Blog Crypto Balancer (BAL) coin review: Is BAL bringing balance to DeFi?

Balancer (BAL) coin review: Is BAL bringing balance to DeFi?

date March 11, 2021 time 6 min read 367 views

DeFi thrives because it offers distributed and inclusive financial services. While DeFi is still low on the global radar, the emergence of platforms like Balancer has shown that DeFi could topple conventional methods of earning interest. And that coin liquidity can be managed securely and trustlessly.

With over $1.9 billion worth of assets locked in its protocol, Balancer has emerged as one of the biggest contributors to the explosive DeFi narrative with its decentralized crypto exchange

On the surface, Balancer functions similarly to other decentralized exchanges like Uniswap, providing crypto pools to power self-sustaining, autonomous crypto trading activities. All trades are executed on the Ethereum blockchain and are non-custodial. 

However, unlike Uniswap, liquidity providers on Balancer can bundle up to 8 assets in weighted pools. This allows providers to not only earn interest on fees but also hold crypto portfolios similar to an index fund.

But why has Balancer Coin (BAL) seen such explosive growth in 2021? In our Balancer coin review, we’ll talk about just what features on Balancer have made BAL so popular.

What is Balancer?

Balancer is a decentralized exchange designed to provide liquidity for the Ethereum DeFi market. 

Launched in March 2020, Balancer functions as an automated market maker, allowing you to create or provide liquidity for pools of paired crypto assets. Each pool is designed to maintain fixed ratios for all tokens inside.

By allowing crypto traders to execute on-chain trades. With this self-sustaining protocol, there is no need for an order matching system or other mechanism used to execute trades on centralized exchanges. 

The protocol allows you to create or add liquidity to customizable pools of paired assets. Think of it as an index fund that automatically maintains a specific percentage for each asset that makes up the pool. 

This architecture ensures that the net value of a pool is constant regardless of price volatility. Traders can buy tokens at a discount to maintain the weights of the pools. In turn, they pay trading fees to the liquidity providers who create the pools.

Balancer is a combination of self-balancing liquidity pools
Balancer is a combination of self-balancing liquidity pools (source: boxmining.com)

Unlike other DEXs that only allow you to pool two assets, Balancer allows you to bundle up to 8 ERC20 tokens in a pool. This means Balancer comes with a higher degree of flexibility for liquidity providers and lets traders instantly swap between multiple assets.

How does Balancer work?

Trading activities performed on Balancer maintain the weight of a pool of crypto assets.

Take a pool programmed to hold 25% of its value as DAI, 50% as SUSHI, and 25% as WBTC for example. This pool must always contain this exact value proportion of DAI, SUSHI, and WBTC, regardless of price swings. 

In the event of market fluctuations that cause the price of WBTC to rise, the pool allows traders to buy WBTC with either SUSHI or DAI to offload the excess WBTC and regain the original 25%-50%-25% weight. The protocol deducts a fee on each completed trade and pays it to the pool creator or liquidity providers. 

Tokens can be swapped regardless of the state of a pool. However, if your trade aligns with the pool’s balancing strategy at a given time you’ll make more profit.

The Balancer protocol supports 3 types of pools:

  1. Public pools: As its name implies, a public pool allows anyone to provide liquidity or withdraw assets to maintain the predefined weight of tokens. The parameters of public pools, including the trading pairs, the weight of the pool, and trading fees, cannot be customized before or after launch.
  2. Private pools: Unlike public pools, only the creator of private pools can provide liquidity and set parameters like the weight, the accepted digital assets, and the fees.
  3. Smart pools: This is similar to a private pool, only that the governance of such a pool is set by smart contracts. In essence, smart pools are programmable and they self-regulate the parameters that govern the weight, fees, and the creation of index funds.

What are the use cases of Balancer?

The following are the applications of the Balancer Protocol:

  1.  Initial DEX Offerings: Balancer allows startups to distribute and fairly discover prices for their native tokens. 

With the advent of decentralized automated market makers (AMMs) like Balancer, new projects can power the initial phase of token distribution by creating pools where new tokens are paired with highly liquid digital assets. This functionality has attracted over $1.9 billion worth of assets in under 1 year of operation.

  1. Decentralized Index Funds: Users can create a decentralized index fund and control the percentage of the portfolio allocated to each digital asset.
  2.  Liquidity Mining: Investors create pools, set parameters, and deposit assets to earn transaction fees and also the protocol’s governance token as rewards.
  3. Arbitrage: Traders can take advantage of disparities between the prices of pooled assets and what they are selling for on the external market. Arbitrageurs can trade on Balancer pools with over-priced or undervalued assets until there is a reconciliation with external prices. 

For instance, if there is a disparity between the price of MKR on Balancer and its market price on other exchanges, you can earn more profit by buying or selling this token.

What is Balancer coin (BAL)?

Following the success of COMP, Balancer launched its native token, BAL, in June 2020. Balancer’s crypto is the governance token of the Balancer ecosystem distributed to liquidity providers and traders as incentives for maintaining the weight of Balancer pools.

The ERC-20 token has its total supply capped at 100 million tokens. a quarter of this has been allocated to founding members, investors, advisers, and core developers. The remaining supply is being allocated to users – traders and liquidity providers – as rewards for contributing to the Balancer network. 

A total of 145,000 BAL tokens are mined and distributed weekly. If this distribution threshold remains constant, it will take 8.6 years to distribute the remaining 75 million BAL earmarked for the community reward program.

Liquidity governance

Balancer uses a governance token distribution framework to determine the number of BAL distributed to each pool.

  • wrapFactor: Token pairs containing stablecoins or wrapped tokens receive fewer Balancer crypto rewards.
  • feeFactor: The protocol encourages low trading fees by allocating more BAL rewards to pools that offer competitive fees.
  • capFactor: The protocol uses this mechanism to cap the total liquidity of a token that is eligible to participate in the BAL reward program.
  • Liquidity staking: Certain token pairs receive more rewards.

What is the historical performance of Balancer?

After the launch of Balancer crypto in June 2020, the governance token debuted on Coingecko at $15.20 per token. In the first 2 months of trading, it recorded a 50% price increase, only for its value to fall to the $8 range in early November, signaling a 100% plunge from its all-time high of $34. 

However, BAL has maintained an uptrend since its price bottomed in November. In the first 6 weeks of 2021, the value of BAL increased by over 300%, and it set a new all-time high of $53 on February 12, 2021.

Is Balancer coin a good investment?

The value of Balancer token depends on the development and attractiveness of Balancer V2
The value of Balancer token depends on the development and attractiveness of Balancer V2 (source: balancer.finance)

Owing to the impressive price performance of BAL in 2021, you may be wondering: Is it wise to invest in Balancer coin?

The recent surge in the value of BAL has been attributed to the proposed launch of the second version of the Balancer protocol. Balancer V2 is poised to optimize the protocol by introducing cost-effective and efficient systems for its automated market maker.

Already, competitor Uniswap has reinvented its protocol. Hence, it comes as no surprise that Balancer is doing the same. Balancer V2 will implement the following solutions:

  1. Protocol Vault: This implementation will allow Balancer to transition to a single vault system for all the assets locked in its pools. The protocol vault will house all of the pooled assets. Therefore, you do not have to pay extra gas fees for executing multiple token swaps, especially when it requires assets from separate pools.
  2. Customizable AMM logic: At the launch of Balancer V2, the protocol will allow projects and liquidity providers to create customizable pools.
  3. Asset managers: The Balancer team recently announced a partnership with Aave to provide decentralized lending opportunities for pooled assets.

Other upgrades include the incorporation of resilient oracles with lower gas costs and the introduction of governable protocol level fees. The price of the Balancer crypto could take off if the protocol, through its proposed upgrade, begins to deliver more value.

How and where to buy and access Balancer tokens

Like every other prominent cryptocurrency, you can buy Balancer tokens on popular crypto exchanges including Binance and Coinbase. Also, since it is a DeFi token, another alternative is to trade your other digital assets for BAL on Ethereum-based decentralized exchanges like SushiSwap, Uniswap, and even Balancer.

As explained in this guide, you can also provide liquidity to the pools on the Balancer protocol or trade on the platform to receive BAL as rewards. 

But what if you don’t want to sell or trade your crypto for BAL?

You could opt for crypto loan platforms, where you can borrow Balancer tokens by collateralizing cryptocurrencies.

With a platform like MyConstant, you can buy BAL without giving up your crypto holdings. This possibility and the added benefits of enjoying consumer-centric and secure loan services for over 70 cryptocurrencies make MyConstant one of the most competitive crypto lending platforms in the business. You also get:

  • 24/7 customer service.
  • Interest Rates as low as 6%.
  • Early repayments for lower rates.
  • Instant matching.

Sounds interesting? Sign up for a free account today and get in on the Balancer project by buying BAL.

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