Balancer is an open-source protocol underlying a multi-token AMM (automated market-making) mechanism that gives the possibility to create Balancer Pools, thus enabling users to trade against these pools. The protocol was developed to reduce trading costs. The AMM mechanism serves to attain the goal successfully as it helps liquidity providers to define the lowest rates, take advantage of this information, and derive profits. Members of the ecosystem can create Balancer pools based on their portfolios. Alternatively, they can also add existing pools to their portfolio while the Balancer Pools themselves can contain two or more tokens.
Balancer was successfully audited by Trail of Bits in March 2020, OpenZeppelin in August 2020, and by Certora in April 2021. The project provides a safe method for cryptocurrency holders to utilize idle capital even without its even distribution across several tokens. The protocol enables cryptocurrency holders to provide liquidity in only one token asset instead of the whole basket. This concept of adding liquidity is called a ‘single-asset liquidity provision’, which is the option that significantly improves the user experience for liquidity providers. Balancer pools can include up to 8 tokens with a corresponding distribution of assets’ value. At this, users can create their own self-balancing index funds or add assets to other pools.
BalancerLabs began working on the Balancer protocol after the launch of the project in 2018 on the initiative of BlockScience, an American data analytics company. It all started with research initiated by the company that evolved into an enormous project afterward. As the members of the Balancer team were inspired by the success of Uniswap, they started exploring the AMM mechanisms used in the DeFi industry with the goal to introduce the results of their developments in a new automated money-making mechanism.
As a result, the 1st version of the Balancer protocol has been released in time to mobilize retail liquidity and introduce peer-to-peer lending options. The team has devised the protocol based on mathematical concepts employing public and private pools. The research activity along with the implementation of different designs to simulate the Balancer protocol went on until the team managed to achieve the anticipated result.
Balancer was developed by the Balancer Finance project established in September 2019. The project was additionally supported by the funds that were raised during the seed round in March 2020. The company managed to raise 3 million USD to boost its programmable liquidity. At this, it is noteworthy to mention the companies that have invested in the project. The list includes such famous names as Placeholder, Coinlist, Accomplice, and Inflection. As the team members have set the goal to create a reliable, flexible trustless platform for programmable liquidity, they have managed to release a unique project with the best minds in the cryptocurrency industry bringing forward their concepts to improve DeFi. In this way, the project has turned into a sandbox for cryptocurrency developers who look for new solutions in DeFi empowering traders to create the most efficient portfolios.
Balancer contribution to DeFi
At its core, Balancer features a single Vault architecture. The Balancer developers employed the Smart Order Routing (SOR) technology to ensure the flexibility of the protocol and to automate the process of the best price execution across all pools.
The introduction of Balancer V1 has brought a whole set of innovative products to the decentralized finance industry. The list includes such options as, for instance, fair distribution of protocol tokens used by Yearn, new rebasing concepts that were later employed by Ampleforth, and LBPs (Liquidity Bootstrapping Pools) enabling fair pricing and preventing early traders or advanced bots from deriving profit at the expense of retail traders who are devoid of access to early data. At this, Balancer has brought forward building blocks for numerous major DeFi projects, such as bZx or Aave.
The platform enables users to create their own self-balancing indexing funds or join existing funds. Balancer V1 brings forth the concept of smart pools that became the key building block of decentralized finance. Taking into account the focus on the efficiency of customized liquidity, the rapid expansion of the platform is easily explicable. At the time of writing, the amount of total value locked in the system has exceeded 3 billion USD.
Based on Uniswap, Balancer is often referred to as a non-custodial portfolio manager. Its protocol enables the members of the ecosystem to earn passive income via yield farming. It has implemented the concept of the investment strategy that was actively developed by Compound. It relies on income from placing cryptocurrencies on different DeFi platforms for cryptocurrency lending. Balancer was one of the first projects that recognized its potential and implemented its own version.
A high level of profit derived from the project motivates the members of the ecosystem to support the protocol with their liquidity, while the team, in turn, only has to care about the smooth customer experience during the procedure.
One of Balancer’s key features is the possibility to customize various aspects such as the percentage of digital assets in the pools. In this way, members of the community determine the most efficient methods to achieve the highest yield from the Balancer liquidity pools. Users can create their own collections of funds used for trades and transactions. Also, some teams that plan to issue their tokens use liquidity bootstrapping pools known as LBPs. It’s also worth mentioning the incredibly high APR (annual percentage rate) equal to 30% achieved with the help of the Balancer V1 protocol.
The team standing behind Balancer Labs is not large as it doesn’t exceed 10 people at the time of writing. However, all of its members are talented professionals who specialize in maths and engineering. Fernando Martinelli, CEO and co-founder of Balancer Labs, is a graduate of the Federal University of Santa Catarina. He has also co-founded other projects such as PrepLounge.com and Brazil Mate. His main area of expertise is engineering, just as in the case with the second co-founder of the platform Mike McDonald, Balancer’s CTO. McDonald is more focused on security engineering as he previously participated in the development of MKR tools created to analyze data for Maker DAO.