It is only natural for investors to query, take out their lenses and search for lucrative crypto opportunities.
After all, open finance—or DeFi has seen exponential growth since late 2019. Billions locked and under management by different high power DeFi protocols. One of them happens to be Balancer. According to Defi Pulse, the open-source project currently manages over $500 million as of Dec 10, 2020. A tidy sum.
So, for ordinary retail investors like us. The question remains: Is Balancer (BAL) a good investment? Is it worth our hard-earned money? Will this project provide value?
In this review, we check the good and the bad, and whether it is a good idea to invest in Balancer now as part of your high performing portfolio.
We shall specifically take you through the inner workings of Balancer, the technology behind it, and why investors are training their eyes on the project. We shall also pick out distinguishing features that make Balancer unique, presenting value for value seekers.
What is Balancer (BAL)?
For the uninitiated, Balancer is ,over and above everything, a decentralized exchange. It is important to start from this point because there are different exchanges each incorporating models to stand out from the crowd.
Here’s a video brief from BoxMining:
A decentralized exchange is, as the name insinuates, decentralized. It allows trustless swapping of assets without a middle man. Think of Binance, Coinbase, Gemini, CoinCheck, and others. These are centralized versions. Widely popular, support fiat, but with some caveats. They are the antithesis of decentralization.
A DEX, on the other hand, rids the intermediation. It relies on the community and its decentralized infrastructure for market discovery and settlement.
Improving on Uniswap
Balancer follows these ideals and is one of the leading DEXes after Uniswap. However, this doesn’t mean it is like Uniswap. The open-source nature of blockchains means there are iterations. Balancer is unique—justifying its $514 million TVL–at the time of writing (Dec 10).
To further break down, Balancer builds on the features of Uniswap. In this case, it uses an automated market maker (AMM) protocol for price discovery. With AMM, this is where the community chips in, providing liquidity.
Different, Balancer introduced liquidity pools comprising several unevenly weighted assets. Instead of the 1:1 ratio of assets provided typically by liquidity providers, it is arbitrary in Balancer.
Besides, fees are determined by the pool creator–and not fixed at say 0.3 percent like in the case of Uniswap—and other exchanges. Within each pool, eight assets for each market can be supported.
The downside of unevenly weighted LP assets is slippage. Ordinarily, an evenly weighted pool translates low slippages.
The Balancer (BAL) Token and the Auto-Rebalancing of Portfolio
On the other hand, the rebalancing of Balancer pools and the support of eight assets for each market provide an opportunity for holders to earn passive income whenever they supply liquidity to any pool. On top of earning a share of trading fees, liquidity providers earn the BAL governance token. The token is meant to incentive liquidity provision.
This arrangement is suitable for projects whose founders can prime their token’s liquidity by creating a pool in Balancer, setting fees, and allowing trustless trading immediately without paying listing fees.
What makes Balancer (BAL) a good investment is that the project is backed by industry leaders including Placeholder, Accomplice, CoinFund, and Inflection. Unlike other high performing protocols whose founders are anonymous, the CTO and CEO of Balancer are also known.
Fernando Martinelli (CEO) is an alumnus of the Pantheon Sorbonne University and a serial investor. On the other hand, Mike McDonald (CTO) keeps a low profile but is skilled, handling the technical part of the protocol.
How Balancer Works
Balancer is open and has no restrictions meaning it can also be a playing ground for scam artists. This is why investors should exercise caution at all times.
There are two ways one can benefit from Balancer’s pools. One way is to create a pool. Here, the pool creator is at liberty to select the assets supported, weighting, and trading fees. The creation of this self-balancing index fund takes minutes to launch.
For guidance, the pool creator specifies the percentage weight of each asset which will be automatically rebalanced depending on traders’ demands. The ratios won’t move unless trading happens. The system hasn’t incorporated outside oracles.
To elaborate, Balancer is different because the token splitting ratio is flexible (but within two to 98 percent), and as many as eight tokens can be included at once. From this, users can decide how much of each token makes up a pool.
How Balancer Re-Balancing Happens
Take, for example, a user choosing to create a pool with four tokens: LINK, AAVE, MKR, and DAI, distributing the percentage of each token as follows: 50%, 30%, 10%, and 10%, respectively.
Balancer users smart order routing (SOR) to route trades to the pool for the best possible prices. What the SOR does is to figure out the best rates and trading prices of a pool’s supported asset before the pool automatically completes the trade using funds supplied by liquidity providers.
In case there is a divergence between the spot rates of a pair within a pool, arbitrageurs will sweep in and eliminate price differences.
The other way is to provide liquidity in a pool. By supplying liquidity, one automatically qualifies and earns a share of trading fees depending on the share of his/her deposit and BAL tokens as aforementioned. The act of providing liquidity to an AMM protocol for earning fees on top of BAL is yield farming.
What Makes Balancer (BAL) a Good Investment and Popular Among Investors?
The freedom aspect (and the absence of KYC) is providing an opportunity for investors the ability to move funds unabated from protocol to protocol. Balancer is an improvement of the Uniswap protocol—one of the most successful DEX.
However, by introducing a few improvements on the Uniswap’s rail and specifically introducing the BAL governance token, the token immediately gained traction. BAL acts as an incentive for liquidity providers shielding them from impermanent loss,
The flexibility in Balancer and the introduction of a self-readjusting pool without portfolio management fees whose governance token began trading in June 2020 gives it an edge over other AMM.
But the main take away and a drawer for investors is the generalization of Uniswap’s Bonding Curve to a more multi-dimensional surface. With this change, Balancer pools can hold several tokens (ranging from two to eight), each with a specified share.
Nine months after launching in March, the Balancer (BAL) token’s liquidity has drastically improved. The governance token has support at several exchanges including Binance, Coinbase Pro, available in the ICONOMI platform, Gemini, and Bitfinex. More exchanges will follow as the protocol becomes more successful, providing channels for investors to purchase the governance token.
Are There Risks?
Undoubtedly, DeFi–as a burgeoning sub-sector, has been a success. There are, nonetheless, concerns from developers and skeptics. Vitalik Buterin recently said the unrealistically high APRs in some protocols were unsustainable and sometimes bear unstated risks.
Balancer, while starting, acknowledged these risks urging users to practice caution. To counter source code risks, the protocol is under constant auditing.
Still, other factors that can affect a farmer’s bottom line include:
- There is the Fee Factor. Here, when swap fees are lower, one receives higher BAL rewards and vice versa.
- The Ratio Factor dispenses rewards depending on how balanced the pool is. Typically, rewards will be low if the ration factor is high.
- The Wrap Factor affects pools with wrapped tokens. The lower it is, the lower the BAL rewards received.
- The BAL Factor is an incentive for liquidity providers to supply liquidity in pools with BAL.
The Performance of the Balancer (BAL) Price
In total, there will be 100 million BAL tokens. With every release, the spot price gets diluted if the protocols find no utility.
For now, the token is one of the top performers in DeFi. Released in late June 2020, BAL hit the exchanges with the opening price of $15.20. Two months later it had doubled to $34 before falling to $12 in mid-December.
The incentive program runs for four years and within that time, the success of the protocol will reflect on the value of the governance token.
If DeFi becomes successful, and more assets flow in as trustless swapping of tokens becomes popular, Balancer will be one of the major beneficiaries, recovering from current levels and perhaps registering new highs in the next few years.
Parting Shots: Is Balancer (BAL) a Good Investment?
In short, the Balancer protocol is one of the leading AMM allowing investors to make money from their idle digital assets or for traders to swap assets without KYC. Therefore, whether or not Balancer (BAL) is a good investment depends on an investor’s risk profile.
As the project’s liquidity improves, it is a means of trading cheaply, flexibly, and for projects to prime the liquidity of what would otherwise be illiquid tokens through Balancer pools. Overly, the BAL token may be an opportunity for investors to diversify their portfolio, supply liquidity, and earn decent passive income streams.
Disclaimer: The information in this article is for educational purposes only. Please do not treat it as investment advice. Do your own research.
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