Balancer Shakes Off Rivals' Shadow With Novel Strategy
Aura Finance Casts Spotlight on Exchange Amid LSD Rally
By: Owen FernauDive
In an industry teeming with drama, Balancer has kept its cool.
The decentralized exchange’s community has been content to let Uniswap, Curve, and the volatile SushiSwap grab the headlines. There have been times when Balancer seemed to disappear from the DeFi conversation altogether.
In the last week that’s started to change as Balancer’s unorthodox approach to the DEX model yields surprising results.
While Balancer’s TVL has remained steady at $1.1B on Ethereum mainnet, the amount of assets in its Polygon deployment has jumped nearly 55% to $139.5M year-to-date, according to a Dune Analytics dashboard. Meantime, BAL, its governance token, is up 4.5% in February compared to a 0.2% uptick for Uniswap.
Casting a Glow
So what’s going on? For starters, Aura Finance, a yield-generating protocol integrated with Balancer, is casting a glow on the quiet decentralized exchange (DEX). Deposits in Aura’s smart contracts have jumped 23% during the last 30 days, and the protocol now has $540M in TVL, vaulting it into the top 20 DeFi projects.
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Aura, a nine-month-old protocol built to maximize returns for users in the Balancer ecosystem, is also poised to pick up a $66M deposit from a flagship project of the short-lived “DeFi 2.0” movement — OlympusDAO. It pioneered a mechanic called “bonding” to acquire liquidity for its own OHM tokens.
Aura’s performance demonstrates the strength of a move made by Balancer almost a year ago to switch up its token model. Last March, the DEX launched a new feature enabling users to lock up a liquidity token representing 80% BAL and 20% ETH, in exchange for a coin called veBAL.
‘Right now I think it’s LSD season and they really positioned themselves well to be at the forefront of it.’
In the meantime, Balancer is flexing in the red hot liquid staking derivatives market: with $69.5M, Balancer has the deepest liquidity of any DEX for rETH, the third largest staking derivative of Ethereum, according to DeFi Llama.
And with $250M, Balancer also has the second deepest pool for stETH, which is by far the largest LSD with over 75% market share, according to a Dune Analytics query.
“Right now I think it’s LSD season and they really positioned themselves well to be at the forefront of it,” 0xSami, the pseudonymous founder of Redacted, the project which developed Hidden Hand and is involved in DeFi’s “real yield” space, told The Defiant.
The story of Balancer shows how product design can attract DeFi investors searching for new sources of revenue.
The veBAL token, for instance, gives users three capabilities — boosted yield on their liquidity positions on Balancer, a share of the fees charged to traders, and a vote on which liquidity pools receive new BAL.
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Balancer’s liquidity pools also offer certain customization options that Curve’s and other DEXs don’t. These offerings include Boosted Pools, which deposits liquidity providers’ unused tokens in yield-accruing protocols like Aave, the lending platform. Balancer also offers Weighted Pools, which allow for liquidity configurations outside of the normal 50-50 for assets on DEXs like Uniswap.
“What makes Balancer Pools unique from those of other protocols is their limitless flexibility,” says a primer produced by Balancer Labs, the key company behind the protocol. “Balancer Pools with high token counts are similar to traditional index funds, allowing users to have broad exposure to the crypto market.”
In true DeFi fashion, Balance’s ecosystem has continued to attract integrations beyond Aura — Hidden Hand, a marketplace which enables protocols to offer token rewards, casually referred to as “bribes,” to users who choose to vote in a given way.
In the case of Balancer, protocols use Hidden Hand to incentivize users to vote to direct emissions of the DEX’s BAL tokens. Both Aura and Balancer take bribes from protocols which wish to incentivize holders of both vlAURA and veBAL, to vote to direct BAL rewards to certain pools.
And here is where Balancer may have truly found its edge — the LSD space, crypto subsector involving tokens which represent staked assets, has been surging this year as staking becomes a vibrant new business in DeFi.
Balancer has been riding the wave. Some of the top vote accruing pools for both the DEX and Aura are for pools which pair an LSD with its vanilla ETH counterpart.
Indeed, in Hidden Hand’s current round, the rETH-ETH pool has accrued the second most incentives to vlAURA holders to get them to direct BAL rewards towards the pool. These incentives have come from Rocket Pool, the project behind rETH, which have been incentivizing vlAURA holders with its RPL tokens.
Again, it’s complicated, but the result has been deep liquidity and also increasing volume levels for the rETH-ETH pool on Balancer. Aura reported a 600% increase in rolling 30-day volume for the pool since August on Jan. 24. TVL for the pool has also grown 407% in that time frame, thanks to Rocket Pool’s incentives.
The rolling 30-day volume levels for Balancer’s rETH-ETH pool have increased 600% since August. Source: Aura
So how did Balancer get here to the forefront of LSDs, potentially DeFi’s hottest subsector?
In 2018, the project was incubated by Block Science, an engineering and research firm. Balancer Labs, co-founded by entrepreneurs Fernando Martinelli and Mike McDonald, raised $3M in a seed round in early 2020.
By the time it launched its V2 in April 2021, the protocol boasted $2.6B in TVL, and during the bull market the market value of its governance token, BAL, reached $780M.
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One little known development was a plan called Balancer Improvement Proposal 19 (BIP-19), which passed in 2022, 0xSami said.
Solarcurve, the pseudonymous author of BIP-19, told The Defiant that the proposal made a crucial push to use the fees earned on pools to bribe those pools to attract deeper liquidity in future. “This allows emissions to naturally go towards pools generating strong revenue,” Solarcurve said.
The pseudonymous Balancer contributor added that the DEX was primed to become the largest exchange on Polygon in terms of TVL.
BIP-19 didn’t entirely solve the problem of BAL emissions being voted towards pools which ultimately weren’t helpful to Balancer — the protocol finally fought off a large veBAL holder who was directing BAL rewards to non-useful pools (and reaping the rewards as a liquidity provider), in December.
With LSDs picking up, and Balancer’s ecosystem looking poised to compete to be the de facto place to trade and provide liquidity on those tokens, the DEX may finally be primed for the spotlight.
Clarification: After DeFi Llama’s team tweeted its TVL figure for Balancer was incorrect, the sentence was replaced by one reporting data from Dune Analytics.