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Balancer has its beginnings as a research project that was started and incubated by Block Science, which is an engineering, R&D, and analytics firm. The project was an initial success as it was able to raise $3 million which it did by selling 5 million $BAL, the platform’s governance token.
Balancer is a decentralized exchange where users can swap tokens with a liquidity pool. Like its contemporaries Uniswap, Sushiswap, and Curve Finance, Balancer uses what is called an automated market maker (AMM) model in order to price cryptocurrencies and execute trades. Balancer’s AMM model means it uses an algorithm to handle trades instead of a traditional order book. For context, centralized exchanges like Poloniex use an order book to match buyers with sellers. With an AMM, the whole system becomes decentralized and trustless, as traders don’t have to rely on a centralized entity or even other users.
To merely say that Balancer is a decentralized exchange would miss the other powerful services it provides. It also, which will be more explained in the next section, can function as a sort of exchange traded fund, as well as a means for new projects to fundraise.
Balancer is a DEX AMM created in 2020 that uses weighted pools containing anywhere from 2 to 8 cryptocurrencies. The platform sort of takes the concept of an exchange traded fund in that users can gain exposure to a bunch of different cryptocurrencies at once in a more stable way.
How does Balancer work?
With Balancer, users can make use of and create liquidity pools of 2 to 8 different cryptocurrencies. The platform is unique in this sense in that other DEX’s often contain pools of only 2 to 4 different cryptocurrencies. Balancer is also unique in that it can be considered as a sort of crypto-based exchange traded fund, where users earn rewards on the underlying crypto assets of a given pool.
Users can become liquidity providers simply by depositing a supported token into a balancer pool. Once they do that, they receive a proportional percentage of platform fees as well as a reward in the form of Balancer’s native token, $BAL.
Users of Balancer are able to create their own pools. When they do, they set the ratio of the tokens that make up the pool. That is, for example, a user could create a pool that is made up of TRX, ETH, and USDD where TRX is 50% of the pool, ETH is 25%, and USDD is the remaining 25%. These pools are meant to maintain a constant value, and do so by using an invariant function. If, taking the previous example, a user were to take an amount of ETH out of the pool, it would have to raise the value of ETH to keep the portion of value constant.
An interesting point to pause and make here is the difference in how users interact with this pool versus its traditional finance analog, an exchange traded fund. In a traditional context, those who have shares of an index fund have to pay the fund’s manager, who then manually re-balances the index. Conversely, those who provide liquidity to balancer pools actually receive rewards for doing so, and as mentioned before, all the balancing is done via an algorithm. An algorithm is also what determines the best price for a trader when they want to buy or deposit a specific cryptocurrency or cryptocurrencies, and rebalances the pool based on the trader’s chosen strategy.
For someone wanting to buy a certain token, the algorithm works such that it prioritizes pools with the largest price discrepancies first. So let’s say someone wants to buy BTC. Balancer looks for a pool with the best price, which would follow that it then selects the pool with the token price that deviates farthest from the mean. When the BTC is bought and is thusly taken out of the pool, its price readjusts, bringing it more in line with the prices of other pools on the platform.
This is a concept that is quite unique to Balancer, and essentially is what one can use to define the pool, as described above: liquidity pools made up of different assets that have proportional values to each other other than the usual 50/50. This really benefits traders that may want different exposures to different assets. A user might want to provide liquidity for both LINK and WETH, but expect LINK to gain more value, and therefore would provide a greater percentage of that asset in comparison to the latter asset.
Balancer as a platform for new projects
Balancer has proven to be a very efficient way for projects to get off the ground via a method called liquidity bootstrapping. Essentially a project uses what is called a liquidity bootstrapping pool (LBP) to generate liquidity and funding for the project.
LBPs are often seen as very potent tools for a project to not only incentivize liquidity but also reach a token’s fair market price and disincentivize whales from snatching up a good percentage of the total token amount. But how exactly is this achieved?
LBPs are weighted pools whereby a project sells their project against another asset or assets, setting its price a lot higher than what they think the token should be. As there is sell pressure on one token and buy pressure on the other, the project’s token should reach a fair price by the end of the sale.
This is the native token of the Balancer platform. And like other DeFi projects, $BAL also functions as its governance token, being used to vote on decisions and make changes affecting the platform. As mentioned before, these tokens are distributed to liquidity providers as a proportion of the amount of liquidity they provide.
How to acquire $BAL?
$BAL is available on multiple exchanges like Poloniex! You can acquire $BAL through trading a BAL/USDT trading pair.
Feeling ready to get started? Sign-up is easy! Just hop on over to https://poloniex.com/signup/ to start your crypto journey🚀
What is Balancer ($BAL)? was originally published in The Poloniex blog on Medium, where people are continuing the conversation by highlighting and responding to this story.
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