Launched in March 2020, Balancer is a decentralized exchange protocol built on Ethereum. It uses an automated market maker to facilitate trades. In practice, it lets you swap ERC20 tokens without an order book. The protocol relies on smart contracts that set up liquidity pools, and trading draws liquidity from those pools. When it first went live, Balancer did not have its own token, but the team later added one. Balancer (BAL) is the protocol’s governance token, used to influence outcomes through votes on different proposals. It is also used to incentivize liquidity providers.

What are BAL key features and how does it work?

Balancer’s developers took inspiration from the UniSwap exchange protocol. As a result, Balancer uses an auto market-making (AMM) protocol with similarities to UniSwap. It employs an n-dimensional invariant approach, meaning a pool can include multiple tokens rather than only two as in UniSwap. Overall, Balancer acts like a self-balancing weighted portfolio, functioning as a price mechanism and liquidity provider. It enables users to earn with the BAL token by supplying assets to customizable liquidity pools and receiving trading fees in return. The Balancer protocol allocates BAL tokens to approved (whitelisted) liquidity pool creators. To qualify for rewards, at least two coins in the pool must be on that list, which is refreshed weekly as new coins are added. This design can make lower fees more attractive, since reducing fees increases the amount of BAL distributed. BAL issuance is also tied to how much is invested in a liquidity pool relative to the pool’s total liquidity. The maximum token supply is set at one hundred million.

What makes Balancer noteworthy?

As part of the fast-growing DeFi sector, AMMs influence the market price of Balancer (BAL). Balancer is itself a decentralized exchange. It also makes it possible for everyday crypto users to participate by joining pools and adding liquidity through deposits into smart contracts. Since the liquidity pool protocol does not depend on centralized entities, it can be used to swap ERC20 tokens directly. Any ERC20 token holder can use Balancer to earn fees. 

What can BAL be used for?

Balancer is designed to automate market-making and help reduce the fees paid by users during transactions, regardless of which currency they move. In the liquidity pool landscape, it stands out for enabling liquidity pools with multiple tokens at the same time-something Balancer developers were among the first to support. 

Balancer smart contracts have been audited by Trail of Bits, a third-party security firm, making them safe for investment.