Balancer 2.0 – One Stop Shop

In this article, I will explain why I believe Balancer, and Balancer 2.0 in particular, will be the next dark horse of the DeFi industry with its innovative features.

Introduction
We are in the midst of a golden age for DeFi. After the speculative frenzy of summer 2020 and the boom of winter, the DeFi industry is evolving rapidly. To keep up with the industry, you have to stay on top of it.

Every week, a new project is announced claiming to be the latest and greatest in its target market. As the attention rises, so do the risks. Therefore, please be careful when investing your hard-earned money in DeFi projects.

In this article, I will explain why I believe Balancer, and Balancer 2.0 in particular, will be the next dark horse of the DeFi industry with its innovative features.

Getting Started with Balancer
Before we dive in, let’s start with a brief introduction to Balancer.

Balancer 2.0 - One Stop Shop

Balancer is an automated market maker (AMM) protocol built on Ether that issues a governance token, BAL.

Balancer supports trading pairs of 2 to 8 tokens (known as trading pools). Each of these tokens has a different share in the pool, ranging from 2% to 98%. Unlike constant product AMMs that only support two-token pairs (e.g. Uniswap), Balancer can implement different impermanent loss mechanisms and capital efficiency depending on the specific use case.

To implement trade routing, Balancer employs an intelligent system that can access liquidity from multiple trading pools in order to automatically find the optimal price from multiple available trading pools. This system is called Smart Order Routing (SOR).

Balancer’s pools are highly customizable, allowing the pool creator to customize the transaction fee rate (ranging between 0.00001% and 10%).

The transaction fee is allocated to the person providing liquidity to the pool, also known as the Liquidity Provider (LP).

In addition, Balancer actually supports a zero transaction fee rate compared to other competitors that charge minimal transaction fees, such as SushiSwap, and is therefore more suitable for high frequency trading.

As a result, Balancer is able to offer a self-balancing index fund, i.e., an inverse ETF (traded open-end index fund). Unlike the traditional financial industry that hires portfolio managers to maintain the balance of an ETF as the underlying asset price fluctuates, an inverse ETF pays a reward to the liquidity provider after the ETF is rebalanced.

Reverse ETFs operate on the principle that market participants are incentivized by arbitrage opportunities to act as counterparties to a pool of funds, driving the rebalancing of the pool when assets are exchanged. As an investor in this ETF, the rewards you receive come from the transaction fees paid by these market participants.

Rewards are issued in the form of exclusive BPT tokens (Balancer Trading Pool tokens) for a particular trading pool, thus enabling composability (i.e., you can create trading pools of Balancer Trading Pools). This can meet the needs of products that want to aggregate multiple different products. Imagine a project that tokenizes real estate and creates separate Balancer pools for each city. Combining these pools creates a pool of tokens that represent the entire national real estate industry.

Balancer transaction pools have several variables.

Change tokens — add/remove tokens to/from the transaction pool (2 to 8)

Change weight — change the weight of any token in the pool (2% to 98%)

Change commission rate ($0.00001 to 10%)

Liquidity provider whitelist/blacklist – restrict the addresses that can be liquidity providers in the trading pool

Maximum Deposit Amount — limit the maximum amount that a liquidity provider can deposit in the trading pool

Start/Stop Trading – suspend trading in the pool

In addition, there are three types of trading pools.

Public pools (aka shared pools) – anyone can provide liquidity (and receive BPT tokens as payment), but all pool parameters are permanently fixed (with trust-free and finality).

Privacy pools – all parameters are flexible and variable, but only the pool owner can change them and provide liquidity (requires trust and does not have finality).

Smart transaction pools – anyone can provide liquidity. Parameters are controlled by smart contracts and can be either fixed or dynamic (with trust-free and flexibility).

With these extensions, Balancer can implement a wide range of application scenarios beyond simple trading.

Liquidity Boot Pool (LBP)
Another application scenario worth exploring is the use of liquidity to bootstrap a brand new token. To this end, Balancer offers a new paradigm that allows for optimal token allocation.

Poorly, Uniswap’s dual-currency pricing model implies that even a small volume of transactions can cause huge price fluctuations, leading to unreasonable price discovery. Moreover, the model is also unsuitable as a token allocation mechanism, as bots can run away from community members’ transactions and repeat the drama of pulling up and shipping out.

In addition, the model requires significant funding from the Genesis team (after all, the other 50% needs to be funded using established tokens, such as ETH).

To solve this problem, Balancer introduced the Liquidity Boot Pool (LBP) – a temporary smart pool that can dynamically change token weights (e.g., from 2%/98% ETH/TOKEN to 98%/2% ETH/TOKEN), allowing founders to use very little capital to create a liquidity bootstrap pool. The result is that the token price will be under constant downward pressure during the selling process. With moderate buying demand, the token price will remain stable during the selling process as the giant whales/bots have no incentive to buy all the tokens at once.

There are already many successful LBPs, such as Radicle, HydraDX and Perpetual Protocol, which have recently gone live.

Balancer can provide value to all participants within the liquidity ecosystem. For investors, it is a self-balancing portfolio; for traders, it is a source of deep liquidity; and for token issuers, it is an efficient startup tool.

As Balancer has successfully provided a stable and highly configurable building block for the DeFi ecosystem, we are certain that more use cases will emerge as more people experiment with Balancer.

At the time of writing, Balancer is in the top 10 highest locked-in DeFi protocols, with a total locked-in position of $1.62 billion.

With the release of v2 in April, we have reason to believe that Balancer will be able to move into the top 5. Not only that, it has the potential to become a major source of DeFi liquidity.

The Benefits of V2
I believe that Balancer v2 and subsequent enhancements will make Balancer the top decentralized exchange in 2021 for a number of reasons.

Past Achievements and Funding
Before we dive into the technical details, we should realize that the project team is the most important part of Balancer’s success.

Obviously, a team without a long history of settling down is bound to lack competence, and a team that does not listen to the community is doomed to fail. There is a reason why venture capitalists bet on the founders.

Balancer 2.0 - One Stop Shop

It’s hard to predict what will work, but it’s much easier to predict which team will succeed.

The team behind Balancer (Balancer Labs) has been working on the DeFi space for several years. In early 2018, the team started working on the Balancer project.

The Balancer team has proven that they can successfully launch and maintain a DeFi product based on decentralized governance. They have always demonstrated respect and care for the spiritual core of the DeFi industry. To enable better collaboration, they built snapshot.page, an open-source tool that supports gas-free voting, which has effectively become the standard for decentralized governance voting. At the time of writing, there are 600 projects using it.

Capital endorsement
I don’t seem to be the only one who is bullish on Balancer Labs, as the team has never been short of funding. To date, Balancer Labs has received sizable investments from a number of high-profile VCs, such as a $3 million investment from Accomplice and Placeholder in March 2020 and a $12 million Series A round of funding in February 2021 from Three Arrows Capital, DeFiance Capital, Alameda Research and Pantera Capital.

gas Efficiency

Balancer 2.0 - One Stop Shop

The industry bottleneck for years in Pan Heng – gas fees! It’s 2021, what’s a DeFi article without it?

The high gas fee has made the whole DeFi ecosystem suffer.

In Balancer’s case, the high gas fees rendered SOR (Smart Order Router) useless, as spreading out liquidity from multiple trading pools, while reducing slippage, was far from offsetting the additional gas fees.

To solve this problem, Balancer v2 aggregates the assets in each liquidity pool into a vault. This vault, called the Protocol Vault, aggregates the assets of all Balancer pools.

Balancer 2.0 - One Stop Shop

All-in-One Vault
The advantage of this approach is that orders that would otherwise need to be completed through multiple transactions (each requiring a gas fee) can be compressed into a single transaction. As a result, Balancer can leverage its multi-pool trade routing mechanism to provide maximum liquidity while minimizing slippage.

This is achieved by decoupling the automated market maker logic of the trading pool from token management and bookkeeping.

As far as I know, other automated market makers use the traditional model of gas inefficiency when drawing liquidity from multiple trading pools. This means that Balancer should have the lowest slippage point for the same level of liquidity provision in the industry.

Net Token Transfer
Storing all tokens in a single vault has the added benefit of allowing for more efficient management of internal transactions, with only one settlement when tokens are transferred out of Balancer.

In Balancer’s newly introduced protocol vault, only the final net token volume will be transferred (via ERC 20 transactions) out or into the vault. This makes arbitrage trading much easier, as you can bounce trades between multiple Balancer pools to achieve arbitrage, and you don’t need to hold any token directly related to the arbitrage action to get started.

For example, if you find a price asymmetry, you can execute a trade such as

DAI -> MKR (trade pool 1)

MKR -> BAL (trade pool 2)

BAL -> DAI (trade pool 3)

Get DAI as an arbitrage gain

Balancer 2.0 - One Stop Shop

Balancer v2 performs multiple swaps simultaneously, but the protocol vault performs only one settlement
Internal Token Balance
In addition, Balancer v2 allows users to hold the balance of internal tokens in the vault. For example, if you buy DAI with ETH and plan to buy back ETH with DAI a few hours later, you can store them all in the vault and wait for the next transaction, thus eliminating a meaningless intermediary ERC 20 transaction.

The internal token balance feature is especially useful for high frequency trading and is a very beneficial DeFi building block. Decentralized exchange aggregators can use Balancer’s internal balance to help traders minimize the cost of gas.

Dynamic transaction fees

Balancer 2.0 - One Stop Shop

Balancer recently announced a partnership with Gauntlet to introduce dynamic transaction fees.

Today, when creating a trading pool, it is difficult for the creator to be accurate in the choice of transaction fees. Ideally, the transaction fee for a token pair should change with the life cycle of both tokens and the overall market cycle.

If circumstances change (e.g., liquidity is moved to another trading pool), static transaction fees may result in diminishing returns. If prices fluctuate dramatically, the liquidity provider may take on more impermanent losses.

Like a carpool app that adjusts prices during peak traffic periods (peak hour pricing), Gauntlet can also optimize transaction fees across trading pools based on actual conditions.

Since the transaction fees themselves will be dynamically adjusted based on changing conditions, you can be completely confident that whatever the transaction fees change, they are calculated by Gauntlet’s algorithms.

Asset Management Contracts
As a retail trader, this is my favorite feature!

Traditional automated market makers are not very capital efficient, as there are a lot of idle assets in each trading pool (no trades ever run out of liquidity).

To fully utilize the potential of these idle assets, Balancer v2 introduces an innovative concept called Asset Management Contracts.

An asset management contract is an external smart contract specified by the trading pool that has full control over all tokens in the pool.

As a result, asset managers can lend tokens in the trading pool to lending agreements, revitalizing the idle funds in the pool and thus increasing the rate of return.

Balancer 2.0 - One Stop Shop
币世界-Balancer 2.0 —— 一站式服务

Visualization of idle funds (“invested amounts”) in a pool of transactions that use lending agreements to generate additional revenue
Good news! Balancer has built the first Asset Management Contract in partnership with Aave!

Asset Management Contracts are a new type of automated market maker feature that demonstrates the power of DeFi’s composability.

How it works has been well abstracted and will not be noticeable to end users.

With the above additions, Balancer’s liquidity providers can earn in three ways.

Earning BAL through liquidity mining

Dynamically optimized transaction fees

Asset management contracts

User Experience/UI
As they say, experience is the best teacher! Balancer has always had its share of user experience issues, and even the new simplified user interface launched in December 2020 still has imperfections. For example, it’s easy for users to ignore the default slippage settings when trading – in the worst case scenario, this could result in your trades failing and gas fees being blown.

Balancer 2.0 - One Stop Shop

By v2, Balancer has assembled a full-time UI team to completely redesign the user experience. The graphical user interface will be refreshed, incorporating best practices from popular dApps.

With the Balancer team recognizing the importance of the UI, v2 will have an additional focus on user education.

The new user interface will be dramatically improved in terms of simplicity, transparency, and user-friendliness, greatly preventing users from making mistakes during operation and providing clearer error alerts when they do occur.

Robust price entry mechanism
For many DeFi applications (prediction markets, lending, margin trading, etc.), on-chain price feeding is a key component. Currently, Balancer pools are not suitable as a price input mechanism (i.e., calculating exchange rates from the ratio of tokens in the pool) because Balancer pools are vulnerable to sandwich attacks. Nevertheless, some teams have inadvertently done so due to lack of education.

Balancer v2 introduces a price input mechanism that will use accumulators to defend against sandwich attacks (a measure pioneered by Uniswap v2), making the Balancer protocol more robust and user-friendly.

Balancer v2 offers users the following two price entry mechanisms with low gas charges.

Instant – faster price updates, but less resistant to price manipulation

Tough – slower price updates, but higher resistance to price manipulation

The project owner can choose one of these price entry mechanisms depending on its application scenario. For example, a lending agreement might choose the Tough type; a prediction market might favor the Instant type.

Governance
As Balancer is transitioning to a community-driven protocol, v2 will introduce three new protocol-level fees. These fees will go into the “treasury” of the Balancer protocol and are fully controlled by the BAL token holders.

Transaction Fee – A fee that traders are required to pay to the liquidity provider of the trading pool, charged as a fixed percentage of the transaction amount.

Withdrawal Fee – A fee to be paid to withdraw any tokens from the protocol vault, charged as a fixed percentage of the withdrawal amount. Please note that transactions and liquidity transfers between different trading pools are not included here.

Lightning Lending Fee – A fee to be paid for borrowing assets from the Protocol Vault to participate in Lightning Lending, charged as a fixed percentage of the amount borrowed.

When v2 goes live, the Balancer Protocol will not charge transaction and withdrawal fees. Lightning fees will be low, this is to ensure that there is always a cost to make a lightning loan on Balancer.

Initially, all fees charged by the Balancer Protocol will be kept in the protocol vault, leaving it up to the community members to decide if and how to use these funds.

Summary

Balancer 2.0 - One Stop Shop

Did Balancer v2 amaze you!

Now, let’s summarize the full article.

In this article, we explained why Balancer is considered a one-stop automated market maker service. We reviewed the fundamentals of the Balancer protocol (v1) and introduced its use cases beyond traditional trading. Two of the most common use cases are self-balancing funds and liquidity steering pools.

Balancer enables these use cases because it combines high customizability, multi-token transaction pools and different types of transaction pools (public, privacy and smart pools).

Balancer v2 introduces a number of competitive and innovative features that take a new step forward in the ambitious vision of becoming a major DeFi liquidity provider.

The additional gas efficiency from the new protocol vault and internal token balance not only helps Balancer achieve gas usage levels comparable to other popular protocols, but also unlocks other use cases (e.g., decentralized exchange aggregators) with the lowest gas cost in the industry.

Efficient gas usage equals efficient capital usage. Since there is no additional cost associated with obtaining liquidity from multiple pools, Balancer can leverage its rich pool resources to provide more cost-effective liquidity than other decentralized exchanges.

In addition, Balancer v2 introduces new asset management contracts and dynamic transaction fees. By intelligently utilizing the idle liquidity of the trading pool and continuously optimizing the fees of the trading pool, these two features can generate additional revenue for liquidity providers without incurring additional costs.

To ensure that the above features are easy to use, v2 will also feature a redesigned user interface and an increased focus on user experience and user education.

There are also improvements such as a robust price entry mechanism and fee governance that are not as eye-catching as the new features mentioned above, but are important building blocks for the DeFi space and will help drive the long-term development of the Balancer protocol.

Words of wisdom
Balancer’s core team consists of talented mathematicians and engineers who are building important primitives for the mobility layer of the DeFi domain. Due to the high mobility of its protocol, Balancer has a wide range of programmability. Therefore, there is every reason to believe that more use cases will emerge in the future, as other talented engineers experiment with the Balancer protocol to address unmet needs in the DeFi domain.

I am very optimistic about the future of the Balance protocol due to the never-ending innovation of its team.

While the entire DeFi ecosystem is hitting record highs in terms of transaction volume, it seems to be just catching the attention of the traditional financial sector and there is undoubtedly a lot of room for growth.

While some tokens have a large market share with first-mover advantages and large liquidity pools, I believe the battle for the title of number one decentralized exchange is just beginning and will be won or lost depending on which party is the fastest to innovate and attract more traders and liquidity providers while addressing the high cost of gas.

I’m incredibly encouraged that the Balancer team is staying on track to become a major liquidity provider.

Posted by:CoinYuppie,Reprinted with attribution to:https://coinyuppie.com/balancer-2-0-one-stop-shop/
Coinyuppie is an open information publishing platform, all information provided is not related to the views and positions of coinyuppie, and does not constitute any investment and financial advice. Users are expected to carefully screen and prevent risks.

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