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The Balancer Protocol and BAL Cryptocurrency Explained

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The Balancer Logo

The Balancer Logo

What Is Balancer?

Balancer is a decentralized cryptocurrency swap on the Ethereum blockchain. Just like on Uniswap, it allows users to trade their cryptocurrencies thanks to provided liquidity in pools. Most other swaps only support liquidity pools with two coins that have a ratio of 1-1. One unique feature of Balancer is that it allows for the creation of pools with multiple coins at a variety of ratios. This is why it’s called Balancer—the protocol automatically rebalances its users' portfolios as the values of various crypto assets vary over time.

How Does Balancer Work?

In a decentralized exchange, or DEX, people can hold their crypto in so\-called liquidity pools to earn rewards in the form of trading fees. This liquidity is used to enable trades and to set prices with automated market makers, or AMMs.

With typical trading pools, users can only add one trading pair into a pool where both coins are always equally weighted. For example, if there was a ETH/USDC pool on Uniswap and that pool held 10,000 USDC and 10 ETH, that pool would trade 1 ETH for 1,000 USDC. If a user bought 1 ETH from the pool, the remaining 9 ETH would then have the same value as the now 11,000 USDC.

This is how typical AMMs work; if the supply of one coin gets lower, it makes its price higher and makes the other asset one cheaper to incentivize traders to buy the coin with the higher supply.

Balancer, however, allows up to eight different coins in a single pool, and users can choose how much weight a coin should have. This means that you could create a pool with 30% ETH, 50% Wrapped BTC, and 20% USDC. If you wanted to buy Wrapped BTC, you could do so by exchanging it for either ETH or USDC in this pool.

The AMM still raises the prices of coins with lower supplies, but it also takes into account the different weights of each in the pool. This way, people can use Balancer as an automatic portfolio manager that rebalances their funding frequently.

Some of the liquidity pools on Balancer and their APRs

Some of the liquidity pools on Balancer and their APRs

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Balancer also charges trading fees for every swap and pays them to its users as a reward for providing the necessary liquidity. So the liquidity pools offer their funds to traders and use them to keep their portfolios balanced while their users earn via trading fees. In traditional finance, you would have to pay portfolio managers to rebalance your portfolio. Here, you get paid to have your funds rebalanced!

If you don't like any existing pool, you can create your own liquidity pool with your own preferred parameters, such as which tokens can be added, what their weights should be, what the trading fees should be, and so on. As long as newly created pool is private, the creator is the only one who has access to it and can make changes. If a pool becomes public, it is no longer possible to change parameters, but it is possible for other people to provide liquidity and trade with it.

What Is the BAL Token?

Originally, Balancer didn't have its own token, but after the success of Compound and its COMP token, a native token was added to the protocol to further decentralize it. BAL is the governance token of Balancer. It is similar to UNI from Uniswap in that it is paid out to liquidity providers as an incentive.

There is a total of 100M BAL tokens. 25M were given to the original team, core developers, and investors. Another 10M were put aside for later fundraising if needed. The remaining 65M token will be distributed to liquidity providers over the next few years. The majority of the tokens will end up in the hands of the platform's users. 145K tokens are released to users per week. The amount a user receives depends on how much liquidity they provide in relation to all other users.

The BAL price performance from July of 2020 to July of 2021

The BAL price performance from July of 2020 to July of 2021

Like other governance tokens, BAL holders have voting rights on proposed changes to the protocol. Proposals are pieces of finished code that are implemented as soon as enough BAL holders vote for their implementation.

The value of the BAL token depends on how much cryptocurrency is in the Balancer ecosystem. With more funds in the protocol, the more desirable voting rights for possible changes become.

The are many other decentralized exchanges, but Balancer has the unique feature of automatically rebalancing portfolios. It does so for free and even rewards its users. Such a tool is very useful for any crypto investor, so the Balancer platform and its token could definitely see substantial growth over the next few years.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Krypton Currency

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