Balancer (BAL) Protocol Guide

Balancer is a crypto platform which operates on the Ethereum blockchain. 

In this guide, we’ll run through everything you need to know about Balancer. We’ll explain exactly what it is, how it works, and why it’s a must-have tool for anyone who’s serious about the cryptocurrency game.

What Is Balancer?

Balancer is a decentralised finance (DeFi) exchange and automated portfolio manager that facilitates liquidity in the ever-developing crypto market. As new cryptocurrencies emerge, one of the main challenges that users face is liquidity. Essentially, as the coin is so new, with few users, can be difficult to trade with it. 

The foundations for Balancer were laid by Fernando Martinelli and Mike McDonald of BlockScience in 2018. The project quickly generated significant interest, raising some $3 million in funding before officially launching in 2020. Running on Ethereum, Balancer acts as an incentivised distribution network. Users can create and manage funds called Balancer pools, which can be composed of multiple tokens with varying weights. 

By depositing assets in them, users provide liquidity, which is essential for buying and selling new cryptocurrencies. In exchange, they’ll earn a share of the trading fees paid to the network, received in the form of Balancer’s own cryptocurrency, BAL.

How Does Balancer Work?

Balancer utilises an automated market maker (AMM) system to simplify the management of your portfolio. With this, users can create customised liquidity pools of up to eight different cryptocurrency assets and determine their weights as they see fit. The AMM can also rebalance token prices on the fly so that your weights maintain the same ratio in your liquidity pool. 

Say you set a pool up with 50% ETH and 50% DAI. Should one of those currencies suddenly climb in value, Balancer will buy and sell your assets as necessary to keep your pool at your specified proportions. 

When a user wants to trade a specific asset, they can do so through one of these pools without relying on traditional order books or matching algorithms. This creates more liquidity and flexibility in trading options, as well as allowing users to earn rewards for participating in the network.

Balancer liquidity pools

Balancer offers three different types of liquidity pools: public, private, and smart. 

Public liquidity pools

As the name suggests, public pools are available to all users. Once you create a public pool, its parameters will be set in place before it launches. However, any user can add liquidity by adding or withdrawing assets. As a result, they’re a great way to earn fees if you only hold a small number of assets, making them a particularly popular choice with most users.

Private liquidity pools

On the other hand, private pools are closed off to other users - only the pool's creator can add to and withdraw from them. This limits the earning potential of smaller value users. However, the trade-off is that these pools remain customisable, with parameters like fees and weights being adjustable at any point.

Smart pools

Finally, we have smart pools. Straddling the line between public and private pools, these pools are a little more flexible than their shared counterparts while still offering some of the restrictions of private pools. Some fee and weight changes are possible via smart programming. At the same time, creators can put limits on who can provide liquidity to the pool.

What Are BAL Tokens?

A key element of Balancer is the BAL. This is the platform’s own custom cryptocurrency, working as a governance token to incentivise liquidity, enhance the network, and boost user engagement. 

When users contribute liquidity, they’re helping build an environment for other users to buy and sell their cryptocurrencies on the Balancer platform. And, as a thank you, these liquidity providers receive a kickback from the trading fees that the network receives. The BAL tokens you receive can be traded on many of the most popular exchanges, like Kraken, Binance, and Huobi.

This reward system creates a beneficial cycle for all users, with ever-increasing liquidity leading to better trading options and greater profitability. But beyond the benefits within the Balancer network, it also opens up new potential avenues for financial gains.

How to Use Balancer

If you’re ready to hop on the Balancer bandwagon, then here are a few handy tips to help get you started on your DeFi journey.

First steps

First things first, you’ll need a compatible Ethereum wallet. MetaMask and Coinbase are a couple of the most popular options, and both support BAL too. 

Once your wallet is ready to go, head to the Balancer website and connect your wallet by following the on-screen instructions.

Creating or joining a pool

Once you’re connected, you’ll need to create or join a liquidity pool. If you decide to create a pool, you’ll need to pick the tokens you want to include and set their weights. This will determine how much of each token is held in your pool.

Alternatively, if you're looking to start off by joining existing pools, you can simply add liquidity straight to them. That way, you’ll immediately start to earn fees from trades that are executed within the pool, giving a passive income stream while you contribute to the market’s liquidity.

Managing your portfolio

Once you’ve got your pool established, Balancer’s automated system will take over. You can sit back, let the algorithms work for you, and monitor your investments on the user-friendly dashboard. Here, you can find real-time insights and analytics for info on your portfolio's performance.

Conclusion

As a modern DeFi platform, Balancer is making waves in the world of portfolio management. Its effective AMM system, customisable liquidity pools, and widely supported BAL governance token make it an excellent choice for anyone in the market for portfolio management solutions or new revenue stream opportunities.

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Author

Caleb is a financial copywriter with a specialisation in fintech and forex. Former copywriter at Barclays and Paysafe. Contributing writer for LiquidityFinder. You can message Caleb here.