What is Balancer? (BAL)

The Beginner’s Guide

Balancer is a software running on Ethereum that seeks to incentivize a distributed network of computers to operate an exchange where users can buy and sell any cryptocurrency.

An emerging decentralized finance (DeFi) protocol, Balancer uses a combination of crypto assets to provide this service, enabling trading without a financial intermediary like an exchange.

It might help to think about Balancer as a kind of index fund, where users create funds based on the cryptocurrencies in their portfolios. These funds are known as Balancer pools, and any user wishing to provide liquidity to a pool can do so by simply depositing an asset in them.

Users who provide liquidity to a Balancer pool then earn a portion of the trading fee paid to the network for the use of their funds, and are rewarded with a custom cryptocurrency called BAL.

These deposits are essential to the network, providing the liquidity needed for users to buy and sell cryptocurrencies on the platform.

This means Balancer must incentivize both sizes of its market in order to operate – crypto users who might wish to make some of their holdings available to be traded, and traders seeking the best possible price for an asset.

In this way, Balancer works in a similar fashion to other decentralized exchanges (DEXs) like Uniswap (UNI) and Curve (CRV). However, Balancer offers additional features, including the ability to bundle up to eight tokens into pools.

Who created Balancer?

Balancer began as a research project at a software consulting firm called BlockScience in 2018, founded by Fernando Martinelli and Mike McDonald.

The project then independently raised $3 million in funding as Balancer Labs in 2020. The round saw some 5 million BAL tokens sold to investors and 25 million tokens awarded to shareholders and employees (out of a total supply of 100 million tokens).

An additional 10 million BAL were set aside, with half being reserved for a fund used for contributors to the Balancer ecosystem and half reserved for sales to future investors.

How does Balancer work?

Just as an index fund can be composed of different stocks, Balancer pools are composed of up to eight different cryptocurrencies.

A Balancer pool’s value is determined by the percentages of each token within it, a weight chosen during the pool’s creation.

Self-balancing index fund

Balancer uses custom programs called smart contracts to ensure each pool retains the correct proportion of assets even as the prices of individual coins in the pools might vary.

For example, a Balancer pool might start off with 25% ETH, 25% DAI and 50% LEND. If at some point, the price of LEND doubles, the pool automatically reduces the amount of LEND it holds so that it can retain 50% of the pool’s value.

So, where does the LEND go? Balancer’s smart contracts make them available to traders looking to buy LEND as prices go up.

Of note, liquidity providers still earn fees while their index funds get rebalanced, compared to traditional index funds where investors pay fees for the rebalancing services.

Balancer pools

Balancer offers private and public pools, aimed at users with different risk appetites.

Public pools allow any user to provide liquidity by adding or withdrawing assets. The parameters of public pools are set, and cannot be changed, before their launch.

This means they may be useful for users with smaller holdings seeking to earn fees from the most popular – and most liquid – pools.

A private Balancer pool is one where only the pool creator can add or withdraw assets. The user can also adjust all the other parameters of the pool such as fees, weightings and the types of assets it accepts.

Private pools are useful to asset managers with a large portfolio seeking to earn fees on their specific assets.

Lastly, smart pools are a type of private pool owned by smart contracts. This feature allows pools to be programmed to perform additional functions, such as changing weights, or creating an index fund that tracks a property portfolio.

Why does BAL have value?

Balancer’s cryptocurrency, BAL, will be essential for distributing its operations, ensuring that no central party can make decisions about how the platform operates.

Further, it also functions as an incentive mechanism, as users who deposit assets into Balancer pools earn BAL tokens. While there are no defined rights or uses for the token as of 2020, holders of BAL will eventually be able to determine rules around how Balancer works.

BAL owners may be able to, in the future, vote on the weekly rate of BAL distribution, Balancer protocol fees or even the possibility of launching Balancer on other blockchains.

Like many other cryptocurrencies, the supply of BAL tokens is limited, meaning that there will only ever be 100 million BAL.

While 15 million BAL were distributed or saved during Balancer’s inception, the remaining 65 million tokens are distributed to Balancer users providing liquidity to the protocol.

Balancer plans on distributing 145,000 tokens a week to users, meaning that the total supply will have been distributed by 2028.

Why Should I Use BAL?

Balancer may be of interest if you are an existing cryptocurrency investor with an idle portfolio that you wish to put to work.

It may also be useful if you are an active trader or portfolio manager, as it allows users to buy units in creatively constructed indices that exist on the protocol.

Holding BAL is useful in the long term if you wish to influence the development of the platform by voting on important decisions about some of its features.

Users can also invest in BAL if they believe that decentralized trading of cryptocurrencies will gain in popularity in the future.

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