Inventory of Balancer's innovative measures: 7 liquidity pools and architectural logic

Original author: Jiang Haibo, PANews

Balancer has made a lot of innovations in the development of DEX, but it lacks a sense of presence under the competition of Uniswap and Curve. According to DeFiLlama's data, Balancer's liquidity in DEX is second only to Uniswap, Curve, and PancakeSwap, ranking fourth; the dashboard compiled by the co-founder of Dune shows that Balancer's trading volume in June this year is also second only to Uniswap, Curve, and PancakeSwap. PancakeSwap, Curve, DODO, ranked fifth.

In the development of LSD, Balancer also occupies a good market. Among the top five liquidity pools on Balancer Ethereum, the four liquidity pools wstETH/WETH, rETH/WETH, wstETH/sfrxETH/rETH, and R/DAI are all Belongs to LSD or LSDFi. Below, PANews will take stock of Balancer's innovations.

Enhanced pool: use idle liquidity for mining

Balancer will cooperate with Aave to launch Boosted Pools at the end of 2021, which can use idle liquidity for liquidity mining of protocols such as Aave. In actual use, the enhanced pool usually only reserves 20% or even less of the total liquidity for transactions, and the rest of the funds are invested in lending agreements such as Aave and Morpho to earn extra income. For example, liquidity providers in the Balancer Boosted Aave V3 USD pool composed of DAI, USDT, and USDC stablecoins can simultaneously obtain transaction fees in DEX, deposit interest in Aave, and $BAL mining rewards issued by Balancer .

Combining Balancer's composability and lending protocol, this innovation can incentivize deeper liquidity, more efficient transaction routing, greater capital efficiency, and higher yield. But also because of composability, when the underlying lending protocol has security issues, liquidity providers in Boosted Pools may also suffer losses. For example, the Euler attack in March this year caused liquidity providers in the Balancer Boosted Euler USD pool to lose $11.9 million. Fortunately, the hacker finally returned the funds.

Composable stable pools

In August 2021, Balancer and Lido announced the launch of a MetaStable (metastable) pool and introduced liquidity incentives. Although Uniswap and Curve previously occupied the main market in non-stable currency and stable currency transactions, the emergence of some new types of highly correlated and incompletely linked assets has also led to new demand, such as Lido's wstETH and Compound's Yield tokens such as cDAI, whose value is close to the underlying assets, but will change over time. If Curve's Stableswap mechanism is used to provide liquidity, as time goes by, the value of one of the assets changes, and the value-added part of the asset is acquired by arbitrageurs.

The Metastable pool will take into account the constant changes in the exchange rate between assets, and by changing the slope of the Stableswap curve, the liquidity will be concentrated around the actual exchange rate, making the capital efficiency and liquidity of the liquidity provider more accurate.

Later, Balancer upgraded all stable types of flow pools (stable pools, metastable pools, etc.) into composable stable pools. Composable stable pools can directly use their own LP tokens for transactions, that is, "nested" transactions, or use LP tokens to form trading pairs with WETH and other assets in other pools, thereby reducing the Gas to join and exit the liquidity pool fee.

As mentioned earlier, four of the top five pools of Balancer liquidity on Ethereum are related to LSD. Since wstETH, rETH, and sfrxETH all accumulate income into the value of tokens, it is more suitable to use composable stable The mechanics of the pool.

Liquidity Guidance Pool: Has helped more than 130 projects to raise funds

The popularity of Uniswap allows everyone to provide liquidity and allow others to trade after the currency is issued, and it also kicked off the IDO boom in 2020. After some projects provided liquidity on DEX, the token price rose dozens of times in a short period of time, and the early earnings were earned by a few whales or robots through scripts. In this process, the team cannot raise a lot of funds, and providing liquidity also requires a lot of funds.

As a veteran DEX, Balancer introduced Liquidity Bootstrapping Pool (Liquidity Bootstrapping Pool, LBPs) in March 2020, which is a smart pool that allows teams to issue tokens while building deep liquidity.

Balancer allows project teams to fund the pool weights of their tokens and change the weights over time. For example, in the auction of TKN tokens, a liquidity pool with a TKN/USDC ratio of 90/10 can be created. At the beginning, 90% of the tokens will be TKN and 10% will be the reserve asset USDC.

As time goes by, the proportion of TKN decreases continuously. For example, according to programming, the ratio of TKN/USDC can reach 50/50 or 10/90. In this process, if there is no external purchase behavior, the price of TKN will continue to fall, as shown in the figure below.

This is a fairer approach to initial token sales where bots are unprofitable and likely to suffer losses due to the high initial pricing. When the price falls to the expected value, users spontaneously trade. The project team does not need to provide a large amount of funds initially, and the tokens are sold at a reasonable price, which is friendly to token issuers.

Fjord Foundry (formerly Copper Launch), a front-end website using Balancer’s liquidity boot pool, shows that auctions have been held for more than 130 communities on multiple chains, with an auction value of $750 million (Balancer and Fjord Foundry each charge 1% of the sales amount) . For example Xirtam scam project is fund raised on Fjord Foundry.

The sale of $AKITA tokens given away by Gitcoin is a successful use case for Fjord Foundry. The issuer of the meme token $AKITA sent some tokens to the Vitalik wallet, Vitalik donated the tokens to Gitcoin, and selling the tokens became a problem. Afterwards, Gitcoin sold $AKITA through Fjord Foundry. The slow sales process avoided a lot of slippage, and accumulated part of the fee income through this pool.

Weight Pool: Provide liquidity with specific weights for various tokens

Weight Pool (weight pool or weight pool) is the main feature of Balancer, which is an extension of the AMM formula x*y=k proposed by Uniswap. In Uniswap, only two tokens are allowed to provide liquidity, and before Uniswap V3, the value of the two tokens must be equal.

However, the risks between tokens are not the same. The 50/50 weighted liquidity pool is not suitable for all liquidity providers and all assets, and sometimes it is necessary to deposit multiple assets into the same liquidity pool. The birth of Balancer solved this problem, allowing users to build liquidity pools with more than two tokens and custom weights, such as a 60/20/20 weight pool of three tokens.

Yearn used Balancer's 80/20 weight pool as YFI's liquidity incentive pool when it distributed tokens.

Custody pool: applicable to fund managers, management fees can be charged

Managed Pools is a derivative of the weight pool, which allows the pool creator (Owner) to update the token weight, allowing the creator to adjust the distribution of internal assets to suit different strategies.

Custody pools are highly flexible, unlocking complex portfolio strategies and providing a framework for fund managers. Fund managers can create various pools and strategies, and users can participate in these pools. Fund managers can charge a certain percentage of management fees, and Balancer can also charge part of the management fees as protocol fees.

Linear pool: introduce the target price range of the trading pair

Linear Pool (Linear Pool) is designed to facilitate users' transactions between original assets and yield-encapsulated assets, such as DAI and Aave's aDAI. Linear pools introduce a target range that encourages maintaining prices within the range.

The linear pool is set up with a fee and reward mechanism to incentivize arbitrageurs to maintain the exchange ratio of the two tokens at an ideal ratio. There is a fee for moving the price out of the target range, and rewards for trades that bring the price back into the range. At the same time, linear pooling is also often used as a component of enhanced pooling.

Protocol pool: Customize the DeFi protocol built on Balancer

The protocol pool represents the entire DeFI protocol built on the Balancer infrastructure. Balancer provides an infrastructure for customized AMMs by separating liquidity pools and bookkeeping logic. Other AMM logic can be implemented on top of Balancer Vault through custom pools, enabling programmable liquidity.

For example, Gyrscope, a stable currency project, concentrates liquidity within the price range of PAMM through the customized Balancer liquidity pool.

Architecture of Balancer v2

Balancer v2, which will be launched in April 2021, is the first to separate AMM logic, token management, and bookkeeping. Token management and bookkeeping are completed by Vault, and the AMM logic of each pool is independent. Architecturally, Balancer V2 also keeps assets in each Vault of V1 separately, transitioning to a single Vault to store all assets. Because there are a lot of liquidity pools in Balancer, such as different transaction fee ratios and pools composed of different assets, all of which have the same asset. The original structure leads to the need to cross multiple vaults when trading assets such as BAL and ETH. The handling fee is high, and the new architecture has better flexibility, capital efficiency and Gas efficiency.

Summary

Balancer has made many original updates in the development of DEX, such as adjusting the structure to manage all assets with a single vault; the auction mechanism of the liquidity guide pool; the multi-token management of the weighted pool and the custody pool; allowing other developers Customize various functions on Balancer, etc.

However, the development of DEX is becoming more and more homogeneous. The initial inspiration of Balancer may come from Uniswap, and the recent release of Uniswap V4 also plans to implement a single vault to manage all funds, and allow developers to develop various functions on Uniswap. DEX competition is getting fiercer.