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Balancer Review [2022] | Trade Crypto, Generate Yield | Pros & Cons

Balancer Review [2021] | Trade Crypto & Generate Yield | Fees, Pros, Cons
Jordan
Major
Updated: 12 Jan, 2022
21 mins read

This review will look at Balancer, an automated portfolio manager and trading platform for cryptocurrency users. In particular, we will examine the products and features of the decentralized exchange as well as discuss its liquidity pools, native utility token, and security.

Introduction

Balancer is a decentralized exchange (DEX) platform and one of the leading automated market makers (AMM) in the crypto sector.

After being in development since 2018, Balancer launched in March 2020 and has swiftly risen to the forefront of the cryptocurrency space. Balancer has quickly established itself as one of the top DEX platforms in terms of both trading volume and locked value, among other metrics.

The decentralized protocol is built on the Ethereum blockchain and offers an open, accessible alternative to centralized exchanges. In particular, Balancer enables anybody to trade Ether and ERC-20 assets in a trustless, permissionless environment.

In addition, Balancer, like many other current decentralized finance (DeFi) apps, has its own native utility token (BAL), dubbed the Balancer token.

In particular, the community-driven protocol offers its users:

  • The chance to generate earnings via the usage of its token (BAL), which allows them to contribute to customized liquidity pools;
  • A self-balancing weighted portfolio manager;
  • Price sensor that enables the decentralized exchange of tokens;  
  • A Liquidity provider;
  • Automatic portfolio management of tokens on the Ethereum blockchain and other EVM-compliant systems.
Balancer homepage. Source: balancer.fi

Why do people use Balancer?

Balancer has over $3.4 billion in liquidity and over 17,500 liquidity providers (LP), not to mention these LPs have made over $70 million in collecting fees. Notably, people use Balancer because it offers several critical integrations in its protocol, such as the following:

  • Reduced gas fees;
  • Enhance capital efficiency:
  • Enabled arbitrage with zero-tokens starting capital;
  • Accessibility to custom AMMs.

Due to its decentralized nature, Balancer is focused on serving investors and traders who wish to swap their assets or offer liquidity without the need for intermediaries. 

Ultimately, Balancer serves everyone, including both Liquidity Providers and traders.

For instance:

  1. Liquidity providers who are also known as market makers benefit by collecting trading fees, while their portfolios are regularly rebalanced.  
  2. Traders, on the other hand, have access to an open, decentralized exchange that is never closed, allowing them to trade whatever they want, anytime they want, for competitive fees.

Balancer offers a number of benefits that distinguishes it from the competition, such as:

  • The degree of freedom and control it affords to pool owners;
  • Balancer is one of the few AMMs that directly rewards traders for using the platform. Users get BAL tokens in proportion to the median gas price and the current ETH/BAL exchange rate at the time of their transaction for qualified swaps.
  • When swaps are done via pools for which they offer liquidity, Balancer liquidity providers receive fees, much like most other AMMs. The fee is dispersed proportionally to the LPs stake in the pool. 
  • Rather than paying a broker to rebalance the pool, the pools receive fees when they are rebalanced continually by traders doing swaps. Additionally, pools with a large token count benefit from having a large number of token pairings, which provides more possibilities to earn trading fees.
  • Multiple asset pools are supported by Balancer, which allows pool owners to incorporate as many as 8 different assets in their pools. Pool managers can build full portfolios that are automatically rebalanced by traders. Since transactions do not need to be routed via Ether (ETH), they are less susceptible to slippage for traders. 

Balancer for investors

Balancer allows you to invest and manage your portfolio like a professional, without the hassle or expense. The investor-friendly protocol handles assets algorithmically by swiftly rebalancing positions and earning trading fees over time.

Balancer investors. Source: balancer.fi

Additionally, Balancer’s various pool designs enable over 25,000 investors to choose the optimal arrangement for their investment objectives with benefits such as:

  • Plug and play: Thousands of individual and institutional investors have utilized Balancer’s simple portfolio setups.
  • Maximize fee earnings: Dynamic fee pools use market conditions to alter trading fees and maximize investor earnings.
  • Flexibility and choice: Balancer enables experienced investors to choose the amount of exposure to each asset in their portfolio and to establish bespoke price curves, allowing them to create an endless number of strategies.
  • Permissionless platform: Non-custodial protocols like Balancer allow investors to manage their own money, rather than relying on a centralized team or third party.
  • BAL token rewards: The Balancer platform rewards investors that deposit assets into incentivized liquidity pools with payouts of $BAL token liquidity mining dividends.
  • Security-minded: With the safety of investors in mind, Balancer’s smart contracts have been rigorously tested to prioritize the protection of investors’ funds.  Balancer also has a history of security audits by leading businesses, as well as a bug bounty of 1,000 ETH, which they claim is the highest in the industry.

Balancer for Traders

Traders may benefit from Balancer’s efficient trading by aggregating crowdsourced liquidity from investor portfolios and utilizing its Smart Order Router to discover the best available price for them to trade at. Exchange any combination of ERC-20 tokens without the need for authorization and with simplicity.

The Balancer Protocol is an open financial marketplace that allows traders to transact in real-time while maintaining security. Users can trade right away without any restrictions or the need to create an account or get anyone’s permission to do so.

In addition to the ability to trade thousands of token pairings at lightning speed and at the best possible prices, the decentralized liquid crypto market provides other benefits such as:

  • No Gas: On the platform’s new Balancer-Gnosis-Protocol (CowSwap) trading interface, you may take advantage of free signature trades (no gas is needed), MEV protection, and the best rates across DeFi exchanges.
  • MEV Protection: Miner Extractable Value (MEV) is shielded from traders on Balancer, which would otherwise result in increased gas fees and extra price slippage for DEX traders if not protected.
  • Balancer vault efficiency: Balancer enables traders to retain a token balance inside the protocol, so trades may be executed without departing the Balancer vault, which is ideal for high-frequency traders since it reduces the cost of gas.
  • +$3.4 billion in liquidity: Trades of any size on Ethereum mainnet, Arbitrum, or Polygon may be certain that they will be priced competitively thanks to the liquidity of the Balancer’s market.
  • User controls funds: With Balancer, traders don’t have to hand up control of their assets to a third party; user funds are always in the hands of the account holders themselves.
  • Zero-capital arbitrage: Flash swap allows traders to perform arbitrage trades that rebalance liquidity pools while also sending gains straight to the trader, all without spending any tokens on the Balancer platform.

Watch the video: Using BGP for the Best Trading Experience

Building on Balancer

By using Balancer’s stable, open-source, permissionless protocol, users in the cryptocurrency space may develop new and creative sorts of financial dapps.

Instead of concentrating on low-level accounting, developers can prioritize new AMM logic with over 50 DeFi integrations in four steps.

  1. Creating a Smart Pool;
  2. Launch a token;
  3. Use Balancer Data;
  4. Use price oracles.
Build on Balancer. Source: balancer.fi

Customizable AMM logic

Smart Pools are dynamic liquidity pools whose parameters may be altered by modifying the smart contract’s code. Pool owners can define who is permitted to participate in the pool. Furthermore, Balancer’s open-source code allows you to innovate without restriction.

In addition, Balancer V2 Smart Pools will be available in the near future. Multiple tokens, configurable weights, and the ability to establish your own swap fees are all available. You may create your own unique Weighted Pool on Balancer V2 in only four simple steps.

Watch the video: Create a Custom Weighted Pool in Balancer V2

Launch a token

For a fair and liquid launch, Balancer has in place a Liquidity Bootstrapping Pool (LBP), which is an adjustable Balancer Smart Pool that is intended for the distribution and price discovery of new assets. Essentially an LBP’s weight is configured to change constantly throughout the token sale. 

This also offers benefits such as:

  • Free & permissionless;
  • Capital efficient;
  • Equitable distribution. 

Balancer key products

Balancer is redefining the notion of decentralized exchanges by providing users with five key products to help them get the most out of their trading experience.

  1. The Vault;
  2. Balancer Pools;
  3. Smart Order Router;
  4. Merkle Orchard;
  5. Balancer Gnosis Protocol.

1. The Vault

Balancer’s central component is the Vault; it is a smart contract that stores and controls all tokens in each Balancer pool. On top of being a crucial part of Balancer, the Vault also serves as the gateway via which most Balancer operations (swaps, joins, and exits) are carried out. 

Accounting and token management are separated from the pool logic in Vault. Pool contracts become simpler since they no longer need to manage assets actively; they merely need to compute swaps, joins, and exits. 

This architecture has the following benefits:

  • A variety of pool designs may be accommodated by this architecture, which is agnostic to pool math and can work with any system that meets a few parameters,
  • You don’t need to create your own decentralized exchange;
  • Anybody who has an innovative concept for a trading system may create a bespoke custom pool that is directly connected to Balancer’s current liquidity.
Balancer V1 and V2. Source: balancer.fi

Gas efficient batch swaps

Multi-hop trading (A->B->C) may become expensive on other decentralized exchanges when token accounting is combined with pool logic since ERC20 tokens must be transferred at each hop. 

However, the Vault contract stores all tokens, giving Balancer an edge; it allows for better swap switch efficiency as the Vault only transfers tokens at the input and output of a multi-hop deal, saving gas by reducing token transfers.

It’s also possible to execute swaps without any token transfers. Since the Vault can keep track of balances for arbitrary Ethereum addresses, just as it does for pools, users may store Internal Balances in the Vault and make trades to and from these balances.

Vault Security

The Vault keeps pool balances independent, which is crucial for a permissionless system where anybody may generate their own tokens and pools. This independence prevents malevolent or carelessly designed tokens or custom pools from draining cash from other pools.

As a result, even if the Vault holds aggregated liquidity of a certain token from numerous pools, the depth of that combined liquidity does not influence individual pool prices.

Balancer flash loans

When it comes to pricing impact on a per-pool basis, the consolidated liquidity in the Vault has no effect; nonetheless, it allows Balancer Protocol to leverage that combined liquidity by issuing Flash Loans. 

Flash Loans are uncollateralized loans that must be returned (plus interest) in the same transaction they were obtained. Formalized assurances prevent borrowers from escaping with tokens since everything must be completed in a single transaction. 

If two Balancer Pools’ prices differ, anybody may execute a Flash Swap. A Flash Swap arbitrageur does not need to possess any of the input tokens required to conduct a deal. Instead, the trader finds the imbalance, instructs the Vault to perform the swap and profits.

2. Balancer Pools

Smart contracts called pools are the building elements of the Balancer Protocol, and they determine how traders may exchange tokens on the platform. The versatility of Balancer Pools sets them apart from other systems.

Unlike other exchanges, which have pools with predefined specifications, Balancer supports pools of any composition and underlying math. Due to Balancer’s open design, anybody may create their own pool type, allowing for flexible pricing options and functions.

Furthermore, WeightedPool2Tokens and MetaStable Pools both provide optional Oracle functionality, allowing them to be utilized as sources of on-chain pricing data.

The following is a list of the many pool choices available on the Balancer Protocol for various token combinations:

  • Weighted Pools: Designed for wide use, including tokens that do not necessarily have a price connection (for example, DAI/WETH). 
  • Stable Pools: Suitable for soft-pegged tokens with a high correlation coefficient (for example, DAI/USDC/USDT).
  • MetaStable Pools: Designed to support non-pegged tokens that preserve correlation but may diverge over time, such as the derivative (e.g., stETH/WETH).
  • Liquidity Bootstrapping Pools: Useful for changing the liquidity of one token into another (e.g. AKITA/ETH). 
  • Managed Pools: Built to provide maximum flexibility in order to manage a dynamic fund. Including weight shifting to rebalance, swap pausing, and management fees. (For instance, WSBDapp).

3. Smart order router

The Smart Order Router (SOR) helps Balancer traders discover the best pricing. The SOR identifies the best trades for a given set of input and output tokens if that is a straight swap in a single pool or a mix of transactions traveling across many pools.

The SOR increases in tandem with the expansion of the diversity of Balancer Pools. Furthermore, the SOR continues to grow as additional pool types with unique math are introduced. 

As a result, the Balancer ecosystem’s many pools can all execute trades. By connecting and integrating with the SOR, any custom pool created on Balancer may use Balancer’s liquidity.

Balancer Smart Order Router. Source: balancer.fi

The SOR is built to generate an arbitrage-free state between the pathways it uses in order to acquire the best price for a trader. To accomplish this, each path the SOR takes must offer the same spot price when the swap is complete.

4. Merkle Orchard

Weekly Liquidity Mining distributions are claimed using the MerkleOrchard contract. The contract allows Liquidity Providers to claim tokens from the contract. 

A Merkle root of the accumulated token amounts is checked against these assertions. Whatsmore, claiming via the MerkleOrchard saves a lot of gas, particularly when claiming numerous weeks of rewards and multiple tokens.

For more advanced use cases, like depositing tokens straight into liquidity pools, the contract permits claim to callback contracts. Lastly, the Balancer community is strongly encouraged to develop unique user interfaces that facilitate this process.

Any user may contribute their tokens to the MerkleOrchard in order for them to be claimed. In order to promote liquidity mining on pools of interest, Balancer anticipates that users will utilize it as a standard utility for delivering ERC20 tokens to any number of receivers. 

In its current state, the MerkleOrchard is being used to distribute BAL and other tokens from various initiatives designed to encourage pool liquidity on the protocol.

5. Balancer Gnosis Protocol 

The Balancer Gnosis Partnership (BGP) is the default trading interface on app.balancer.fi. 

BGP employs Gnosis Solvers and the Balancer Vault to perform trades in batches, and traders submit swaps using Gnosis Solvers by simply signing a message to initiate a gasless transaction.

To safeguard traders for Miner Extractable Value (MEV), the solvers match transactions first using on-chain liquidity, enabling them to take advantage of Coincidence of Wants.

To guarantee traders always receive the best price, BGP uses many Decentralized Exchanges. However, its strong integration with Balancer’s Vault enables it to perform sophisticated multi-hop deals with minimum token transfers, substantially lowering transaction costs.

Finally, since BGP groups gasless transactions together, unsuccessful trades do not result in a fee loss.

Coincidence of Wants (CoWs) is an economic occurrence in which peer-to-peer transactions are settled directly between participants without the need for an AMM, avoiding slippage and fees. 

On Gnosis v2 platform CowSwap, users may purchase and sell tokens using gasless orders that are settled peer-to-peer or into any on-chain liquidity source while protecting MEV. 

User savings are realized by eliminating the requirement for an external market maker or liquidity provider, which means gas costs, slippage tolerance, and protocol fees may be reduced.

The following are some of the advantages of using BPG:

  • MEV security;
  • Competitive on-chain pricing ;
  • Failed transactions will not incur any gas costs;
  • Trades that do not use gas;
  • Professional third-party transaction management.

Watch the video: Balancer-Gnosis-Protocol

Governance

The Balancer Governance Process allows anyone with BAL voting power to vote on proposals. Essentially the Balancer Protocol’s governance makes choices on new features and the direction the protocol should evolve. Ultimately, governance is the final authority, and no one may overrule the outcomes of a vote.

To put it simply, the Balancer Governance Process follows an idea from its inception through debate, proposal, voting, and finally enactment. It is intended to be an open, transparent, and intuitive method of advancing the protocol’s future development openly and honestly.

Balancer Governance Votes take place on Snapshot, which is an off-chain gas-free multi-governance client that produces easily verifiable and difficult-to-contest results.

Balancer Governors have the authority to activate and change the Governable Protocol Fees charged to traders. The Protocol fees may be collected via trading fees and flash loan fees and kept in the Vault. 

On top of deciding what happens with the fees, the Governors have the authority to choose how they should be spent to best promote the development and performance of the protocol.

BAL Governance Token

Tokenization is a common feature in many current DeFi apps, and Balancer is no exception. When you provide liquidity or trade on the Balancer Protocol, you may earn the BAL token, which is utilized for participation in the governance of the Balancer Protocol.

BAL holders, also known as Balancer Governors, are responsible for voting on proposals that are pertinent to the protocol. 

Trading Fees

Balancer Pools are highly customizable, so each pool can charge a different fee. The amount of fees charged is entirely up to the discretion of the pool’s developer, with fees ranging from 0.0001% to 10%. When using the Smart Order Router, the fees will always be taken into consideration when determining the optimum price to be offered.

Trading fees: A tiny proportion of each transaction paid by traders to pool LPs, established by the pool developer or dynamically optimized by Gauntlet. Moreover, the Balancer governance may vote to implement a Protocol Trading Fee, which is a proportion of the Trading Fee. 

Suppose a pool charges a 1% cost and governance institutes a 1% protocol fee; the overall swap fee charged to the trader remains at 1%, but 0.99% of the fee is distributed to the pool’s LPs, and 0.01% is allocated to the protocol fee collector contract.

Note: At launch, all protocol costs were set to zero and may be altered solely via governance.

Fees for Flash Loans: A modest fraction of the assets utilized to fund flash loans from Balancer’s Vault. This is the protocol fee; it is collected by the protocol and distributed by governance.

Balancer community 

All Balancer conversations and decisions are determined democratically through Governance Snapshot voting. The Community is made up of people who care about the protocol’s growth and development. Discussions are conducted on the Balancer Discord, while implementation and policy changes are debated on the Governance Forum.

Balancer snapshot. Source: balancer.fi

You can find other community pages on other networking platforms such as:

Security 

There are no admin keys or backdoors on the Balancer Protocol, which makes it completely trustless, and you cannot upgrade the Balancer pools. Tokens that do not correspond to the ERC-20 standard are not supported by Balancer, despite being in use on certain pools. 

Furthermore, Balancer does not have control over the tokens held on Balancer pools; instead, they are smart contracts. However, this does not eliminate the inherent dangers associated with smart contracts.

To guarantee that tokens with known flaws are not utilized in pools, the configurable rights pools (CRPs) are in place. It also guarantees that all other tokens may interact with the protocol in a secure manner.

Fully audited

Security is of the utmost importance to Balancer, which is why the platform has undergone audits with Certora, OpenZeppelin, and Trail of Bits.

Bug bounty program

As part of the V2 release of the Balancer core contracts, Balancer is also operating a bug bounty program on an ongoing basis. The severity of a vulnerability will determine the amount of the reward paid out under the bounty program.

In this case, the bug bounties apply to the Balancer smart contracts responsible for securing protocol funds on the Ethereum mainnet.

The balancer native token is also listed on established cryptocurrency exchanges and trading platforms for secure transactions such as Binance, Coinbase, Bithumb, Kraken, and Crypto.com, among others.

Balancer Pool Hack 

An issue occurred that allowed an attacker to siphon cash from two pools containing tokens with transfer fees (sometimes referred to as deflationary tokens). 

Balancer had frequently cautioned about the unforeseen consequences of ERC20s with transfer fees in its docs, discord, and other channels. This is precisely why STA was excluded from the compiled BAL mining whitelist. 

The system is built for ERC20-compliant tokens, and when tokens act in unexpected ways, negative consequences might occur. Balancer is a permission-less system, which means that malicious or faulty tokens may always be introduced at the contract level.

Balancer in response: 

  • Transfer fee tokens have been added to the UI’s blacklist. 
  • Added further documentation about the dangers associated with how these pools operate and how tokens that are faulty or maliciously constructed might possibly drain funds from a pool. 
  • Continues to audit and evaluate the protocol on a continuing basis.

Ultimately, Balancer reimbursed the liquidity providers who had lost funds and continues to offer bug bounties.

Balancer Pros & Cons

Pros

  • Balancer is a fully decentralized market maker protocol;
  • Anyone can create liquidity on any particular token;
  • Reduced gas fees;
  • Custom AMMs;
  • A balancer multi-asset pool allows pool owners to integrate up to eight different assets in their pool, allowing for more diversification;
  • Using multi-asset pools, pool managers have the ability to build comprehensive portfolios that are automatically rebalanced by traders.

Cons

  • The concept of the platform and connecting another wallet is difficult for beginners in crypto;
  • Malicious transfer tokens can still be added as it is a DEX;
  • More educational material could be provided so users know how to use the platform step by step.

Final thoughts

Finally, Balancer is a well-known decentralized exchange platform that is establishing itself as a new generation of cryptocurrency trading interfaces that does away with accounts and order books entirely. 

In contrast to centralized exchanges, the new automated market maker offers an open and easily accessible alternative. Balancer, like many other AMM platforms, route trades via whichever liquidity pools are required to achieve the best rate for the customer, which means swaps may be either direct or indirect in nature.

In the end, Balancer meets its aim to serve investors and traders who wish to swap their assets or offer liquidity without depending on centralized intermediaries, and the platform accomplishes its goal.

FAQs about Balancer

What is Balancer?

Balancer is an automated market maker and decentralized exchange based on the Ethereum blockchain. The platform values assets in a liquidity pool based on their ratio. Adding or removing liquidity from one side of a pool affects the pool ratio and hence the price of each asset, so  Balancer trades via whatever liquidity pools are available to ensure the user receives the best pricing possible.

How do I use Balancer?

There are three ways to participate in Balancer: trading supported tokens against one other, creating liquidity pools to increase the balancer protocol’s liquidity, or investing in pre-existing liquidity pools to make a profit from trades.

What are the fees for using Balancer?

Balancer Pools may be configured in a variety of ways, and each pool can charge a different fee. The pool developer determines the fee structure, which might range from 0.0001 % to 10%. While utilizing the Smart Order Router, fees are always included when determining the optimal pricing.

What is BAL cryptocurrency?

The Balancer token (BAL) is the official native utility token of the Balancer Protocol. The token is utilized to participate in governance of the Balancer Protocol and when you provide liquidity or trade on the Balancer Protocol, you may earn BAL.

3 out of 5 (2 votes)

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Jordan Major
Author

Jordan is an investor and market analyst. He's passionate about stocks, ETFs, blockchain, and digital assets. At Finbold.com, he delves into the technicalities to obtain future trends for new market traders and gives insights into user-friendly platforms for beginners.

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