What is Balancer (BAL), and how does the BAL token work?
Balancer is one of the most popular decentralized exchanges in the cryptosphere, with over 2 billion dollars of value currently locked into its many liquidity pools.
First founded in 2018, the Balancer dApp initially ran without a native token, but then the BAL token was introduced in June 2020 as an additional incentive for LPs to “yield farm” on Balancer, helping the protocol attract more liquidity, and to become a key part of the DeFi space.
Yield Farming is when crypto users deposit assets into Defi protocols with the aim of earning rewards, often in the form of a percentage of the trading fees earned in their specific liquidity pool.
But Balancer offers much more flexibility for yield farmers. Read on to find out what is Balancer, what is the use case of the BAL token, Balancer news for 2021, and why Balancer is considered to be a staple of the Ethereum DeFi ecosystem.
What is Balancer (BAL)?
The Balancer Protocol was launched by Mike McDonald and Fernando Martnelli, two active members of the Maker DeFi community. Like most groundbreaking decentralized applications, Balancer runs on the Ethereum blockchain.
To understand Balancer, we need to understand how an AMM (Automated Market Maker) works.
What’s an AMM?
In a normal exchange, where traders seek to buy or sell assets for as close to their desired price as possible, it is the behaviour of the buyers and sellers that decides what is the going market rate on the order books, and the company that owns the exchange that provides the exchange service, for which they usually take a fee.
Automated Market Makers, or AMMs, are unique to the world of DeFi, and utilise smart contract technology to create liquidity for trading environments without the need for permission from a third party.
This is done with the help of a mathematical formula (X * Y = K) that was first proposed by Vitalik Buterin, and liquidity in the form of cryptocurrencies or tokens that are provided by users, meaning also that people are free to create their own trading pairs, instead of being limited to what is offered on a centralized exchange.
BAL for example is the native token of the Balancer ecosystem and can be used to provide liquidity in the protocol’s customizable liquidity pools.
What’s the difference between Balancer and Uniswap?
Balancer works in a similar way to Uniswap, except that up to eight tokens can be added into a single pool, compared to Uniswap’s two. It’s also not necessary that ETH is one of the tokens in the pool, whereas all Uniswap currencies are paired against ETH.
Also, Balancer pools aren’t limited to equal “50/50” token weightings. LPs can for example open a pool that provides 60% Maker token, 20% Wrapped Ethereum, and 20% USDC.
In fact, the name ‘Balancer’ actually comes from the way that the protocol automatically ‘rebalances’ the weighted percentage of the tokens added to each pool.
This means that Balancer can offer more exotic yield farming pairs for holders of ERC-20 altcoins.
Innovations and Hacks
Yield farmers using the Balancer protocol can take advantage of some of these exotic pairings and earn a high yield by providing tokens to pools with lower demand and helping to reduce price slippage.
These pools are also customizable in the way that Balancer users can make them either:
Shared; which means running a typical open liquidity pool where users can earn Balancer Pool Tokens as a reward for being an LP. Once a shared pool is created, the parameters like transaction fees and asset weighting cannot be changed.
Smart; where smart contracts are used to run the pool according to adjustable, pre-set parameters.
Private; meaning that the creator is the sole contributor, and decides all of the pool rules.
This complexity did cause a problem for Balancer In June 2020, however, when the protocol became the victim of a complex hack that utilised flash loans to steal almost half a million dollars worth of tokens from a pool with 5 different currencies.
But to the credit of the Balancer team, they responded by refunding the lost tokens of LPs that were affected by the hack, increasing their bug bounties, and launching a third code audit from a respected crypto auditing company.
What’s the use case of the BAL Token?
In total, 100 million BAL tokens were created at origin, with less than 10% of the tokens in supply as of October 2021. BAL tokens are currently released at a rate of 145,000 per week, which suggests that the BAL coin will remain an inflationary currency for an estimated 8 more years.
The main function of the BAL token is to attract liquidity to the platform, as Balancer users don’t only earn a transaction percentage of each asset they place in the pool, but also BAL tokens on top of that. This is similar to how the COMP token works, in order to incentivise users to stake their assets in Compound.
Also, like with many governance tokens, the BAL token is used to incentivize participation in the decentralized governance of Balancer.
In this way, BAL token holders can have their vote on important decisions that affect the future of the platform, like changes in the protocol fees, the merging of other blockchains and scaling solutions
A recent example would be the integration of Balancer with Polygon and Arbitrum, two scaling solutions which are currently helping many Ethereum-based dApps to have faster and cheaper transactions.
Balancer news in 2021
In May of this year, the team launched Balancer version 2, with a colourful new rebrand, a move towards better gas efficiency for lower transaction costs, and a new ‘liquidity mining’ feature that gives yield farmers greater flexibility to join different pools, and farm higher rewards.
The capital for the move over to Balancer v2 was partly supplied by a 5 million dollar funding round, in which venture capital funds Defiance Capital and Three Arrows purchased BAL tokens from the Balancer treasury.
2021 has seen Balancer moving to become a vital piece of the DeFi lego ecosystem.
DeFi blue chip Aave has for example launched a ‘backup pool’ on Balancer, where users stake a reserve supply of Aave and Wrapped Ethereum to be used in the case of a ‘black swan’ event, like the Maker DAO flash liquidation of March 2020.
Balancer has also partnered with another DeFi mainstay, Gnosis, to launch BGP, a decentralized exchange that uses the best features of both protocols to offer the most accurate trade prices and to prevent the high gas prices associated with bidding wars between bots.
And the Polkadot ecosystem has also come calling, with the EVM-compatible Moonbeam project aiming to connect the Balancer protocol with Polkadot later this year.
The more interconnected the Balancer protocol becomes in the future blockchain multiverse, the more use cases will open for the BAL token, and the more successful the project will be.
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This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.