Original author: Jiang Haibo, PANews
Balancer has made many innovations in the development of DEX, but lacks a sense of presence under the competition of Uniswap and Curve. According to DeFiLlama's data, Balancer's liquidity in DEX ranks fourth, second only to Uniswap, Curve, and PancakeSwap; the dashboard organized by Dune co-founder shows that Balancer's trading volume in June is the fifth, only below Uniswap, PancakeSwap, Curve, and DODO.
In the development of LSD, Balancer also occupies a good market. Among the top five liquidity pools of Balancer on Ethereum, the liquidity pools of wstETH/WETH, rETH/WETH, wstETH/sfrxETH/rETH, and R/DAI all belong to LSD or LSDFi. In the following text, PANews will list Balancer's innovative measures.
Boosted Pools: Using Idle Liquidity for Mining
Balancer collaborated with Aave at the end of 2021 to launch Boosted Pools, which can use idle liquidity for liquidity mining in protocols such as Aave. In actual use, Boosted Pools usually only retain 20% or even lower proportion of total liquidity for trading, and the remaining funds are invested in lending protocols such as Aave and Morpho to earn additional income. For example, liquidity providers in the Balancer Boosted Aave V3 USD pool, which consists of DAI, USDT, and USDC stablecoins, can simultaneously receive transaction fees in the DEX, deposit interest in Aave, and $BAL mining rewards issued by Balancer.
Combining Balancer's composability with lending protocols, this innovation can incentivize deeper liquidity, more efficient transaction routing, higher capital efficiency, and higher returns. However, due to composability, liquidity providers in Boosted Pools may also suffer losses when there are security issues in the underlying lending protocols. For example, the Euler attack in March this year resulted in a loss of $11.9 million for liquidity providers in the Balancer Boosted Euler USD pool, but fortunately, the funds were eventually returned by the hacker.
Composable Stable Pools
In August 2021, Balancer announced the launch of the MetaStable pool in collaboration with Lido, along with liquidity incentives. While Uniswap and Curve previously dominated the market for non-stablecoin and stablecoin trading respectively, the emergence of new types of highly correlated but not fully pegged assets has created new demand. Examples include yield tokens such as Lido's wstETH and Compound's cDAI, whose values closely track the underlying assets but can change over time. Providing liquidity using Curve's Stableswap mechanism would allow arbitrageurs to profit from the appreciation of one asset over time.
The MetaStable pool takes into account the constantly changing exchange rates between assets and concentrates liquidity around the actual exchange rates by adjusting the slope of the Stableswap curve. This enhances capital efficiency and provides more accurate liquidity for liquidity providers.
Later on, Balancer upgraded all types of stable liquidity pools (stable pools, metastable pools, etc.) to composable stable pools. Composable stable pools allow direct trading with their LP tokens, enabling "nested" trades, and can also form trading pairs with assets like WETH in other pools, reducing gas fees for joining and exiting liquidity pools.
As mentioned earlier, four out of the top five liquidity pools on Balancer on Ethereum are LSD-related. Due to the accumulation of yield in the value of tokens such as wstETH, rETH, and sfrxETH, the mechanism of composable stable pools is more suitable.
Liquidity Bootstrapping Pools: Helping over 130 projects raise funds
The popularity of Uniswap allowed anyone to provide liquidity for their tokens and enable others to trade them, sparking the IDO frenzy in 2020. Some projects saw their token prices rise tens of times shortly after providing liquidity on DEX, but early gains were captured by a few whales or bots using scripts. Additionally, teams were not able to raise much capital during this process, and providing liquidity also required significant funds.
As an established DEX, Balancer introduced Liquidity Bootstrapping Pools (LBPs) in March 2020. LBPs are intelligent pools that allow teams to launch tokens while establishing deep liquidity.
Balancer allows project teams to allocate weights to their token pools and change them over time. For example, for a TKN token auction, a liquidity pool with a TKN/USDC ratio of 90/10 can be created, initially allocating 90% of the tokens to TKN and 10% to the reserve asset USDC.
Over time, the proportion of TKN has been decreasing. For example, based on programming, the ratio of TKN/USDC can reach 50/50 or 10/90. In this process, without external purchasing behavior, the price of TKN will continue to drop as shown in the following figure.
This is a fairer way of initial token sales. Since the initial pricing is high, it is not profitable for bots to rush in and may suffer losses. When the price drops to the expected value, users will spontaneously engage in transactions. The initial project team does not need to provide a large amount of funding, and the tokens are sold at reasonable prices, which is friendly to the token issuer.
The front-end website Fjord Foundry (formerly Copper Launch) that uses Balancer's Liquidity Bootstrapping Pools shows that it has conducted auctions for more than 130 communities on multiple chains, with auction values amounting to $750 million (Balancer and Fjord Foundry respectively charge a fee of 1% of the sales amount). The Xirtam project, a scam, raised funds on Fjord Foundry.
An example of successful use of Fjord Foundry is the sale of $AKITA tokens received by Gitcoin. The issuer of the Meme token, $AKITA, sent a portion of the tokens to Vitalik's wallet. Vitalik donated the tokens to Gitcoin, but selling the tokens became an issue. Afterward, Gitcoin sold $AKITA through Fjord Foundry, and the slow sales process avoided a large amount of slippage and accumulated some fee income through the pool.
Weighted Pools: Providing liquidity with specific token weights
Weight Pool is Balancer's main feature, which is an extension of the AMM formula x*y=k proposed by Uniswap. In Uniswap, only two tokens are allowed to provide liquidity, and before Uniswap V3, the value of the two tokens must be equal.
However, the risks between tokens are not the same, and a 50/50 weighted liquidity pool is not suitable for all liquidity providers and assets. Sometimes it is necessary to deposit multiple assets into the same liquidity pool. Balancer was created to solve this problem, allowing users to build liquidity pools with more than two tokens and customize the weights, such as a 60/20/20 weighted pool with three tokens.
Yearn has used Balancer's 80/20 weighted pool as the liquidity incentive pool for YFI during token distribution.
Managed Pools: Suitable for fund managers, can collect management fees
Managed Pools are derivatives of weighted pools that allow pool creators (Owners) to update token weights, allowing them to adjust the distribution of internal assets to accommodate different strategies.
Managed Pools offer high flexibility, unlocking complex portfolio strategies and providing a framework for fund managers. Fund managers can create various pools and strategies, in which users can participate, and the fund managers can collect a certain percentage of management fees, while Balancer can also collect a portion of the fees as protocol fees.
Linear Pools: Introducing target price ranges for trading pairs
Linear Pools are designed to facilitate trading between underlying assets and yield-wrapped assets, such as DAI and Aave's aDAI. Linear Pools introduce a target range that encourages maintaining the price within the range.
Linear Pools have fee and reward mechanisms to incentivize arbitrageurs to maintain the exchange rate between the two tokens at the ideal ratio. There is a cost for moving the price outside the target range and rewards for trades that bring the price back within the range. Linear Pools are also frequently used as components of enhanced pools.
Protocol Pools: Custom-built DeFi protocols built on top of Balancer
Protocol Pools represent the entire DeFi protocol built on top of the Balancer infrastructure. Balancer provides the infrastructure for customized AMMs by separating liquidity pools and accounting logic. All other AMM logics can be implemented on custom pools on top of the Balancer Vault, enabling programmable liquidity.
For example, the stablecoin project Gyrscope concentrates liquidity within the price range of its customized Balancer liquidity pool.
The architecture of Balancer v2
Balancer v2, launched in April 2021, separates AMM logic, token management, and accounting. Token management and accounting are handled by Vaults, while the AMM logic of each pool is independent. In terms of architecture, Balancer V2 also transitions from each Vault in V1 individually safeguarding assets to a single Vault storing all assets. Due to the large number of liquidity pools in Balancer, with pools having different transaction fee ratios and different asset compositions containing the same assets, the previous architecture required cross-Vault transactions for assets such as BAL and ETH, resulting in high fees. The new architecture offers better flexibility, capital efficiency, and gas efficiency.
Summary
Balancer has made many original updates in its development in DEX, such as adjusting the architecture to manage all assets in a single Vault; the auction mechanism of liquidity bootstrapping pools; multi-token management for weighted pools and managed pools; and allowing other developers to customize various functions on top of Balancer.
However, the development of DEXs is becoming more and more homogeneous. Balancer may have initially drawn inspiration from Uniswap, and recently released Uniswap V4 also plans to implement a structure where a single Vault manages all funds and allows developers to build various functionalities on Uniswap. The competition among DEXs is becoming increasingly fierce.
