What is Balancer?

What is Balancer?

What is Balancer?

…and how do you make money on it?

Dapps & Protocols

·

15 min

What is Balancer?

…and how do you make money on it?

Dapps & Protocols

·

15 min

What is Balancer?

…and how do you make money on it?

Dapps & Protocols

·

15 min

What is Balancer?

…and how do you make money on it?

Dapps & Protocols

·

15 min

What is Balancer?

Attention all DeFi enthusiasts! Are you tired of the same old yield farming platforms that promise the moon and deliver nothing but dust? Look no further than Balancer – the decentralized finance protocol that's shaking up the world of automated market makers (AMMs).

With Balancer, you're not just another user – you're a liquidity provider, a market maker, and a risk manager all in one. You get to create your own custom pools with multiple assets, adjust their weightings, and earn rewards for every trade made in your pool. It's like being your own boss in the world of DeFi!

But that's not all – Balancer is designed with fairness and efficiency in mind. Instead of prioritizing the big whales, it provides equal opportunities for all users to participate in the liquidity provision process. And with low fees and high capital efficiency, it's a win-win situation for everyone involved.

Balancer is regarded as an OG DeFi protocol. Launched in 2020, Balancer represented a revelation in the DeFi space for its customizable liquidity pools. Furthermore, Balancer became the first AMM to support multiple assets in its liquidity pools – more on that in the next section.

Balancer also has its own governance token, called BAL. In addition to its impeccable record track, the protocol integrated its governance structure to become fully decentralized. Users stake BAL tokens and receive veBAL, representing their voting shares.

In its current structure, Balancer has never been hacked. In case of an extreme event such as an exploit, there is a governance structure called the Emergency DAO that “kills” pools and gauges. Balancer's DAO and subDAOs are managed by multisigs. 

How does Balancer work?

Balancer encourages efficient token trading via pooling crowdsourced liquidity. Most traditional AMMs such as Uniswap create 50/50 liquidity pools. In this scenario, two tokens can be traded against each other and are given equal importance. If the demand for one token rises, the AMM ensures its price increases correspondingly too.

Liquidity providers that add tokens to the pool get a share of the trading fees, making it a lucrative way of earning passive income. However, 50/50 pools are limited to a trader's needs – most users rarely want to own the same amount for two tokens. A risk-adverse investor may want to earn only a portion of the volatile assets.


Balancer Protocol introduces much-needed flexibility to the DeFi paradigm. It is an AMM specifically designed to support more than one asset in a single liquidity pool. Users can also create their own pools with custom token splits and weights. This level of flexibility makes Balancer one of the most popular DeFi infrastructure projects, as it helps providers have full control over their portfolio.

Balancer's ability to create multi-asset liquidity pools makes it akin to an Index Fund, where you have the ability to create custom baskets of tokens depending on your investment philosophy. Instead of manually rebalancing your portfolio to maintain the right proportion of tokens, the Pool automatically adjusts prices as traders swap between various tokens.

The Vault

The Vault is Balancer's main product – it is a smart contract that holds and manages all tokens in each Balancer pool. You can think of it as the brain of the protocol. In Balancer's setup, all crypto assets are held in the Vault, allowing the token accounting and management to take place separately from the pool logic. This approach comes with a couple of benefits.

One of them is gas efficiency. Hopping between liquidity pools can be a costly activity since users must withdraw from one liquidity pool to their wallet, and then to the next liquidity pool. Such activities are prevalent among traders spotting arbitrage opportunities, or users who simply want to move to a pool that pays higher yields. 


Balancer's advantage is that all tokens are stored in the same contract. The Vault merely keeps internal records of which pool is holding what, transferring tokens only at the input and output steps. This reduction in token transfers ultimately saves a considerable amount of gas.

You may wonder how Balancer maintains security under this mechanism. Holding all funds on a single smart contract can be seen as a giant honeypot for a hacker, who could drain the entire Vault of its liquidity. It is important to mention that Balancer keeps separate balances for each pool. As such, even though Balancer's Vault keeps consolidated liquidity of all pools, the depth of that combined liquidity does not change the price impact in the individual pools.

The second advantage is that Balancer can offer flash loans. Initially developed by Aave, flash loans are uncollateralized loans that must be repaid (with interest) in the same transaction as it is borrowed. Since everything is completed in the same transaction, there are codified guarantees that make it impossible for borrowers to run away with the tokens.

Balancer Pools

Pools are fundamental blocks of every DeFi application. They are essentially smart contracts and maintain the value of two or more crypto tokens. The smart contracts readjust the pool to maintain a proportional and equal value in it. Balancer takes the concept one step further by multi-asset pools.

For example, you can create a pool with ETH, WBTC, MATIC at 50/25/25 weight. The assets as well as the token weights are fully customizable, which makes it a perfect tool for managing risk. Balancer pools can go as far as to support a maximum of 8 crypto assets.


As you can imagine, weighted pools open the word to endless possibilities of customization. Balancer offers 6 type of pools, each having its weighted math adjusted for maximum efficiency. Without going into details, Balancer has worked out the bonding curve for each these pool types in order to reduce the slippage for swaps. Slippage occurs when the participant receives a different trade than the execution price intended. Bonding curves are a way to create a predictable flow between assets.

Weighted Pools are great for general use cases, including tokens that don't necessarily have any price correlation (USDT/ETH). Weighted pools are suited for users who want to have exposure to certain assets while still maintaining the ability to provide liquidity. The higher a token's weight in a pool, the less impermanent loss it will experience in the event of a price surge.


For example, if a user wants to provide liquidity for WETH and MATIC, they can choose the pool that most aligns with their strategy. A pool more heavily favoring MATIC implies they expect bigger gains for MATIC, while a pool more heavily favoring WETH implies bigger gains for WETH. An evenly balanced pool is a good choice for assets that are expected to remain proportional in value in the long run.

Composable Stable Pools are more popular for assets that are expected to consistently trade at the same parity. The most prevalent example includes stablecoins, but it also became popular among liquid staked tokens (ex. wstETH/WETH). 


Liquidity Bootstrapping Pools (LBPs) get more creative, as they can dynamically change token weighting. LBPs change their token weight based on times selected by the pool creator. They represent an efficient way for protocols to attract liquidity to the protocol and create a fair market. Unlike older token sale models, such as bonding curves, users are disincentivized to buy early and instead benefit from waiting for the price to decrease until it reaches a level they believe is fair.

LBPs often start with intentionally high prices. This strongly disincentivizes whales and bots from scooping up much of the pool liquidity from the start. When LBPs are used for early-stage tokens, this can help increase how widespread the token distribution is.

Managed Pools, as their name implies, are manually balanced by pool managers. Because Managed Pools are usually used by institutions, they introduce centralized security mechanisms such as as circuit breakers. 

Boosted Pools go beyond Balancer protocol in the sense that idle liquidity is forwarded to external protocols. They are specifically made for stablecoin assets and give LPs additional yields besides the pool trading fees.

Finally, we have Custom Pools – the playground for dapps and experienced users. rather than launching their own DEX, teams can launch on top of Balancer, allowing them to directly tap into Balancer's existing liquidity from Day 0.

Smart Order Router

If you ask a trader about his main concern when using DeFi protocols, his first answer will be "fees." With multiple pools inside and outside Balancer, fees play an important role in calculating the profitability of doing swaps. As trades compound, so do the fees. Little does it matter that after 10 swaps, a trader made 5 ETH, when the total gas fees exceed profits. 

High fees make for inefficient markets, which is why Balancer has created the Smart Order Router (SOR) to find the best prices for Balancer trades. The SOR keeps growing as the number of liquidity pools increases. By integrating with the SOR, any custom pool built on Balancer can benefit from all the other Balancer liquidity.

How to make money on Balancer?

As an investor, you can make money on Balancer by depositing crypto tokens into its liquidity pools to receive a share of the trading fees. It is an easy and simple method of earning passive income. The more popular the liquidity pool, the more trades will occur, which results in more trading fees. This strategy works well when you have widely used assets like WBTC, ETH, or stablecoins. It falls into the low-risk-low-reward category.

You can also provide liquidity for more exotic assets, which comes with increased trading fees. Exotic assets usually have fewer liquidity providers, as such, trading fees are split between fewer participants. On the downside, there is a risk of impermanent loss. If liquidity keeps getting drained out of the pool, your deposited assets will drop in value. It is a high-risk-high-reward strategy that requires you to constantly check the pool’s liquidity.


To add liquidity to Balancer follow these steps:

1. Go to Balancer app

2. Click on the "Explore Pools" tab on the top-corner right

3. Click on the desired pool

4. Select your amount of tokens (to invest a single asset, choose "Custom amounts")

5. Approve tokens

6. Click on the "Invest" button

7. Profit

You can choose to invest a single token, a subset of tokens, or all of them. The pool will calculate how many pool tokens to give you for your input tokens. If you join the pool according to pool weights ("Best price"), you will not create any price impact. If you join in an unbalanced way ("Custom amounts") you may impact the price.

Balancer BAL

Besides the trading fees you receive from providing liquidity, Balancer incentivizes LPs with its native token BAL. This strategy is often referred to as liquidity mining and tends to bootstrap liquidity on the protocol. For example, Balancer may issue extra BAL rewards to newly launched pools. Although Balancer doesn't deem BAL as an investment vehicle, BAL tokens can be sold on the market or be used to participate in the protocol governance.  

The amount of BAL emissions for bootstrapping protocols is decided by the community. Token holders can stake their BAL tokens and receive voting rights in the form of veBAL. Getting involved in protocol governance comes with advantages. For one, you can help maintain the protocol, which indirectly results in better stability for you as a user. Secondly, you can issue proposals to boost certain pools. 

Another more direct way of earning with BAL is by providing liquidity in a special BAL/WETH 80/20 BPT liquidity pool. Users will receive a proportional amount of veBAL tokens based on the liquidity deposited and the lock duration. 

veBAL is the governance token of Balancer, but it grants profits for users without necessarily having to participate in the governance process. By depositing in the BAL/WETH 80/20 BPT pool, users are entitled to 75% of the protocol fees.


Here's how you earn veBAL:

  1. Open the Balancer app

  2. Click on the "veBAL" tab

  3. Click on "Get veBAL"

  4. Input how much you want to lock

  5. Select the lock duration

  6. Click "Deposit"

  7. Approve the transaction

Balancer Flash Swaps

Remember the Vaults and how all tokens are pooled together in one smart contract? Although we briefly touched on flash loans, it felt necessary to mention flash swaps as one of the ways to make money on Balancer.

Anyone who identifies a price discrepancy in two Balancer Pools can execute a Flash Swap. An arbitrageur who makes a flash swap does not need to hold any of the tokens normally required to make a trade. Instead, the trader identifies the imbalance, tells the Vault to make the swap, and is rewarded with the profit.

Let's say you have detected a price asymmetry between 3 Balancer pools. In this situation, you trade DAI for ETH in pool 1, ETH for BAL in pool 2, then BAL for ETH in pool 3 and end up making a profit in ETH. Although the example looks easy and you don't need to hold any of the assets to make a profit, it takes some effort to detect the price asymmetry. Keep in mind that you still need to pay gas for the transaction!

Executing a flash swap is a technical process which requires interacting directly with the Balancer smart contracts – there is no user-friendly UI. It is recommended to check the Balancer docs for more details.

Price Prediction for Balancer — Can it hit $1000?

Buying and hodling BAL — the native token of the Balancer protocol — is one way of potentially making money on Balancer.

The main utility of BAL is for governance and incentives for providing liquidity to the protocol. The value of BAL is correlated to its number of users. Furthermore, BAL holders have an incentive to accumulate BAL in order to adjust the protocol parameters. As a hodler, holding BAL literally means holding voting shares. These shares may be valuable to bigger players who want to influence the protocol.

By looking at its current price, it’s natural to think about the chance of BAL hitting $1000 per token. This can happen sooner, or way in the future, and is determined by a couple of ever-changing factors.

Let’s examine the potential growth of the BAL token by analyzing its tokenomics. BAL’s current market cap sits comfortably at ${MARKET_CAP}. With {CIRCULATING_SUPPLY} BAL tokens being in circulation today, that means a price of {PRICE} per BAL.

How did we come to that calculation? It’s quite easy, the price of a BAL token is equal to its current market cap divided by the number of tokens in circulation. Dividing ${MARKET_CAP} by {CIRCULATING_SUPPLY} gives us a result of {PRICE} for each BAL coin. 

By changing the order in the simple formula above we can use it to calculate other things as well. This helps us a lot because we can deduce the market cap of BAL at different token prices. Then, we can use the result to compare it to the current state of the network and see what would be required for BAL to hit that price.

At a price of $1000 per token, that means the current market cap of BAL would equal ${{CIRCULATING_SUPPLY} * 1000}. Remember that we arrived at this number by multiplying the amount of circulating tokens by $1000.

Now let’s shift our attention to the fully diluted market cap.

Some blockchains may have their tokenomics built in a way that only a small percentage of tokens are circulating at the beginning. This can be misleading because we don’t have the full picture and only take into account the current number of coins released in the market.

The fully diluted market cap represents the total value of a coin if all tokens were in circulation. BAL’s whole supply of tokens is {MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} BAL which means that no more coins above that number will ever be created.

These tokens are not created at the discretion of a specific entity. They are created automatically by the network to reward different actors that keep it secure.

How does this impact the price of BAL? Taking into account the current price of a BAL token, that would result in a fully diluted market cap of ${MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY * PRICE}. BAL coins that have been burned are not taken into consideration because they have been permanently removed from circulation.

Whether it seems gigantic or not, the number we came to above only takes into account the current price of a BAL token. Doing the same calculation but with a price of $1000 gives us a result of ${{MAX_SUPPLY - TOTAL_SUPPLY + CIRCULATING_SUPPLY} * 1000} for the BAL protocol fully diluted market cap.

These are all crucial details to know when calculating if BAL can reach the price of $1000 per token. If the diluted market capitalization is way too high, the token has little room left to grow. Blockchains in general have no cap on the value they can reach, whether that number seems possible it’s totally up to you.

The future of BAL depends solely on its growth as a network used by tens and hundreds of millions of users. Because Balancer is one of the DeFi OG protocols, it is possible for the price of BAL to reach $1000 by 2030.

If you’re looking to add some BAL to your portfolio, the most trusted places to get some are Binance and Coinbase.


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