Index funds are a common practice across the world of finance, allowing users to expose themselves to a range of different investments with one simple purchase. Although incredibly popular, with billions of USD attributed to traditional index funds, they hadn’t, until recently, penetrated the world of cryptocurrency.
Currently nearing the 2 trillion USD mark, it’s no wonder that cryptocurrency systems have now begun to turn to the creation of index funds for this decentralized currency. Created in 2019, Balancer is an automated portfolio manager that permits you to create your very own crypto liquid pool funds. This system allows you to collect fees from traders that rebalance your funds through arbitrage opportunities, expanding the ways you can earn.
Instead of having to pay an average of 0.06% on a mutual fund like in the world of traditional finance, Balancer provides further methods to turn your cryptocurrency into a passive form of income. In this article, we’ll be taking a look at Balancer, breaking down exactly how it works and pointing towards its uses for those looking to maximize their crypto returns.
What is Balancer?
At its core, Balancer provides advanced index fund services to those interested in cryptocurrency investing. While typical index funds are made up of a certain number of centralized companies at various percentages, Balancer offers pools made up of different cryptocurrencies.
For investors in crypto that want to make a passive income, these index fund pools provide an easy method of generating a return. Investment pools are automatically rebalanced over time, with a powerful mathematical framework allowing a portfolio to self-rebalance while it generates fees.
One of the main aspects that have created a surge of popularity following Balancer is the ability to add up to eight different assets into one liquidity pool. Due to this, users can access far more liquidity than more narrow systems, helping to increase their profits.
Equally, for new cryptocurrency projects, this system can be used as a launchpad, with new tokens grouping in with established tokens in order to generate liquidity while providing a level of safety to investors. This comprehensive portfolio management system allows investors to gain further liquidity, access a continual passive income stream, and finally brings index funds to the world of cryptocurrency.
What Sets Balancer Apart From Other AMMs?
Most liquidity pools are managed by what’s known as an Automated Market Maker (AMM), which are smart contracts that automate the process of running and changing a liquidity pool. While this is a common practice in any DeFi institution that allows for staking, what sets Balancer apart is the level to which users have control of the pool.
There are four core ways in which the index funds within Balancer are radically different from that of other DeFi platforms:
- Customizable Liquidity Pools
- Completely Automated Balancing
- Full Crypto Index Control
- Users Set the Fees
Let’s break these down further.
Customizable Liquidity Pools
Balancer wants to give power directly to their users, allowing anyone to use the platform to craft, customize, and personalize the liquidity pools that they invest into. This relates both to the different cryptos that are entered into the liquidity pool, as well as the different percentage distributions that are awarded to the pool.
The flexible pool structure of this platform allows up to 8 differently weighted tokens to be added to the pools. At a surface level, this allows new users on Balancer to gain access to exactly the proportion of exposure to different funds that they would like. Going further, for more advanced users, the level of customization that these pools offer will allow for the construction of custom logic pools. These pools help investors to set price curves within individual cryptocurrencies, creating room for an infinite number of investing strategies.
Completely Automated Balancing
Within the Balancer platform, the protocol for liquidity pools is set to always rebalance themselves. Due to this, no matter what happens to the price of one of the cryptocurrencies within the liquidity pool that you’re invested in, the whole pool will be automatically rebalanced to ensure the desired ratios are continuous.
These minute and automatic trades take place continuously, with thousands of tiny trades allowing your desired ratio to be followed as closely as possible. The native exchange of Balancer will use smart order routing, mitigating price slippage across different pairs and providing a stable system that keeps your percentages in check.
Full Crypto Index Control
Balancer aims to put the investor first, giving them several different possible routes when investing their cryptocurrency. Once within the platform, users have three options for investing in a crypto index:
- Create a private pool – Within the platform, you can choose which cryptocurrencies you want to add to the pool, selecting the ratios and then adding liquidity. This allows you to completely customize your trading, turning any crypto you lock in the pool into a passive form of income.
- Join a shared pool – If you want someone else to manage your cryptocurrency, you can join a shared pool. These are open liquidity pools that already have set rates and cryptocurrencies within them. You just need to read the benefits and investment strategies and then enter however much you would like.
- Create a shared pool – If you’re looking to manage your money, as well as the money of others, you’re able to create shared liquidity pools. You then take on the role of the index manager, changing and editing investments as you see fit.
With this large range of possible ways to invest, you have the power to pursue any strategy that you would like. Furthermore, as you can enter into a pool with only one token, you’re able to access diversification within your portfolio easier than ever before.
Set the Fees
Within a liquidity pool system where users can create their own shared pools, the question arises of who sets the fees and what they are. Unlike other management systems, Balancer allows users to choose their own trading fees. Due to this, the Balancer shared pool system has become a competitive landscape, with different liquidity pool creators trying to undercut others with their fees.
With this competitive system in place, the fees on Balancer are continually reduced, with users that are looking for high rewards with low crypto index fund fees, being in luck on this platform.
What is the future of Balancer?
Alongside providing a seamless decentralized index fund investment platform for cryptocurrency investors, Balancer has also seen lots of popularity within distinctive projects that have used its systems to build. By leveraging Balancer, considering that it’s permissionless and open-access, other developers are able to create new management systems.
Due to the open nature of Balancer, with the direct call on their site for users to build with the system, many DeFi systems have sprung up:
- Beethoven X – Another AMM launched from Balancer, Beethoven X allows users to create weighted pools, perfected on the $FTM currency that offers lower gas fees and an easy-to-use system.
- Rabbithole – RabbitHole awards new users that move through on-chain tasks, creating a learning system that helps to onboard people to a certain chain. This acquisition chain has now been integrated into Balancer, with this providing an introductory course that enters over 3,000 new users onto the chain.
- HaloDAO – HaloDAO is a stablecoin system that has partnered with Balancer, helping to create further rewards for the users of these platforms when people use these stablecoins within the Balancer index fund system.
- Tempus – In September of 2021, Tempus received a $50,000 grant from Balancer, with their main goal of building an additional AMM on top of Balancer to help create more ways for Balancer users to invest and trade within these systems.
These four are only a few examples of how Balancer is rapidly initiating partnership builds, expanding the scope of their product, and creating a more inclusive and comprehensive ecosystem for their users.
There are currently over 50 DeFi integrations with Balancer, indicating that the future of this platform is secured due to the extensive scope of projects that are now developing on it. From creating investor clubs and index funds to creating smart treasures or launching a new token, there’s a lot that users can build with Balancer.
Food For Thought
Creating a system where users are able to invest their crypto into user-controlled index funds, Balancer has effectively brought the widely successful index fund investment strategy to the world of cryptocurrency. As a central function of traditional finance, it’s no surprise that Balancer is getting so much positive attention.
If users are looking to create an index fund of up to eight different cryptocurrency distributions and earn passive income on them, then Balancer is the all-in-one platform that will let them do so. With strong foundations and new avenues of building pursuit, as well as a range of partnerships and integrations on the horizon, Balancer is a fascinating new project that we should all be watching over in the coming months.
Disclaimer: This content does not necessarily represent the views of IWB.