Balancer: The Decentralized Automated Portfolio Manager and Trading Platform
Balancer at a Glance
Balancer Finance is a unique financial product that aims to reconstruct the idea of the index fund. Created in 2019, Balancer is an automated portfolio manager and liquidity provider on the Ethereum Blockchain. The team behind Balancer concluded that liquidity pools with high token-counts are like traditional index funds. However, liquidity pools differ from index funds specifically in the fee structure. Instead of paying a fee for a portfolio manager to rebalance an individual’s portfolio, liquidity providers (LPs) collect fees as the liquidity pool is continuously rebalanced by traders swapping tokens. This becomes advantageous for both LPs and traders. LPs collect fees and have their portfolio automatically rebalanced, while traders have access to 24/7 markets and arbitrage opportunities.
Balancer’s Unique Value Prop: The Vault
At the heart of Balancer is The Vault, which is a smart contract that contains and manages every token in each Balancer pool. The design of The Vault allows Balancer to achieve reduced gas swaps when exchanging between a variety of different tokens. The Vault’s architecture simplifies the overall logic of each Balancer pool, since the accounting and management responsibility is delegated to The Vault. Each Balancer pool is only responsible for keeping track of swaps, liquidity additions, and liquidity removals. The rebalancing mechanism takes place within The Vault, giving the design of Balancer liquidity pools a unique advantage. By concentrating all liquidity into a central location, this allows Balancer to offer developers deep liquidity for any token they are launching. Any token can plug into Balancer’s Vault’s liquidity, only needing to satisfy a few requirements. The Vault is token agnostic, giving developers a wide range of flexibility.
By having the accounting and management take place in one central place, this allows Balancer to offer batch swaps with minimal gas fees. In some instances, a user may need to swap between multiple tokens (A B C). On traditional model DEXs, a trader would have to perform two swaps to reach their destination token. This can end up in a trader paying two separate gas fees. Since Balancer’s Vault keeps track of the accounting and management of every token for every Balancer pool, this allows a seamless transaction between any asset(s) a user desires to exchange for.
Another advantage of the combined liquidity in Balancer’s Vault is the ability to leverage that capital to offer an innovative financial product known as flash loans. Flash loans are uncollateralized loans that must be repaid in full in the same transaction that it is borrowed. Because flash loans must be completed in a single transaction, this means code can ensure that borrowers are unable to run away with tokens. Traders who identify an arbitrage opportunity within two Balancer pools can perform a flash swap to profit from the situation. A flash swap can be performed by any individual trader, regardless of if they own the input tokens. Simply, the arbitrage trader alerts the Balancer vault of the price discrepancies and is rewarded in profit.
The main governance token for Balancer is BAL. Voting power for BAL holders stems from the total BAL a wallet holds. BAL holders vote on governance proposals to decide specifics such as fee structure and the distribution of BAL tokens over time. To maximize efficiency of the Balancer protocol, it is necessary for BAL holders to reach an alignment towards the best path forward for Balancer. Since inception, Balancer has attracted roughly $3.8 billion in Total Value Locked (TVL) in its pools and has deployed its application on Ethereum, Polygon, and Arbitrum. Balancer constantly pushes the boundaries of innovation for DeFi, and this is a main reason it continues to attract capital to its products.
DeFi 101: A Guide to Decentralized Finance
Decentralized Finance, or DeFi, has been rapidly gaining traction amongst the investment community. DeFi protocols, like Solana, Chainlink, or Uniswap, have real-world utility (and revenues) that are quickly displacing their traditional counterparts that require intermediaries to function.
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