How to use Balancer. A Step-by-step guide by QDAO DeFi
October 14, 2020
Add: Veronica Zubrii
The unique n-dimensional platform Balancer allows users to generate multi-cryptocurrency liquidity pools without compromising asset management options. Here’s a detailed Balancer Platform guide from the QDAO DeFi team.
Balancer is an Ethereum-based decentralized finance service that appeared on the market in March 2020. Initially, it wasn’t fully decentralized and Ethereum addressed the issue of deploying the protocol while being unable to assert changes over the protocol. In half a year, they transformed it into a fully-fledged DeFi platform that now enables the creation of private, smart and public pools.
- Private pools only allow the owner to contribute liquidity and manage permissions/parameters.
- Shared pool hosts the liquidity created by all users. Fees, tokens and weights are set permanently. The owner has no privilege rights. Ownership of liquidity is tracked by a Balancer Pool Token.
- Smart pool is a variation of private pools that are controlled by a smart contract. Parameters and arbitrary restrictions can be altered. Liquidity is accepted by anyone.
Balancer Features & Benefits
Balancer is a DeFi protocol that enables automatic market-making. The liquidity provider allows market users to take profit from the bid and ask for prices. Hence, it’s an automatic decentralized market maker that’s controlled by the trading algorithm.
What makes Balancer special? While Uniswap allows for keeping two assets in a liquidity pool, Balancer is n-dimensional – it supports 8 assets for each liquidity pool (market). The weighting of supported assets is arbitrary and the trading fees are set by the pool creator.
Thus, Balancer has two main options:
- Provision of liquidity. Users can deposit their assets into pools, i.e. provide liquidity. That earns them a fee.
- Trading. Users can trade their tokens in a decentralized pool. Balancer’s smart order routing system guarantees low fees and fast transaction speeds.
Balancer has more flexible conditions than centralized exchanges like Binance or Coinbase. When it comes to DeFi, the price of tokens in the pool varies according to their set weighting. The Balancer Labs team believes it will help to increase liquidity and profits.
About BAL token
Recently, Balancer announced the launch of BAL token: it was distributed over liquidity providers through the process of liquidity mining. It serves as the reward for liquidity providers – it’s paid out every two weeks. BAL has governmental functionality, i.e. it renders voting power to holders.
Does DeFi mean Defended?
Although blockchain solutions are considered to be safer than regular centralized networks, they are prone to bugs and vulnerabilities. The Decentralized Finance sphere has only just started gaining traction, which means the security of projects might be compromised and Balancer is no exception.
It was the victim of two hacker attacks that took place one after the other on 29th July. STA and STONK pools were affected by a hacker exchanging Statera and Ether, multiple times back and forth. Prior to that, the hacker took a flash loan from dYdX in ETH worth $23 million and stole COMP tokens worth ~$2,300. During exchange transactions, the STA balance was diminished by 1% but the smart contract did not account for this.
To drain the STA pool, the attacker swapped other assets, including LINK, SNX, BTC and ETH. The remaining assets were cashed out to Ether with Uniswap.
The Balancer team admitted this bug and said they would refund the users who lost their assets. Yet, their security practices remain under question – some experts claim they knew about this vulnerability. Developers, in their turn, claimed that the issue was unexploitable and it was about the faulty flash loan feature.
Although Balancer removed the STA pool from the liquidity mining program, it’s still not clear why they did not fix the issue in the smart contract. Meanwhile, the protocol is available and users can add tokens at their own risk.
That begs for the golden rule to be repeated again: “Never invest what you cannot afford to lose”.
But if you are still considering trying the Balancer liquidity pools, follow this tutorial.
How to deposit in Balancer
Open the main page and click on ‘Pool Management’. Start with connecting a wallet – click on the button in the upper right corner. So far, Balancer supports MetaMask, WalletConnect, Portis, Coinbase and Fortmatic.
In the Dashboard, you can see á list of available private and public pools with the ratio of tokens included. Also, there’s info about market cap, 24H volume, swap fee and users’ liquidity currency added to the pool.
Click on the market you want to add liquidity to and check the details (liquidity, volume, swap fee and your pool share). Click on ‘Add Liquidity’ and choose the tokens to deposit. You can set up several cryptocurrencies (unlocking all of them) or a single one – the pool will automatically split the amount for you.
First-time users are required to create a Proxy contract for liquidity management. Please note that it requires a gas fee but will save you ETH down the road.
After setting up the amount for deposit, click on ‘Add Liquidity’ and confirm the transaction. Your assets are now in the pool. You can remove your funds any time by clicking on the ‘Remove Liquidity’ button.
Beware of something called Impermanent Loss. Since you have regular crypto and stablecoins stored in a certain ratio and the price of crypto is constantly changing, you might end up with less crypto and more stablecoin than you expected – the ratio (weight) is being balanced by the system.