🤔 What is Balancer ?
Balancer is a decentralized exchange(DEX) built on Etherium, which facilitates exchange of Etherium based tokens without the need for any middleman.
💡 What role does BAL token play ?
BAL is the governance token for Balancer protocol. Token holders propose and vote on updates to Balancer protocol.
👴🏻 Fernando Martinelli - Founder
- Fernando is from Lisbon in Portugal.
- He has a degree in Engineering Control and Automation from the Federal University of Santa Catarina, Brazil.
- He obtained multiple master’s degrees from Heriot-Watt University in Edinburgh, Scotland (Robotics and Image Processing, 2008); University of Burgundy in Dijon, France (Robotics and Image Processing, 2009); and University of Girona in Spain (Robotics and Image Processing, 2009).
- Fernando has been part of several startup companies which include PrepLounge in 2014 and Brasil Mate also in 2014.
- He started working on Balancer in 2018 and is the current CEO of Balancer labs.
😌 What problems does it solve ?
- No trusted third party: Users are in control of their funds. The exchange does not involve any middleman, unlike centralized exchanges.
- Centralized exchanges pool all the funds and cryptocurrencies in one place, presenting a lucrative target for hackers.
- No complicated paperwork like KYC and long waiting period is involved for trading cryptocurrencies.
- Governments cannot regulate Balancer because:
- It is deployed on Etherium.
- Its governance is decentralized.
- Efficiency gains: Balancer does not have to run servers and hire an army of developers. This allows Balancer to provide better rates as compared to centralized crypto exchanges, which have to generate profits and have huge overheads.
🤖How does it work ?
Unlike order books that match buyers and sellers, Balancer uses automated market maker.
Liquidity providers pool their liquidity in liquidity pools. Liquidity pools consist of one or more crypto assets. The product of the value of the assets in the pool is constant.
The trader can take out a crypto asset from the pool by providing sufficient quantity of another asset such that the product of the value of assets in the pool remains constant.
Arbitragers use the opportunity to deposit the expensive asset and take out cheaper asset rebalancing the pool if the price of an asset gets mispriced as compared to the existing price in the real world
Balancer offers 3 types of liquidity pools:
- Public: Anyone can start a public liquidity pool. Crypto assets, fees etc are fixed at the start and cannot be changed in the future. Other users can also add liquidity to the liquidity pool and earn a portion of trading fees generated by the liquidity pool.
- Private: The liquidity pool is owned by an individual, who can change fee structure and rules of the pool. Outsiders cannot add liquidity to the pool.
- Smart pool: The liquidity pool is run by smart contracts. The smart contract has pre-determined rules that update parameters of the liquidity pool. For example, smart contract can be designed to increase trading fees when a lot of trading takes place.
Balancer liquidity pools as ETF
Investors can use Balancer pools as ETFs (Exchange-traded funds). They can design a pool to have fix percentage of each asset. This turns the concept of index fund on its head: instead of paying fees to portfolio managers to rebalance the portfolio, liquidity providers receive fees from traders who rebalance their portfolio.
Traditional ETFs charge fees to run and rebalance funds because they are limited by:
- Trading fees for rebalancing.
- Administrative overheads.
- Legal and regulatory compliance, etc.
Smart order router
Balancer provides a simple user interface for users to swap tokens.
But it uses “smart order routing” in the background to select the best pool so that the trader gets the best price.
Users can borrow flash loans worth millions of dollars from Balancer without putting up any collateral. However, the loan has to be paid back in the same blockchain transaction block, otherwise, the whole transaction is canceled.
Arbitrage is one of the most common use cases of flash loans.
🏛️ Governance model
- Balancer uses snapshot, a decentralized voting system. BAL token holders create and vote on proposals to update the protocol.
- Balancer uses Multisig signers to make changes passed by voting. Balancer’s Multisig signers are a diverse set of widely respected community members. The multisig does not have decision-making power, as its role is to simply enact on-chain the decisions BAL holders make via off-chain voting on snapshot.
🤑 How much money does the project have for future development ?
- The team has raised $12 million dollars from VC funds by selling BAL tokens.
- Balancer project has 10 million BAL tokens in Ecosystem fund for future development.
- Crypto industry is growing. So is the demand for cryptocurrencies.
- Network effects: More liquidity providers will attract more traders. More trading fees will attract more liquidity providers. This positive feedback loop has potential to cause exponential growth in a short period of time.
A hacker exploited vulnerability in two of the Balancer pools to hack about $500,000 worth of multiple tokens in Jun 2020.
Balancer admitted their mistake and compensated the affected users.
After thorough discussions with the community, the Balancer Labs team decided that it will fully reimburse all the liquidity providers who lost funds in the attack of yesterday. We will also pay out the highest bug bounty available for @Hex_Capital— Balancer Labs (@BalancerLabs) June 29, 2020
More details on the...
😨 Risks and challenges
- Trading sector is heavily regulated by their respective governments, central banks and securities & exchange commission. Many governments will try to ban/regulate Balancer for operating without a license.
- Liquidity pools hold tokens worth millions of dollars presenting a lucrative target for hackers.
- There are many crypto projects building decentralized exchanges.
- Balancer has sufficient funds, however, they do not have any ongoing source of revenue. Balancer is a long-term project whose growth can be affected by lack of funds.
BAL token holders can pass a proposal to give a portion of trading fees to the Balancer fund, to fund future development.
BAL token have fixed max supply of 100 million tokens. Their distribution is as follows:
- 25M tokens were allocated to founders, options, advisors, and investors, all subject to vesting periods.
- 5M tokens were allocated for the Ecosystem Fund. This fund will be deployed to attract and incentivize strategic partners who will help the Balancer ecosystem grow and thrive. BAL holders will ultimately decide how this fund is used over the coming years
- 5M tokens were allocated for the Fundraising Fund. This fund will be used for future fundraising rounds to support Balancer Labs’ operations and growth
- Liquidity providers also receive BAL tokens as reward in addition to the trading fees. 145,000 BAL tokens, or approximately 7.5M per year, are distributed every week through the Liquidity Mining program.
Token’s price increases due to demand pressure.
Demand pressure on BAL token will come from:
- Governance: Users will acquire BAL tokens to participate in governance.
- Speculators: They will buy BAL tokens for future price appreciation.
Crypto exchange and crypto ETF market is a multi-billion dollar industry growing at an exponential rate. The governance token of a project that aims to disrupt this industry will be worth a lot.
🧐 Indicators to watch out for
- Balancer Twitter following is growing:
- Daily trading volume:
- Total value locked:
- Average trade size:
Balancer is one of the most versatile decentralized exchange. However, I will not be investing in BAL tokens because:
- It has fixed max supply but only 35% of the supply is in circulation. 65% of the total supply will come into circulation in the coming years.
- There are too many projects building decentralized exchanges. It is difficult to pick out a winner.