What is Balancer?
Balancer is a decentralized financial protocol based on Ethereum that allows automatic market making.
More broadly, a traditional market maker/liquidity provider buys and sells financial instruments, providing the market with liquidity and profiting from the difference between the buy and sell prices. Thus, an automated market maker (AMM) is a market agent driven by algorithms that determine the rules of the trade.
The combination of Ethereum with AMM, the assets in the market, the algorithm that drives that market, and the ability to create the market are becoming decentralized.
How it differs from Uniswap
What makes Balancer unique is that the protocol supports up to eight assets per market (the weight of the assets supported is arbitrary), as well as customizable trading fees set by the pool creator. The differences between Uniswap and Balancer Labs can be seen below in the table from Token Terminal.
Users can then use pools in two ways:
- Providing liquidity: Users can deposit supported assets into pools, providing liquidity to users of the pool. Those that deposit assets can earn a fee, though due to volatility and other factors, there are cases where liquidity providers can lose some of their assets.
- Trading: Users can trade tokens in a decentralized manner through pools, with Balancer’s smart order routing system ensuring the exchange of cryptocurrency at low fees and at quick speeds.
Unlike centralized exchanges like Coinbase and Binance, which use order books to derive prices, the price of tokens in a pool is based on their deviation from their set weighting.
Balancer Labs believes that this liquidity sourcing system is capable of creating a network flywheel effect, resulting in increased liquidity, traders, commissions and profits for LP.
Thanks to Balancer’s flexible options, pools can do much more than just provide cryptocurrency holders with the ability to exchange their assets.
Balancer Labs has released pool schemes such as one for liquidity bootstrap pools or one for pools that attempt to eliminate the risk of losing LP assets.
What is BAL?
As aforementioned, BAL is the native governance token of Balancer. The team behind the DeFi protocol sees this as a necessary step to decentralized and diversify governance.
BAL holders will be able to “help guide the protocol to its fullest potential.” Balancer specifically names deploying the protocol on blockchains other than Ethereum, implementing layer two solutions, introducing fees at the protocol level to generate revenue, and more as examples of actions BAL holders can make.
There is currently not a formal governance structure in place, though when launched, Balancer’s may be similar to that of other protocols. Other DeFi protocols have the following governance structure:
- Users identify an issue when using the protocol and share observations online.
- Users narrow down the best ways to address the issue via public forums.
- Users create and present a technical specification of a solution to the issue.
- It’s presented to the community, then voted on.
- If the proposal gets a majority of votes and/or reaches a certain threshold, it is implemented.
While Balancer has just one token, Zild has three:
- Zild token is the governance token of the project, the holders of which will make decisions regarding the development of the project and profit
from the token’s appreciation. Zild tokens will be listed at various exchanges.
- Yild token is a synthetic token needed to facilitate communication. It serves as a kind of IOU that users receive when they send their funds to the liquidity pool.
- Xild is a reputation token. Such tokens are credited for timely loan repayments, regular provision of the liquidity and other behavior, which is predictable and beneficial for the community. With Xild tokens, users can reduce the amount of the collateral. Xild tokens cannot be transferred to another user or resold.