A 2-minute Quick Guide to Balancer Protocol

The balancer is an automated market maker (AMM) protocol that builds on the features of Uniswap, expanding the use of AMMs to liquidity pools (LP) comprising several unevenly weighted assets.

What problem does Balancer solve?

Balancer enables users to earn fees on their Ethereum-based idle assets. Users can deposit their entire portfolios into Balancer’s self-rebalancing LPs & earn fees as other users trade against their portfolio.

How does it work?  

A user can provide liquidity by either creating an LP (users assets & their weightings + trading fee set by the creator) or adding their assets to existing pools.

Anyone can now create their own self-balancing index fund or invest in someone else’s.

Liquidity providers of Balancer stakeholders

Balancer protocol allows any Ethereum address to add liquidity in the form of tokens to existing Balancer pools, or even create their own pools.

Liquidity attracts traders, trading generates fees, and ultimately pool profitability attracts more liquidity.

This is a flywheel effect that we are beginning to see happen within the Balancer protocol.

Regardless of the venue, early liquidity providers take on more risks and opportunity costs: contract risk, low initial pool profitability, etc.

We believe that these protocol users should get to participate early on in deciding how the protocol evolves.

This is proposing to implement the concept of liquidity mining: Balancer protocol would distribute BALs to liquidity providers, starting imminently.

See below for more details on the proposal.

Future version of Balancer governance token

Balancer V1 launched without a native token and confirmed our assumption that Balancer’s approach would resonate with the community.

However, in order for the protocol to keep up with the fast-evolving Ethereum and Defi space, there are many new versions and continuous development of the protocol will be essential. 

BALs are a key way of decentralizing the governance of the protocol such that it can remain resilient over time, protected from the failure of any single stakeholder.

Our government needs to be as resilient as our technology infrastructure.

Token Supply and Distribution

The total supply of BAL tokens will be 100M.

25M BAL tokens are initially allocated to founders, core devs, advisors, and investors, all subject to vesting periods.

The remaining 75M tokens are intended to be mostly distributed to liquidity providers in the coming years.

In the future, and with governance approval, tokens may also be distributed to strategic partners in order to foster the development of the protocol and its ecosystem. 

The proposed amount of distributed BALs to liquidity providers is 145,000 per week or approximately 7.5M per year.

This means in the first year of BAL’s existence there would be 30% supply inflation off the initially allocated supply of 25M tokens.

This high rate of supply inflation is meant to kickstart the distribution of governance rights of the protocol out to those who earn it.

The schedule of BAL distribution for the following years is going to be extensively discussed by the Balancer community, and we plan for it to ultimately be decided by BAL holders. 

Balancer Pools

A Balancer pool is a contract that can hold several different tokens, each of which with its own defined share of the total value in the pool the token weight. 

Balancer pools will always hold the same ratio of value in each token even if their relative prices change.

This is why we consider Balancer to be a self-balancing portfolio management tool.

Balancer pool is controlled by smart contracts

This protocol has been designed from the ground up to be a building block for other projects and developers in the ecosystem.

As such, flexibility is one of the core features of it, and it comes in two flavors: 

• Tokens inside pools: Any ERC-20 fully compatible token can be held by Balancer pools. Synthetics, derivatives, wrappers, vouchers, etc.
• Control of Balancer pools: Controlled/private pools only accept liquidity from their controller. Since third parties are forbidden from providing liquidity, with this type of pool the controller may safely change token weights, add/remove tokens and even change the trading fee. The key point here though is that pool controllers can be smart contracts, embedding any desired logic on how to manage their controlled pools.

Solution to the Balancer pools

While receiving interests and forwarding them to BP, PCs can also adapt the weights of BP tokens to compensate for the imbalance created by their different lending rates.

All atomically so that arbitrageurs never get the chance to profit off of pool liquidity providers.

Conclusion

Cryptic Ocean is a blockchain technology company that provides end-to-end blockchain development and blockchain consulting services to multiple business domains.

Our goal is to assist corporations adopt new technologies and change difficult problems that arise throughout technology evolution.

Contact us for the most effective solutions regarding the utilization of blockchain technology to resolve the toughest challenges faced by the globe nowadays.

FAQ’s

If you found this article interesting, here you can find more Articles.