Did you know that eating a consistent, balanced diet of dairy, wheat, and protein every day has been scientifically proven to contribute to better mental clarity and efficiency in the day time hours? Additionally, snacking (as a result of bad food management) is known for leading to bad food choices and poor calorie intake…
The same type of assertions can be held true for decentralized exchanges on Ethereum, but rather than me referring to the different types of fruits or wheat you can eat and your mental clarity, I am referring to the pools of assets you can trade, and the efficiency to which you can do so.
Put simply, decentralized exchanges that we know today have unnecessarily complex back end logic, which is often at the expense of traders utilizing the protocol…
In this article, I will discuss some new revelations about Balancer Exchange, a flexible liquidity provision protocol on Ethereum. Just recently, the protocol announced that they will be undergoing a complete overhaul of their existing exchange model in the near future, and the proposed changes have some very significant implications…
To understand what they propose and why it is a big deal, we first have to take a look at the smart contract logic making up the existing models behind Dex’s like Uniswap and Sushiswap that many use today.
A majority of their smart contract logic consists of multiple tokens being exchanged throughout multiple pools (i.e. a user trades ETH for LINK or pools ETH-LINK to liquidity). While this works fine, it is often inconvenient for the trader in terms of both speed and gas fees, due to the multiple tokens being swapped throughout the pools of liquidity at once within the smart contracts that make it up.
As we know all too well, Uniswap trades can get very pricey, even more so in times of network congestion.
Furthermore, there is not much flexibility offered on the back-end side of things in regards to your liquidity provision. I could not, for example create a pool of three tokens or perhaps even four with Uniswap or Sushiswap, immediately taking away the possibility of creating an index-fund style pool with my liquidity.
But this is where Balancer Exchange comes in.
In an article describing their planned protocol upgrade, the Balancer Exchange team introduced a COMPLETE overhaul to their existing structure at an aim to significantly increase gas optimization on the exchange.
“In Balancer V1 — and all AMMs we are aware of — trading with two or more pools is gas inefficient because users have to send and receive ERC20 tokens from all pools.”
With Balancer’s new Protocol Vault, even though trades are carried out in batches against multiple pools, only the final net token amounts are transferred from and to the vault, saving a significant amount of gas in the process.”
Rather than swapping tokens amongst several pools, Balancer V2 will only ever transfer the net amount of tokens out of a single pool, which results in significantly cheaper and faster trades for users.
Additionally, Balancer V2 will “separate the Automated Market Maker (AMM) logic from the token management and accounting.” This will allow for traders to use much less gas when trading, and only one token approval will ever be required to trade.
The new structure will also make it much more attractive to high-frequency traders, as the shared design enables internal token balances. That way, “Balancer can keep both tokens in the vault which may be used for the next trades, avoiding any unnecessary ERC20 transactions altogether.”
As I’m sure you could imagine, this also opens up a world of opportunities for decentralized exchange logic that Balancer plans to pioneer in, including asset manager pools, customizable AMM logic for projects to utilize to their advantage, and on-chain oracles anyone can tap into. These are some of the topics I will cover in detail below.
Asset Managers are liquidity pools unique to Balancer V2, which are solely controlled by voting, allowing liquidity providers to earn yield on a lending protocol or other source of income while pooling on Balancer. This will make the exchange increasingly capital efficient, and put some of the tokens pooled on the exchange to use.
“AMMs have been extremely successful in 2020. However, a lack of capital efficiency arises as most of the assets in an AMM are not actually used at any given time. Balancer V2 has a simple yet powerful feature that addresses this and revolutionizes the way AMMs are designed: Asset Managers.
Asset Managers are external smart contracts nominated by pools that have full power over the underlying tokens the pool has deposited in the vault.
The Asset Manager can lend tokens to a lending protocol to improve the pool’s yield. It’s important to note that a buffer must always be kept in the vault, or else trades could fail: the vault cannot trade out assets it does not currently hold on behalf of a pool.”
Balancer additionally announced a partnership with AAVE to be the first asset manager. This means a multi-billion dollar lending protocol will be bringing a diverse portfolio of supported tokens, including BAL!
“This partnership will bring more capital efficiency to Balancer, allowing liquidity providers to earn additional yield on top of swap fees and BAL from liquidity mining.”
I am sure we can expect a lot more integrations and partnerships in regards to V2 asset managers. I also believe this will cause a huge influx of volume going throughout the protocol once implemented.
Customizable AMM Logic
This is one of the topics I am personally more excited to explain a bit in more detail. The customizable AMM logic described by Balancer would allow projects to use the smart order routing system from their exchange, but also offer support for ongoing parameter changes to branch off of with. However, all of the AMM’s made through the launchpad will concur volume (and accrue the fees) to the Balancer token.
Let’s go over the basics of what exactly a AMM (automated market maker) is to understand this on a deeper level… Contrary to many existing exchanges today, like the stock market, assets and their prices are quoted automatically with an algorithm taking the ratio of tokens liquidity was provided in (typically an ERC20-ETH pair). This is much more convenient than the model of NASDAQ for example, because it does not require another person to fill the order. The assets are just swapped with a net amount in or out of the pool, and the ratios (aka price) are automatically quoted by the automated market maker at the given moment with the ratio of the tokens to one another in the pair.
This means that, once liquidity is provided to an asset on a decentralized exchange with an AMM, the market is automatically “made” so long as there is liquidity in the pair.
Now that we understand more about what exactly an automated market maker is, let’s go over the customized AMM logic proposed by Balancer’s V2 upgrade…
“We are in the first inning of automated market makers and aspire to be the go-to platform for developers, traders, and liquidity providers. In 2020, there was an influx of use-case specific AMMs with different trade-offs optimizing for different goals. This trend is very likely going to be even stronger in 2021.
Balancer V2 pioneers customizable AMM logic by creating a launchpad for teams to innovate with different AMM strategies without having to worry about low-level token transfers, balance accounting, security checks and smart order routing. With Balancer V2, this all comes out of the box.
At launch, Balancer V2 will offer weighted pools (constant weight, index fund style pools like in Balancer v1) and stable pools which are suitable for tokens that are soft pegged to each other (building on the great work by the Curve team). Shortly after launch, we will have smart pools — which allow for ongoing parameter changes — and many other types of pools being built by partners. All pools provide trading liquidity thanks to smart order router.”
So, not only will Balancer be generating fees from their own exchange, but Balancer will also accrue fees from other projects who utilize their customizable liquidity pools which will serve as a backbone for many new creations not previously possible.
Fees from all of these features discussed will be earned and possibly distributed amongst holders of the token through swaps, flash loans, pool creations, and all of the customized AMM’s created on the protocol.
Similar to Uniswap, Balancer Exchange plans to introduce their own on-chain oracles that anyone can utilize for their decentralized applications. They will support both time-weighted prices of assets and instant price quotes, both for different important use cases.
“Balancer V2 will include oracles that are resistant to sandwich attacks using accumulators — as pioneered by Uniswap V2. In addition, dApps will be able to query prices with minimal gas costs and without having to store past accumulator states. We plan on offering two types of prices that can be queried with low gas costs:
Instant: A more up-to-date price but less resilient to manipulation
Resilient: A less up-to-date price but more resilient to manipulation
Choosing a price type will vary depending on each use case. For example, lending protocols will likely rely on the resilient price while prediction markets could use the instant price.”
Liquidity Bootstrapping Pool
This concept is something that I believe has brought BAL the most value, and will continue to do so for its fairness and effectiveness. Balancer Exchange is the only protocol offering this feature with its level of legitimacy and known reputation in the space.
What is an LBP? As explained by Balancer Exchange:
LBPs are fully customizable based on a team’s needs, allowing them to pair their token with any set of ERC-20 tokens of their choice, and to weight the value of the pool among the tokens as they see fit. Those weights can be adjusted periodically based on a predetermined schedule configured by the team, continuously changing the pool’s total value distribution among the tokens.
A) The LBP can launch with a heavily weighted distribution towards the team’s token, requiring a significantly lower amount of capital upfront. This lowers the barrier to entry significantly for early stage startups.
B) Not only can the team select the tokens against which they would like to sell the project token, but Balancer’s SOR also allows investors to pay with any ERC-20 token that has sufficient liquidity on Balancer (there are currently 117+ tokens listed on Balancer).
C) The LBP’s continuous weight adjustment creates downward pressure on the token price, preventing it from skyrocketing out of control and giving investors a chance to only buy at a price they individually consider fair. This creates an incentive for investors to WAIT before they buy, rather than FOMOing in, as the best price will most likely come later during the token sale, NOT in the very beginning.
These types of sales have become awfully popular the last few weeks, and it is because of their particular favorability amongst investors, and reliability for gaining teams sufficient capital for liquidity. Prime DAO members were tasked with helping to revamp the liquidity bootstrapping pools a few months ago, and their effort has proven to be a great success.
“Six members of PrimeDAO have formed a team to propose an exciting overhaul of the Liquidity Bootstrapping Pool experience for running IDOs on Balancer — and we have approved a grant of 4,125 BAL (a little under $52K USD at the time of approval) to fund this project.”
The members of the community helped to build a user interface easily configured to the likings of any team wishing to use an LBP, and the token sakes hosted on Balancer quickly began to multiply as a result. Liquidity bootstrapping pools will remain a key factor in the success of Balancer’s exchange, and they will only get more complex and configurable upon launch of V2 with the addition of smart pools.
Competitors & Comparison
Despite pioneering in such automated market maker technology described previously in this article, Balancer has tended to lag behind its competitors in terms of market capitalization (which I believe is because of problems V2 aims to fix including gas fees, accessibility, etc).
Taking a look at some of the analytics from the other popular decentralized exchanges today, you’ll notice quite the difference…
UNISWAP MARKET CAP: $17B
SUSHISWAP MARKET CAP: $2.7B
1INCH MARKET CAP: $710M
BALANCER MARKET CAP: $640M
UNISWAP VOLUME: $1B
SUSHISWAP VOLUME: $280M
1INCH VOLUME: $200M
BALANCER VOLUME: $46M
TOTAL VALUE LOCKED:
UNISWAP TVL: $5B
SUSHISWAP TVL: $4.8B
1INCH TVL: $232M
BALANCER TVL: $2.1B
Personally, I find it very hard to believe that this is the appropriate valuation of the Balancer Exchange protocol, knowing that they will be accumulating volume from the customized AMM’s branched off of it, future indices, ETF’s, and more to be available for trade with Balancer’s unique automated market maker technology.
For all of these reasons, I believe Balancer will prove to be a formidable challenger to Sushiswap and Uniswap in the next coming weeks…
Some updates from the team also lead me to believe a majority of these changes to the protocol will be made in the near future. As explained by the Balancer team, the code for V2 was sent away for audit nearly a month ago, and they project the release to be within this month (March).
The CEO of Balancer Exchange also left some notable pieces of information a few months ago, hinting at a layer two solution coming for their protocol in the near future.
What Balancer V2 proposes is a major structural change to the functionality of their automated market maker and decentralized exchange, at an aim to avoid unnecessary gas prices on Ethereum. It introduces on-chain oracles, malleable AMM parameters, and asset manager pools to bring a whole new level of capital efficiency and customizability to the exchange.
Very quickly, I think we will notice Balancer become more than just an exchange, pioneering in many fields of decentralized finance made possible due to their unique liquidity provision model.
Combine all of these features with protocol fees that accrue to the Balancer token and treasury, and I think you’ll see why I am very bullish on the future of the platform!
This concludes my write up on BAL… If you enjoyed it, please consider following me on all of my social channels for more in-depth write ups like this every day!