A closer look one of the most popular decentralized exchanges
Although it’s only been live for a few months, Balancer has already made its mark in the dynamic DeFi sector, attracting thousands of users and hundreds of millions of dollars worth of value.
Running on the Ethereum blockchain, in its simplest form, Balancer can be viewed as a decentralized token exchange, much like Uniswap.
That means any user with an Ethereum wallet can swap ERC20 tokens.
However, for more advanced users, Balancer offers a sophisticated way to build a self-balancing portfolio of cryptocurrencies.
Indeed, that use case is why the dapp is called Balancer.
As the developers explain in their whitepaper, in the world of traditional finance, it’s key for the long term performance of index or tracker funds that as the price of the owned stocks in the fund changes, so the fund has to be constantly rebalanced so it correctly tracks the desired index, such as the S&P 500 or Nikkei 225.
In this way, Balancer allows users to add multiple tokens in various ratios to the liquidity pools which power its token exchange features. This is very different from Uniswap, which limits users to adding two tokens in equal amounts of value to its liquidity pools.
For example, you could add $100-worth of ETH and DAI into the ETH/DAI Uniswap liquidity pool but you could create a liquidity pool in Balancer, split between ETH, DAI, and MKR in the ratio 30%, 40%, and 30%. (Or any other ratio almost any other supported tokens.)
As with Uniswap, these liquidity pools generate income as they accumulate trading fees, while the ratio between tokens will remain roughly the same because as users trade these tokens, the changing relative price between them creates arbitrage opportunities; at least that’s the plan.
As ever, we need to point out that all dapps are experimental, and dapps such as Balancer are particularly experimental and things can (and do) go wrong. So never use more value in such dapps than you are comfortable with losing.
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