This review will look at Balancer, an automated wallet manager and trading platform for cryptocurrency users. In particular, we will examine the decentralised exchange’s products and features, as well as discuss its liquidity pools, native utility token and security.
INTRODUCTION
Balancer is a decentralised exchange (DEX) platform and one of the leading automated market makers (AMM) in the crypto sector.
After being in development since 2018, Balancer launched in March 2020 and has quickly risen to the forefront of the cryptocurrency space.
Balancer has quickly established itself as one of the leading DEX platforms in terms of trading volume and blocked value, among other metrics.
The decentralised protocol is based on the Ethereum blockchain and offers an open and accessible alternative to centralised exchanges. In particular, Balancer allows anyone to exchange Ether and ERC-20 assets in a trustless and permissionless environment.
In addition, Balancer, like many other current decentralised finance applications (DeFi), has its own native utility token (BAL), called the Balancer token.
In particular, the community-driven protocol offers its users:
The opportunity to generate earnings through the use of their token (BAL), which allows them to contribute to customised pools of liquidity;
A self-balancing weighted portfolio manager;
A price sensor that enables decentralised token exchange;
A liquidity provider;
Automated token portfolio management on the Ethereum blockchain and other EVM-compatible systems.
WHY DO PEOPLE USE BALANCER?
Balancer has over $3.4 billion in liquidity and over 17,500 liquidity providers (LPs), not to mention that these LPs have earned over $70 million in collection fees. In particular, people use Balancer because it offers several critical integrations in its protocol, such as the following:
Reduced gas rates;
Improved capital efficiency:
Arbitrage enabled with zero token upfront capital;
Accessibility to customised AMMs.
Due to its decentralised nature, Balancer focuses on serving investors and traders who wish to exchange their assets or offer liquidity without the need for intermediaries.
Ultimately, Balancer serves everyone, including liquidity providers and traders…..
For example:
Liquidity providers who are also known as market makers benefit by charging trading fees, while their portfolios are regularly rebalanced.
Traders, on the other hand, have access to an open, decentralised exchange that never closes, allowing them to trade whatever they want, whenever they want, for competitive rates.
Balancer offers a number of benefits that distinguish it from the competition, such as:
The degree of freedom and control it offers pool owners;
Balancer is one of the few AMMs that directly rewards operators for using the platform. Users earn BAL tokens in proportion to the average gas price and the current ETH / BAL exchange rate at the time of their transaction for qualified swaps.
When swaps are transacted through pools for which they offer liquidity, Balancer’s liquidity providers receive fees, as do most other AMMs. The fee is dispersed proportionally to the LPs’ participation in the group.
Instead of paying a broker to rebalance the pool, pools receive fees when swap dealers continuously rebalance them. In addition, groups with a large number of tokens benefit from having a large number of token pairings, which provides more opportunities to earn trading fees.
Balancer supports multiple asset groups, allowing group owners to incorporate up to 8 different assets into their groups. Group administrators can build complete portfolios that traders automatically rebalance. Since transactions do not need to be routed through Ether (ETH), they are less susceptible to slippage for traders.
Balancer for investors
Balancer allows you to invest and manage your portfolio like a pro, without the hassle or expense. The investor-friendly protocol manages assets algorithmically by quickly rebalancing positions and earning trading fees over time.
In addition, Balancer’s diverse pool designs allow over 25,000 investors to choose the optimal arrangement for their investment objectives with benefits such as:
Plug and play: Thousands of individual and institutional investors have used Balancer’s simple portfolio configurations.
Maximise fee returns: Dynamic fee pools use market conditions to alter trading fees and maximise investor returns.
Flexibility and choice: Balancer allows experienced investors to choose the amount of exposure to each asset in their portfolio and set custom pricing curves, allowing them to create a myriad of strategies.
Permission-free platform: Non-custodial protocols such as Balancer allow investors to manage their own money, rather than relying on a centralised team or third party.
BAL token rewards: The Balancer platform rewards investors who deposit assets into incentivised liquidity pools with payments of $BAL tokenised liquidity mining dividends.
Security mindset: With investor security in mind, Balancer’s smart contracts have been rigorously tested to prioritise the protection of investor funds. Balancer also has a history of security audits by leading firms, as well as a bug bounty of 1,000 ETH, which they claim is the highest in the industry.
Balancer for Traders
Traders can benefit from Balancer’s efficient trading by crowdsourcing liquidity from investors’ portfolios and using its Smart Order Router to discover the best available price for them to trade. Trade any combination of ERC-20 tokens without authorisation and with simplicity.
The Balancer Protocol is an open financial marketplace that allows traders to trade in real-time while maintaining security. Users can trade immediately without any restrictions or the need to create an account or obtain anyone’s permission to do so.
In addition to the ability to exchange thousands of token pairings at lightning speed and at the best possible prices, the decentralised liquid cryptocurrency market provides other benefits such as:
No gas: On the platform’s new Balancer-Gnosis-Protocol (CowSwap) trading interface, you can take advantage of free signature trades (no gas required), MEV protection and the best rates on DeFi exchanges.
MEV protection: Miner’s extractable value (MEV) is protected from traders in Balancer, which would otherwise result in increased gas fees and additional price slippage for DEX traders if not protected.
Balancer vault efficiency: Balancer allows traders to retain a tokenised balance within the protocol, so trades can be executed without leaving the Balancer vault, which is ideal for high-frequency traders as it reduces the cost of gas.
+$3.4 billion in liquidity: Trades of any size on the Ethereum, Arbitrum or Polygon mainnet can be sure to be competitively priced thanks to Balancer’s market liquidity.
User controls funds: With Balancer, traders do not have to hand over control of their assets to a third party; users’ funds are always in the hands of the account holders themselves.
Zero equity arbitrage: Flash swap allows traders to perform arbitrage trades that rebalance pools of liquidity while sending profits directly to the trader, all without spending any tokens on the Balancer platform.
Building on Balancer
By using Balancer’s stable, open source, permissionless protocol, users in the cryptocurrency space can develop new and creative types of financial dapps.
Instead of focusing on low-level accounting, developers can prioritise the new AMM logic with more than 50 DeFi integrations in four steps.
Create a smart pool;
Launch a token;
Use balancer data;
Use pricing oracles.
Customisable AMM logic
Smart Pools are dynamic pools of liquidity whose parameters can be altered by modifying the smart contract code. Pool owners can define who can participate in the pool. In addition, Balancer’s open source code allows you to innovate without restrictions.
In addition, Balancer V2 Smart Pools will be available in the near future. Multiple tokens, configurable weights and the ability to set your own exchange rates are available. You can create your own unique weighted pool in Balancer V2 in just four easy steps.
Launch a token
For a fair and liquid launch, Balancer has in place a Liquidity Bootstrapping Pool (LBP), which is an adjustable Balancer Smart Pool that is intended for distribution and price discovery of new assets. Essentially, the weight of an LBP is set to constantly change throughout the token sale.
This also offers benefits such as:
Free and permissionless;
Capital efficient;
Equitable distribution.
KEY BALANCER PRODUCTS
Balancer is redefining the notion of decentralised exchanges by providing users with five key products to help them make the most of their trading experience.
The Vault;
Balancer Groups;
Intelligent Order Router;
Merkle Orchard;
Balancer Gnosis Protocol.
1. The Vault
The central component of Balancer is the Vault; it is a smart contract that stores and controls all the tokens in each Balancer cluster. In addition to being a crucial part of Balancer, the Vault also serves as the gateway through which most Balancer operations (swaps, joins and exits) are carried out.
Accounting and token management are separated from the pool logic in Vault. Pool contracts become simpler as they no longer need to actively manage assets; they simply need to calculate swaps, joins and exits.
This architecture has the following benefits:
A variety of pool designs can be accommodated by this architecture, which is agnostic to pool mathematics and can work with any system that meets some parameters,
No need to create your own decentralised exchange;
Anyone with an innovative concept for a trading system can create a customised bespoke pool that is directly connected to Balancer’s current liquidity.
Gas-efficient batch exchanges
Multi-hop trading (A->B->C) can be costly on other decentralised exchanges when token accounting is combined with group logic, as ERC20 tokens must be transferred on every hop.
However, the Vault contract stores all tokens, which gives Balancer an advantage; it allows for better swap switch efficiency, as vault only transfers tokens on entry and exit of a multi-hop deal, saving gas by reducing token transfers.
It is also possible to execute swaps without any token transfers. Because the Vault can track balances for arbitrary Ethereum addresses, just as it does for groups, users can store internal balances in the Vault and perform transactions to and from these balances.
Vault security
The Vault keeps group balances independent, which is crucial for a permissionless system where anyone can generate their own tokens and groups. This independence prevents malicious or carelessly designed tokens or custom groups from draining cash from other groups.
As a result, even if the Vault holds aggregate liquidity of a given token from numerous pools, the depth of that combined liquidity does not influence individual pool prices.
Balancing flash loans
When it comes to the impact on prices per group, the consolidated liquidity in the Vault has no effect; however, it allows Balancer Protocol to leverage that combined liquidity by issuing Flash Loans.
Flash Loans are unsecured loans that must be repaid (plus interest) in the same transaction in which they were obtained. Formalised guarantees prevent borrowers from running off with tokens, as everything must be completed in a single transaction.
If the prices of two Balancer Pools differ, anyone can execute a Flash Swap. A Flash Swap referee does not need to own any of the input tokens required to execute a deal. Instead, the trader finds the imbalance, instructs the Vault to perform the swap and profits.
2. Balancer pools
Smart contracts called pools are the building blocks of the Balancer Protocol, and determine how traders can exchange tokens on the platform. The versatility of Balancer pools sets them apart from other systems.
Unlike other exchanges, which have pools with predefined specifications, Balancer supports pools of any composition and underlying mathematics. Due to Balancer’s open design, anyone can create their own type of pool, allowing for flexible pricing options and functions.
In addition, WeightedPool2Tokens and MetaStable Pools provide optional Oracle functionality, allowing them to be used as daisy-chained pricing data sources.
The following is a list of the many pool options available in the Balancer Protocol for various combinations of tokens:
Weighted Pools: Designed for broad use, including tokens that do not necessarily have a price connection (e.g. DAI/WETH).
Stable Pools: Suitable for soft linkage tokens with a high correlation coefficient (e.g. DAI / USDC / USDT).
MetaStable Pools: Designed to support unlinked tokens that preserve correlation but may diverge over time, such as the derivative (e.g. stETH / WETH).
Liquidity Bootstrapping Pools: Useful for changing the liquidity of one token into another (e.g. AKITA / ETH).
Managed Pools: Built to provide maximum flexibility in order to manage a dynamic pool. Including weight shifting for rebalancing, exchange pause and management fees. (For example, WSBDapp).
3. Smart Order Router
The Smart Order Router (SOR) helps Balancer operators to discover the best prices. The SOR identifies the best trades for a given set of input and output tokens whether it is a direct trade in a single pool or a combination of transactions travelling across many pools.
The SOR increases along with the expansion of the diversity of Balancer Pools. In addition, the SOR continues to grow as additional pool types with unique mathematics are introduced.
As a result, the many groups in the Balancer ecosystem can execute trades. By connecting and integrating with the SOR, any custom group created in Balancer can use Balancer liquidity.
The SOR is designed to generate an arbitrage-free state between the paths it uses to acquire the best price for a trader. To achieve this, each path the SOR takes must offer the same spot price when the trade is completed.
4. Merkle Orchard
Weekly Liquidity Mining distributions are claimed using the MerkleOrchard contract. The contract allows liquidity providers to claim tokens from the contract.
A Merkle root of the accumulated token amounts is compared to these claims. In addition, claiming through the MerkleOrchard saves a lot of gas, especially when claiming numerous weeks of bounties and multiple tokens.
For more advanced use cases, such as depositing tokens directly into liquidity pools, the contract allows for claiming callback contracts. Finally, the Balancer community is strongly encouraged to develop unique user interfaces that facilitate this process.
Any user can contribute their tokens to the MerkleOrchard to be claimed. In order to promote liquidity mining in interest groups, Balancer anticipates that users will use it as a standard utility to deliver ERC20 tokens to any number of recipients.
In its current state, MerkleOrchard is being used to distribute BAL and other tokens from various initiatives designed to promote fund liquidity in the protocol.
5. Balancer Gnosis Protocol
Balancer Gnosis Partnership (BGP) is the default trading interface on app.balancer.fi.
BGP uses Gnosis Solvers and Balancer Vault to perform batch trades, and traders send swaps using Gnosis Solvers by simply signing a message to initiate a gasless transaction.
To protect traders from miner extractable value (MEV), solvers match transactions first using on-chain liquidity, allowing them to take advantage of wish matching.
To ensure that traders always receive the best price, BGP uses many decentralised exchanges. However, its strong integration with Balancer’s Vault allows it to perform sophisticated multi-hop deals with minimal token transfers, which substantially reduces transaction costs.
Finally, because BGP pools gasless transactions, failed trades do not result in a loss of fees.
Co-Wish matching (CoWs) is an economic occurrence in which peer-to-peer transactions are settled directly between participants without the need for an AMM, avoiding slippage and fees.
On the Gnosis v2 CowSwap platform, users can buy and sell tokens using gasless orders that settle peer-to-peer or on any liquidity source on the blockchain while protecting MEV.
User savings are achieved by eliminating the requirement for an external market maker or liquidity provider, which means that gas costs, slippage tolerance and protocol fees can be reduced.
The following are some of the advantages of using BPG:
MEV security;
Competitive blockchain pricing;
Failed transactions will not incur any gas costs;
Trades that do not use gas;
Professional management of third party transactions.
GOVERNANCE
The Balancer Governance Process allows anyone with BAL voting power to vote on proposals. Essentially, Balancer Protocol governance makes decisions about new features and the direction in which the protocol should evolve. Ultimately, governance is the final authority, and no one can override the results of a vote.
Simply put, the Balancer Governance Process follows an idea from inception through discussion, proposal, vote and finally enactment. It is intended to be an open, transparent and intuitive method for advancing the future development of the protocol in an open and honest manner.
Balancer governance votes are conducted in Snapshot, which is an off-chain gasless multi-governance client that produces results that are easily verifiable and difficult to contest.
Balancer governors have the authority to activate and change the Governable Protocol fees charged to traders. Protocol fees can be collected through merchant fees and flash loan fees and held in the Vault.
In addition to deciding what happens to the fees, governors have the authority to choose how they should be spent to best promote the development and performance of the protocol.
BAL governance tokenisation
Tokenisation is a common feature in many current DeFi applications, and Balancer is no exception. When you provide liquidity or trade on the Balancer Protocol, you can earn the BAL token, which is used to participate in the governance of the Balancer Protocol.
BAL holders, also known as Balancer Governors, are responsible for voting on proposals that are relevant to the protocol.
TRADING COMMISSIONS
Balancers are highly customisable, so each group may charge a different fee. The amount of fees charged is entirely at the discretion of the group developer, with fees ranging from 0.0001% to 10%. When using the Smart Order Router, fees will always be taken into account when determining the optimal price to be offered.
Trading commissions: A small proportion of each transaction paid by traders to pool LPs, set by the pool developer or dynamically optimised by Gauntlet. In addition, the governance of the Balancer may vote to implement a Protocol Trading Fee, which is a proportion of the Trading Fee.
Suppose a group charges a 1% cost and the governance institutes a 1% protocol fee; the overall swap fee charged to the trader remains at 1%, but 0.99% of the fee is distributed to the group’s LPs, and 0.01% is allocated to the protocol fee collection contract.
Note: At launch, all protocol costs were set to zero and can be changed only through governance.
Flash loan fees: A modest fraction of the assets used to fund Balancer’s Vault flash loans. This is the protocol fee; it is collected by the protocol and distributed by governance.
BALANCING COMMUNITY
All Balancer conversations and decisions are determined democratically through Governance Snapshot voting. The Community is made up of people who care about the growth and development of the protocol. Discussions take place in the Balancer Discord, while implementation and policy changes are debated in the Governance Forum.
Other community pages can be found on other networking platforms such as:
Twitter;
LinkedIn;
Medium;
Github.
SECURITY
There are no admin keys or backdoors in the Balancer protocol, which makes it completely trustworthy, and you cannot update Balancer groups. Tokens that do not correspond to the ERC-20 standard are not supported by Balancer, despite being in use in certain groups.
In addition, Balancer has no control over the tokens held in Balancer pools; instead, they are smart contracts. However, this does not eliminate the inherent dangers associated with smart contracts.
To ensure that tokens with known defects are not used in the groups, configurable rights pools (CRP) are in place. It also ensures that all other tokens can interact with the protocol in a secure manner.
Fully audited
Security is of paramount importance to Balancer, so the platform has undergone audits with Certora, OpenZeppelin and Trail of Bits.
Bug bounty programme
As part of the V2 version of Balancer’s core contracts, Balancer is also operating a bug bounty programme on an ongoing basis. The severity of a vulnerability will determine the amount of reward paid under the bug bounty programme.
In this case, bug bounties are applied to Balancer’s smart contracts responsible for securing the protocol’s funds on the Ethereum mainnet.
The Balancer native token is also listed on established cryptocurrency exchanges and trading platforms for secure transactions such as Binance, Coinbase, Bithumb, Kraken and Crypto.com, among others.
Balancer Pool Hack
An issue occurred that allowed an attacker to siphon cash from two pools containing transfer fee tokens (sometimes referred to as deflationary tokens).
Balancer had frequently warned about the unintended consequences of ERC20s with transfer fees in its documents, discord and other channels. This is precisely why STA was excluded from the BAL mining whitelist compiled.
The system is designed for ERC20-compliant tokens, and when tokens act in unexpected ways, negative consequences can occur. Balancer is a permissionless system, which means that malicious or faulty tokens can always be introduced at the contract level.
Balancer in response:
Transfer fee tokens have been added to the UI blacklist.
Added more documentation on the dangers associated with running these pools and how tokens that are faulty or maliciously constructed could drain funds from a pool.
Continued to audit and evaluate the protocol on an ongoing basis.
Ultimately, Balancer reimbursed liquidity providers who had lost funds and continues to offer bug bounties.
PROS AND CONS OF BALANCER
Pros
Balancer is a fully decentralised market making protocol;
Anyone can create liquidity in any particular token;
Low gas fees;
Custom AMMs;
A multi-asset pool balancer allows pool owners to integrate up to eight different assets into their pool, allowing for greater diversification;
Using multi-asset pools, pool managers have the ability to build comprehensive portfolios that traders automatically rebalance.
Cons
The concept of the platform and connecting another wallet is difficult for cryptocurrency novices;
Malicious transfer tokens can still be added, as it is a DEX;
More educational material could be provided to let users know how to use the platform step by step.
FINAL THOUGHTS
Finally, Balancer is a well-known decentralised exchange platform that is establishing itself as a new generation of cryptocurrency trading interfaces that does away with accounts and order books altogether.
Unlike centralised exchanges, the new automated market maker offers an open and easily accessible alternative. Balancer, like many other AMM platforms, routes trades through whatever liquidity pools are required to achieve the best rate for the client, meaning swaps can be direct or indirect in nature.
In the end, Balancer fulfils its objective of serving investors and traders who wish to swap their assets or offer liquidity without relying on centralised intermediaries, and the platform achieves its goal.
FREQUENTLY ASKED QUESTIONS ABOUT BALANCER
What is Balancer?
Balancer is an automated market maker and decentralised exchange based on the Ethereum blockchain. The platform values assets in a liquidity pool based on their ratio. Adding or removing liquidity from one side of a pool affects the ratio of the pool and therefore the price of each asset, so Balancer trades across the available liquidity pools to ensure the user receives the best possible price.
How do I use Balancer?
There are three ways to participate in Balancer: by trading compatible tokens with each other, by creating liquidity pools to increase the liquidity of the balancer protocol, or by investing in pre-existing liquidity pools to profit from trades.
What are the fees for using Balancer?
Balancer pools can be configured in a variety of ways, and each pool can charge a different fee. The pool developer determines the fee structure, which can range from 0.0001% to 10%. When using the Smart Order Router, fees are always included when determining the optimal price.
What is the BAL cryptocurrency?
The Balancer token (BAL) is the official native utility token of the Balancer Protocol. The token is used to participate in the governance of the Balancer Protocol and when you provide liquidity or trade on the Balancer Protocol, you can earn BAL.
