Balancer is an automated portfolio manager and trading platform built on the Ethereum blockchain. Its official launch came in March 2020, yet the protocol started development in September 2019 led by Fernando Martinelli, Nikolai Mushegian, and Mike McDonald, who funded the project with $3 million.
Balancer offers several innovative and simple features for its users. It works as an automated market maker (AMM), which is opposed to traditional order books and allows users to trade digital assets permissionless and automatically by using liquidity pools.
Balancer Developers and Founders
Balancer is a product of Balancer Lab, founded by Fernando Martinelli and Mike McDonald. It began as a research software program in 2018 at BlockScience, an engineering and analytics firm for complex systems. Balancer currently has four leading developers:
- Fernando Martinelli: Co-founder. Martinelli is an entrepreneur and Maker Protocol community member, he has also worked and developed many other projects before founding Balancer.
- Kristen Stone: Chief Operating Officer at Balancer who previously worked as a product manager at Coinbase.
- Mike McDonald: Security engineer and creator of mkr.tools who later joined Martinelly to develop Balancer, currently the Chief Technology Officer.
- Timur Badretdinov: Frontend developer who focuses on dApps (decentralised applications) and portals of the protocol.
How Balancer Works
Balancer is a broad platform. It works as an Automated Market Maker (AMM) and a self-balancing weighted portfolio. It’s a multifunctional protocol, and first and foremost, a decentralised exchange for the swap of ERC-20 tokens. Yet we need to keep in mind it doesn’t properly work as an exchange, as it uses a combination of cryptocurrencies to fund trading pools so anyone can swap assets without the need for an exchange.
Users on Balancer can create funds based on the assets on their portfolios —known as ‘Balancer Pools’ — where they can add liquidity by simply depositing in them.
Being an Automated Market Maker, Balancer acts as a DEX, allowing peer-to-peer (P2P) crypto transactions without the need for third parties. Balancer automatically will route trades through various liquidity pools in order to find the best rate for the user. Some swaps may be direct; for example, a user deposits ETH and it’s automatically swapped to BAL, or it might need to go through USDT first and then to BAL.
Have you ever noticed how a weighted index fund functions in traditional finance? In essence, an index fund is an investment strategy that holds a balance of several assets. We can take the SP 500 for instance: it’s a stock market index tracking the performance of 500 large companies listed on the United States markets.
How is this idea transplanted to Crypto?
Here’s an example of how Balancer works:
Let’s say a Balancer pool might start off with 25% BTC, 25% ETH, and 50% LTC. If LTC experiences a market correction and its price suddenly drops, the protocol rebalances token prices to maintain the 50% of the pool’s value. On the contrary, if the price of LTC doubles, the protocol reduces the amount of LTC in the fund. When this happens, Balancer’s smart contracts will make the excluded LTC available to traders looking to buy when markets are bullish.
Liquidity providers still earn fees while their funds are being rebalanced. This isn’t a feature in any traditional stock market index fund, where investors have to pay fees for the rebalancing services.
There are three main types of pools designed to meet investors’ appetite for risk:
- Private Pools: Only the pool’s governor has the right to add or withdraw assets, as well as adjusting all of the pool’s parameters like gas, fees, types of assets that can be added, and weightings. These pools are useful for traders with large portfolios seeking to earn interest on their assets.
- Public Pools: Everyone can add or withdraw assets on public pools, but unlike private pools, parameters can’t be changed. These pools are useful for smaller portfolios seeking to earn fees from the most popular and liquid assets in the market.
- Smart Pools: These pools are a type of private pool as well; the difference is that they are controlled and owned by smart contracts. The addition of smart contracts allows pools to be programmed to perform certain functions like creating an index fund that tracks a portfolio or changing weights. Anyone here can add or withdraw assets.
There are a total of 54 tokens you can deposit to liquidity pools, including BAL (Balancer’s utility token) Ether (ETH), Bitcoin (BTC), DAI Stablecoin, USDC, WBTC (Wrapped Bitcoin), WETH (Wrapped Ethereum), LINK (Chainlink), and more. You can add other less liquid tokens to custom pools, yet this is not always the best idea as working with illiquid tokens is always risky.
Balancer System Governance
At first the protocol was meant to be in the hands of the creators as they didn’t have their own token, but later on it was decided the best option was to leave the future of Balancer in the hands of the community. The on-chain governance system began on June 23, 2020, when the protocol announced BAL token distribution on a weekly basis to liquidity providers, giving them the power to make future decisions and changes in the protocol’s development.
Balancer, like almost any DeFi project, has its own token: $BAL, an ERC-20 token that powers the entire protocol. 100 million BAL tokens were created, distributed weekly to liquidity providers at a rate of 145k per week. At the date of launch, 25 million tokens were given to the team, core developers, advisors and investors, 5 million tokens for the Balancer Ecosystem Fund, and 5 million to the fundraising fund.
The BAL token allows yield farming and liquidity mining for users thanks to its Liquidity Mining program, which is maintained by a Liquidity Mining committee called “Ballers.” Ballers have control of token distributions and each week they decide which pool will be used to allocate the tokens. We can check out the committee’s progress on the liquidity program each weekend on their Discord channel.
BAL started as a worthless token, but it’s now one of the most valuable tokens in the market, priced at $29 per coin at press time. Besides airdrops, liquidity providers and other users can buy BAL on most popular crypto exchanges like Kraken, Coinbase, ZenGo, HBTC, OKEx, Huobi, etc.
Balancer Security and Auditing
Balancer has been fully audited three times by three security and analytics firms: Certora, OpenZeppelin, and Trail of Bits. The protocol announced they will run a bug bounty program for the V2 release of the Balancer core contracts. The reward depends on the severity of a vulnerability. For instance, if a user finds a critical vulnerability like draining a significant amount of funds from the vault or permanently locking significant funds in it, the reward could be up to 1,000 ETH ($2,000.000).
Balancer is an innovative DeFi protocol built on Ethereum. Since its creation, the protocol’s main focus was to bring a broad set of tools for customers and investors. It is without a doubt one of the fastest growing protocols in the DeFi space, mostly due to the significant amount of work done by developers, ensuring an ecosystem that offers multiple functions for users to profit.