Weekly Analyst Thoughts
Balancer: Offering New Exposure to Crypto Through Liquidity Pools
There is a new addition to the DeFi space this week: Balancer. Balancer the next big decentralized exchange, an evolution from exchanges like Uniswap, Kyber Network and Totle Swap. This self-balancing index fund uses liquidity from arbitrageurs to keep Balancer pools at desired percentages. Liquidity providers use Balancer to create a Balancer pool, or personalized index fund, and determine what percentage of up to 8 cryptocurrencies they would like to manage in their pool by providing the liquidity for each. Once providers have established their pool, they can then alter the portion of each crypto within the pool based on the crypto’s recent performance. In establishing a pool with individually contributed liquidity, liquidity providers are then paid for their contributions.
To demonstrate how the Balancer pool works, the image below depicts a shared Balancer pool in action. Liquidity providers contribute 75% Maker and 25% WETH into this pool. This pool’s skew was altered and had Maker above 75% and WETH below 25% this week because Maker went up 30-40% when it got listed on Coinbase. In this price action, an arbitrageur could have exchanged WETH for Maker at a slightly cheaper price while also helping the Balancer pool out by self-balancing back to its 75-25% ratio.
The first generation of DEFI dexes forced liquidity providers to allocate a 50-50 ratio of any two cryptos to any pool they wanted to provide liquidity for. With Balancer, liquidity providers have a chance to make their own self-balancing index funds with personalized portions of each crypto they choose to include. These highly flexible, personally-managed index pools give arbitragers and investors a new level of exposure to the depth and profitability of the crypto space, bringing the ecosystem one step closer to universal comfortability and adoption.
By Jacob Stelter