Balancer is a software running on Ethereum that seeks to incentivize a distributed network of computers to operate an exchange where users can buy and sell any cryptocurrency. ... These deposits are essential to the network, providing the liquidity needed for users to buy and sell cryptocurrencies on the platform.
Balancer is an automated market maker (AMM) for multiple tokens. It enables portfolio owners to create Balancer Pools where traders can then trade against these pools. Balancer is still a relatively new liquidity provider (LP) in the decentralized finance (DeFi) space.
Balancer’s mission is to offer a financial protocol that allows in a flexible and decentralized way to provide programmable liquidity, and through this, offer instant on-chain swaps with efficient gas costs to the entire ecosystem.
At first glance it may seem that Balancer is nothing more than a Uniswap with the possibility of creating pools with more tokens and with ratios between tokens different from 50/50, but if we study the protocol we’ll see it is much more than this.
In traditional finance we find the so-called “index asset managers”; Indexed investment funds that keep the distribution between the different assets constant. Here investors are charged a commission not only for participating in the fund, but also for the rebalancing between assets that are updated by asset managers. Balancer has completely reversed the economic logic of these funds. Now with Balancer, not only do you not have to pay fees for participating in the pools acting as a liquidity provider, but you also generate income through fees for achieving this rebalancing. They pay you to participate in a protocol with a natively integrated asset management function. This is because the protocol sells part of its assets and charges a commission for the sale in order to rebalance the proportions between the tokens.
This rebalancing takes place through arbitrage, since investors are incentivized to trade pools where the price has risen or fallen to areas where it is profitable to trade and “rebalance” them. This allows the pools to charge commissions for these trades and therefore generates returns to the liquidity providers, in addition to allowing the portfolio to be rebalanced again.
In some way Balancer has completely decentralized the concept of market-making, not only because of what we have commented previously, but also because you always have the option of turning your entire portfolio into a new pool. In other words, you can choose the distribution between tokens that you prefer and use Balancer to rebalance those proportions, in addition to charging fees for doing so. Just amazing!
So far we are not taking into account Balancer’s contribution to the ecosystem either, since it acts as a kind of “sandbox” that allows us to innovate and investigate in relation to pools with unequal proportions and fees and thus find solutions to problems that we have not yet found.
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