Liquidity is paramount to the growth of DeFi. Many DApps require reliable pools of liquidity to function. One of the most interesting project’s innovating in the pool liquidity space is Balancer. If you haven’t heard of Balancer, now’s a great time to learn because Balancer is about to start distributing BAL tokens to liquidity providers on June 1st, 2020 at 00:00 UTC.
What is Balancer?
Balancer is a non-custodial generalized automatic market maker (AMM) protocol that launched in March of this year. Yes, that’s a mouthful but it’s easy to understand once you break it down. You’re probably familiar with AMM exchange models like Uniswap, but where Balancer differs is the fact it’s generalized making it suitable for all sorts of needs, but more on that in a bit.
Balancer pools are like self-balancing index funds
Anyone can create a Balancer pool and add liquidity to the protocol. However, what makes Balancer pools so unique is that you aren’t restricted to pools with the typical 50/50 split between two tokens we’re used to. Balancer pools support up to 8 tokens with custom distributions. For example, a pool could be 30% WETH, 30% MKR, and 30% USDC, and 10% LINK while another pool is 80% WETH and 20% DAI.
Balancer uses smart order routing (SOR) to route users’ trades to the pools that combined provide the best rate possible. Essentially, Balancer pools are like self-balancing index funds but instead of charging you fees you actually get paid for contributing your liquidity.
Different pools for different needs
As previously mentioned, Balancer liquidity pools are highly flexible and can be optimized for specific use cases. Balancer Labs has even released templates for new innovative pool designs. Take for instance Liquidity Bootstrapping Pools (LBPs) that communities can use to build deep liquidity for their token. Or even, stablecoin pools with zero impermanent-loss.
Balancer Protocol Governance Token (BAL)
Balancer V1 initially launched with no native token; this latest update to Balancer introduces the Balancer Protocol Governance Token (BAL). BAL holders will determine the future of Balancer protocol, making decisions like implementing new features, potential protocol fees, or even bigger picture plans like whether to use layer 2 scaling and/or deploy contracts on other blockchains.
Out of the total supply of 100M BAL tokens, 25M were initially allocated to founders, core devs, advisors and investors and are all subject to vesting periods. The remaining 75M BAL tokens will be mostly distributed to users who provide liquidity to Balancer pools in a process called liquidity mining.
Liquidity mining – Earn BAL on top of pool returns
For a protocol like Balancer to remain decentralized, the governance process also needs to be decentralized. And, it only makes sense for those that use the protocol the most to be given a voice in said process. This is exactly what Balancer’s liquidity mining aims to do.
Each week, 145k BAL will be awarded to users with liquidity in Balancer pools, totaling 7.5M BAL per year. The idea is to create a really strong incentive for early adopters grow liquidity and get involved in the governance process.
Starting on June 1st, 2020 at 00:00 UTC (which is tonight if you’re reading this Sunday May 31st), those currently providing liquidity to Balancer protocol will be eligible to receive BAL tokens. So now’s your chance to add liquidity or create a new pool to reap the benefits of being that early adopter.
“All liquidity providers will receive Balancer Protocol Governance Tokens as long as a USD price can be extracted from CoinGecko for at least 2 tokens present in their liquidity pools. Liquidity from tokens without such USD price is not eligible.”
Earn BAL on top of pool swap fees
Every Balancer pool has its own customized pool swap fee; whenever someone performs a trade that utilizes the pool’s liquidity, this fee is distributed equally to that pool’s liquidity providers. So when you provide liquidity not only are you earning this fee, but you’re also earning BAL
Liquidity mining encourages lower pool fees
One of the coolest parts of liquidity mining is that it’s designed to incentivize pools to have low pool swap fees. The USD value of each pool’s underlying tokens according to CoinGecko is multiplied by what’s called a feeFactor to determine how many BAL the pool is eligible to receive.
As you can see in the chart above, the higher the fee, the lower this feeFactor is, and the less BAL tokens that pool’s liquidity providers receive each week. The logic is that pools with lower fees pull in more users willing to trade on Balancer and so these pools should receive greater rewards. Personally, I think it’s a clever way to optimize Balancer to achieve lower fees while still rewarding liquidity providers accordingly.
Don’t miss out. Liquidity mining starts soon.
If you haven’t tried it yet, there’s never been a better time to consider adding liquidity to existing pools or creating your own pool. Starting tonight Sunday 31st (June 1st, 2020 at 00:00 UTC to be precise), those currently providing liquidity to Balancer protocol will be eligible to receive BAL. Not only will you earn BAL, getting involved early is also a great way to ensure Balancer works best for you, implementing changes you want to see as a stakeholder in the protocol.
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