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At its core, Balancer is an Automated Market Maker (AMM) that allows users to create programmable liquidity. AMMs are a type of decentralized exchange where instead of using a traditional order book that pairs buy and sell orders, a smart contract acts as a partner in every trade. Each smart contract contains a cluster of tokens, called a liquidity pool, that is used to make sure both sides of a trade involving those tokens can be matched.
This results in constant liquidity for both buyers and sellers, so users aren’t stuck with unfilled orders for long periods of time. Not only is this a convenience factor, without predictable liquidity, asset prices are more susceptible to shocks in one direction or another, as large holders have much more influence over price direction. The more liquidity an asset has, the more difficult it is for individual actors to affect price, causing asset prices to trend towards a stable equilibrium.
In the traditional finance world, investors who are looking for a diverse portfolio pay fund managers a fee to rebalance their asset mix whenever they become too heavily skewed away from optimal. Balancer turns traditional finance on its head, and instead users participating in smart pools collect fees from traders every time they rebalance the user’s portfolio.
While Balancer was not the first AMM in DeFi, the Balancer team has created a new approach. All AMMs use an algorithm to manage liquidity, but traditionally AMMs use a constant product formula which limits liquidity pools to two assets at a fifty-fifty ratio. For example, take a liquidity pool of Dai and ETH. As trades occur that disturb Dai-to-ETH equilibrium, the smart pool’s contract will facilitate counter-balancing trades, bringing the ratio back to fifty-fifty.
What makes Balancer different is its smart pools use a constant mean formula, which allows for more than two assets and weights outside of fifty-fifty. Balancer pools are able to include up to eight tokens at any number of weights. The constant mean formula also permits adaptive fee structures that can react to market forces like volatility or demand. Because of this flexibility, it allows for all sorts of experimentation for projects looking to create liquidity.
There are approximately 1500 shared liquidity pools on Balancer users may choose to join. These are public pools created to feature all different types of tokens that range from simple fifty-fifty asset weight splits, to more complicated, multi-token, varied weight splits. They range in size; the largest with over a $37 million market cap, the smallest in the tens of thousands. Once created, shared pools are not changeable, which prevents pool creators from manipulating it to steal funds.
However, users are not locked into choosing one of the shared pools to participate in. If none of the pools have the right asset mix or fee structure, a user may create their own, and it’s very simple to do. On the Balancer “Pool Management” page, a user creates their own pool with a few selections; their preferred token distribution and weights, and swap fee. Then the user funds each token in their pool using a browser-enabled wallet like Metamask, and selects create.
Users may choose to create public pools in which anyone can participate, or private pools with public swap disabled. A private pool is editable by its creator, who may change asset mix and fees. Balancer also allows a type of private pool called a “smart pool” in which pool attributes are controlled by a smart contract.
Beyond individual users, Balancer is useful for projects looking to take advantage of programmable liquidity. “We see it as a low level protocol other projects can build on top of”, said Mike McDonald, Co-founder & CTO of Balancer. “Teams have tokens that are interacting with a number of other projects, so programmable liquidity is a very necessary thing. They can plug their protocol into Balancer, build some smart contracts that sit on top, and have access to all the integrations Balancer has with DEX aggregators, arbitragers, things like that.”
At Alchemy, we value DeFi innovators like Balancer, which is why we are proud to support their infrastructure needs with our suite of products. Alchemy’s supercharged platform keeps latency to a minimum, giving Balancer users a snappy experience with no delay in wallet balance updates. Also, Balancer’s protocol generates a lot of API calls in order to keep wallet balances and asset prices updated, but these are lightweight calls that don’t require a lot of processing. Because Alchemy’s pricing structure is based on computational units not number of calls, this keeps costs down for Balancer. We’re excited to partner with Balancer as they continue to develop new products and features in DeFi that further blockchain adoption.
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