What is Balancer?
Decentralized finance (DeFi), a general term that includes products such as decentralized exchanges, automated market makers, and non-custodial lending protocols, started to gain significant traction in 2020. As of May 2021, the overall market cap of this growing community is over $155 billion.
The Balancer platform is one such DeFi protocol that operates as a decentralized exchange and automated market maker for crypto assets. A little over one year after its launch in March 2020, Balancer has a total value locked-in (TVL, analogous to Assets Under Administration) of $3.5B and its governance token, BAL, has a market cap in excess of $500 million [May 2021.]
A market maker is a trading entity that buys and sells assets within a public market to create liquidity. Balancer offers a couple different products, positioning its Invest product as a “set-and-forget protocol for investors,” essentially a self-balancing weighted portfolio. Users deposit crypto assets and Balancer algorithmically manages those assets by conducting trades behind the scenes and rebalancing the user’s portfolio. Investors — users who deposit assets into liquidity pools — receive incentives in BAL, Balancer’s governance token, so that they may participate more actively in Balancer’s development and vote on proposals. Anyone with two or more ERC-20 tokens available to deposit can be a liquidity provider on Balancer.
Balancer’s Trade product is a decentralized exchange, enabling user-controlled custody of assets and instant crypto trading. Users can also opt to have a portion of their trade gas fees reimbursed in BAL.
Balancer is a permissionless and non-custodial platform. Once a contract is on the blockchain, there is no way for Balancer Labs (the team behind Balancer) to change it. The platform doesn’t control the funds, the investors do.
What is BAL?
BAL is similar to other ERC-20 tokens created and minted for the purpose of distributing a protocol’s governance more broadly. Balancer Labs is the research team behind the Balancer platform, but in the spirit of decentralization and community, the team did not want to retain full control over the project. Shortly after the launch of the platform, the team created BAL, reserving 25% of the tokens for the core developers and advisors, allocating another 10% to ecosystem funds, and the rest are released to platform’s liquidity providers at a programmed rate.
As stated in its documentation, BAL is not an investment vehicle; rather, it grants voting power to people who interact with the protocol and who want a seat at the governance table. Notably, however, the popularity of the Balancer platform has created market demand for BAL outside of just its voting functionality.
How is Balancer different from Bitcoin?
Balancer’s purpose is completely different than Bitcoin, which is a peer-to-peer payments network, intended for transactions between buyers and sellers.
In contrast, Balancer is a network for decentralized trading and generating liquidity. While BAL can be used to buy things, similar to most cryptocurrencies, this is dependent on vendor approval and is not the primary use case for the token. Instead, it is meant as a reward for offering liquidity to asset pools.
Another difference: Balancer is built on the Ethereum blockchain and BAL is a minted ERC-20 token. Bitcoin runs on its own, separate blockchain, is mined, and predates Ethereum by about six years.
Bitcoin, which as of May 2021 has a market cap of over $1.1 trillion, is also far larger than Balancer. Bitcoin’s dominance varies, but it generally represents around 60% of all value in the cryptocurrency economy. Balancer is comparatively tiny, despite having its own market cap in excess of $500 million [May 2021.]
Bitcoin is a different investment to Balancer. BAL’s value is linked indirectly to the success of the cryptocurrency market as a whole, as it needs a supply of desirable coins to be useful. Without this supply, there would be no trading and hence no need for Balancer. While Bitcoin is often taken as an indicator for the general health of the cryptocurrency space, it dwarfs all other projects in size and stands alone in terms of success, as it is totally independent of other cryptocurrencies.
Before trading any crypto assets it is important to understand the risks. This overview is a starting point for you to perform your own research prior to investing in a crypto asset. First and foremost:
No Canadian securities regulatory authority has expressed an opinion about Balancer, including an opinion that BAL is not itself a security and/or derivative.
Wealthsimple has performed a legal assessment of BAL prior to making it available on Wealthsimple Crypto and has concluded that BAL is not and is unlikely to be deemed a security or derivative. However, there is a risk that this conclusion could change in the future and the impact of this on an asset’s value is outlined in our Product Disclosure.
We evaluated Balancer based on publicly available information, including (but not limited to):
- The creation, governance, usage and design of Balancer, including the source code, security and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that first created Balancer;
- The supply, demand, maturity, utility and liquidity of Balancer;
- Material technical risks associated with Balancer, including any code defects, security breaches and other threats concerning Balancer and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them; and
- Legal and regulatory risks associated with Balancer, including any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of BAL.
Like all other crypto assets, there are some general risks to investing in BAL. These include short history risk, volatility risk, liquidity risk, demand risk, forking risk, cryptography risk, regulatory risk, concentration risk, electronic trading risk and cyber security risk. Each of these risks are described in more detail in our in-app Product Disclosure. In addition to these general risks, we note that as with any DeFi protocol, Balancer presents a slightly elevated short history risk relative to more established cryptocurrencies like Bitcoin. BAL also presents some concentration risk with a significant majority of BAL holders considered “large holders” which is defined as an address holding greater than 1% of circulating supply. As more BAL is distributed and rewarded to Balancer participants, concentration will decrease. This is not uncommon with early stage governance tokens. Further, the Balancer community is not under any legal or regulatory obligation to disclose material information to the public regarding its activities. Holders of BAL have no recourse to Balancer or Wealthsimple if BAL declines in value for any reason.
We emphasize that this Crypto Asset Statement is not exhaustive of all risks associated with trading BAL. Investors should perform their own assessment to determine the appropriate level of risk for their personal circumstances.
WDA is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Wealthsimple Digital Assets Inc. dated June 18, 2021. Please be aware that the statutory rights of action for damages and the right of rescission in the securities legislation of each province and territory of Canada would not apply to a misrepresentation in this Statement.
Last updated: July 26, 2021