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The crypto industry dedicated significant time to solving the challenge of creating decentralized exchanges (DEXs) as an alternative to centralized platforms. However, initial DEXs faced issues with limited liquidity, which hindered user adoption. This changed with the advent of automated market makers (AMMs), providing DEXes with a more robust solution. Balancer, a popular project, is an example of an AMM successfully addressing liquidity challenges in the industry today.
What is Balancer?
Balancer is an AMM built on the Ethereum blockchain. Launched in March 2020, it raised $3 million through a seed round. Like other AMMs, Balancer offers its own liquidity pools where users can deposit tokens. By contributing liquidity to these pools, users become liquidity providers (LPs), and their assets are utilized for executing transactions on exchanges. LPs receive rewards in exchange for their participation, making it an incentivized and beneficial role.
The Balancer project team
Fernando Martinelli and Mike McDonald founded Balancer. The project originated as a research program within BlockScience, a software company, in 2018 before evolving into its current form. Before Balancer, Martinelli had a background as a serial entrepreneur and was actively involved in the Maker community. McDonald assumed the role of CTO at Balancer, leveraging his experience as a security engineer and the creator of mkr.tools.
How does Balancer work?
Balancer operates as a self-balancing weighted portfolio, serving as an LP and a price sensor. It allows users to generate profits through its native cryptocurrency, BAL. To participate, users contribute to the project's customizable liquidity pools. Three types of pools are available: private, shared, and smart.
Private pools grant ownership and governance to the pool creator, while shared pools are designed for LPs. Smart pools function similarly to private pools but are controlled by smart contracts. Users earn rewards in the form of Balancer Pool Tokens (BPTs).
Balancer native token: BAL token
The native cryptocurrency of the Balancer project is BAL. Although it was not initially introduced at the project's launch, BAL was created in June 2020 to function as the project's governance token. This decision was influenced by the success of Compound's COMP token.
Currently, BAL enhances decentralization and serves as a motivating factor for LPs. The maximum BAL supply is 96.1 million tokens, with a total supply of 57.6 million units. As of June 2023, the circulating supply of BAL is 49.95 million tokens.
BAL token use cases
As a governance token, BAL holds primary use cases within the Balancer ecosystem. It enables token holders to participate in decision-making by voting on proposals and shaping the platform's future.
Apart from its governance role, BAL can be used for trading and purchasing, provided entities are willing to accept it. Furthermore, users can stake BAL to earn rewards and provide liquidity in Balancer's pools, further enhancing the token's utility within the ecosystem.
Balancer token distribution
Balancer token (BAL) distribution is as follows:
- Twenty-five percent was reserved for the team, core developers, investors, and advisors.
- Five percent was allocated to the Balancer Ecosystem Fund for incentives and partners.
- Five percent was allocated to the fundraising fund.
- Liquidity providers will mine the remaining tokens.
The importance of AMMs
AMMs, including Balancer, hold significant importance in the crypto industry as they facilitate the existence and operation of DEXes. By offering liquidity, AMMs contribute to advancing the industry's goal of achieving complete decentralization.
Furthermore, AMMs provide traders with an alternative to centralized exchanges (CEXs), allowing them to engage in decentralized trading. Additionally, LPs can earn passive income by supplying liquidity to AMMs. The project's ability to benefit all parties involved is among its greatest strengths.
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