What is Balancer (BAL)?

Balancer (BAL) is one of the great tools of the Ethereum DeFi ecosystem that is focused on the automatic creation of markets, using liquidity pools and offering decentralized currency exchange capacity (DEX).

EThe Balancer protocol (BAL), is another of the great protocols DeFi or decentralized finance that make life on the blockchain of Ethereum. Its objective is to create a decentralized mechanism for the exchange of ERC-20 tokens and promote an automated market creation system (Automated Market Maker or AMM).

But what does all this really mean? What does Balancer really allow us to do? Well, we will answer these and other questions below.

Balancer, a protocol with multiple functions

The Balancer (BAL) project started in 2019 September thanks to the work of Fernando Martinelli, Nikolai Mushegian y Mike mcdonald, who started the project with a fund of 3 million dollars for its development.

From that time until now, Balancer has become one of the top 10 projects in the DeFi world. And no wonder, its functionality and ease of use make it perfect for users who want fast exchanges between Ethereum tokens.

In addition, as Balancer is an automatic market creation protocol, it has the ability to perform decentralized currency exchanges (DEX). In this way, Balancer becomes a means to replace traditional market makers and helps to provide liquidity to traded assets.

As an additional point, Balancer takes advantage of the liquidity captured to carry out currency exchanges, and thereby generate profits that feed the protocol pools (known as Balancer Pools) and generate profits for its suppliers.

In fact, one of the most used features of Balancer is its pool system, which many DEX and other DeFi platforms use to automatically determine the best rates and trading prices through the Intelligent Order Routing (SOR). Intelligent Order Routing (SOR) is an automated order handling process that aims to take advantage of the best opportunity available in a variety of different trading venues. The result is that they can use the liquidity in the pools to carry out large operations, with the best possible exchange between different tokens.

This situation ends up benefiting Balancer users (who earn commissions for these operations and are transformed into rewards for them), users of the platform that use Balancer services (who can carry out their exchange operations quickly and at best possible price) and to the users of the latter platform who access the tokens they want without intermediaries and at low costs.

Balancer Pools, the heart of Balancer

Now, all of the above is possible thanks to the calls Balancer Pools. These pools are nothing more than spaces where the funds injected by users (liquidity providers) are stored. These pools can currently store tokens such as Ether, DAI, MKR, BAL, USDC, BTC ++, WBTC, Weth, BAT, SNX, ANT, ZRX, LINK, cDAI, cUSDC, CRV and YFI.

In total Balancer offers support for 54 tokens on its platform. Additionally, others can be added to custom pools, but with a warning about the dangers of using illiquid tokens.

Be that as it may, all these pools can be used in cryptocurrency trading as a counterparty to the transaction, thus providing liquidity to traders.

On the other hand, Balancer Pools can be divided into three categories:

1. Controlled pools or private pools: these are when a fixed state is on the group and the creator can set the tokens and weights. This is generally done for private actors who do not want external liquidators, for example external liquidators who work with large amounts.
2. Final Pools or Shared Pools- These funds are open for all players to add liquidity and it is a one-way transition. They cannot be modified and have a fixed parameter, unlike controlled pools and are usually for the general public to liquidate and obtain profits.
3. Smart pools: which are a variation of a private group where the controller is a smart contract, allowing for any arbitrary logic / constraints on how the group parameters can be changed. Smart groups can also accept liquidity from anyone and issue BPTs to track ownership.

System governance

Like other DeFi projects, Balancer has a community governance system that can be exercised by users holding BAL tokens.
At first, Balance did not have this functionality. However, the development team thought to let the community decide on the future of Balancer. Thus, on June 23, 2020, the BAL token began to be distributed on a weekly basis among its liquidity providers, thus giving them decision-making power in the development of the protocol.

The idea behind the BAL token is to create a worthless token, with an issuance limited to 100 million BAL. Of these, 25 million were assigned to its creators, advisers and investors, all subject to periods of consolidation. There are then 75 million remaining tokens that are destined to be distributed mainly to liquidity providers in the coming years. The issuance of the token is pegged at BAL 145.000 per week, or approximately 7,5 million per year.

This means that in the first year of BAL's existence there would be 30% supply inflation from the initially allocated supply of 25 million tokens. This high rate of supply inflation is intended to drive the distribution of the protocol's governance rights to those who obtain it.

However, what was thought of as “a worthless token”, now has a price per coin (as of October 2020) of $15. If we multiply that by $25 million, we see that the protocol's creators, advisors, and initial investors have pocketed $375 million from this move. Not bad for a project that took a year to develop and that initially started with a 3 million dollar budget.

On the other hand, and if you have not realized it, the BAL token enables both yield farming and liquidity mining to be put into practice. All this ends up making Balancer a good place for the most daring to seek profit.

Balancer opportunities and risks

Job opportunities

As we discussed a few moments ago, Balancer is a protocol where you can put yield farming and liquidity mining into practice.

In the first place, you can create or participate in a liquidity pool and obtain profits by investing in it, serving as a bridge of change for those who use Balancer. On the other hand, you can invest and earn BAL tokens that you can exchange for other tokens and reinvest them on the platform by leveraging your position. Or you can use those BAL tokens for more governance power within the protocol.

Risks

Like any DeFi protocol, Balancer is not without risks, many risks, and this perhaps many people learned the worst way. Balancer was recently the victim of two successful attacks that resulted in the loss of more than $ 500. This makes one thing very clear: a DeFi platform can have many audits, but there can always be some vulnerability that endangers its operation, and with it the loss of part or all of the funds.

Of the rest, the Balancer risks are the same that we can find in other cryptocurrency projects, and especially other DeFi projects or Smart contracts. So you just have to keep an eye on what you do. And more importantly, if you want to take this as an investment, do not invest in what you do not understand and always never more than you can afford to lose without negative consequences for your economy.

Links of interest