Balancer is a decentralized finance (DeFi) automated market making protocol that operates on the Ethereum blockchain.
Decentralized automated market-making protocols, like Balancer, facilitate the decentralized trading of Ether and ERC-20 tokens.
This is made possible by users who provide liquidity in the form of asset pools. With Balancer, these asset pools can hold anywhere from 2 to 8 different Ethereum based tokens.
For example, when a user wants to buy Ether with Dai (an Ethereum based stablecoin pegged to the US dollar), the pool provides the Ether and receives the user's Dai, slightly changing the overall balance of the pool and subsequently the values of the two assets in the pool.
In return for providing this liquidity, the pool participants (liquidity providers) receive a predetermined transaction fee in addition to BAL tokens (Balancer's native governance token).
Pool participants hope that the transaction fees will outweigh any potential losses in value the pool incurs as a result of providing liquidity for trades that are unfavorable to the balance of the pool (also known as impermanent loss).
