General
Let’s describe in depth Balancer, a powerful and versatile AMM that provides a flexible foundation for empowering programmable liquidity on Ethereum, outlining its main virtues and features.
What is Balancer?
- Balancer stands as a revolutionary decentralized Automated Market Maker (AMM) protocol, firmly rooted in the Ethereum blockchain. Its core function is to provide a flexible foundation for programmable liquidity. This remarkable protocol differentiates itself by separating the mathematical logic governing AMM curves from the essential swapping mechanisms. In doing so, Balancer transforms into an extensible AMM capable of embracing an array of swap curves and diverse pool types.
- These encompass traditional 50/50 setups, weighted pools, custom weight configurations like 80/20 for precise exposure control, stable swap curves, nested pools exemplified by Boosted Pools, pools featuring dynamic weight adjustments as seen in Liquidity Bootstrapping Pools, concentrated liquidity pools, managed pools offering customizable parameters, and even the potential to accommodate entire protocols like Gyroscope.
- This expansive flexibility ensures that all combined liquidity becomes effortlessly accessible to swappers, aggregators, and arbitrageurs. To further optimize efficiency, the Balancer Vault orchestrates batching and path logic, resulting in exceptionally low gas costs and minimal capital requirements. This seamless infrastructure benefits individual pools and projects built upon Balancer, providing them with access to global liquidity and facilitating diverse swap paths.
What is an AMM?
- An Automated Market Maker (AMM) is a decentralized exchange (DEX) protocol used in the cryptocurrency space. Unlike traditional exchanges with order books, AMMs rely on liquidity pools, where users provide pairs of assets, and a mathematical formula (e.g., the Automated Price Curve) to determine exchange rates.
- Traders can directly swap assets through these pools, and liquidity providers earn fees based on their pool share. AMMs are decentralized, accessible to anyone, available 24/7, and programmable, making them a fundamental component of decentralized finance (DeFi). Uniswap, among others, popularized this concept, enabling various DeFi services like trading, lending, and yield farming.
Users of Balancer
Balancer serves as a valuable tool for an eclectic group of participants within the DeFi landscape:
- Swappers have the ability to seamlessly exchange ERC20 tokens. This can be achieved through the Balancer Dapp or popular aggregators such as 1inch, Matcha, or Paraswap.
- Liquidity Providers (LPs) are empowered to add liquidity to pools, earning swap fees, liquidity incentives, and various forms of yield. Passive LPs can harness boosted pools to augment their returns on compounding Aave tokens.
- Arbitrageurs can effectively conduct swaps against pools by employing techniques like batch swaps and flash loans.
- BAL Token holders can lock their tokens into veBAL, allowing them to actively participate in the governance processes that shape the evolution of the Balancer protocol.
The Vault: Balancer’s Core
- At the heart of Balancer lies the Vault, a smart contract meticulously designed to manage and secure all tokens held within each Balancer pool. The Vault not only safeguards these assets but also acts as the central hub through which the majority of Balancer’s operations (including swaps, joins, and exits) are executed.
- The Vault architecture ingeniously segregates token accounting and management from pool logic, streamlining pool contracts. Pools are relieved of the need to actively manage their assets and are tasked solely with calculating amounts for swaps, joins, and exits.
- This innovative architecture opens the door to various pool designs, as the Vault is indifferent to pool mathematics. It can readily accommodate any system that fulfills a few basic prerequisites. Consequently, individuals with groundbreaking ideas for swapping systems can seamlessly integrate custom pools into Balancer’s existing liquidity, eliminating the need to construct standalone Decentralized Exchanges.
Optimized Design for Swaps
- The Vault’s design prioritizes two pivotal aspects: the achievement of remarkably low gas costs and the preservation of flexibility, allowing for complex paths and joins as part of swaps. This approach underscores Balancer’s exceptional pool composability, showcasing its adaptability and enabling the creation of novel pool combinations.
- A prime example is the utilization of tokens paired with the boosted stable pool. Historically, most tokens chose to pair with stablecoins or native assets like ETH, leading to the creation of individual AMM pools such as ABC/USDC and XYZ/USDC.
- This resulted in duplicated and isolated stable liquidity, necessitating additional steps to connect with other stablecoins. Balancer addresses these challenges by supporting nested pools and unique combinations, made possible by the Vault architecture and innovative concepts such as pre-minted BPTs and relayers for joinswaps.
Governance in Balancer
The Balancer governance framework encompasses various key components:
- veBAL: it represents a time-locked, non-transferable derivative of the 80/20 BAL/ETH BPT on Mainnet. The veBAL holders, known as Balancer Governors, play a crucial role in voting on diverse proposals relevant to the protocol’s advancement. These proposals span a wide range, from determining which pools to incentivize with BAL rewards to shaping the allocation and management of treasury funds.
- BAL Token: The BAL token forms the primary component of veBAL. As veBAL allows swapping between BAL and ETH, BAL liquidity scales with Governance. Since veBAL liquidity remains locked, the market can easily project the scaling of BAL liquidity depth over time by analyzing the unlock schedule of veBAL.
- Governable Protocol Fees: Balancer Governors wield the authority to enable and adjust Governable Protocol Fees, which can be sourced from swapping fees and flash loan fees and subsequently stored in the Vault. The Governors themselves determine the allocation of these fees, strategically directing them to support the protocol’s health and progress.
- Governance Process: Alterations to the Balancer Protocol and the allocation of community funds are executed through a governance process. This process comprises a proposal, a prepared transaction payload for on-chain execution via Gnosis Safe, and a snapshot vote that validates the proposal. Currently, a quorum of at least 2 million veBAL votes is required for validation.
- Snapshot: Snapshot, a derivative of Balancer, serves as an off-chain gasless multi-governance client characterized by easy verification and robust results. Balancer Governance Votes are conducted on the Snapshot platform.
- Multisig: To enact off-chain votes on Snapshot, Balancer Protocol employs a Multisig comprising a diverse set of widely respected community members. Importantly, the Multisig does not possess decision-making power; its role is limited to the execution of on-chain decisions made by BAL holders through off-chain voting.
- Emergency subDAO: To safeguard veBAL from malicious actors and address concerns like gauges and pool factory manipulations, an emergency subDAO has been established. This subDAO is endowed with bounded authority to manage the protocol effectively.
Components of the Balancer Ecosystem
Balancer encompasses a diverse array of components and participants:
- Balancer Labs: This entity is the original developer of the protocol and is now exclusively dedicated to open-source smart contract development. Balancer Labs does not function as a service provider to the DAO.
- Orb Collective: An independent entity formed by former Balancer Labs and Balancer DAO contributors, Orb Collective is composed of experienced professionals passionately committed to advancing the adoption of the Balancer Protocol on a global scale.
- Balancer Foundation: it plays a pivotal role in providing the DAO with an additional mechanism for executing work. It aligns with Balancer’s decentralization goals and bolsters resilience across the Balancer Ecosystem.
- Balancer OpCo: As a wholly-owned subsidiary of the Balancer Foundation, Balancer OpCo fulfills integral functions supporting the Balancer DAO. It serves in administrative and operational capacities, as well as frontend development.
- Balancer Maxis: it is a dedicated workgroup formed by community contributors deeply aligned with the protocol’s long-term sustainability. Its members actively engage in proposing and executing innovative ideas and assisting third-party projects.
- Balancer Grants: it constitutes a community-owned grants program established to accelerate development and optimize contributor rewards. It offers an alternative pathway for funding smaller, short-term, or one-off projects that may not fit within the SP funding model.
In conclusion, Balancer emerges as a pivotal DeFi platform, offering programmable liquidity and fostering a robust ecosystem that caters to a wide spectrum of DeFi participants and innovations.
On the official website you have everything you need to know about this powerful AMM.
