Balancer-Crypto Index Funds and BAL Explained
What is Balancer ?
Balancer is an ethereum based application specifically a decentralized exchange that utilizes a special trading algorithm called an automated market maker that allows traders to swap their crypto tokens in a very efficient way.It creates your own index fund idea is let’s dig in in the world of defy and cryptocurrencies.
The price they want and you get a trade at the time that you want either way you either get to select the price or the time of the trade not both now there is a newer solution that is much better and it doesn’t rely on humans but instead algorithms this method is called an automated market.
How Balancer actually works ?
The algorithm is very simple and it follows this equation x times y equals k.
Algorithm works is actually quite simple as you buy more of one asset the algorithm automatically charges you more and more to keep buying that asset. So even, if you have a trillion dollars to trade with the pool will never run out of either asset to sell you. Because it’ll keep charging you an infinitely higher price. Another way to think about it in this way might be better is that you approach the pool with what you want to sell.
A pool of ethereum and usdc if you go to the pool and you say you want to buy one dollar worth of ethereum. It might sell you some ethereum at an average price of four thousand dollars. However, if you go to the samepool and you buy ten dollars worth ofethereum.
It’ll charge you a higher average price of four thousand and eightdollars once more. If you go to the pool with one hundred dollars it may charge you an average price of four thousand one hundred dollars per ethereum and finally if you approach the pool with a million dollars. It may charge you an infinitely high amount of usdc to buy that aetherium.
But the trick here is that the pool will never run out of ethereum to sell you it’ll just keep charging you a higher portion now since you interacted with the pool and raised the price of the ethereum in that pool other people are gonna come along and sell their ethereum to that pool at a higher price basically giving the pool back more ethereum but also taking some usdc and this is a liquidity pool rebalancing feature liquidity pools and automated market makers are quite complicated.
What makes Balancer better ?
Uni swap, pancake swap,and sushi swap you can only deposit two assets in the very beginning of this technology. Each of these pools had to also contain ethereum,so you could have a usdc eth pool in a bow token eath pool and to get from usdc to bow token.
You’d have to make two different swaps eventually the developers got fancy and realized. They could allow users to set up any pool they wanted so something like a usdc bow token pool was possible even more so they realized they could hook up a ton of these pools together automatically.
So anyone can trade from one token in one pool to any other token in another pool at ease and this is technically called routing. Here’s the cool thing that Balancer does they take this one step further instead of just letting you deposit two assets into a pool.
They let you add up to eight different assets in a liquidity pool now the math behind these multi-asset pools is called weighted math and it is designed to allow for swaps between any asset whether or not they even have a price correlation prices are determined by the pool’s balances pool’s weights and the amount of the tokens that are being swapped. This might get a little more technical but Balancers weighted math equation is a generalization of the x times y equals k.
What is Crypto Index Fund ?
Accounting for cases with more than two tokens as well as weightings that are not an even 50 50 split next up they actually have something called a Portfolio manager (Crypto Index Fund).
These multi-asset pools allow us to do is to create a synthetic index fund of crypto tokens that will automatically manage itself and rebalance itself as needed. So you can easily create your own pool of four or five assets that you want to hold long term and then let people use that pool to trade with there are actually two things.
The first is that simply by letting other people trade with your funds to make swaps you will actually earn money how well when you first set up the initial pool of assets you decide on what fee the trader should pay for using your liquidity pool because hey they’re using your money now this fee is usually very low but when a ton of traders use a ton of money every day for a year it can really add up.
So this means your crypto index fund will technically earn somewhat as a dividend as other traders use it to rebalance their prices the other thing that i technically forgot to mention is a scary term for new investors called impermanent loss.
The Balancer token was actually one of the very first governments token in the whole wide world of defy and right now that’s exactly what they’re used for governance. But they are working on native staking contracts right now until then you can actually deposit balancer tokens in a few different pools across a few different chains to earn more balancer tokens .The balancer team also has a grants program where developers can apply for funds to further the project’s goals.