There is rarely a day that Bitcoin is not in the news. However, Bitcoin, which set the ball rolling for cryptos as we know them today, comes with its own set of issues. For instance, due to its unpredictable volatility it cannot effectively serve as a means of exchange. For instance, if you go into a shop and buy a newspaper with Bitcoin, one day that newspaper might cost you $1, the next day, the same newspaper could cost you $10. That is not practical.
Q2 2021 hedge fund letters, conferences and more
The crypto market is extremely volatile. As we’ve seen prices can skyrocket and drop overnight, sometimes as much as 10%. However, blockchain innovation is moving unwaveringly forward, with key drivers such as traditional finance adoption of blockchain technology, dApps offering greater financial rewards, Automated Market Makers, and the growth of NFTs and DeFi tokens. DeFi could realistically pose a complete new system of banking and savings that could overhaul our current system due to its very nature of being human proof and tamper-proof.
We are just at the beginning of DeFi, the market is still immature and is evolving rapidly. There’s no doubt that the interest is there, with all the major banking institutions opening desks and funds to cater for their clients. There is money to back that interest. Roughly $82 billion is locked in DeFi at this point, and this creates an incredible opportunity for projects to expand. The innovation is there as well. Take Balancer, for example. Balancer Labs supports the ongoing development of Balancer Protocol, which aims to become the leading platform for programmable liquidity.
AMMs And Liquidity In Crypto
Balancer Protocol allows for automated portfolio management and provides liquidity to the crypto markets by turning the concept of an index fund on its head: instead of paying fees to portfolio managers, you collect fees from traders who rebalance your portfolio by following arbitrage opportunities. Developers leverage Balancer as a permissionless building block to innovate freely and create new treasury management systems. Balancer Lab’s mission is to become the primary source of DeFi liquidity by providing the most flexible and powerful platform for asset management and decentralized exchange.
We asked Fernando Martinelli, the CEO of Balancer Labs, how they are innovating in this space: “Balancer Labs is a small yet agile internal team of almost 30, with a strong community supporting our greater mission. In less than a year, we’ve launched V2, built new Pools to further liquidity, and partnered with successful protocols to help scale Defi.”
So what led him into the crypto arena? “When I first heard of Bitcoin in late 2012 I first thought it was a ponzi scheme. Then I looked into it again and soon it hit me as a revolutionary technology.”
“However, I always thought that the great volatility would be an impediment for its mass adoption. When the whitepaper of Ethereum came about, I realized that smart contracts could be the answer for stable coins. This led me to working closely with the MakerDao team in their very early days. Eventually the MakerDao community was key for Balancer to come together, with Nikolai Mushegian (co-founder of Maker) and Mike McDonald (creator of mkr.tools) playing a central role in Balancer Protocol.”
Liquidity Pools Role In The DeFi Ecosystem
You will come to hear a lot more about liquidity pools as they are foundational in the current DeFi ecosystem and are used to facilitate decentralized trading and lending. They are an essential part of automated market makers such as Balancer.
Martinelli told us “A single liquidity pool holds two tokens, and each pool creates a new market for that particular pair of tokens. WBTC/WETH can be a good example. When a new pool is created, the first liquidity provider sets the initial price of the assets in the pool. Liquidity providers add an equal value of two tokens in a pool to create a market. In exchange for providing their funds, they earn trading fees from the trades in their pool. As an incentive, when liquidity is supplied to a pool, the liquidity provider receives special tokens called LP tokens equal to the amount of liquidity they supplied to the pool. For Balancer Protocol, liquidity providers receive BAL tokens. If the initial price of the tokens in the pool changes from the current market price, it creates an arbitrage opportunity. “
So how can the blockchain enhance automated trading? “Blockchain technology introduced transparent pricing, new alternative markets, faster payments, and permanent transaction recordkeeping. Balancer Protocol is enabling people to trade for lower costs and at faster speeds than ever before.”
Balancer has been busy. They recently launched version 2.0 of their Automated Market Maker. V2 which offers a generalized protocol for AMMs operating within DeFi, and all pools managed by Balancer are administered from a single vault. V2 reduces Ethereum gas fees for end-users and introduces the option for external smart contracts (called asset managers) to put the underlying tokens of a liquidity pool to use also elsewhere in DeFi.
Martinelli said, “As we transition to a protocol phase, our main focus is on providing useful liquidity. Aggregators and wallets have to spend a considerable effort on each new integration, so naturally, the protocols that facilitate meaningful liquidity and volume will be prioritized. As our protocol becomes more decentralized, so is the process of deploying the Ecosystem Fund, the Balancer Grants Committee was implemented. In this highly competitive space, teams building on top of Balancer as well as engaged community members should be generously rewarded with a stake in the protocol.”
Central Banks And DeFi
Central Banks have been sniffing around the area of crypto for a while. While bitcoin is too unstable to pose a threat, stablecoins have certainly come to their attention, with many central banks proposing or planning their own Central Bank Digital Currencies. They have the ability to regulate or even block cryptos. We asked Martinelli if they pose an obstacle to what he is doing in DeFi or is there a way the two worlds can live in harmony?
“As of now, Central Banks do not pose an obstacle to Balancer. Our mission is to become the ultimate flexible Automated Market Maker. We hope to continue pioneering innovation in the DeFi space, and as the industry scales, I believe traditional finance will adopt this technology.”
Balancer is working on collaborating with teams and protocols to help scale access to DeFi and focus on user experience. Martinelli told us “Balancer protocol is transitioning from a product phase to a protocol phase. Its long-term success will be the success of what’s built on top of it.”
Crypto has reached a state of mass adoption, and DeFi is well on its way to the same. As the existing protocols grow and get better, this arena gives investors a safe alternative to investing, often with opportunities that are unavailable in the traditional financial markets.