What is Balancer (BAL)?

What is Balancer (BAL)

Balancer is a software running on Ethereum that seeks to encourage a distributed network of computers to operate an exchange where users can buy and sell any cryptocurrency.

Emerging decentralized finance using protocol (DeFi), Balancer uses a combination of cryptoactives to provide this service, allowing trading without a financial intermediary such as an exchange.

It can help to think of Balancer as a kind of index fund, where users create funds based on the cryptocurrencies in their portfolios.

These funds are known as Balancer Pools, and any user wishing to provide liquidity to a pool can do so simply by depositing an asset into them.

Users who provide liquidity to a pool of balancers receive a portion of the trading fee paid to the network for the use of their funds and are rewarded with a custom cryptocurrency called BAL.

These deposits are essential for the network, providing the necessary liquidity for users to buy and sell cryptocurrencies on the platform.

This means that Balancer must encourage both sizes of its market to trade — cryptography users who may want to make some of their stock available to be traded and traders who are looking for the best possible price for an asset.

In this way, the Balancer works similarly to other decentralized exchanges (DEXs) such as Uniswap (UNI) and Curve (CRV). However, Balancer offers additional features, including the ability to pool up to eight tokens.

What is Balancer (BAL)

Who Created the Balancer?

Balancer started as a research project at a software consulting company called BlockScience in 2018, founded by Fernando Martinelli and Mike McDonald.

The project then independently raised $3 million in funding as Balancer Labs in 2020. The round saw nearly 5 million BAL tokens sold to investors and 25 million tokens awarded to shareholders and employees (out of a total supply of 100 million tokens ).

An additional 10 million BAL was set aside, with half being set aside for a fund used for Balancer ecosystem contributors and half set aside for sales to future investors.

Why Does BAL Have Value?

The Balancer's cryptocurrency, BAL, will be essential to the distribution of its operations, ensuring that no central party can make decisions about the functioning of the platform.

In addition, it also works as an incentive mechanism, as users who deposit assets into Balancer pools earn BAL tokens.

Although there are no defined rights or uses for the token as of 2020, BAL holders will be able to set rules about how the Balancer works.

BAL owners will in the future be able to vote on BAL's weekly distribution rate, Balancer's protocol rates, or even whether to launch the Balancer in other blockchains.

Like many other cryptocurrencies, the supply of BAL tokens is limited, meaning there will only be 100 million BAL.

While 15 million BALs were distributed or saved during the Balancer startup, the remaining 65 million tokens are distributed to Balancer users, providing liquidity to the protocol.

Balancer plans to distribute 145.000 tokens per week to users, which means the total provisioning will be distributed by 2028.

Price Balancer

 

How Does the Balancer Work?

Just as an index fund can be made up of different stocks, Balancer pools are made up of up to eight different cryptocurrencies.

The value of a balancer pool is determined by the percentages of each token within it, a weight chosen when creating the pool.

Self-balancing Index Fund

Balancer uses custom programs called Smart Contracts to ensure that each pool retains the correct proportion of assets, even though the prices of individual currencies in the pools may vary.

For example, a set of balancers might start with 25% ETH, 25% DAI and 50% LEND. If at any point the LEND price doubles, the wallet automatically reduces the amount of LEND that it maintains in order to retain 50% of the portfolio's value.

So where does LEND go? Balancer's smart contracts make them available to merchants who want to buy LEND as prices rise.

Importantly, liquidity providers still earn fees while their index funds are rebalanced, compared to traditional index funds where investors pay fees for rebalancing services.

Balancer Pools

Balancer offers private and public pools, aimed at users with different risk appetites.

Public pools allow any user to provide liquidity by adding or removing assets. Parameters for public pools are defined and cannot be changed prior to launch.

This means they can be useful for users with smaller memberships looking to earn fees from the most popular — and most liquid — pools.

A private balancer set is one where only the set creator can add or remove assets. The user can also adjust all other pool parameters such as rates, weights and the types of assets he accepts.

Private pools are useful for asset managers with a large portfolio looking to earn fees on their specific assets.

Lastly, smart pools are a type of private pool owned by smart contracts. This feature allows pools to be programmed to perform additional functions such as changing weights or creating an index fund that tracks a portfolio of properties.

Why Should I Use Balancer (BAL)?

Balancer can be interesting if you are an existing cryptocurrency investor with an idle portfolio that you want to put into practice.

It can also be useful if you are an active trader or portfolio manager as it allows users to buy units on creatively constructed indexes that exist in the protocol.

Maintaining the BAL is useful in the long run if you want to influence the development of the platform by voting on important decisions about some of its features.

Users can also invest in BAL if they believe that decentralized trading of cryptocurrencies will gain popularity in the future.

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