TL;DR

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.
Balancer should be dead simple to integrate with/ build on: we need better docs/templates/tutorials and the ecosystem fund should be deployed for this.
Useful liquidity – which facilitates trading volume – is necessary to keep Balancer relevant for aggregators/wallets/apps.
Liquidity mining should incentivize useful liquidity but also be used for joint incentives/ partnerships/ experimentation.

When I created the mathematical framework 34 that powers Balancer V1 in early 2018, my vision was for Balancer to be a flexible and permissionless asset management tool that allows traders to directly tap into the protocol’s liquidity. In other words, anyone could turn their own portfolio into an index fund: except the individual contributing capital would earn fees instead of paying a fund manager, as happens in traditional finance.

Since then, creative forks of Balancer V1 taught us how much more could be achieved by allowing customized pool logic as opposed to only index-fund like pools. Balancer could become much more than a single Automated Market Maker (AMM), it could be the building block for several other AMM designs, created by independent teams, focusing on different use cases.

By aggregating the liquidity of various pools in the same single vault, projects using Balancer benefit from the liquidity and trading volume of one another, creating what I believe can be a very strong network effect.

To summarize, I see Balancer currently transitioning from a product phase – where a proof of concept was demonstrated – to a protocol phase – where scaling happens through strong network effects.

Product Phase - Balancer V1

Balancer V1 saw very strong traction and established itself as one of the leading AMMs. It enabled interesting products like:

Multi-token index funds
80/20 pools that allow more exposure to one asset but still facilitate trading volume. A good example is the 80/20 AAVE/WETH pool used in AAVE’s safety module
LBPs (Liquidity Bootstrapping Pools 12) that powered the token generation events of dozens of high caliber projects like PERP, Radicle, HydraDX and Illuvium.
Fair launch distributions like YFI

During 2020, it became clear that many other interesting types of AMMs were possible but not supported by Balancer V1. This was addressed by our innovative Balancer V2 architecture 8.

Protocol Phase - Balancer V2

With feedback from over 10 different projects that were building on Balancer V1 or their own forks of it (Balancer Labs is proud to have always deployed open source code), we realized that the single vault, flexible pool architecture was needed in our industry. Even though Balancer V2 just launched in May of this year, some very interesting projects are already building on it:

PrimeDAO 10 and Copper 8 developing token launch platforms using LBPs
PowerPool 12 building meta-governance and smart indices
Indexed Finance 11 developing passively-managed crypto index funds
Element Finance 14 enabling fixed-rate yield through the exchange of Principal tokens and Yield tokens using the YieldSpace AMM design
Gyroscope Finance 17 creating a new all-weather stablecoin with a primary-market AMM

It’s very clear to me that no single product or project can beat a thriving ecosystem of diverse teams focusing on different problems, addressing different markets and creating their own business models.

Balancer’s long term success depends entirely on the success of the protocols and products built on top of it.

This realization has some practical implications that I would like to discuss below.

Balancer Labs

As Balancer becomes more and more decentralized, Balancer Labs’ role is to be one of many active participants in the Balancer ecosystem. Our main goal will be to make sure that Balancer V2 is easy to use and extremely well documented 9 through tutorials, screencasts and templates. It should be straightforward for any team to fork a pool template and add their own logic and specificities. Balancer Labs will be actively working on this, but the contribution from community members will be essential – and generously compensated through grants 11.

Balancer will only be attractive as an AMM platform if it is actively used as a source of liquidity by retail traders, aggregators, wallets, arbitrage bots and other such players. Making Balancer V2 easy to use also means that these players should have no trouble using V2’s liquidity to its fullest potential. As the number of different pool types grows, our Smart Order Router (SOR) 7 becomes even more essential for Balancer protocol. Balancer Labs is committed to leading SOR development, also with the help of the community.

Liquidity mining

Very healthy forum discussions on Balancer’s primary objective have taken place, mainly questioning how liquidity mining should be distributed – e.g. by bakamoto 12. The main dichotomy is whether the protocol should focus on being a useful source of liquidity and facilitating significant trading volume or if it should focus on maximizing liquidity provider fees.

In my personal view, at this stage, in order for Balancer to gain more significance and be top of mind for other teams to integrate with, our main focus should be in 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.

Staying relevant in practice means creating innovative solutions to avoiding liquidity fragmentation on Ethereum mainnet. This includes new pool primitives that we are currently working on and are excited to announce in more detail in the near future.

This doesn’t mean that experiments cannot be done with multi-token and high-fee pools. Polygon is an especially suitable platform for this as its extremely low gas price makes fragmentation of liquidity a feature, not a problem as on Ethereum mainnet.

Partnerships, Community and Ecosystem Fund

Balancer Labs is very active in business development, doing its best to find and engage other projects that we feel would benefit from using Balancer. As our protocol becomes more decentralized, so is the process of deploying the Ecosystem Fund. A group of community members have stepped forward to propose the creation of a grants committee 11 that would manage this process. I support the spirit of that proposal and hope we as a community can agree on its final form and pass it soon.

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 (BAL tokens from the ecosystem fund). The time to deploy the ecosystem fund is now, as a Cambrian explosion of cool ideas and talented teams look for suitable base-layers that will enable them to solve the next challenges in DeFi.

What’s next?

If you are excited about our mission of becoming the leading platform for programmable liquidity, please get involved in our discord 18 and check our regular community updates here on the forum. We also have monthly community and tech update calls. I would love to hear more on how you, an active community member, could help Balancer achieve this vision.