What is Balancer? (BAL)
The Beginner’s Guide
Balancer is a decentralized finance (DeFi) protocol running on Ethereum that seeks to incentivize a distributed network of computers to operate a decentralized exchange where users can buy and sell any cryptocurrency.
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 sides 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.
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 offers private, public adn smart 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.
Smart pools have flexible parameters and exist as an intermediate between public and private Balancer pools. This feature allows pools to be programmed to perform additional functions, such as changing weights, altering swap fees and limiting who can provide liquidity to it.
Liquidity Bootstrapping Pools (LBPs) are a type of smart pool that allow projects with relatively low capital to raise liquidity for their native tokens.
They work using a variable weighting system that can be altered over time. Typically, a project will launch an LBP and weight its native token much higher than its paired token. The sale starts off in favor of the project token and gradually lowers in price by changing its weight as time goes by to create constant downward pressure on the price. This process gains a competitive edge over bots and whales and allows for price discovery.
This system is designed this way to prevent bots and whales from manipulating the market. The first buyers will pay the highest price. It also helps projects to raise liquidity more efficiently than fixed-weighted public liquidity 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.
Why does BAL have value?
Balancer’s cryptocurrency, BAL, is 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. Leveraging Curve's veCRV mechanism, holders of BAL must now lock their Balancer Pool tokens (80/20 BAL/WETH) for up to one year to receive voting-escrow BAL, or veBAL tokens. These tokens provide boosted yields and voting powers.
Like many other cryptocurrencies, the supply of BAL tokens is limited, meaning that there will only ever be around 94 million BAL.
Balancer's issuance schedule was intially programmed to release 145,000 tokens a week to users as liquidity mining rewards. However, following the veBAL system activation in March 2022, routine halving events have now been introduced. This means the amount of new BAL tokens entering into circulation will be programmatically halved every four years.
Kraken's Crypto Guides
- What is Bitcoin? (BTC)
- What is Ethereum? (ETH)
- What is Ripple? (XRP)
- What is Bitcoin Cash? (BCH)
- What is Litecoin? (LTC)
- What is Chainlink? (LINK)
- What is EOSIO? (EOS)
- What is Stellar? (XLM)
- What is Cardano? (ADA)
- What is Monero? (XMR)
- What is Tron? (TRX)
- What is Dash? (DASH)
- What is Ethereum Classic? (ETC)
- What is Zcash? (ZEC)
- What is Basic Attention Token? (BAT)
- What is Algorand? (ALGO)
- What is Icon? (ICX)
- What is Waves? (WAVES)
- What is OmiseGo? (OMG)
- What is Gnosis? (GNO)
- What is Melon? (MLN)
- What is Nano? (NANO)
- What is Dogecoin? (DOGE)
- What is Tether? (USDT)
- What is Dai? (DAI)
- What is Siacoin? (SC)
- What is Lisk? (LSK)
- What is Tezos? (XTZ)
- What is Cosmos? (ATOM)
- What is Augur? (REP)
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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