Having a balanced portfolio is very important, especially in crypto, but investors that follow strict portfolio rules will rarely step out of their comfort zone and make speculative trades. This results in a lot of disposable capital that could start earning passive rewards if deposited into Balancer pools.
In short, Balancer is a decentralized automated market maker but also an automated index fund that pays out fees to all capital depositors on the platform.
What Is Balancer? #
Balancer is a decentralized application existing on the Ethereum blockchain. By utilizing smart contracts Balancer offers users to earn passive income on their crypto investments without the need to put their capital at risk.
At the basic level, Balancer is an automated market maker similar to Uniswap meaning that anyone can connect their wallet to the protocol and perform a token swap. The second service Balancer offers are the balancer pools that can consist of two or more cryptocurrencies deposited at a fixed rate.
What Are Balancer Pools? #
Balancer has seven different pools that power the decentralized exchange. Users can deposit funds in any of these pools and earn passive income that is generated by swap fees, BAL token emissions and rebalancing the pools.
Traditionally you would be paying an index fund when a rebalance needs to take place but with Balancer this is completely inverted. To further understand how it works let’s have a look at all the different pools:
- Weighted Pools are 8-token pools with custom weighting.
- Two-Token Weighted Oracle Pools act like price oracles for the protocol and are based on the weighted pools.
- Stable Pools can contain anywhere between 2 and 5 stablecoins.
- Liquidity Bootstrapping Pool is a custom pool of 2-4 tokens where only the creator can add or remove liquidity. Can be used as a personal index fund.
- MetaStable Pools are generalized stablecoin pools that help bootstrap assets that should have the same price, but their values can fluctuate over time. For example, one of the meta stable pools consists of DAI and cDAI.
- Investment Pools are basically public investment funds. Their weighting and token allocation are customizable, but it allows public liquidity providers to participate and subsequently invest in them.
- Convergent Curve Pools are designed by Element.fi to support two tokens that converge in price. You can read more about them here.
How Do Balancer Pools Work? #
To understand the idea behind balancer pools let’s imagine that you have invested in a BTC/ETH/USDT pool where all assets are allocated in the same percentage meaning that your pool holds 33.3% of every asset. The protocol will always calculate their value in USD terms and if Ethereum or Bitcoin start outperforming each other in price the smart contracts will execute trades that rebalance the pool to maintain the fixed weight ratio.
These trades generate trading fees and apart from regular trading are the main source of income for liquidity providers on Balancer.
What Is The BAL Token? #
The Balancer token is issued to liquidity providers through the liquidity mining incentive program. LPs earn trading fees but also get a share of BAL emissions on top of that proportional to the value of their deposit.
BAL is also a governance token for the Balancer protocol meaning that all BAL holders can vote on proposals and possible changes on the protocol. BAL tokens can be vested by locking them in the BAL/ETH pool at a 80/20 ratio for up to 1 year. Depositors then get veBAL tokens in exchange which can be used to vote on increasing or decreasing reward emissions for certain pools.
In general, it would be fair to say that Balancer is an advanced version of Uniswap where liquidity providers have a bit more control over their funds and less worry regarding impermanent loss.
Considering that Balancer is also a decentralized index fund it can serve as a great investment opportunity for investors that want to maintain their token allocation but also earn passive income on their crypto holdings.