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Decentralized exchanges (DEXs) and liquidity providers have been at the forefront of the decentralized finance (DeFi) industry and its adoption by the crypto mainstream. The most standard model for these protocols is based on swap-pair pools with two tokens. Balancer (BAL) is a unique protocol that has moved to an innovative model of crypto swaps and pools by hosting pools with multi-token support. In this article, we cover this leading DeFi protocol in-depth.
The Automated Market Maker (AMM) is a model of trading used by DEXs that has been lauded as a more efficient trading system than the order book model. The order book trading system matches buyers and sellers of assets, in this case, cryptocurrencies. If there is no suitable seller or buyer for your order, you might have to wait for some time. This introduces an element of inefficiency into the whole trading process.
Under the AMM model, market players called liquidity providers add the necessary funds to swap-pair pools, incentivized by a share of the revenues from the trading fees in the pool. This ensures that each swap pair has enough liquidity to meet the demands of traders. The traders, both sellers and buyers, then transact with the swap pool instead of dealing with another trader.
The AMM trading model has been a massive improvement over the order book system. It has underpinned the operations of many of the leading DEXs, such as Uniswap (UNI), Curve (CRV), SushiSwap (SUSHI), PancakeSwap (CAKE) and more. In its standard form, the AMM model is based on liquidity pools funded by a pair of cryptocurrencies.
Balancer is a leading DeFi app that acts as a token swap platform, a liquidity mining source, and an efficient liquidity protocol for integration into other DeFi protocols. Balancer runs on Ethereum (ETH), Polygon (MATIC), Arbitrum, Fantom (FTM), and Optimism.
Balancer has revolutionized DeFi by first introducing the concept of multi-token pools. On top of the standard setup with two tokens per pool, Balancer also offers liquidity pools based on multiple coins. The maximum number of tokens per Balancer pool can be eight in standard pools and 50 in a special variety of pools called Managed Pools. The multi-token pool setup lets liquidity providers earn yield from a pool that resembles a multi-asset fund product, e.g., an index fund or a mutual fund.
Balancer allows traders to use the current swap pairs and pools as well as set up their own pools. This gives you the freedom to design your own crypto index product.
Balancer uses algorithmic rebalancing of fees and rates based on the trading activity and the composition of the pools. Such smart pools help the platform offer the best rates and fees.
As mentioned, Balancer is based on three key services – coin swaps, liquidity pool mining, and DeFi development/integrations. One key service is coin and token swaps. Balancer offers a big variety of liquidity pools, making swap transactions on the platform cost-efficient. While Balancer’s swap fees depend on each specific pool and can range widely, the lowest swap fee available on the platform is only 0.0001%. This rate is probably the most affordable you might find in the DeFi industry, at least among the leading protocols.
The second key service on Balancer is liquidity mining. In this respect, Balancer offers opportunities unmatched by other DeFi protocols. The majority of the DeFi platforms offer you the standard two-token pools, while Balancer gives you yield farming opportunities based on multi-token pools. You may also create your own pools to generate custom liquidity sources. When traders swap cryptos involving your pool’s assets, you can earn a share of the fees.
The third key target group of Balancer is DeFi developers. Balancer, thanks to its numerous liquidity pools and low fees, is a great tool to integrate with other DeFi protocols. Balancer offers blockchain developers the ability to programmatically create tokens, liquidity pools, and data oracles to source swap pair rates.
Balancer’s initial version, V1, was launched in early 2020. The protocol underwent a major upgrade in April 2021 and V2 was launched. The second version of Balancer introduced a few technical and functional improvements such as its single-vault system.
Vaults are smart contracts that manage the crypto assets held in Balancer pools. The Vaults are critical to Balancer’s working mechanism, which is based on the dynamic rebalancing of the vaults to maintain trading and liquidity mining efficiency and flexibility. Version 2 of Balancer introduced the concept of a single Vault to manage a set of assets in a pool.
Balancer Pools are multi-asset liquidity sources that underpin all the swapping and liquidity provision/mining operations on the platform. As noted earlier, Balancer is not a standard cookie-cutter DEX with just two-token pools. The platform features a variety of pools. Currently, Balancer has the following types of liquidity pools:
Weighted Pools are the simplest and most standard pool types on Balancer. They use Balancer’s Weighted Math which allows for coin swaps between tokens that may not share a price correlation, e.g., DAI/WETH. Weighted Pools also allow users to configure their pools according to their preferred token counts and weightings, a feature not offered in most pools.
Composable Stable Pools use Stable Math, a methodology based on Curve’s StableSwap, which allows for swaps between assets that have the same price (i.e. stablecoins like DAI/USDT/USDC), or a high price correlation (i.e. assets that are pegged to popular cryptos like WBTC or WETH).
Liquidity Bootstrapped Pools (LBPs) help to maintain stable prices and a fair market with their dynamic token weighting and time change, which are triggered by Balancer’s Weighted Math equation combined with time-dependent weights.
Managed Pools are custom-designed non-standard pools that give users maximum flexibility in terms of the pool’s composition, features, and management. Earlier, we noted that Balancer is unique in the sense that it provides standard pools with up to eight crypto assets per pool. However, when it comes to the customized managed pools, the maximum token limitation is 50. That’s right – under the Managed Pool option, Balancer can handle as many as 50 crypto assets per pool!
Featuring LBPs’ time-based Weighted Math formula, Managed Pools are typically reserved for fund managers who need to create complex “fund-like” products from a big variety of crypto assets.
Asset Managers help to manage the balances of Managed Pools, and invest the assets elsewhere while facilitating trade within the pools. There are options for pools without the function of Asset Managers in case of malicious Asset Managers who may cause a fund loss with bad investment.
Boosted Pools are an innovative functionality of Balancer V2 designed for interaction between Balancer pools and external liquidity platforms to create deeper liquidity and higher capital efficiency. Since Boosted Pools are designed to interact with an external source, they are based on smart contracts that are outside of the Balancer’s control. This is by design to ensure the integrity of the system.
Balancer’s most prominent Boosted Pool system has been launched in partnership with Aave (AAVE), one of the leading lending and borrowing protocols in the DeFi industry. The Aave-linked asset manager allows Balancer users to earn yield from liquidity sources on Aave. The partnership between Aave and Balancer was launched in December 2021. Balancer has announced that this Boosted Pool product is only the beginning of a wider network of partnerships planned with external liquidity providers.
Smart Order Router (SOR) is an important trading optimization functionality on Balancer. The platform prides itself on having an efficient rebalancing of assets to enable a low-cost environment for multi-asset trades and liquidity mining. SOR is a key element of the trading environment’s optimization. SOR optimizes trading routes across a variety of pools. Thanks to SOR, traders don’t have to plow through numerous pools to find optimal trading opportunities. Instead, SOR ensures that the best rates are delivered to them via the single-vault system.
When you provide liquidity to Balancer’s pools, you can earn rewards in BAL tokens, the platform’s native cryptocurrency. You may claim the tokens via the Balancer app’s claim section. The tokens, besides serving as crypto rewards, also act as voting rights on the platform.
Balancer is among the leading DEX platforms in the industry, consistently ranking among the top 10 DEXs. It is often compared to other leading DEXs, particularly the first AMM-based DEX, Uniswap, and Curve Finance. While Uniswap offers a very wide range of crypto pairs for swapping, Curve focuses on stablecoin pairs. Unlike these two exchanges, Balancer has the advantage of offering pools with several, or even many in the case of Managed Pools, cryptos.
Depending on the pool, the swap fees on Balancer might also be better. For instance, the standard swap fee is 0.3% on Uniswap, 0.04% on Curve, and can be as low as 0.0001% on Balancer. However, before using the Balancer for swaps, check the swap rate applicable to each particular pair since the fees may vary widely. Theoretically, depending on the trading activity and the rebalancing algorithm, the swap fee might be as high as 10%.
BAL is an ERC-20 standard token on Ethereum. Within the platform’s original rules, BAL was used primarily as a governance token. Holders of BAL could also vote on key matters concerning the protocol and its products. BAL was earned by providing liquidity to the protocol’s pools.
These functionalities of BAL have now been replaced by the new veBAL token. As per Balancer’s announcement in March 2022, veBAL is now the token to be used for liquidity mining and governance participation on the platform. To earn veBAL, you will need to provide liquidity to the Balancer’s key 80/20 BAL/WETH pool.
BAL was first launched in June 2020 at around $15. The token’s best performance was recorded during the earlier months of 2021. In May 2021, BAL reached an all-time high of $74.45. Since then, the token has largely been on a downtrend pattern, though it has mostly stabilized around the $5 range in recent months. As of the time of writing (Jan 18, 2023), BAL trades at $6.76.
The PricePrediction.net portal projects that BAL will reach a maximum of $20.54 by 2025 and $42.84 by 2027. Another popular crypto forecasting portal, Digitalcoinprice.com, estimates a slower growth, predicting that the token will reach $20.08 by 2025 and $25.75 by 2027.
Balancer is a crypto with very solid potential and represents a good investment. There are several factors why we believe in positive future returns for BAL:
As detailed in the section above, the key price prediction portals are estimating that the token’s price will keep growing.
The Balancer platform constantly remains in the top 10 among DEXs.
Balancer offers a unique crypto service where you may earn liquidity rewards from multi-token pools. As the DeFi industry matures and products become increasingly complex, traders will further look for opportunities to earn income from more sophisticated products. Balancer, with its multi-token pools, particularly the Managed Pools, is well-positioned to meet this demand.
The GALA token can be bought directly on its platform and on top centralized exchanges such as Bybit. On Bybit, you can trade BAL as a USDT perpetual (BALUSDT).
Balancer is not a standardized platform just for coin swaps. It offers liquidity mining opportunities that resemble those used by fund products in the financial industry. Additionally, its algorithmic rebalancing of fees and rates allows it to offer some of the most competitive fees among DEXs. All these benefits of the platform will ensure that Balancer stays among the top DeFi protocols in 2023 and beyond. The protocol’s relevance will also be boosted by the demand from traders that are looking for ever more sophisticated yield farming opportunities.