What Is Balancer Exchange?

Balancer is a decentralized and permissionless exchange powered by an automated market maker. The goal of this project is to provide a crypto asset exchange service that is devoid of centralized infrastructure. Notably, Balancer does not utilize the order book-trading system. Therefore, unlike centralized exchanges, Balancer does not need makers and takers. Instead, Balancer uses a protocol that incentivizes crypto holders to make their funds available so that other users can trade against the deposited liquidity. 

In summary, the Balancer ecosystem relies on an automated, trustless, and decentralized model for finding the best trading deals for users while ensuring that the activities of traders rebalance the weighted components of the portfolios' liquidity providers. 

Having explained the fundamentals of Balancer, you may be wondering: What is BAL, and why is it essential to the Balancer ecosystem? 

Simply put, BAL is an ERC20 token that functions as the reward and governance currency of Balancer. In other words, Balancer distributes incentives using BAL tokens. Also, BAL decentralizes the governance of Balancer as holders are eligible to vote on proposals.

What Is Balancer?: Key Points

• Balancer is a decentralized exchange that uses automated market-making mechanisms to provide liquidity for traders.
• The protocol relies on an incentivized-based model of operation designed to attract crypto holders to deposit their coins and make them available for the Balancer trading community to trade against.
• The system sets itself apart from other AMM-based decentralized exchanges by providing additional features like flash loans, subsidized transaction fees, and a dynamic pool system. 
• The native token of Balancer is BAL. 

How Does Balancer Work?

Having highlighted the fundamentals of BAL and its protocol, the question is: How does Balancer work?

Index Fund-Like Functionalities

Notably, Balancer combines two traditional concepts to eliminate the need for an order book-based trading mechanism that usually requires centralized entities and processes. On the one hand, Balancer adopts the index fund system, as it provides portfolio management solutions to crypto holders. To complement this index fund-based mechanism, it has also adopted the concept of trading or exchanging assets. Balancer has tweaked these two concepts such that the system reflects the decentralized ethos of the blockchain ecosystem. 

Hence, while it offers services that replicate the operation of an index fund on the blockchain, the way Balancer goes about implementing this service eliminates the need for intermediate processes and entities. Instead of engaging the services of asset managers and paying them for maintaining the targeted weight of portfolios, Balancer makes this fund available to users to trade against to automatically rebalance constituent crypto assets to predefined weight even as prices fluctuate. 

By adopting this model, liquidity providers do not pay to constantly rebalance their portfolios as they would when using an index fund. Instead, in contrast to conventional methods, they get paid for providing liquidity for traders. 

Smart Contract Pools

The portfolios in the Balancer ecosystem are called pools. These are smart contracts designed to hold specific combinations of cryptocurrencies. For example, a wETH-BAT pool is a smart contract that contains wETH and BAT. As mentioned earlier, each pool is designed to maintain a certain weight for each of its constituent digital asset. 

For example, a pool that holds a 40/60 wETH-BAT pool will always strive to ensure that wETH represents 40% of the digital asset's value in the pool while BAT accounts for the remaining 60%. Notably, a liquidity pool can hold up to eight different crypto assets. As such, Balancer is ideal for managing portfolios containing a wide array of cryptocurrencies. You can either deposit your holdings in existing pools or create a smart contract-based liquidity pool of your own. 

Types of Pools

Below are some of the pools you will find on Balancer:

• Weighted pools: These are liquidity pools ideal for crypto assets whose prices do not necessarily correlate. An example is the DAI/wETH pool. 
• Stable pools: As its name implies, a stable pool is compatible with crypto assets soft-pegged to specific assets. The supported tokens also tend to maintain a high price correlation. 
• MetaStable pools: This is ideal for non-pegged tokens with high price correlation but might potentially diverge in the future. 
• Liquidity bootstrap pools: These pools specialize in transferring liquidity from one token to another. It is used majorly by new projects looking to conduct decentralized token sales. 
• Managed pools: Managed pools offer the extra flexibility required to manage dynamic funds. 

Trading on Balancer

Having established the index fund-like capabilities of the BAL protocol, the question is: What is Balancer offering as a rebalancing mechanism for liquidity?

Balancer has integrated a trading economy that capitalizes on the funds deposited by liquidity providers. As mentioned earlier, the activities of traders on Balancers ultimately rebalance the portfolios of depositors. Recall that liquidity pools are designed to maintain predefined weights for all the constituent tokens. 

For example, if the price of BAT tokens in our wETH-BAT pool highlighted earlier increases drastically, such that the weight of the pool shifts from 40/60 to 20/80, the protocol automatically allows traders to purchase BAT with wETH. The active purchase of BAT will continue until the liquidity pool rebalances to 40/60

Where Is BAL Used?

Now that you have a broad understanding of how Balancer works, the question is: What is BAL used for?

Governance

Although it is easy to fixate on BAL price movements and the potential of profiting off it, the token primarily confirms the eligibility of users to partake in governance-related processes. In other words, BAL holders are Balancer's stakeholders. As a result, they get to vote on new proposals and, in the process, shape the project's future. 

Liquidity Reward Mechanism

Like most decentralized platforms, BAL also anchors Balancer's incentive-based economy. BAL is allocated to liquidity providers as part of the reward mechanism designed to encourage crypto holders to deposit their coins into Balancer's liquidity pools. In other words, when you deposit cryptocurrencies into a liquidity pool on Balancer, you are eligible to receive a fraction of the BAL tokens distributed daily to liquidity providers. 

It is worth mentioning that before the launch of the Balancer Gnosis protocol, a gas optimization-focused version, users accessed subsidized trading services through the BAL For Gas initiative. This program helped traders reduce the cost of buying and selling crypto on Balancer. However, once Balancer Gnosis went live, there was no need to continue this initiative since the implementation allowed users to enjoy gasless trades. 

As it is with most cryptocurrencies, some holders are more particular about Balancer price movements. For these individuals, the goal is to generate profits by tracking long-term and short-term Balancer price trends. 

Balancer's Founders and History

The development of Balancer kicked off under Block Science, a software engineering company, as a research program co-founded and headed by Fernando Martinelli and Mike McDonald.  This program spun out as a standalone company called Balancer Labs. At the time of writing, Fernando holds the role of CEO of Balancer Labs, while Mike is the CTO of the company. 

The development team built on the AMM theory was first introduced by Vitalik Buterin and proven to be viable by Uniswap, the first AMM-based decentralized exchange. As highlighted by Fernando in a blog post, the founding team developed a mathematical framework for rebalancing portfolios without the input of intermediaries. After perfecting this framework, Balancer Labs conducted a $3 million seed funding round in March 2020 and launched the mainnet version of Balancer the same month. 

Balancer's Tokenomics

As part of plans to enable a community-governed ecosystem, Balancer created the BAL token, which has its maximum supply pegged at 100 million tokens. Below is how the token was allocated:

• 25 million BAL was allocated to the founding team, investors and advisors. 
• 5 million BAL was allocated to a fund for promoting ecosystem growth 
• Another 5 million BAL was set aside to finance future fundraising campaigns.
• The remaining 65 million BAL funds the protocol's liquidity reward scheme. 

It is worth mentioning that the 25 million BAL allocated to the founding team and early investors is subject to a 3-year long vesting schedule. This vesting mechanism ensures that entities that control a significant fraction of the maximum supply cannot dump their tokens all at once and inadvertently crash BAL price. 

How Is BAL Created?

Now that we have explored the history of Balancer, you may be wondering: What is Balancer Labs' preferred token emission system?

Balancer has adopted a token emission system that distributes BAL to liquidity providers. Balancer currently distributes approximately 145,000 BAL tokens weekly as liquidity rewards, which adds up to 7.5 million BAL annually. 

However, starting from 2023, the weekly reward amount will begin to shrink to implement a 4-year halving plan. According to the halving calculations done by the development team, the distribution of BAL will reduce increasingly so that by 2026 the weekly allocation for liquidity reward would have halved to 72,500 BAL. This will continue until 2223 when the maximum supply of BAL is expected to be in circulation. 

In a way, this distribution system shares some similarities with what we have in the Bitcoin ecosystem, which halves block rewards roughly every four years. 

Balancer's Competition and How It Fares

Notably, Balancer operates in the fast emerging and highly competitive DeFi market. The competition becomes even more intense in the sub-DeFi sector, where Balancer targets crypto traders looking to use permissionless AMMs to execute trades. Those familiar with the DeFi ecosystem will agree that decentralized exchanges have played a vital role in the initial DeFi boom of 2020. For so long, Uniswap has contributed immensely to the explosion of DeFi projects partly because it introduced liquidity-generating solutions tailored for new DeFi projects.

So, in essence, Uniswap, being arguably the most prominent DEX currently, is Balancer's biggest competitor. To put the disparity in the adoption rate between these two protocols into perspective, Uniswap, at the time of writing, has over $5.07 billion TVL, while that of Balancer is $753.5 million. In other words, Uniswap has managed to attract more capital than Balancer.

In light of the disparities between the adoption rate of Balancer and Uniswap, the question is: What is Balancer Labs doing to keep up with competitors?

There are reasons to believe that Balancer Labs is working tirelessly to close the gap between its protocol and Uniswap. For one, the platform has continued to evolve by providing more flexibility and functionalities. More importantly, these upgrades look to expand the scope of Balancer by enabling a robust ecosystem where everyday crypto users and enterprises can take advantage of decentralized financial infrastructures. Some features include the flash loan, a dynamic pool system, gasless trades, and more. 

Balancer's Partnerships and Investors

As mentioned earlier, Balancer raised $3 million in a seed round in 2020. This round was led by Accomplice and Placeholder, with participation from Inflection and CoinFund. According to Messari.io, other firms that have invested in Balancer over the years include: 

• Blockchain Capital
• Defiance Capital
• Fenbushi Capital 
• Pantera Capital
• Three Arrows Capital
• Alameda Research

One of the major deals linked to Balancer Labs was announced in April 2021. Balancer and Gnosis, a DeFi protocol, collaborated to build a gasless decentralized exchange in line with the ongoing campaign for cost-efficient blockchain transactions. 

This collaborative project, named the Balancer Gnosis protocol, provides users with gasless trading services, improved user experience, and transparency. Before this partnership, Balancer had collaborated with Aave, another DeFi powerhouse, to offer additional asset management solutions for liquidity providers. The collaboration between these two protocols made it possible to lend out idle liquidity on Balancer. 

Balancer's Strengths, Weaknesses, Opportunities and Threats

Strengths 

The strength of Balancer lies in the dynamic nature of its offerings. Over the years, Balancer has ensured that its services remain flexible and seamless. For instance, the launch of Balancer Gnosis established an infrastructure designed to eliminate the unreasonably high cost of trading in the Ethereum ecosystem. The partnership with Aave also opened more opportunities for liquidity providers to generate returns. 

All-in-all, one of the best selling points of Balancer is its fast-evolving ecosystem that seemingly adopts technologies that will make it easier for users to access decentralized finance-based services. 

Weaknesses

Due to the experimental nature of the DeFi ecosystem, many of the technologies and infrastructures involved are nascent and untested against certain threats. As expected, the nascency of DeFi provides malicious participants with ample opportunities to steal from protocols. Notably, Balancer has been a victim of this inherent flaw of the current DeFi terrain. 

In June 2020, Balance recorded its first security incident after an attacker capitalized on the frailties of the protocol's flash loan service to steal $500,000 worth of tokens. Another security incident, which resulted in the loss of $500,000 worth of tokens, was reported in January 2021. 

Opportunities

Judging by the type of deals and partnerships linked to Balancer, it is safe to say that the protocol is leaning towards the collaborative development that DeFi enables. For instance, the possibility of depositing on Balancer and generating additional yields from Aave is due to the DeFi dynamism absent in the traditional financial terrain. Balancer can tap into the multi-billion dollar fund management market and rake in some market share from traditional players. Even a small shift from conventional finance to Balancer can help massive adoption and growth. 

Threats 

The biggest threats to Balancer's long-term viability are competing and established decentralized exchanges like Uniswap. Since Uniswap has a first mover advantage and has continued to evolve, Balancer has to do more to establish itself as a viable alternative. However, there is a strong probability that Balancer will remain competitive if it continues to form the right partnerships and innovate seamless functionalities. 

Balancer's Roadmap

The Balancer roadmap can be divided into three major phases. During each phase, the development team focuses on optimizing existing functionalities or implementing new ones. Below are the three major development phases of the Balancer ecosystem:

The first phase: This phase culminated in the launch of the Balancer protocol in 2020. The focus here is the viability of the base code of Balancer and the implementation of extra features, including flash loans. Like most Ethereum-based DeFi protocols launched around the same time, much emphasis was not placed on gas fee optimization. 

The second phase: The second phase kicked off in 2021 with the launch of Balancer v2. During this phase, Balancer Labs focused on making it affordable for users to trade and provide liquidity on Balancer. One of the prominent features introduced in this phase is the Vault, a flexible liquidity pool mechanism. By implementing the Vault, Balancer established a single smart contract that manages and holds all of the coins in the liquidity pools available on Balancer. 

The third phase: In this phase, Balancer began to expand the scope of its operations such that other projects can build AMMs on the Balancer ecosystem. As such, Balancer is no longer a protocol providing a single AMM infrastructure. These days, the project prioritizes the enablement of an environment where multiple AMM solutions can thrive. 

Balancer's Updates, News and Highlights

Due to the active development of Balancer, most of the news surrounding the project can be linked to its partnerships and upgrades. In 2021, in particular, Balancer Labs embarked on major upgrades that not only optimized the performance of the protocol but also reduced the cost of trading on Balancer's permissionless AMM. As mentioned earlier, Balancer v2 went live in May 2021. Notably, the major highlight of this upgrade is the Vault implementation. 

Following the launch of Balancer v2, the protocol partnered with Gnosis to create Balancer Gnosis, a separate decentralized exchange that offers gasless trades. In 2022, Balancer focused on establishing its DAO so that other projects can start building AMMs on its protocol. As part of the plans to optimize governance, Balancer launched veBAL tokens in March 2022. This new token is designed to enable online voting for proposals. For the Balancer community, the launch of veBAL marked a shift from the Snapshot-based voting model to on-chain governance.

Where To Buy BAL

Like most popular cryptocurrencies, you can purchase BAL on a centralized exchange. One such exchange is OKX, which offers a seamless trading experience. On OKX, you can exchange your USDT for BAL tokens.

How To Store BAL

For those looking to hold BAL for the long-term, it is advisable to store your BAL tokens on non-custodial wallets like Trezor or Ledger that support the ERC20 token standard. However, If you would instead go for a storage solution that offers instant access to the crypto market, a more suitable option is a custodial solution like the OKX exchange wallet service. 

How To Stake BAL

After veBAL went live, the voting requirements of Balancer were updated such that BAL holders had to stake their tokens to contribute to the protocol's governance protocol. Below is how to stake BAL on Balancer:

• As a BAL holder, you need to deposit liquidity into the 80/20 BAL/WETH pool. 
• Once you provide liquidity into this pool, you will receive LP tokens which you will then lock up on the protocol to become eligible to receive veBAL and vote on proposals. 
• Note that lockup duration matters. If you initiate a longer lockup period, you tend to receive more veBAL tokens. The longest lockup duration is one year. 

Balancer distributes 75% of trading fees to BAL stakers (veBAL holders).

Alternatively, you can settle for a third-party staking solution that supports BAL. An example is the OKX savings service which offers users a 1% hourly interest when they loan out their BAL tokens to margin traders.

FAQ About Balancer

What Are the Benefits of Buying BAL?

BAL anchors the incentive-based governance of the Balancer protocol. If you stake BAL on the appropriate Balancer liquidity pool, you will become eligible to partake in the protocol's decision-making processes. More importantly, you become eligible to earn rewards. 

How Secure Is Balancer?

Balancer operates within the Ethereum ecosystem. Therefore, it inherits the security cover that Ethereum's consensus and encryption infrastructure provide. However, the main DeFi threats are linked to smart contract coding errors. Note that Balancer has been a victim of these threats in the past. Considering the risks involved carefully before depositing funds on the protocol is vital. 

Does Balancer Provide Gasless Trading?

Thanks to the launch of Balancer Gnosis in 2021, Balancers can now execute gas-efficient trades. This implementation eliminated the impact of Ethereum's scalability woes. 

What Is the Difference Between BAL and veBAL?

BAL is the governance token of the Balancer protocol launched in 2020, while veBAL is a more recent token created in 2022 to optimize the protocol's existing governance system. Although both tokens are required to become eligible to vote on proposals, veBAL can only be earned by staking BAL. In contrast, BAL tokens are distributed to all liquidity providers on Balancer. 

Does Balancer Support Staking?

Ever since veBAL went live, BAL holders now need to stake their tokens to enjoy voting privileges. The process requires holders to take BAL in a specific BAL/wETH pool to receive LP tokens, which can then be locked up to claim veBAL tokens.