To anyone keeping an eye on DeFi in recent weeks, you’ve surely heard of Balancer – an automated asset management platform for programmable liquidity.
For those unfamiliar, Balancer allows anyone to create public (shared) or private liquidity pools for up to 8 assets with customizable weighting and swap fees.
This past week, Balancer started its Liquidity Mining program for the newly announced governance token – BAL. Since it’s debut, Balancer has seen a strong spike in liquidity, volume, and unique LPs, best highlighted by this Dune Analytics dashboard from Matteo Leibowitz.
In this article, we took some time to chat with Fernando Martinelli – the CEO of Balancer Labs – where we cover:
- Why Liquidity Mining?
- Combatting BAL Farming
- BAL Governance
- Uniswap Vs Balancer
- Understanding Balancer Pools
- Target Users
- Bootstrapping Liquidity
- Balancer is Hiring!
With so much to cover, we decided to skip formalities and jump right into it!
Balancer Liquidity Mining has been all the rage lately. What was the thought process behind it’s design?
With Liquidity Mining we had two objectives: decentralization and liquidity incentives.
With BAL, our primary objective is to distribute ownership of the protocol so that it can get to a point where ownership is decentralized enough that the company developing it today (Balancer Labs) can be dissolved. We believe the best way to distribute that ownership is by giving it to the people making it work.
On the flip side, the protocol doesn’t work well without liquidity. In order for Balancer to be effective, you need to have significant liquidity to mitigate slippage. This chicken and egg problem can be addressed by using Liquidity Mining to get the flywheel spinning.
What’re your thoughts on this trend of Liquidity Farming – or creating pools which are optimized to collect as much BAL as possible?
There’s a very subjective line between what’s considered farming and what’s genuinely contributing to the protocol. This is one of the prime examples of where the community can be responsible for setting that line once BAL starts being distributed.
We’re using a feeFactor which rewards those with lower Swap Fees with a higher allocation of BAL. While 50/50 weights offer the most efficient liquidity, with Balancer people can weigh assets up to a maximum of 98/2. We’re seeing certain pools follow this weight with minuscule trading fees as a way to farm BAL without having to worry about impermanent loss (more on that later).
To address this, the community has been thinking about how to improve the Liquidity Mining formula using something called a ratioFactor. This factor essentially penalizes pools that are uneven by correlating more slippage to smaller BAL allocations.
Week 2 of BAL mining starts shortly with an updated formula https://t.co/91OoPuYkLp Thanks to the community members who proposed and pushed this update through. Join our discord & forum to participate in governance and help shape protocol incentives
— Balancer Labs (@BalancerLabs) June 7, 2020
We expect the formula to evolve a lot and have even been discussing boosts for crucial pools like ETH, DAI and USDC to incentivize contributions to those which need the most liquidity.
We’ve even considered reducing BAL rewards to zero for pairs like wETH/sETH or DAI/cDAI, where there is a clear peg and even a pool with very small fees makes no sense for traders. In other words, for liquidity to be useful, there has to be demand for trading, and some pairs by definition just don’t have that. What’s neat is that this whole thing evolves naturally as people try and exploit it and the community will step up to address them on a case by case basis.
What are some of the ways you expect BAL to be used for governance?
Once the BAL contract is deployed in June, we expect voting on the improvements of the distribution equation to start almost immediately. This will also include things like listed assets on our front-end. There’s a lot of subjectivity regarding which tokens are “scams” so it’s ultimately up to the community to decide what’s accepted.
A draft for the first week of BAL mining distributions is up at https://t.co/uURZh5naa1
The first mint is still a couple weeks out to give users time to review and reproduce results.
— Balancer Labs (@BalancerLabs) June 10, 2020
On the fundraising side of things, we envision voting around what partnerships we should go into for our Series A round.
As a quick aside, what did that Seed Round look like? Was it for tokens, equity or a combo of both?
It was a combo of both. All shareholders are entitled to a pro-rata share of 25M tokens that belong to Balancer Labs. We were very open that the idea is for Balancer Labs to be totally extinct or dissolved assuming the BAL distribution pans out as expected.
There’s been a lot of discussions pitting Uniswap against Balancer. How do you view this comparison?
Balancer is not trying to compete with Uniswap or steal market share from them. I really like Hayden and constructively talked to him even before Uniswap launched and before Balancer Labs was even founded.
The way I see it, we’re optimizing for different things. Liquidity on Uniswap is as efficient as possible and they’ve provided a great tool for other projects to use with their newly launched oracle in V2, among other things.
With Balancer, we aim to be a building block. For this, things need to be flexible and customizable. Our private pools are highly customizable. You can write any arbitrary logic in a smart contract that controls a private pool, creating what we like to call Smart Pools.
We’re excited to showcase things like RealT’s smart pool – essentially a real estate index fund building on all their tokenized real-estate – where the smart pool ERC20 tokens represent ownership of the whole index.
We can even take this a step further and imagine a Smart Pool token as collateral for Maker where anyone can provide liquidity between the different components!
What do I need to know as a Balancer Liquidity Provider?
Balancer is a generalization of Uniswap. This means Balancer pools can have the same behavior as a Uniswap pool (50/50 weight with a 0.3% fee). The difference is with Balancer, you can control whatever exposure you have to a particular token. The more imbalanced the weights, the less traders need to swap to cause your pool price to move.
For example, if you want to be exposed to trading fees, but you’re very bullish on MKR – provide liquidity to the 75/25 MKR/WETH pool. This way, you still get some upside of the trading fees while suffering less impermanent loss in the event that MKR outperforms WETH like we’re seeing today.
3/ If you're an LP for eg @UniswapProtocol or @BalancerLabs you shouldn't compare directly to buy-and-hold. You should compare to what you would have done otherwise.
Would you have held ETH regardless of the price? Very few have the metal to hold indefinitely.
— Hugh Karp ?? (@HughKarp) June 8, 2020
I’ll soon be publishing a blog post about the dynamics of Balancer pools and how those with high swap fees essentially allow you to act as a swing trader: in a nutshell, high fees in a pool enable it to buy cheap and sell high, and being inactive (i.e. equivalent to holding) while price variations aren’t relevant!
But what I think is the most underrated aspect of AMM’s relative to traditional order books is that with an AMM you can add liquidity and forget about it. That in and of itself is a cool reason to provide liquidity to Balancer.
Orderbooks are clearly more efficient than AMMs. But what many fail to realize in the comparison is on the supply side where AMMs allow passive market-making. The lines between a hodler and a liquidity provider are blurred
— Mike McDonald (@mikeraymcdonald) June 2, 2020
Who is Balancer’s target user?
The target is the liquidity providers – people who want to get the upside of trading fees and at the same time benefit from the self-balancing properties of Balancer pools. We’re not focused on making the best UI/UX for trading as traders can get better-combined liquidity with trade aggregators like 1Inch. The DEX aspect of Balancer is not our core focus.
One of the really cool aspects of Balancer is this concept of Liquidity Bootstrapping Pools (LBPs). Can you summarize what this is?
Basically Balancer allows new projects to sell their tokens while at the same time creating a very liquid trading venue for token holders. LBPs are smart pools themselves, that allows weights to be flipped over time. Anyone can “poke” the smart pool contract to update the weight and profit off arbitrage. For more details read this article on LPBs.
In the coming weeks we’ll also be rolling out token factories for Smart Pools, giving people templates to bootstrap liquidity in unique fashions.
What else should people be on the lookout for?
We’re really excited to roll out Smart Pools like the RealT property index fund. We’ve already seen other great and innovative projects – like PieDAO – building on top of Balancer and are excited to see that trend continue.
Lastly, we’re a small team but we have big ambitions. We’re currently hiring Solidity developers and full-stack engineers. If you’re interested in applying, join our Discord to get involved and get in touch!
—-
Rounding out the article, it’s clear that Fernando and the Balancer Labs team are set to make some big waves this summer.
With $30M in cumulative liquidity at the time of writing, Liquidity Mining has driven strong demand for the newly launched automated asset management protocol.
To this end, it seems like the SAFG model is playing out exactly as intended – with liquidity providers rushing to get their hands on governance tokens despite having no economic value.
If one thing is for sure, we’ve only just scraped the surface on what Balancer is capable of! To keep up with the project, be sure to follow them on Twitter or join the conversation on Discord.
Until then, we’ll see you BAL farmers on the fields for an honest day’s work!
Curious to check out more interviews like this? Check out our past interviews! In the meantime, be sure to stay up on all things DeFi with our newsletter.
Cooper is the Editor of DeFi Rate. He is an ambassador of Set Protocol and an active contributor to MetaCartel where he seeks to find emerging consumer-facing applications that propel the Ethereum ecosystem. He often works with projects as the Director of Fitzner Blockchain Consulting where he coauthors the weekly publication Token Tuesdays.
Like my writing? Drop me some gwei @ coopahtroopa.eth ??
