Balancer

What is Balancer (BAL)?

Balancer is an Ethereum-based trading protocol that has become a mainstay of decentralized finance. Often described as an automated market maker (AMM), Balancer allows anyone to trade a variety of cryptocurrencies in an efficient, permissionless, and trustless manner.

This trading protocol is also often described as a price sensor or an automated portfolio manager. It has many peers, but its true differentiation comes in the form of high-token count liquidity pools, which act almost like index funds.

Balancer’s BAL token serves as an incentive for protocol users but, more importantly, also as a governance token. This makes Balancer decentralized and very much controlled by its community and those who actually use the platform.

When Was Balancer Launched?

The Balancer protocol was conceived as a research project at the software firm Blockscience in 2018. Following two years of development, Balancer launched in 2020 under the stewardship of Balancer Labs. Balancer raised $3 million in a seed round led by Placeholder and Accomplice.

Who are the Founders of Balancer?

Balancer Labs was founded by Fernando Martinelli and Mike McDonald, business partners with a successful enterprise history.

Martinelli is the CEO of Balancer Labs. Prior to founding Balancer, he was a co-founder of Brasil Mate. Martinelli is also a prolific investor who, according to Crunchbase, took part in the seeding of three start-ups in 2022.

Balancer’s other co-founder, Mike McDonald, is the CTO of Balancer Labs. He is also the creator of MKR.tools, an independent MakerDAO platform data analytics site.

How Does Balancer Work?

Boiled down to its very essence, Balancer is an automated market maker (AMM) protocol. An AMM replaces a traditional market maker when it comes to providing liquidity for trading.

Normally, exchanges use a technique called the order book for trading. An order book lists buyers and sellers of an asset, creating a classic market and allowing price discovery based on supply and demand.

A traditional market maker such as Virtu Financial (VIRT) infuses liquidity by providing quotes on both sides of the order book. Interestingly, the U.S. stock market allows market makers to do this even if they don’t own the underlying securities, and Virtu CEO Doug Cifu describes himself as a “liquidity fairy."

Ramifications for price discovery notwithstanding, traditional market makers do provide considerable amounts of liquidity, for better or for worse.

AMMs do far more than that, replacing the order book entirely and decentralizing the trading process. Instead of the order book, AMM protocols like Balancer create liquidity pools containing user-deposited tokens that traders can buy from and sell to.

Therefore, liquidity is provided by actual token holders, who are rewarded for it. The BAL token is used as an incentive for providing liquidity, which in turn gives liquidity providers voting power within the protocol.

The prices of tokens in these pools are defined by a mathematical formula and maintained by arbitrage. AMM protocols can have a different mathematical basis, but arbitrageurs are consistent. They scan different venues for the same token, and if price differences emerge, they swoop in to take advantage.

The flurry of buying and selling of tokens by arbitrage traders, who operate in high volumes, tends to bring token prices back to equilibrium very quickly.

What is Impermanent Loss?

Impermanent loss is one of the main risks faced by contributors to liquidity pools in protocols like Balancer.

When depositing tokens into a pool, liquidity providers do so in a certain ratio. When depositing two tokens into the pool, they might deposit them at 50:50, three tokens at 33:33:33, and so on.

When one of these assets experiences a change in price relative to others, the protocol adjusts the pool automatically to maintain the deposit ratio. This means that the liquidity provider experiences a notional loss.

The term “impermanent” comes in because this loss isn’t realized unless the liquidity provider decides to withdraw from the pool. If they keep their tokens in the pool, later volatility could see their original ratios restored. For this reason, many liquidity providers prefer to deposit highly correlated assets.

What Makes Balancer Unique?

Balancer is unique in that it gives a lot of flexibility to pool owners, including allowing pools that contain multiple tokens rather than just a pair. While a simple differentiator, this is a significant one since most other similar protocols only allow pools containing a single pair of tokens.

These multi-asset pools serve in a similar manner to traditional index funds that are actively managed. They allow users to have broad exposure to a variety of tokens.

However, Balancer takes this a step further still. Rather than paying fees to a fund manager to balance the portfolio, these pools collect fees as they are constantly rebalanced by traders making swaps. These fees go to the liquidity providers.

Balancer also stands out for its “Vault” smart contract. This central smart contract keeps internal records of the contents of each Balancer pool and allows the number of token transfers during swaps to be significantly reduced. This results in considerable amounts of gas being saved.

How is the Balancer Network Secured?

Balancer is a protocol built using smart contracts, which have been audited by Trail of Bits, ConsenSys, and OpenZeppelin. This, along with the fact that configurable rights pools block tokens with known issues, gives the Balancer protocol a significant level of security.

Despite this, Balancer has been exploited in the past. In late June 2029, an attacker with in-depth knowledge of DeFi was able to exploit certain non-standard ERC-20 tokens. This hack resulted in cryptocurrencies worth $450,000 at the time they were stolen.

Transactions and account balances, meanwhile, are maintained by Ethereum: the blockchain Balancer is built atop. This is also a big plus for Balancer because Ethereum is one of the most robust and battle-tested blockchains in existence.

Ethereum has been around since 2015 without any major hacks or failures, although various dApps on top of it have had various problems of their own. Ethereum is secured by a proof-of-stake (PoS) consensus mechanism that came into effect in September 2022.

In PoS Ethereum, holders of 32 ETH or more can bond their tokens to the protocol in order to play the role of a validator. Since these validators stand to lose their significant investment via “slashing” and are rewarded with more ETH if they do a good job, they are incentivized to perform.

What is the Use of BAL?

Balancer’s native BAL cryptocurrency is mainly used as a governance token within the Balancer ecosystem. Decentralized governance ensures that no central party can make unilateral decisions about the protocol’s future and direction.

Holders of BAL tokens can vote on various aspects of the protocol, and the token is also used as an incentive. Liquidity providers on Balancer are issued BAL tokens for depositing assets into Balancer pools.

Who Controls Balancer?

Balancer is controlled by BAL token holders. While the platform began in the hands of Balancer Labs, governance over the protocol has been decentralized to give BAL holders voting power.

BAL holders, also called Balancer Governors, vote on wide-ranging proposals covering everything from protocol fees to future token distribution. These votes are made off-chain, so Balancer has a multisig empowered to enact the decisions on-chain. This multisig does not have decision-making power.

How Much BAL is In Circulation?

The BAL token was launched in June 2020 with a total supply of 100 million BAL. 25% of this total supply was reserved for the team, core developers, investors, and advisors, while a further 5% went towards fundraising.

The remaining BAL tokens are issued on a weekly basis to liquidity providers on the Balancer platform. 145,000 BAL tokens are given out every week to those that deposit tokens at Balancer.

Assuming this rate of distribution remains constant, the BAL token will be fully diluted in 2028.

How Do You Buy BAL?

Aside from earning BAL tokens by depositing into Balancer pools, you can also buy BAL on the Balancer platform. Other decentralized exchanges on Ethereum can also be used to buy BAL, including the likes of Uniswap and Sushiswap.

You can also buy BAL tokens on most top-tier centralized exchange platforms, reflecting its position as one of the pre-eminent DeFi protocols on Ethereum.

Is It Possible to Buy BAL Instantly?

If you want to buy BAL tokens and require instant settlement, using a decentralized exchange employing a layer 2 solution like Polygon is the way to go. In addition to increased speed, layer 2s can also cut down on fees when transacting on Ethereum.

You can also use the main Ethereum layer with a DEX like Uniswap V2, but remember to account for gas fees and a wait of up to a few minutes for confirmation.

Centralized exchanges can perform transactions instantly, but they usually do not perform instant settlements. Greater scrutiny has been brought to this issue of late following the collapse of the FTX platform, which was discovered to have misappropriated customer funds.

How Do You Store BAL?

While you could certainly elect to store your BAL tokens on a CEX, there appears to be an increased risk in doing so. A multitude of custodial platforms and exchanges have collapsed in 2022 alone, taking user funds along with them.

In contrast, a non-custodial Ethereum wallet will keep your BAL tokens safe. Of course, taking charge of your own crypto isn’t totally risk-free. You’ll have to keep your keys and secret wallet phrase safe and be wary of which websites and dApps you connect it to.

If you want even more security, a hardware wallet like a Ledger or Trezor device could assure you a little more peace of mind. However, for constant use of protocols like Balancer, a hot wallet like Metamask or Trust may be a convenient option.

Balancer Energy Consumption

Balancer is a decentralized application or an interwoven set of smart contracts. It doesn’t have its own blockchain. Rather, it operates atop the Ethereum blockchain alongside many of the industry’s top cryptocurrencies.

Ethereum, prior to its September 2022 transition to proof-of-stake, used to be a proof-of-work (PoW) blockchain. Given its popularity and utility, it was widely mined and came under attack for its admittedly significant energy usage.

However, PoS is a much more energy-efficient way to attain blockchain consensus. Since the switch, the Ethereum Foundation has reported a 99.95% reduction in the blockchain’s power consumption.

Is BAL a Good Investment?

Balancer is one of the biggest names in DeFi, and for good reason. Aside from the June 2020 attack, which was in the still early days of the protocol, Balancer has an excellent track record for safety.

In its niche of providing efficient AMM services, Balancer is one of the most exciting propositions in the industry. The control and flexibility it gives pool owners are second to none, and the BAL token’s governance allows these same pool owners to have significant influence.

In a future where DeFi looks extremely compelling thanks to the weaknesses of CeFi shown by the likes of FTX, Celsius, Voyager, and others, Balancer looks well set to be one of the star pioneers.