What is Balancer Protocol? Everything you need to know

Balancer is one among the most popular decentralized and automated market makers on the Ethereum network. Users can instantly exchange tokens and receive fees for providing liquidity to other pools.

Balancer is a competitor to other platforms, such as SushiSwap and Uniswap. There are advantages and disadvantages to it.

This article will answer your questions about Balancer. It will also examine core features, customer service, security guarantees, as well as other topics.

The Balancer Protocol

The AMM platform makes it possible for users to swap ERC-20 assets using liquidity pools. This allows them to do so without the need of a centralized authority or entity. As they provide liquidity, balancers can also receive a portion of trading fees.

The platform offers several incentives for users to increase liquidity on the Balancer Protocol. It offers users the flexibility to create private liquidity pools, which is what sets it apart from other AMM protocol players.

Users can create pools by using multiple crypto assets. Balancer operates in the same manner as other prominent automated market makers. It trades through any liquidity pool needed to obtain the best rates for its users.

Balancer’s main users include investors, traders, traders, smart contracts and liquidity providers. They also capitalize on the different price spreads across platforms.

Pros:

  • Fully decentralized, and without permission
  • Anyone can open liquidity pools
  • You can customize your AMMs

Cons:

  • Only limited to ERC-20 Tokens
  • There is no mobile app available
  • High gas fees
  • Not for beginners
  • Unregulated DEX

What is Balancer?

Balancer is an Ethereum-based, decentralized exchange. It is also one of the top automated market makers in cryptocurrency. It is based on Ethereum’s mainnet, and users can use several features to build DeFi products.

It was launched back in 2019 by the founders of Balancer Labs – Mike McDonald and Fernando Martinelli. Both co-founders are experienced contributors to crypto industry and have collaborated on other blockchains or DeFi projects.

Balancer’s development began with the bronze release in 2018. The remaining three phases were launched in 2020. After a round funding in March 2020, Balancer raised $3 million to release the bronze phase.

In the earlier years of Balancer’s launch, about 100 million BAL tokens (Balancer’s utility token) were minted. 75% were released to miners, and 25% were distributed among developers and shareholders. It sold 5 million tokens to public.

Products and features that balance

The Balancer Exchange

The Balancer software allows you to trade at the best prices. This protocol promotes efficient trading by pooling crowdsourced liquidity and using Smart Order Routing to find the best prices.

Users can exchange any combination of ERC-20 tokens on Balancer and get access to intelligent pricing, MEV protection, and gas subsidies/optimizations.

The Trade App

To start using the protocol’s Trade App, buy and sell or store cryptocurrencies, users only need to create a self-custody wallet.

The BAL Token

Users earn BAL tokens for trading or liquidity on the Balancer Protocol.

BAL tokens may be claimed and used for participation in the Balancer governance protocols. The voting rights of liquidity providers will be determined by the percentage of tokens that they own or stake in the pool.

The Balancer Pools

ERC-20 tokens are required for balancer pools to be able to manage smart contracts and keep value. Each token is assigned a weight and can be traded with other tokens in the pool. The pool is maintained at a proportional, equal liquidity level by smart contracts.

Doing this ensures that each token is equal in value to the liquidity of the entire pool. The pool owners get fees for trades that occur within the pool. There are two types of pools covered by the protocol:

  • Public Swimming PoolsThese pools enable anyone to add digital assets to Balancer to provide liquidity. Creators can set the parameters of public pools before launching, and these parameters can’t be changed even by them. Small-scale investors who want to make a profit from their holdings will find public pools essential.
  • Private poolsOnly the creator can add or remove an asset. The pool’s parameters can be adjusted by the creator, such as weightings, acceptable assets and fees. Private pools are great for asset manager who have large portfolios but prefer to make a profit on certain digital assets.

Balancer’s open design allows anybody to create their pool type while choosing between different functions and flexible pricing options.

These are just a few examples of the many pool options available for different combination of tokens.

  • Stable Swimming PoolsStable Pools can be used for tokens that are soft-pegged and have a high correlation coefficient such as DAI/USDC/USDT.
  • Weighted Pools: Weighted pools are designed for wide use, including some tokens that don’t have a price connection like DAI/WETH.
  • MetaStable PoolsThese are intended to support non-pegged tokens which preserve correlation. These tokens can diverge over time, and a good example would be a derivative.
  • Managed poolsThese are made to allow for maximum and solid flexibility to manage dynamic fund investments.
  • Liquidity Bootstrapping poolsThese pools can be used to modify the liquidity of a token into another.

The Vault

The vault is Balancer’s central component. It is a smart contract which controls and stores tokens in every Balancer pool. It is an essential part of the ecosystem. The vault also acts as a gateway to allow users to carry out most operations, such as joins or swaps.

Accounting and token management are separate from the Vault pool logic. Balancer claims Pool contracts become easier since they don’t need to manage assets actively and only compute exits, swaps and joins.

Smart Order Router (SOR).

Balancer’s Smart Order Router helps its traders find the best pricing possible. It will identify the best trades for specific output and input tokens. This can be a straight swap in a single pool, or a mixture of transactions across several pools.

The Smart Order Router grows with the increase in the number of Balancer Pools. It continues to grow as more pool types with different math are added. This means that the Balancer ecosystem’s pools can all execute trades.

Also, by integrating and connecting with the Smart Order Router, any custom pool on Balancer can use Balancer’s liquidity features.

Balancer Gnosis Partnership

App.balancer.fi uses the Balancer Gnosis Partnership as the default trading interface. The Balancer Vault and Gnosis Solvers are used to execute batch trades. Gnosis Solvers are used by traders to submit swaps. All they have to do is sign a message, which initiates an inert gasless transaction.

The Solvers match transactions using On-chain liquidity to keep traders safe from Miner Extractable Value or MEV. This facilitates taking advantage of Coincidence Of Wants. BGP uses several Dexes in order to guarantee that traders always get the best price.

BGP’s solid integration with Balancer’s Vault allows it to carry out sophisticated multi-hop deals with minimum token transfers while lowering transaction costs. It groups gasless transactions, ensuring that unsuccessful traders don’t lead to a fee loss.

How to open a balancer account

It is easy to get started with Balancer. The platform’s UX makes access and navigation seamless, providing useful and well-placed tools to trade, invest, and withdraw tokens.

Traders and portfolio managers can leverage Balancer’s unique products and features to invest or build on the platform to create new innovative types of decentralized financial applications (dApps).

On the top left corner of Balancer’s homepage, users will find options to use Balancer’s Invest App, Trade App, or the Build option.

Balancer fees and commissions

Every pool on Balancer charges a different fee. Besides, the number of fees charged may depend on the choice of a pool’s developer, and some fees can range from 0.0001% to 10%. Let’s find out some fees applicable to the Balancer protocol.

Fees for trading on the Balancer Exchange

Pool developers set trading fees which represent a portion of the transaction crypto traders pay to pool LPs. Users are charged a takers fees from takers and an makers fee by makers when they use centralized exchanges.

When they accept orders already placed, takers remove liquidity from the order books. These users are called makers.

An alternative to charging separate takers and makers’ fees is charging the same flat fees to the maker and the taker. There are no trading fees on decentralized exchanges such as Balancer. So in terms of trading fees, Balancer doesn’t charge users.

Network Fees

Network fees are paid to particular blockchain or crypto miners and aren’t fees paid to the Balancer exchange. Network fees can change from time to another and are not fixed. They are affected by the network’s performance at any given moment.

Supported Devices

Balancer doesn’t have a mobile app available on Android or iOS. The exchange can be accessed via the web app on a desktop computer or a mobile device.

Support for Customers

Users can chat with Balancer’s customer support, and this is a feature that sets it apart from many ‘decentralized’ competitors.

Besides the live chat functionality on the website, users are also free to send an email to contact@balancer.finance , or reach out through LinkedIn or Twitter.

Supported Cryptocurrencies

Balancer does not support tokens that don’t match the ERC-20 standard, even if they are used on certain pools.

The platform also doesn’t control the tokens held in the Balancer pools; they are smart contracts. To make sure tokens with known flaws aren’t used in pools, the configurable rights pools or CPRs, are set in place.

Balancer’s native token is also listed on some established crypto exchanges and trading platforms for secure transactions. These platforms include Coinbase and Binance, Kraken, Crypto.com and Bithumb.

Security

The Balancer protocol has no admin keys or backdoors, making it a fully trustless one where users can’t upgrade Balancer pools. Below are some Balancer’s security mechanisms:

  • Balancer is Fully AuditedBalancer audits with Certora, Trail of Bits and OpenZeppelin. It is subject to more audits in order to meet security and dex standards.
  • Bug Bounty ProgramBalancer has an ongoing bug bounty program. This is part of the V2 release its core contracts. The severity of the bug will affect the amount of reward. Bug bounties will be paid to the smart contracts Balancer that are responsible for the security of protocol funds on Ethereum’s mainnet.

As we’ve mentioned, Balancer is permissionless, so there’s always the chance of faulty or malicious tokens being introduced at the contract level. Here’s what Balancer’s response to all of this is:

  • Balancer continues to audit and evaluate the protocol on a regular basis.
  • It added transfer fee tokens the UI blacklist.
  • Balancer added more information about the dangers of pool operation and how tokens created maliciously could drain funds from a pool.

The Balancer’s Pool Hack

In January 2021, an issue enabled an attacker to steal money from two pools containing tokens that had high transfer fees. This issue happened despite Balancer’s frequent caution about unforeseen consequences surrounding ERC-20 with transfer fees in its discord, docs, and other channels.

The ERC-20-compliant tokens that can be used on the Balancer platform are accepted. Negative consequences will always result from these tokens acting in an unusual or unexpected way. Balancer paid liquidity providers who had lost funds to close this event.

Conclusion

The Balancer protocol is convenient for crypto investors looking to trade digital assets at the best prices or have an inactive portfolio they wish to leverage.

Portfolio managers and large investors may find private liquidity pools on the platform to be very useful. Multi-token pool access allows for a solid, rebalanceable index of cryptos.

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