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What Is Balancer Protocol? - An Introductory Guide To DeFi Most Enhanced AMM.

 

By Damian David Mar 14, 2023

 

 

What Is Balancer Protocol?

 

Balancer protocol is a decentralized finance (deFi) automated market maker (AMM) protocol and decentralized exchange (DEX) built on the Ethereum Blockchain that utilizes a variant type of liquidity pools (LPs) allowing flexible and customizable ratios for Liquidity providers.

 

Balancer's core features revolve around Smart Contract functioning Automated Market Makers (AMM) Liquidity Pools (LPs), Swaps and Trades, Portfolio functions and various incentivizing opportunities for everyone in the DeFi ecosystem.

 

Balancer protocol was launched in March 2020 by Fernando Martinelli who is the CEO of Balancer Labs and Mike McDonald who is the CTO of Balancer Labs. It was however initially proposed in early 2018 as a research project at a software firm called "BlockScience"

 

 

How Does Balancer Protocol Work?

 

The classical Automated Market Makers (AMMs) in the cryptocurrency market have liquidity pools that are created using the formula: X×Y=k. This formula Insinuates there must be two token variables to qualify it as a liquidity pool. The smart contract functionality of the Automated Market Maker (AMM) subsequently balances the value of X and Y to remain constant (K) for as long as that Liquidity pool exists.

 

Balancer works using a formula somewhat likened to index funds in the stock market. Index funds in the stock market are used to invest in a selected index which typically is made up of hundreds of companies. In simpler terms, imagine a reliable publication publishes the top 100 companies in the world in respect to a certain benchmark which is typically their value.

 

A stock broker creates what is tagged "Index Funds" which is made up of the invested funds of different people. Now this stock broker's job is to take the index funds and invest it all in the top 100 companies that were "indexed" by the publication, so basically people whose money are in the index funds directly have chunks of investments in all the 100 companies. 

 

And when the list is changed or adjusted the stock broker also makes adjustments to the index funds in the sense that he or she removes invested funds from companies that are no longer listed and then re-invests it in the new listed companies and this continues for as long as that index funds exists.

 

Balancer works like that but in an automated and decentralized way. The liquidity pools that are created in the Balancer Protocol are tagged "weighted pools" and can be created using more than two token variables in a predetermined ratio. So the formula could be something like: X×Y×Z=k in ratios like 50% to 25% to 25% or 25% to 50% to 50% or 20% to 20% to  60%.

 

This way a liquidity provider can create pools with more than two tokens or add more than two tokens to a liquidity pool. Optimal experience and profits is inevitably obtained from this possibility, traders are also given the leverage of selecting from a vast pool of liquidity precisely from the best rates and thus maximizing their swaps.

 

Balancer Liquidity Pools

 

Liquidity Pools in the Balancer Protocol are of two types namely; Native Pools and Smart Pools. Native Pools are further sub categorized into two types namely; Private Pools and Core Pools.

 

Private Pools: Private Pools are liquidity pools in the Balancer Protocol that are created by a liquidity provider, adjusted and controlled by a Liquidity provider. The parameters by which the private pools are functional is chiefly decided by the creator of the pool. So to participate in a private pool you'll have to trust the pool creator enough to allow him to manage your assets, basically like how index funds are used as explained above.

 

Core Pools: Core Pools are liquidity pools in the Balancer Protocol that are created and the parameters by which it functions is predetermined and set permanently for as long as the pool exists. So if the creator of the pool created the pool with 40% ETH 10% BTC and 50% USDC, those are the parameters that the pool will function with for as long as the pool exists as it can't be altered. Core Pools are also called "Public" or "Shared" pools so anyone can join the pool anytime.

 

Smart Pools: Smart Pools is a merge of the two subcategories of the the Balancer Protocol Native Pools. They're a privately owned liquidity pool that is created, adjusted and controlled by smart contracts therefore ensuring more security and reliability. Smart pools also come with extra automated features for example; dynamic fees, liquidity caps, LP whitelisting, trading pauses etc.

 

What is BAL?

 

BAL is the native ERC20 token of the Balancer ecosystem used for governing the Balancer ecosystem and for incentivizing Liquidity Providers. BAL token was launched in June 2020 by the Balancer Labs and it also has variations in Polygon, Arbitrium and Goerli chains.

 

As of March 2023, according to CoinMarketCap one BAL token is valued at $5.63 with a total market cap of $271,570,329. There is a total supply of 96,150,704 BAL tokens and circulating supply of 48,226,604 BAL tokens.

 

How To Use Balancer Liquidity Protocol 

 

● On your web browser, enter app.balancer.fi.

 

● You'll be required to connect your wallet so click on the "connect wallet" button provided on the top right of your screen or just below the header.

 

● Select the wallet you wish to connect to and you'll be redirected to your wallet application to grant permission.

 

● After you've successfully connected your wallet you'll be redirected to the home page again.

 

● You can switch between multiple chains like Polygon, Arbitrium and Gnosis Chain on the top right of your screen depending on where your crypto assets are.

 

● But if your assets are Ethereum Standard then it wouldn't be necessary switching as by default the dApp works with the Ethereum mainnet.

 

● You'll be provided a long list of liquidity pools to select from and add liquidity.

 

● Optionally you can create your own liquidity pool by clicking on the "create a pool" button provided on the top right of your screen.

 

Is Balancer Safe?

 

Balancer Protocol is non-custodial, and has been audited by some of the leading Audit teams in the decentralized finance (deFi) ecosystem which are; Bits, ConsenSys and OpenZeppelin. Balancer Protocol strictly allows only tokens that are of Ethereum standard conforms to the blockchains security measures. 

 

Why Choose Balancer?

 

Balancer is beneficial to both the Liquidity Provider and the Trader. Because of the vast and flexible Liquidity Pools that the Balancer Protocol provides, there is an optimal profit making experience by Liquidity providers and also an optimal swapping experience by traders.

 

The custom weighted pools in the Balancer Protocol inadvertently lead to price differences between them, swaps are carried out from the pool with the best price. The maximum flexibility and infinite liquidity possibilities the balancer Protocol provides make it stand out in the DeFi ecosystem.