 100M BAL, 25 million was initially distributed to the advisors, core developers, founders, and investors. However, the tokens are all subject to vesting periods. 

The remaining 75M BAL of tokens will be mostly distributed to users who provide liquidity to balance pools in a process referred to as liquidity mining. 

The altcoin can also be obtained through crypto exchanges. Currently, BAL is supported by several liquidity pools; Balancer’s pools, Uniswap pools. The coin is also supported by some centralized exchanges such as Bibox and FTX.

Balancer’s Contribution to Liquidity Mining

A balancer utilizes a system that involves rewarding a fixed number of tokens to users who provide liquidity for all pools. A pool to qualify should allow a USD price to be extracted from CoinGecko for at least two tokens present in their liquidity pools. Every week, approximately 145 000 BALs or 7.5M BALs per annum will be distributed via this process. The process is expected to take around nine years to distribute the total 100M BALs issued entirely.  

The reward model serves to create incentives for pool creators to keep transaction pool fees low. This process will, in turn, attract more liquidity and entitles liquidity pools to claim more BAL. 

Forms of Balancer Pools

Liquidity pools are pools of tokens locked up in a smart contract, in a protocol; such as Balancer. The LPs, as commonly referred to, facilitate trade and provide liquidity. Some decentralized exchanges extensively use the LPs. On Balancer, there are three primary forms of Balancer pools:

Private Pools

Private pools are the most restricted of all LPs as the owner restricts most permissions. These LPs allow only the owner to supply liquidity, update any parameters, and fully control the LPs assets according to the owner’s preferences. 

Shared Pools

In this type of LPs, some of the integral parameters are set in stone. Parameters such as tokens, fees for transfers, and weights are all eternally fixed. There is no room for adjustment allowed in such LPs as in private pools or smart pools since the pool creator has no special privileges extended to them.

Smart pools

The smart pools are LPs regarded as a variation of private pools. In these LPs, smart contracts are used to control transactions. The smart contracts allow for any restrictions on how pool parameters can be changed. However, the LPs accept liquidity anywhere and are continuously tracked by the Balancer pool token.

Trading using Balancers

Traders can use Balancer to swap between any two tokens. Trading using the system has several options. LPs with high trading fees allow traders to buy low and sell high. The practices also have their downsides, less active pools with low trading volumes. On the other hand, Lps of this kind is saturated with arbitrage bots. Fewer fees increase trade volumes. 

However, it’s important to note that with high trading volumes, profits are reduced. High fee pools give a brilliant treasury strategy since rebalancing is not done until attaining maximum deviation from the nominal percentage. 

Alongside the high and low fees on LPs, dynamic fees in smart pools can also be utilized where the user prefers adjusting to the market volatility during trades. It gives the users many options to profit in both the pools and the external markets.

Conclusion

Users today look forward to earning passive incomes through crypto and crypto-related projects. The DeFi Balancer poses as one such platform that gives users the ability to get rewards by simply adding liquidity to a pool or exchanging assets across liquidity pools. 

To avoid paying for portfolio management services, the trustless system gives users the ability to control and build their portfolios. 

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Eventually, with more trading activities, the user’s dossier is also restructured by the same traders. The Balancer wishes to remain transparent as they carry out regular audits. Among the protocols that conduct the audits include Open Zeppelin, Consensys Diligence, and Trail of Bits.

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