What is Balancer Protocol? Everything You Need to Know
Balancer is one of the most popular automated market makers (AMMs) and decentralized exchanges on the Ethereum network. It allows users to instantly swap tokens and earn fees when they provide liquidity to different pools.
Balancer competes with other platforms such as ERC20-based Uniswap and SushiSwap. It has its advantages and disadvantages.
The following aims to answer questions regarding Balancer, examine core features, customer support, security guarantees, and so forth.
The Balancer Protocol
With the use of liquidity pools, this AMM platform allows users to swap their ERC-20 assets without the need for a centralized entity or authority. Balancer users can also earn a share of trading fees as they provide liquidity.
To increase the liquidity on the Balancer Protocol, the platform offers several incentives to users. What sets it apart from some of the big guns in the AMM protocol space is that it goes as far as offering users enough flexibility to create their private liquidity pools.
Users can ultimately create pools using two or more crypto assets of their choice. Much like other notable automated market makers, Balancer routes its trades through any liquidity pools needed to secure the best rates for users.
The three main user demographics on Balancer include traders, investors, smart contracts, liquidity providers, and arbitrageurs (they capitalize on different price spreads across platforms.)
Fully decentralized and permissionless
Liquidity pools are open to anyone
Limited only to ERC-20 Tokens
No mobile application is available
High gas fees
What is Balancer?
Balancer is a decentralized Ethereum-based exchange and one of the leading automated market makers (AMMs) in the cryptocurrency world. It runs on the Ethereum mainnet and allows users to benefit from several features to create DeFi products.
It was launched back in 2019 by the founders of Balancer Labs – Mike McDonald and Fernando Martinelli. Both co-founders are veteran contributors to the crypto industry and have collaborated working on other blockchains and DeFi projects.
The development of Balancer began in 2018 with its bronze release. The rest of the three phases went live in 2020. The bronze release followed a round of funding in March 2020, with Balancer raising $3 million.
In the earlier years of Balancer’s launch, about 100 million BAL tokens (Balancer’s utility token) were minted. The protocol released 75% of them to miners and distributed 25% among its developers and shareholders. In the process, it sold out 5 million tokens to the public.
Balancer Products and Features
The Balancer Exchange
Balancer allows users to trade at optimal prices. The protocol encourages efficient trading via pooling crowdsourced liquidity from investor portfolios while using its Smart Order Routing feature to find the best prices for traders.
Users can exchange any combination of ERC-20 tokens on Balancer and get access to intelligent pricing, MEV protection, and gas subsidies/optimizations.
The Trade App
To start using the protocol’s Trade App, buy and sell or store cryptocurrencies, users only need to create a self-custody wallet.
The BAL Token
Providing liquidity or trading on the Balancer Protocol earns users BAL tokens.
BAL tokens are claimable and used to participate in the Balancer governance protocols. In that case, liquidity providers are assigned voting rights depending on the percentage of tokens they hold or stake in the pool.
The Balancer Pools
Balancer Pools run smart contracts and maintain value by having two or more ERC-20 tokens. Every token has its weight, and users can trade them with other tokens within that pool. The smart contracts readjust the pool to maintain a proportional and equal value of liquidity in it.
Doing so keeps the value of each token proportional to the value of liquidity in the entire pool. Pool owners receive fees from the trades that happen within the pool. The protocol offers two major types of pools:
Public Pools: These pools allow anyone to provide liquidity to Balancer by adding digital assets. Creators can set the parameters of public pools before launching, and these parameters can’t be changed even by them. Public Pools are vital for small-scale investors who prefer to earn fees from their holdings.
Private Pools: Here, only the creator can add an asset or withdraw it. The creator can also adjust the parameters of the pool, including weightings, acceptable assets, and fees. Private pools are great for asset managers who own large portfolios and prefer to earn fees on specific digital assets.
Balancer’s open design allows anybody to create their pool type while choosing between different functions and flexible pricing options.
Below are some examples of the many pool choices available for different token combinations.
Stable Pools: Stable Pools are suitable for soft-pegged tokens with a high correlation coefficient like DAI/USDC/USDT.
Weighted Pools: Weighted pools are designed for wide use, including some tokens that don’t have a price connection like DAI/WETH.
MetaStable Pools: These are designed to support non-pegged tokens that preserve correlation. Such tokens, however, may diverge over time and a good example is a derivative.
Managed Pools: These are built to provide maximum and solid flexibility needed to manage dynamic funds.
Liquidity Bootstrapping Pools: These pools are useful for modifying the liquidity of one token into another one.
The vault is Balancer’s central component. It is a smart contract that controls and stores all tokens in each Balancer pool. In addition to being an important part of the ecosystem, the vault serves as a gateway through which users carry out most operations like joins, swaps, and exits.
Token management and accounting are separated from the pool logic in the Vault. Balancer claims Pool contracts become easier since they don’t need to manage assets actively and only compute exits, swaps and joins.
Smart Order Router (SOR)
Balancer’s Smart Order Router helps its traders find the best pricing possible. It identifies the best trades for a specific set of output and input tokens if they are a straight swap in one pool or a mix of transactions across several pools.
The Smart Order Router increases with the expansion of the diversity of Balancer Pools, and it keeps growing as extra pool types with different math are introduced. This means that the Balancer ecosystem’s pools can all execute trades.
Also, by integrating and connecting with the Smart Order Router, any custom pool on Balancer can use Balancer’s liquidity features.
Balancer Gnosis Partnership (BGP)
On app.balancer.fi, the Balancer Gnosis Partnership is the default trading interface. It employs Gnosis Solvers and the Balancer Vault to carry out trades in batches. Traders can submit swaps using Gnosis Solvers by signing a message that initiates a gasless transaction.
To keep traders safe for Miner Extractable Value or MEV, the Solvers match transactions using on-chain liquidity, facilitating taking advantage of Coincidence of Wants. BGP uses several Dexes to guarantee traders always receive the best prices.
BGP’s solid integration with Balancer’s Vault allows it to carry out sophisticated multi-hop deals with minimum token transfers while lowering transaction costs. It groups gasless transactions, ensuring that unsuccessful traders don’t lead to a fee loss.
How to Open a Balancer Account
Getting started on Balancer is straightforward. The platform’s UX makes access and navigation seamless, providing useful and well-placed tools to trade, invest, and withdraw tokens.
Traders and portfolio managers can leverage Balancer’s unique products and features to invest or build on the platform to create new innovative types of decentralized financial applications (dApps).
On the top left corner of Balancer’s homepage, users will find options to use Balancer’s Invest App, Trade App, or the Build option.
Fees and Commissions on Balancer
On Balancer, every pool charges a different fee. Besides, the number of fees charged may depend on the choice of a pool’s developer, and some fees can range from 0.0001% to 10%. Let’s find out some fees applicable to the Balancer protocol.
Balancer Exchange Trading Fees
Trading fees are a proportion of every transaction crypto traders pay to pool LPs and are established by pool developers. With centralized exchanges, users get charged a takers fee from takers and a makers fee from makers.
Takers are users removing liquidity from the order book when they accept already placed orders. Makers are users who place these orders.
An alternative to charging separate takers and makers’ fees is charging the same flat fees to the maker and the taker. With decentralized exchanges like Balancer, there are no available trading fees. So in terms of trading fees, Balancer doesn’t charge users.
Network fees are paid to particular blockchain or crypto miners and aren’t fees paid to the Balancer exchange. Network fees are not fixed; they vary occasionally. Their figures depend on the pressure on the network at any given time.
Balancer doesn’t have a mobile app available on Android or iOS. However, users can run the exchange on its web app using a mobile phone or desktop.
Users can chat with Balancer’s customer support, and this is a feature that sets it apart from many ‘decentralized’ competitors.
Besides the live chat functionality on the website, users are also free to send an email to firstname.lastname@example.org , or reach out through LinkedIn or Twitter.
Balancer does not support tokens that don’t match the ERC-20 standard, even if they are used on certain pools.
The platform also doesn’t control the tokens held in the Balancer pools; they are smart contracts. To make sure tokens with known flaws aren’t used in pools, the configurable rights pools or CPRs, are set in place.
Balancer’s native token is also listed on some established crypto exchanges and trading platforms for secure transactions. These platforms include Coinbase, Binance, Kraken, Crypto.com, and Bithumb.
The Balancer protocol has no admin keys or backdoors, making it a fully trustless one where users can’t upgrade Balancer pools. Below are some Balancer’s security mechanisms:
Balancer Is Fully Audited: Balancer audits with Trail of Bits, Certora, and OpenZeppelin. It regularly undergoes more audits to ensure it meets security and dex standards.
Bug Bounty Program: Within the V2 release of its core contracts, Balancer is running an ongoing bug bounty program. The amount of reward paid will depend on the severity of the bug. Bug bounties will apply to the Balancer smart contracts that are responsible for securing protocol funds on the mainnet of Ethereum.
As we’ve mentioned, Balancer is permissionless, so there’s always the chance of faulty or malicious tokens being introduced at the contract level. Here’s what Balancer’s response to all of this is:
Balancer continues to evaluate and audit the protocol on an ongoing basis.
It has added transfer fee tokens to the UI blacklist.
Balancer also added additional documentation about the dangers linked with how pools operate and how tokens that people maliciously construct might drain funds from a pool.
The Balancer’s Pool Hack
In January 2021, an issue allowed an attacker to steal cash from two pools containing tokens with lots of transfer fees. This issue happened despite Balancer’s frequent caution about unforeseen consequences surrounding ERC-20 with transfer fees in its discord, docs, and other channels.
The Balancer platform is built for ERC-20-compliant tokens. When these tokens act unusually and unexpectedly, there will always be negative consequences. In concluding this event, Balancer reimbursed liquidity providers who lost funds.
Balancer is a convenient protocol for crypto investors who wish to exchange digital assets at optimal prices or have idle portfolios they would like to leverage.
Private liquidity pools on the platform are standout features that portfolio managers and large-scale investors may find useful. Multi-token pools offer access to a solid index of cryptos that can rebalance automatically.
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