Epicenter - Learn about Crypto, Blockchain, Ethereum, Bitcoin and Distributed Technologies - Fernando Martinelli: Balancer – The Automated Market Maker Protocol for Programmable Liquidity

Episode Date: July 28, 2020

Balancer is a generalized automated market maker (AMM) protocol built on Ethereum. It allows anyone to create or add liquidity to customizable pools and earn trading fees. On one side there are liquidity providers (LPs) that generally seek to balance their holdings, and they get rewarded with trading fees. On the other side, traders that are looking for the best rate possible.One way to look at Balancer is as a generalization of Uniswap, however Balancer pools aren't restricted to the same 50/50 split between 2 tokens. A Balancer pool can support up to 8 tokens with any weights. It supports smart order routing which ensures trades get sent to the pools which provide the best rate possible. They can be seen as self balancing index funds which pay you for contributing liquidity to the platform. Instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders, who continuously rebalance your portfolio by following arbitrage opportunities.The inner workings are quite complex but CEO & Co-founder of Balancer, Fernando Martinelli, breaks down the token economics and governance of the protocol for us.Topics covered in this episode:Fernando’s background and how he got into the spaceBalancer's connection to MakerAn introduction to liquidity mining and some of the problems with thisThe connection to the Uniswap formulaWhat Balancer is and how the protocol worksHow does this work as a Portfolio Management tool and how dynamic are the feesHow smart pools wok - The network of pools and the offchain set upHow the weighting system works on BalancerThe options for users - keeping it simple and the data that is available in your Balancer accountGovernance tokensHow the BAL token is designed and how it worksHow finance for the protocol is raisedThe future plan of dissolving BalancerHow they plan to attract volumeWhat’s coming up in Balancer V2Episode links: Balancer WebsiteBalancer White PaperBalancer DiscordBalancer BlogBalancer TwitterFernando TwitterThis episode is hosted by Sunny Aggarwal & Meher Roy. Show notes and listening options: epicenter.tv/350

This is Epicenter, episode 350 with guest Fernando Martinelli. Hi, I'm Sebastik with you and you're listening to Epicenter. The podcast where we interview crypto founders, builders, and thought leaders. On this show, we dive deep to learn how things work at a technical level and we fly high to understand visionary concepts and long-term trends. If you like Epicenter, the best way to support us is to leave a review on Apple podcast. If you're on a Mac or iOS device, the easiest way to do that is to go to epicenter. dot rocks slash Apple. Today our guest is Fernando Martinelli.

He's the co-founder and CEO of Balancer Labs. Balancer is a generalized automated market maker protocol or AMM. It allows anyone to place liquidity into a pool and to put it to use. So on one side, we have liquidity providers who generally seek to balance their holdings, and they can do that by placing it in an AMM protocol like Balancer, and they'll get rewarded with trading fees. And on the other side, we have traders who are just looking for the best. rate possible. One way to look at Balancer is as a generalization of Uniswap. However, Balancer

pools aren't restricted to the same 2020 split between two tokens. A balancer pool can support up to eight tokens with any distribution. For example, one could create a pool with 70% wrapped ETH, 20% die, and 10% link. And Balancer uses smart order routing, which ensures trades get sent to the pools which provide the best rate possible. So essentially, balancer pools can be seen as a sort of self-balancing index fund, which pays you for contributing liquidity to the platform. So the inner workings of balance are quite complex. So thankfully, we have Mayer and Sunny on this one to break things down and help us get a better understanding of how the protocol works, and also the token economics, which allow it to function and the governance of the

protocol enabled by BAL tokens. This week, the interview debrief is free for all subscribers and for everyone to hear. And Sunny and Mayer go on for an extra 15 minutes, and they talk about token economics and the business model of Balancer. If you like the interview debrief, you'll want to check out Epicenter Premium to get these every week.

As a premium subscriber, you'll get access to a private RSS feed where you can hear the debrief after every episode. You'll also get enhanced features like episode transcripts and interview chapters that allow you to easily skip to specific sections of the interview. You'll also get access to roundtable discussions and bonus content.

we put out from time to time. And you can sign up for Episenter Premium at premium. At premium.competre.com.com. And with that, here's our interview with Fernando Martinelli. So today we have on with us Fernando Martinelli, who is the CEO of Balancer Labs, where they are building the Balancer Protocol. It's great to have you on, Fernando. Great to be here. Thanks for inviting me, guys. Yeah, so me and Meir have been like, you know, following the balancer work for a long time. You know, I think Mejia was very interested in. of like multi-asset pools. I've also been really interested for a while in just like, you know, more advanced

parameterization of uniswap or AMMs because like I have this like giant blog post I wrote like a couple months ago where I'm like, oh, I want to parameterize everything in AMMs. And then someone's like, oh, you should go check out what balancer is doing. And it's like, oh, wow, this is really cool. Yeah, happy to finally like, you know, be able to chat with you about this stuff. So can you tell us a little bit about your background and how you got into crypto in the first place. What were you working on before Balancer, if anything? So I'm a mechatronics engineer and I did a master's in robotics and image processing.

I also did an MBA at the Sorbonne University in Paris, worked for a Bain company as a strategy consultant in Germany. I actually created a few startups already in the past. I started very young when I was 14. I created this cyber cafe that was very, very successful because it was the time where people were addicted to Counter Strike, and I was myself too. I figured I should create my own cyber cafe. I went to Europe, and after I worked for a company, I created this company that allows people to prepare for interviews called Prep Lounge, got back to Brazil, and created an energy drink company quite different. And how I got involved with crypto in the first place was late 2012. I got introduced to it by a friend. And at first

first, I just dismissed it completely. Like, this is a Ponzi scheme. You're only going to buy this thing, if you believe that others will buy it, and the value will grow just because, like, people are buying into it. And then the second time I looked at it, early 2013, it really struck me, like, how, like, revolutionary this is. And I kept kind of paying close attention. And when Ethereum came out, it really, like, kind of caught my attention because I think

that Bitcoin is very, is great for, like, a base money layer. but Ethereum has this flexibility that allows you to create the financial system instead of a coin, right? I was very excited with stable coins. That was something that I really believed we need to get mass adoption since then. I still do. And Ethereum allowed that, and that got me to be participating in the early days of the MakerDAO community. This is where I got to meet Roon and Nikolai and all the guys in early 2016. I collaborated a little bit with MakerDAO doing some research on the control mechanisms

for the target rate feedback mechanism that didn't get applied. And now there's like reflexor that's actually reviving all those control ideas with Amin and Stefan. So yeah, that is kind of an overview of how I got to hear. And so a lot of the early balancer team is from like the Maker community, right? to Nikolai and like Mike McDonald as well. And was there anything in particular? Like there was a problem that you guys faced in like designing Maker and you're like,

okay, I need to go build this Balancer is going to be the solution to some problem we were facing there? It wasn't a problem we were trying to solve for Maker. It was, so Balancer started as a research project at Block Science, which is an engineering research and development analytics firm. And that was kind of me alone collaborating with them. And yeah, the reason why balancers started in the first place was like this idea of how can I keep a portfolio stable in terms of percentage of value distributed. Like you want to be positioning, trading and you don't want to have like to actively go and buy and sell tokens just because one of them went up by a lot.

So you want to have this kind of peace of mind of being passively investing in a basket and having it being automatically. rebalance for you. That was the beginning of everything. And yeah, we spent off of block science and created Balancer as its own company. And I showed this to Nikolai. He was extremely excited because he had this problem. I had the problem myself too. Like, how can I put my tokens, provide liquidity with them if back then only there was only uniswap and you can just like put 50-15 Nicolai as being one of the MakerDAO founders. He has a lot more in MKR. At least, I suppose, then Heath, so it would be great for him to have an 80-20 pool, right, with MKR and Heath.

And he really loved the idea. He then kind of joined as our chief architect and tech advisor, wrote a lot of the code, and then Mike McDonald joined as a CTO and co-founder as well. And yeah, this is kind of how we got to here. So if the original goal was to figure out how to, like, do passive portfolio management, something more similar to like set protocol, I would say. then what point did it transition to then becoming like also liquidity providing? It was a consequence.

Like when you want that to happen, then you need someone to do the trading for you, right? So the idea is that it's a two-sided market where you have like the right prices in place for people to be incentivized, rational players to be incentivized to be doing the trades you want. So if your pool needs to sell A for B, you want to let people be marginally incentivized to buy B for A or yeah do the opposite trade. It then creates this massive amount of liquidity where like if everyone's using this common protocol which is balancer, they're all like creating pools and adding tokens to them. That creates this massive liquidity that makes it very easy and gives great conditions for

people to train. I'm really curious about the generalization of uniswap, right? So you have uniswap, which is this constant product market maker in which there are two assets, X and Y and it's a pool which is 50-50 and then in some ways Balancer extends that formula to it introduces more terms and it introduces the exponents in these terms and it's a generalization of uniswap who had the brainwave of generalizing uniswap like that and how did that idea come about? It was me so I came up with that formula back in early 2018 and since then it was a long

like process of modeling, simulating things, and lots of things. That formula, that aha moment came while I was sleeping. I had like tried dozens and dozens of things and, yeah, written a hundred maybe pages of mathematical scripts. Because one thing is to get that simple and kind of small or very simple formula. The other thing is to prove that that formula, like if you take partial derivatives of two tokens and you prove that your pool is going to always have the same. value in each of the token. So it seems very simple, but it was a lot of time that I spent, yeah, working on that. I also did, during my undergraduate studies, I did advanced mathematics at the university. So that helped quite a bit. Yeah, it was pretty much myself.

Maybe before we dive deeper into the math, or could you maybe give a broad overview of what is balancer and what does the protocol do? Balancer is an AMM protocol. for programmable liquidity. And AMM there stands for automated market making. It's a complicated term, but it's nothing. But the protocol trades automatically. That means that balancer allows for the creation of flexible liquidity pools that are continuously self-rebalanced.

So the protocol makes sure that those pools are rebalanced. And that's what we just spoke about. The nice thing about those pools, and if you look at Uniswap, you see that it also does that. If you go to contracts that Uniswap has, you're going to see that the ETH value and the token value. So if you're talking about Unoswap V1, you can see the ETH value and token value. You're going to see that those values are almost the same. Uniswap always keeps those pools at 50-50 percentage distribution of value.

Now, Balancer allows you to do that with many tokens, not only two, and not only like the same weight. So you can have 20% token A, 20% token value. be and 60% token C. You can have up to eight tokens. And you can also choose the trading fee that you want your pool to have. And that's fixed also for Uniswap at 0.3. So you can think of a bouncer pool as an index fund where instead of the LPs paying a fee for the administrators to manage the fund and sell the tokens that go up, which is what happens in conventional finance, it actually pays the LPs for providing liquidity to those funds. So it kind of inverts that idea of I'm paying for an index fund manager to take care of my funds and rebalance them for me. It's actually I'm getting

paid for letting people use my liquidity in that index fund to trade. So yeah, maybe kind of finalizing the answer, you ask about who are users, what's in it for them. There's two types of users. It's a two-sided market. On the one hand, you have the liquidity providers who are looking to both balance their holding, so they don't want to be over-exposed to one of the tokens that they hold. So they want to be selling those tokens as those tokens go up. And the other use case is you're making trading fees, right? As people sell by, sell by, you're charging a small fee out of each of those trades. So you're accumulating more and more funds. So it's a way in which you can generate some interest or some trading fee revenue. The other side is you have traders. And they

want to trade A for B. They don't care where that's coming from. They just want to have the best rates or conditions possible. And Balancer can use tap on the liquidity of all DuPools to offer someone a trade. So one way to think of Balancer is that Balancer takes two different parts of the financial supply chain, or two different parts in the traditional financial supply chain, and it kind of merges them into one. So on the one, so on the one's, side, you have the asset management supply chain, which is me shipping some dollars into fidelity and then managing the index fund for them for me. And this fidelity has, you know, like trillions of dollars of assets on its balance sheet. And then on the other side,

you have the market makers which are operating on the different exchanges, the New York Stock Exchange, all of these exchanges. And these market makers are people that have the assets and are always willing to quote prices on the assets. So they have been. US dollar and British pounds and they are willing to always quote an exchange rate between them. The nature of a market maker, traditional market maker is that they need access to assets so that they can make the market. And the nature of an asset manager is that they have lots of assets which have been sourced from all of the people that own the index token.

And normally, you know, like these two are quite siloed. These two functions of finance are done by different entities. One of these entities has asset and the other needs assets, but the twain never meet in traditional finance. But Balancer is almost the system where it's a smart contract where both these parts of the supply chain exist inside one smart contract. So you have users that want an index supplying assets and those assets being used to make a market and the market maker is the smart contract itself. So it's like it's compressing down the entire financial supply chain into set of smart contracts and allowing for a new kind of efficiency to emerge because of that compression. I couldn't have done a better job at kind of doing that analogy than you did.

That was extremely good. And I totally agree with that. The idea is that balancer using Ethereum, which is an amazing protocol and an amazing revolution for society. It just like spreads the fees that are now going to fidelity to NASDAQ, NYSC, to all those regulated entities that have to spend a lot of money being regulated and paying lots of salaries. This is why you have to pay an index fund manager for them to manage your funds for you. The beauty of Ethereum and decentralized finance is that you don't need anyone for that because you have the smart contracts controlling that and it's totally trustless and permissionless. So, yeah, we're just combining those two sides of the market and, yeah, spreading the fees across them. So no one is getting in the middle anymore.

And this is not only cheaper for everyone. It's more efficient and faster and has a lot of advantages. So one of the questions I have, though, here is I understand why it does well as a trading venue. But when you say it acts as a fund, like portfolio management, you know, when you do portfolio management, you usually want to rebalance occasionally, right? So in your portfolio, you have like 80% bonds, 20% stocks, and then suddenly the stocks 2x or 3x. And now you have way more stocks. And then at some point, you like, rebalance your, you know, you sell some stocks to equal out.

But the problem is, you know, I feel like for the portfolio management, the profit works because it happens. at like sort of longer intervals where, you know, you let the stocks rise for a week and then you rebalance. But I feel like the problem with doing it on balancer is the rebalancing is almost, it's like it's too over-eager where it rebalances too quickly. It's a continuous rebalancing. And so you're rebalancing before you even get to realize the profits of the stocks rising. So for that reason, is it really act as a good portfolio management tool in that case? That's a great question, Sunny. So actually, there is a way to simulate exactly what you're saying. Like, wait for there to be some profit for one of the tokens to go up by a given amount before you start

selling that. And I wrote an article on that, which is how to use balancer pools with high fees to simulate swing trading. So when you have a high fee, let's say 10%, your pool, is only going to sell or it's only going to be profitable. So let's say Ethereum is $200. Your pool with a 10% fee is selling at 220 and buying at around 180, right? So what happens is the price is stuck until someone trades. And if the external market price goes from 200 all the way to 221, that's when someone's going to buy from you. So you're going to be selling at 220. and then if the price goes down, whenever it's between that in that bandwidth,

like between 180 and 220, you're not selling nor buying because it makes no sense for external actors, to pay more or less than the current market price. So if it falls down to 180, then actually you start buying ETH. So this acts exactly as you say. So the fact that you can customize the fees

allows you to choose like what strategy you want. So if you want to be rebalancing very often, that would be a zero fee, or if you want to rebalance, like, very sporadically when prices have huge variations, that's a higher fee. So you can't control that with the fee, which is pretty cool, right? Yeah, that's really interesting. You never thought about that because we're used to 0.3% on Uniswop, which is fixed, right? So that's why people, I think, never thought about that. But that's actually pretty powerful and pretty cool, in my opinion. Is it possible to make these much more resilient where, like, you know, sometimes the fee, you know,

you want it to be higher for some reasons when maybe there's higher volatility or maybe you want to be lower when there's lower volatility or how dynamic are these fees? Or is it like, you know, you set a fee one time or it's like, okay, we're doing 10% for this pool and it's stuck there? Great question. I think in order for me to be able to answer that, I'd have to kind of explain a few things real quick. We have two types of balancer pools today in balancer v1, which are the private pools and the shared pools. So the first ones, the private pools, are owned by an address, and only that address can add liquidity to those pools. And because there's only liquidity from that address, that address the owner of the pool can do whatever they want. So they can do it exactly

what you're saying. They can start with a high fee, add more funds, and then change weights, add new tokens, remove tokens, and then decrease the fees. They can do whatever they want, because it's their pool. Now, we also have the equivalent to, to uniswop markets, which are the shared pools, which are immutable. So you cannot change anything. And that's necessary because other people can put money into that pool as well. So if you allow the creator of that pool to change and add a new token, they would be able to just add their token that they own 100% of the supply and drain the funds of everyone else. So that's why shared pools have to be immutable. The nice thing about Ballaster is that you can have a private

pool that's controlled and that's actually composability on Ethereum, it can be controlled by or owned by a smart contract, not by an address. So that smart contract is what we call, or that whole kind of structure is what we call smart pools. So smart pools are actually private pools at the base layer, like they're seen as private pools by the protocol, but the owner of those private pools are smart contracts that can be gateways for external liquidity. And one of the, you know, like the use cases that I think is the coolest, like one of the coolest ones is exactly what you said. Is like, imagine a surge pricing pool or search pricing fee pool. When there's a lot of demand for liquidity, think Black Thursday, everyone like is desperate to close their vaults because they're going to get liquidated.

They don't care if they're paying 0.3, 5, 1 or 2%. Right. They just need liquidity. So this is when that smart contract that controls and owns that pool says, okay, it's high volatility time. I'll just like crank up my fees and I'm going to make this pool more profitable. And then what that means is that it's like Uber when it's raining. Like no one wants to drive and everyone wants to take the cab. So what happens is the prices go up.

So you attract more drivers to the streets. And that's exactly what happens. By increasing the fee of that pool in times of high volatility, you attract more liquidity providers. And that in turn makes that pool better for traders because the slippage is going to be lower because the more liquidity you have, the lower the slippage. So you actually are matching both sides, supply and demand, which makes that smart pool a lot more efficient for both sides.

So I think that in the future we're going to see a lot more smart pools, and we're working a lot on that and other teams as well, as opposed to just shared pools that are innutable. We're going to see a lot more of those smart pools. The difficulty with a shared, like with a public pool is that a public pool is probably good for trading, but as a portfolio management solution, a public pool is not so good because once you set a particular set of assets

and certain percentages for that assets, that thing is kind of frozen forever and can't adapt to changing circumstances. So that's not an ideal portfolio for anybody. It is frozen, but you can withdraw your liquidity at any moment. So there's no lockup period of liquidity. So if you find that basket or like that, fees of that pool are not ideal, then you can just move, migrate your liquidity to the pool you like

more. And we've been seeing that a lot happening on Balancer lately. So pools that were big at the beginning, now people realize, okay, the fee here was not ideal. So let's move to a pool with a higher fee. So even though the pool is static, your liquidity is not. You can migrate your liquidity anytime. And we're also working with other teams and inside Balancer as well to create like those intense intelligent migrations or migrators, if we detect that there's a better pool for exactly or a similar distribution or basket that you already have, that tool with one click, you can just migrate your liquidity to a better pool that's more profitable or whatnot. But it does require active management then?

Yes, if you're talking about the shared pools, but not if you're talking about a smart pool, which is the surge pricing thing. So those smart pools can also change the weights, can also change the, yeah, add new tokens. And there's a very nice example that I like to give about a few actually. But RealT is this company that tokenizes real estate on Ethereum. They are building a smart pool that does exactly that. Like they are constantly adding new properties to Realty. So instead of like having everyone migrating to a new shared pool with an extra property,

what they do is they create that smart pool where they are the controllers of the assets they can add new properties they can remove owed properties and if they have more than eight properties so balancer pool is limited to eight tokens today in version one what they can do is they can replace a property by a pool of properties so now instead of having just eight properties you can have eight different cities each city is actually a pool that contains properties in that city so you have florida detroit and etc The nice thing about that is that your smart pool token, so actually also smart pools are tokenized, so you own a part of that smart pool, that token does not change. Even though all the properties are being updated and changing the weights, you can use that

smart pool, like the mother token, you can use it as a maker dial collateral because that token is canonical. It's not going to change. So that's really powerful. Of course, you have to trust the guys at RioT. If you're already trusting them to hold those properties on your behalf, like, tokenizing those, you're actually already trusting them anyways. So a smart pool, if they want to do, like, they would have to like implement their own

tokenization to distribute shares because, you know, the balancer protocol just sees it as a private address. So they have to sort of do their own sort of shares however they want and like deal with like how to, you know, when people add liquidity issuing shares and all of that. Smart pools will have that part. So the controller of that private pool issues shares, ERC20 shares, for people who provide liquidity to that controller. The controller then passes that liquidity down to the pool it controls.

But then the controller itself issues ERC20 shares for people who are providing liquidity. We're working in almost launching and auditing right now, a smart pool factory. It's like a template that anyone can create their own smart pool, and they can actually decide what rights that smart pool that are creating will have. I can choose to create a smart pole that can only change the swap fee. I can choose a smart pole that can add tokens, but not change the swap fee. So you have all those like levers you can change or switches you can turn on and off. And then you have that smart pool without having to deploy

any code at all. And all of those are ERC20 compatible. So the issue shares that can be used as an ERC20 anywhere on Ethereum. I can sort of see two types. of smart pools that or two broad categories. And it's like really a spectrum. But there's one which is more sort of governance focused smart pools, which are like, you know, you can imagine them basically being Dow's and similar to Maker almost, right? You use governance to make decisions. And then on the other side you have, you mentioned earlier, Reflexer Labs, right?

You know, more automated like using smart pools and smart contracts to make better, smarter algorithmic things that adjust the parameters. And there's obviously a spectrum in the middle. So which ones have more traction right now? And which ones do you personally see as going to be more popular going down the road? Right now we're not seeing a lot of smart pools out there. It's like really the early days. It's very nascent and incipient.

But the guys at Piedao did an amazing job. They've already come up with their own smart pool. They didn't wait for us, which was awesome. They have this Dow controlled smart pool where, where the Dow can decide, okay, let's change the weight of this token because now, like they have the BTC plus plus, the UST plus pies. So now UST plus, it has USDT or USC. USDC has some like trust issues.

So let's agree that we should decrease that weight. And then they vote. And then the Dow decides that the controller of that private pool, like a smart pool, has to change, reduce the weight of that stable coin that is having problems. So for now, that's pretty much the smart pulls we have around. In terms of what's more promising, that's a great question. So one thing that I think will be huge for Balser is going to be treasury management. So if you have a project or a company or whatever that has funds on chain,

you want to have like some sort of management where you don't want to be overexposed. So for example, an insurance protocol. They have different types of assets that they will need to use. in case there's some claims, someone gets hacked, they need to use that insurance fund. That insurance fund itself has to be risk managed. So if one of the assets goes up by a lot, you don't want to be holding 99% of all the insurance funds in that asset. So balancer is perfect for that.

It will be selling that token as it goes up. And if it goes down and then, it rebies it. So it's a great way to use a smart pool. Another thing that, another way I really like is the concept of liquidity bootstrap. pools. And that is an article we can maybe link in the show notes by Mike McDonald, our CTO. He talks about how a project that's starting and has a lot of tokens that they want to sell like an ICO. They can start with a smart pool that has 95% of that project token and 5% ETH or die. And then over the course of six months to a year, they will start flipping those

weights. So at the end of a year, you're actually going to end up with 95% die and 5% your project token. So slowly you allow people to poke that smart contract and update the weights according to that schedule of a year. And what you're doing is you're selling in a year, you're selling like 90% of your tokens. And along the way, you're letting people trade. You're making your token very liquid, which is one of the biggest problems for projects. They pay a lot of money for private companies to be market making on centralized exchanges. They pay for being listed on Binance. They pay for those market makers to make sure that there's some liquidity,

people can buy and sell. And now they can do all of that on balancer without paying anything. And actually, that may be a segue to the next topic, but they actually are getting bow tokens in return. So they're getting some tokens that will allow them to have a voice or to vote in the direction, the future direction of the protocol. So they only have, like, advantages, in my opinion. about this like i.eo or IDO initial decks offering, I guess you could call it.

So let's like take an example of the UMA token launch. So we just had UMA on the podcast last week. And so for them, what happened was they were trying to sell off relatively small percentage of their tokens, of their total supply, which is only about 2%. On Uniswop, they have to do like a 50-50 balance. It turns out they weren't able to put that much ETH in either. And it just, the problem was as people bought in, the price was just fluctuating way too wildly. Like it just, there wasn't enough liquidity to make it usable.

How do you fix this in Balancer? Is there somehow I can use the weighting system of Balancer to have done this better? So your project wants to sell your project tokens, let's say, in case of Uma. They didn't have a lot of ETH. So what they could have done on Balancer is they could have put, let's say, say 20% of the weight of that pool in ETH and 80% in UMA tokens. So the overall pool would have a lot more value in it, which would have made it more liquid. So the slippage for the same size of a trade would have gone down.

So it would be much better for traders. Now, the thing that I like most about LBPs, so liquidity bootstriving pools, that idea, is that what you could do is you start with a very high price to avoid this kind of bank run, like everyone's trying to be the first ones to buy because they know that the price is starting as like the seed price and everyone knows that ooma is very successful as a great project so everyone wants to be the first to buy and just to sell to dump on top of the late kind of laggards. So what you can do with balancer is you start with a very high price and then what you do is you start decreasing the weight of your project token and increasing the weight of of

if no one trades, the effect that that has is you're decreasing the price of your token. So let's say you start with 955, a very high price, and then no one buys and it starts decreasing the weight. At some point, the price will become interesting for someone. And then what you do is like you completely get rid of that hype or those kind of important people that just want to buy and resell. Because people know that if no one buys, the price will fall. So they will wait for the right month. moment for them to step in. And if anyone wants to buy before that, they can buy, but they know that the price is high and it will keep falling. If people don't just keep buying, keep buying, the price

will fall. That's so cool. It's basically like a combination of a Dutch auction with an automated market maker into like one. Exactly. That's so cool. Yeah. So it's a Dutch option because, yeah, anyone can wait until the price goes down. But it's an AMM because if along the way people start buying, the price will grow, right? We'll go. Yeah. So that's pretty cool. Going back to the topic of smart pools and the more algorithmic style ones, to me it seems one of the things that would be the most useful in a better, smarter, AMM, would be essentially how I see it is when you design a fee model, there's three parameters you can take into account, which is volume, slippage, and volatility. and currently Uniswap only takes into account the volume. It's 0.3% times volume.

The one that you'd really want to take into account, though, is volatility. If you want to be able to say that, like, hey, okay, as the thing is getting more volatile, automatically increase the fee. Can I do that on balance or is that easy? Like, how, you know, Uniswap v2, they started like sort of keeping this like historical records of prices and stuff. And, you know, how hard would it be to construct a volatility index on balancer that's consumable by a smart contract? That's a good question.

So I don't believe that we want to focus on that because that's quite a complex problem in and of itself, especially if you want to do that on chain, then it becomes even harder. You need an Oracle. You need some like some history of prices in the past. there are projects that are doing great work on that. For example, open. They're building on top of Balancer as well. They have some ideas around volatility and how you can get that information on-chain. Today, what you can do with Balancer is what I said.

You have a smart pool that has a controller that can just change the trading fee. And it gets like some external source of data. Could be off-chain, someone like really like a monkey watching the monitor. the transaction, which is increased fee, decrease fee. Or it can be like something more complex, totally on-chain, using opens information. So, yeah, now you do need some external source of information to use volatility. But the cool thing is that you can't, right? Balancer pools are flexible.

You can change the swap fee according to liquid to volatility. What data is available from Balancer that I can, like, query from my own smart contract? Could I, you know, for example, Thorchain, they are doing, you know, along with the volume, they also take into account the spread of a, you know, how what the, what the, what the, what the, what the, basically how much liquidity is in that pool right now. Is it easy to sort of like ping the balancer contract for that information so I can have my, my smart pool be, take that into account? Yeah, there, there's ways how you can control that. So what you could do is you have a trade function in the controller. So you say, like, now you cannot trade directly with my pool because my pool is kind of turned off. The controller can set public swap true or false.

And then what they can do is like it's false. So you cannot trade directly at the base layer, like protocol layer of balancer if you want. But if you want to trade, you can talk to me. And I will, in this atomic transaction, I'll let it be tradable. And I'll turn it on. Yeah. I'll turn it on. I'll set the fee according to the amount you want to trade.

I'll let you trade. And then I'll turn it off again. And then you get your trade with the fee that I want. So that's really cool. Yeah. So there's also a team that's working on that. Yeah. So essentially, like in balancer fees are like the assets you put in there,

they are customizable up to weight. The weights are customizable. How much portion each asset gets? The fees are customizable. And we also discuss that when you make the fees customizable, you also get behavior that the trading frequency can also drop. If you increase the fees, trading frequency can be dropped. So via fees, you get customizability of trading fees.

What's also customizable is the control of a balancer pool. So it can be an individual, it can be a firm, it can be a DAO, etc. what is customizable is switching on and off of a pool and what else well at what point is this too confusing for users you know one of the things that attracted people to uniswap was it's like you know

here's I have some eth and die I don't know what to do like I'm just going to put it in this pool forget it but now it's like you know what if there's like different smart pools who all are like you know for the similar pairs and they're like, now now there's so many decisions I have to make again and I have to like, look, okay, who, which smart pool is better?

At what point do we start to lose out on what made AMM so attractive in the first place? Awesome questions. I do think that we have, we're very like opinionated there. We want to be the base layer, the Lego, like the money Lego, the primitive that people use to build cool applications on top of. So if you want something simple, Sonny, because your users are used. used to uniswap and you just want to throw like two tokens there. You can just use balancer and create your own UI for balancer that does exactly that. Even better, like balancer has this native function that allows you to provide liquidity with only one token. So you, if you have a pool of eight tokens,

you can just invest in that pool using one of your tokens, one of the tokens in that pool. So you don't need to have all the tokens and like kind of add them all together. You can, but you don't need to. And if you want to do something more complex, like we saw lots of projects, interesting projects building on top of balancer at Hack Money. One of them is like my defypi. You can build so many things. You can go to Uma and you can like start this synthetic

and then you can put those synthetics into a balancer pool. You can change the fees and the weights. So it's the spectrum of complexity that's on the app layer and we restrain like ourselves or we, restrict ourselves to being a very good protocol that is flexible that allows people like to get creative on top of. So in some senses, you know, there's this Aragon project and the Aragon project came and said, we are building a framework for DAOs. Other people are going to come and build the actual DAOs. And our framework is so extensible and generalizable that we can conceivably

match a lot of the needs of users and balancers something like that except for these these pools you're building a framework that's extremely extensible and then other people will come and build the applications that go to the to the end users but flowing out of that kind of design is a natural question of how does so how does the base layer extract value in this in this economy of many people designing customized pools and are many other people contributing assets and so on. So that's going to become an interesting question when we talk about the business models around balancing. Yeah. So the answer to that is it really is up to the governance to decide when there will be, if there will be a prodigal level fee. That base layer is where all

the liquidity sits. And it's also like where traders tap onto for trade. So it doesn't matter if you have like a very smart pool that changes the swap fee when there's like more volatile times or if that pool is managing a treasury of a Dow. It really doesn't matter for a trader who wants to trade A for B. It doesn't matter where it comes from the balancer ecosystem. As long as it's in Balancer, it will be used to get the best trade possible. And at that point, the protocol can decide that the governors that hold BALT tokens, the Governors' tokens of the BALISO protocol, they can decide, okay, from now on, we believe that we are adding enough value to the ecosystem already. People are really using BALSER a lot, so we deserve, like, to get a small fraction of that. It's up to the governors,

to the token holders. And it's a tricky decision because, like, everything's open source, and anyone can clone and start a copycat. So if you charge too high of a fee, people can just fork it and use a copy without any fees. If you charge, yeah, if you charge no fees, then at the same time, people might not be so incentivized to be paying attention to everything, to be making form to decisions. So it's like in democracy, like you have to pay the governance of president. And, yeah, at some point, that could be the case where there is some fees.

they're going to bow token holders to kind of incentivize them to make the educated right decisions for the good of the protocol. Yeah. So I think maybe what's interesting here is to actually go into what the bad token is, unless Sunny has a different question. Well, what I wanted to say was like, so you guys pitched this as a governance token. And this whole concept of a governance token, you know, zero X started like, picking their token like years ago as oh the point of this token is a governance token would it be

fair to say that the like true value of governance tokens is in its potential ability to add fees eventually that extract like value or do you think that there is some larger external value to governance tokens outside of that as well that's a very good question philosophical one uh i think if you were like a rational actor, Sunny, the only point is like this kind of cash flow of future cash flows, right? So how much I can make with this token that I'm holding in the future? And there you have to factor in what's the percentage of chance that there will ever be a fee. And in all those calculations for a rational actor, will define how much the token is worth today. And if you're like, if you're like a philanthropist or you like Defy and you just want to be like part of the decision-making

process, you might just want to pay for a BALT token because you want to like give your say and have a voice into how things unfold in the future. So I think they're like, yeah, if you're thinking rationally, then it's the probability of there being a protocol level fee in the future. So yeah, yeah. So as my hero is saying, let's maybe talk about the BAL token itself. And so, you know, you guys have been very public in saying the goal is you want Balancer Labs as a company to disappear. Why is that the goal and how have you designed the BAL token to achieve that goal?

So that kind of is something that is in the DNA of the team that built Bancer. We are like the purists that, like it's more like the early days of the MakerDAO developers. we don't want to be like a centralized company that's controlling the protocol and getting fees. Yeah, we want this to be like really a community common good and we want this to be self-sustainable and not to depend on us. We're like doing the dev work right now, but we're seeing already a lot of people building tools on top of the balancer. You have pools.

Vision predictions at exchange. So many nice tools that people are building. And this is exactly the direction. we want to go to in the new future, say like four or five years. The idea is that it will be just like Ethereum or just like Linux. It's an open source software or platform that people are just incentivized to be building on top of and improving. That's kind of the idea.

We don't want to be centralizing any decisions or how this should evolve. How have you designed the token? What is the bad token and what does it do? I understand it, like, at some level balancer is an idea. It's this design of how to build pools. Then the another asset that you have is the open source solidity code, which is so general and extensible that you can build various kinds of pools with it. And then you have a token.

So how does the token exercise any influence over the code or the design? And what is the connection between these elements? Great question. So the answer there is that we knew that it's hard to start with an on-chain governance system, very complex, with lots of parameters that governance have to decide. It's just like not realistic to start that way. So what we did instead was let's start with something that has no admin keys, has no kill switches, has no upgradeability. That's balance of we one. You deploy a pool, that pool will live for as long as Ethereum lives.

That was like our objective. Let's be very conservative. And there's no way you can game the system or control it. There's no governance token for V1. Now, in the next versions, not sure if V2 already, but V3, V4 probably, we'll start getting the BOW token more intertwined in the code and getting more of unchain governance like spells, like you have with, acre dial, like you just propose this new kind of feature on chain and then you cast a spell

and people vote on it and if it's approved, then it automatically gets implemented at the code level, at the like on chain level. Now what we're doing is we're already using balancer tokens for people to signal to vote on chain, but by signing messages only like carbon voting. They're not sending transactions. So by doing that, we can iterate very fast how the governance and the decisions take place. For example, the BOW liquidity mining program, we're distributing tokens every week to people who provide liquidity on BALSER. We want to provide liquidity or give BOWD tokens for the liquidity providers that are providing the most useful liquidity. What is the most useful liquidity? That's a very subjective thing. And instead of like doing like comp did and saying,

well, we're just going to distribute like one comp token per block, half half to landers and borrowers, and that's it. Now, we decided to say, well, it could be more complex than that, and it is. Let's just like do everything off-chain, distribute, like decide how we're going to distribute that off-chain according to some rules that the community itself will iterate on and will improve on. And they do that by using their bow tokens and voting for changes, for new factors. And that has worked very well so far. It's really interesting to see

how the community has proposed new things and they got approved. And yeah, it's really great to see. To me, like the fundamental thing, fundamentally, the issue appears to be that you have pools and, yes, individual pools have utility to these traders

and to the portfolio holder, the credit providers, agree. But you have essentially, like design and open source code and that can be implemented wherever. It can be implemented in Cosmos SDK, substrate, Agorik, Solana, different people can do the same thing. There doesn't appear to be anything which is like a network of pools. Some way in which there are 100 pools, each having some assets together doing something

where each pool is getting more utility out of that network level coordination. If you had a network of pools of some kind, then the balancer token could have some claim-over value because it's orchestrating that network. But that seems to be absent from your system, doesn't it? No, it's not. It is there. It will be more so in future versions.

But an example of how this is already the case, Mojir, is when you have a trade, you can use our S-O-R. You can trade with individual pools, so you can just say, well, this is a nice pool. It has a lot of ETH and Maker, MKR. I'll just trade with that pool. But this is not the ideal move for a trader. The ideal thing they should do is to use our smart order router.

The smart order router looks at all the pools that are on Balancer, and he sees all the pools that have ETH and MKR, and then splits your order in a way that is optimal for you to get the most return possible. So whenever you're trading on balancer, you're not trading against a specific pool. You're trading against the protocol. And the protocol uses that network, as you said, 100 pools and chooses, okay, a thousand if I'll send 200, 200, 200, and 400.

And that way you get the most MQR back. And it's no different than what actually one inch is doing already. One inch is doing that network effect across different protocols, right? So it looks for liquidity on uniswap and balancer, on oasis. And it gets like the distribution that suits. that trade or that returns the most from from this trade. Yeah, I was just going to ask that why, what's the benefit of doing that? Isn't that going to be somewhat almost expensive to do on-chain?

And wouldn't like doing a off-chain aggregation of, so what would be the benefit of going through this versus letting one inch use their node to query like every balance to pull and figure out optimal routing? We don't do that. on chain. So apologies if that, that sound like that. No, so our SOR is a JavaScript package that you just execute client side. It asks for pull information from our subgraph and then runs like some SOR algorithm and then prepares already, okay, this is the trade that is going to be optimal. And then on chain, you just execute the trade. You just send like, I want to trade with that

pool that much, that put that much, and then you execute it. We do. We do. have, we're working right now on our on-chain SOL, because many protocols need that to happen on-chain. They just want to say, on-chain balancer, I want to sell 100Eth or die. Please help me. You cannot access JavaScript packages, right?

So we're finalizing our on-chain SOL as well, but what I told you about was off-chain. And yeah, so, sure, one inch can do that, can poke all the pools individually, but it can get very messy because we now have about a thousand pools. So what we do is like we make it transparent for them and give them already like a figure of what the balancer ecosystem can offer in terms of vast liquidity. And then they use that as if it was just like a single uniswap pool. They can

treat that much better. They cannot handle a thousand different exchanges, which would be if they had like a thousand different pools, each of them like treated like a uniswap pool. So we're kind of facilitating the interaction of aggregators or integrators with balancer with our own SOR. One thing I've always wondered is that these balancer pools, so each individual pool is at some level paying arbitrages to discover the exchange rate between assets. So when you think of something like ease and mkR, it could considerably be the case that 200 different pools are paying separately to discover that same price. Could that not be the value prop of the network of pools and balancer that somehow this

intelligence is, it allows the sharing of this intelligence in some way and it makes a network of pools more intelligent on chain. And that's the value prop that even if you want to build your own pool, go and join specifically the balancer network. the pricing intelligence is the best there. Totally. Absolutely. So what we'll see here is that we're not going to have 100 pools that are very similar because it's rationally wrong, right? You're not going to put your create pay $50 or $100 today to deploy a pool or you're

not going to put your money like your $1,000 in an 80, 20 maker, Heath pool in a pool that has another $1,000 if there is the same exact pool, with a million dollars, right? Because that one million dollar pool is going to be profitable for arborers to trade and generate fees with variations of price a lot smaller than the variations of price in a $1,000 pool, right? So you're going to see naturally the liquidity coalescing or revolving around some sweet spots. And the nice thing of balance is that we're not aiming to say what the sweet spots are.

We're not going to say 0.3% is the right fee. it's up to you. If you want to put 0.5%, if that is a profitable choice, what will happen is that people off-chain will just observe all the pools, will see that your pool was a good choice, and naturally liquidity will migrate to your pool. Does that make sense? To me, that doesn't make sense,

because to me, one of the value props was that, hey, I can build my own portfolio. Now, some person can come and say, in my portfolio, ETH is 10% and maker is 20%. And some maker maximalist will come and say, hey, in my portfolio, maker is going to be 80% and ETH 10%. And both are valuable and both get their pools

and the balancer protocol should be written in a way that both pools are viable. So I don't see the two views as being consistent where you want people flexibility over percentages. So those are different pools, whereas on the liquidity side, you're saying things within Ethan Maker should get consolidated into one pool. Isn't it the case that portfolio management actually requires there to be lots of pools with Ethan Maker and discovering prices independent? Yeah, what I tried to say is that for similar pools and exposures, then you're not going to see so much fragmentation. But definitely if there is an LP that wants to be 90% exposed to ETH and 10% to MKR,

it's not compatible to 90% MKR and 10% ETH, right? So there will have to be two different pools for those two different needs. But what I'm saying is that there's not going to be 1,000 pools. So 9010, 89, 11, 88, 12, because there is like some threshold where it makes sense to kind of of give up a little bit on your exact exposure that you wanted to being part of a very close exposure, but in a pool that is huge already, it's used very often and it's generating lots of trading fees, and it's very profitable. Does that make sense? So going back to, you mentioned a little bit ago about distribution of bowel,

and so one of the interesting things that you guys are doing is, you know, people who are providing liquidity on different balancer pools, you're sort of airdropping bow tokens to them. And this is sort of a, you know, it solves two problems of one, how do you distribute a token to users? I mean, okay, you give it to liquidity providers. And also you incentivize liquidity. But then, you know, with this whole defy craze with like liquidity mining and yield

farming and all this stuff that's been going on, you're actually like, you know, Like, you know, the first one we've had on who's like, you know, been part of this whole, you know, game, I guess. What's been like sort of the takeaways from this process? And I also remember reading that there was like, you know, some sort of like weird things where people could game the liquidity mining. And so there have to be like, what are the problems you ran into and what solutions are you guys working on? So, yeah, I absolutely think that this is a first and foremost. most a way to distribute ownership of your protocol to people who really care about it. And those are users.

Those are the liquidity providers who are making it possible for traders to trade. So that was the decision. Like how, again, getting back to the subjectivity of usefulness for liquidity. How do you say liquidity is useful? Well, usually how much people are trading with that pool. But that is very easily gamable. You can just wash trade. and that would be like a catastrophe very hard to come around.

So we decided to say, well, if you add liquidity to BALSR, then you get BALT tokens. And we knew that this dislike was prone or very likely going to be gained because our idea was to let the community step in and come up with cool suggestions to improve this process. So what we initially did is it's just like a percentage of total U.S.D value of the liquidity approach. provide proportionate to the full liquidity on balancer. And your token has to be listed on coin gecko. As long as there's like a price tag to your token, because if there is none, you cannot talk about USD liquidity that you're providing. Right.

So you have to have two tokens in a pool because you have to be able to trade two tokens that have a price tag on coin gecko. And then very quickly, we, yeah, the community, and we knew that already, but we wanted kind of the community to step in and can't come to the same conclusion. Community realized that if you have a pool that's 98-2, that pool is, even though there's like a lot of value locked in dollars, that pool doesn't facilitate a lot of trades. Because if you trade a little bit, that will already like change the price a lot. So you have a high slippage for uneven pools.

What the community came up with was, okay, let's introduce a ratio factor, which says that pools that have very uneven weights, they're going to get less bow for the same USD value locked. And that's just like one of the examples. And other examples are hard-packed tokens. So if you create a pool that has dye and a die, both are listed on coin gecko. And you can put like a lot of money there. You know, you have no risk of people like of impermanent loss. And then we can get back to that again. but there's no real risk of volatility there because you know those tokens are packed so if you have a pool like that with a 0.5% fee there's not going to be one single trade on that pool because people can just use the a V contract to to wrap and unwrap die to a die right yeah so we created this hard peg which says like you're going to be slashed by a lot if you just provide that not so useful liquidity and yeah and then so on so forth we we have a very complex kind of system to distribute liquidity today, which has evolved according to the demands of the community. Wait, so how does the slashing work? It's just like a governance-based slashing,

like, oh. Sorry, maybe slashing is the wrong word. You get penalized for providing liquidity that's hard, like hard-packed. So you actually don't get as much bow for the same USD as you would if you had ETH and Maker, you know, MKR and ETH. So the same $10 here for, $1,000.00. So the same $10 here for a die will get a lot less bow tokens than $10 for mkr and e if that makes sense and this is all sort of possible because the bow isn't being distributed by like a smart contract or something right it's just being distributing okay that was exactly that point like that that was really what differentiated us from compound like compound took a long time actually to to bake that into the smart contracts already and we believe that it's we're so much in the early days there's so much to

and to improve that we decided to keep that off-chain. Because anyways, like, if you look at compounds, governance, it's very concentrated. The team has a lot of a token. So they can still decide pretty much the outcome of the votes, right? So there is already like a social contract there that they will let the community decide. But still, you have to trust the founders that they're not going to vote. And it's the same for balancer, right? We, the vote, the team, advisors and investors in these early days, well, we haven't distributed

so many BAL tokens yet. So we could, even if it was on-chain, we could control the governance process if we broke this social contract that we have to not vote and let the community kind of build and vote with their token. So if we already, if the community is already trusting us to keep that social contract, why not just do things off-chain which is a lot more efficient and easy to work on it to iterate and to improve right so that was our thought process so that that makes a lot of sense right like especially with it feels like with a protocol like balancer there is a lot of there's so many tokens and there's quite a lot of emergent complexity around liquidity mining here right and maybe you want to be able to tweak the distribution process as things emerge.

Maybe it's more valuable to pay out the tokens to some particular token that's in short supply, for example. Or there could be a role for human subjectivity here. One question that does come to mind is that, you know, Balancer Labs has raised financing. And so is all the financing raised by selling tokens or are these equity financing rounds of a company separate from the. Yeah, so this is actually, we've been quite innovative, and I think we were one of the first S-SFG, so agreement for future, standard agreement for future governance.

What that means is that investors not only acquired equity, but also the pro rata share of governance tokens that that equity maps to. So what we did is Balance our Labs, the company that raised venture capital, capital with accomplice, placeholder, and other investors, it has the right to get 25 million tokens out of a possible cap in the future of 100 million tokens. So if you have 1%, if you invested 1% in the equity of Balancer Labs, you have 1% of the 25 million tokens. So the investors both got equity and tokens. And this is probably not going to be the case for our future. fundraising rounds because yeah we we kind of want to make want to make it more simple like simpler by having this future fundraising fund which will be used for uh yeah for selling tokens in in

uh new series yeah that's really interesting so what you're trying to do with this seafg format is you're trying to make your investors indifferent to where the value or accrual occurs so if the value accrues to the token, they have a claim on it. And if it accrues to the company, they have a claim on that. So you are essentially trying to make them indifferent so that it gives you flexibility. Yeah, though we have been very upfront and candid about the equity not being worth anything very likely in the future. Because since the beginning, we had this in mind that we want to make this product like a common good that is going to be owned by the BOW token holders and the company ideally will be dissolved and the equity is not going to mean anything at all.

So that's hopefully the outcome that we're going for. That's quite a radical decision. Do you find it hard to convince people to join your team and because your equity is going to be worthless. So why, how do you incentivize your employees then? That's a great. So this is not something that's going to happen overnight next year. So it's probably a long, like a longer process, like five years, maybe to 10 years. And what I, what I, and that also includes myself, not only our employees, right? So what I, what I think is that even though the company itself is going to be dissolved,

that doesn't mean that the team that's, now working for Balancer Labs won't be able to work further on Balancer, right? Because then we're going to have like we're going to find some other common good ways of financing like Gitcoin grants or yeah, whatever means we can find to finance the development on the platform. We'll probably be involved with that. Like Vitalik is not paid by the Ethereum Foundation at least as far as I know, but he's still involved, is still doing work. And there's many people who are working for Ethereum with other

kind of incentives in mind, not necessarily getting a salary from a centralized entity. So this is how I envisioned the future of Balancer. So given all this like liquidity mining or incentivization that's been happening, one thing we see on Balancer is basically it's beating Uniswap massively on liquidity, but not yet. on trading volume. So why is this? And what are sort of what's your plans on we've got the liquidity now? How are you planning on attracting the volume, trading volume? Great question. So this is because we've been around for a few months and Uniswap has been around for a lot longer. And Uniswap is integrated with pretty much everything in the FI, like whatever platform or front end or like distribution app like

Zyrian or Zeprify. They've all been integrated with Uniswop for a long time. So Uniswap is seen by everyone. It's also like a brand. People think of trading. They go to Uniswap. Decentralized trading, they go to Uniswap. So it's a matter of time until we have like integrations by X.

API. They're like finalizing their integration or Kiber Network. They're also finalizing integration. One inch has started already integrated with Balancer from day one. So Paraswap is also working on integrating balancers. We need time to kind of get integrated, right? So that's the first thing. And the second thing is that actually Uniswap's liquidity is the most efficient possible

because it's always 50-50. So there's a lot of liquidity on balancer. There's like a $200 million pool. One pool has $200 million now, which is YFI and the Y-Curve token. That pulls a 98-2. So it naturally has effective liquidity, the effective liquidity that that pool has is a lot lower than $200 million, right? So it's hard to compare volume between Uniswap and Balancer because Balancer allows for that flexibility, which means that not all liquidity will be efficient or the most efficient for traders because that means they are like the pools are 50-50 or 3rd, 3rd, or 25, 25, 25.

And that's not the case. What would you say is the most unique or interesting pool that you've seen? Or maybe it's not been deployed yet, but like you know that people are working on. There's so many. So I think LBPs are going to be a huge thing. As I said earlier, Sunny, like the idea of the ideal initial decentralized offer or decentralized exchange offer, this flexibility of having a smart pool that has this schedule of weights flipping and letting people not only buy your tokens, but also create liquidity,

all wrapped in one. To me, this is very powerful. One pool that I'm really excited to see coming out, and I don't know if you talked about that last week, you had Uma here in the show. There is this idea of having a perpetual synthetic pool. So what? What Uma does is they have this awesome system that allows you to create any synthetic that has an expiry date. And often what you see is people seeking exposure to goad without an expiry date. So they want to be just long goad. But that doesn't work so simply, like so easily for a protocol like Uma to do directly because maybe they explain that. But they need this expiry date in order for the underlying price and the synthetic price not to deviate a lot.

lot. So what you can do is you can have different months, like synthetics with expired dates of different months, all in the same pool. And then what you do is a smart pool that as soon as one of the expiry dates is getting close to maturation, you start decreasing that weight to start phasing out that gold, let's say September, because it's close, and you start facing in gold November. So, and that is naturally done by arbitrages that do those trades for marginal profit. So your pool is actually leaking a little bit of value, but you know that your pool will always have like three or four different months that are being recycled automatically. So not only you create this one place for people who want to have exposure to gold,

November, to trade with gold exposure September, people can trade between those different different months. You're also creating a perpetual exposure to gold, which is the ERC20 token of the pool. So that pool is issuing ESC20 tokens that represent exposure to gold, full stop. So that's amazing. You have the option to have gold December and you trade for gold

September, but you can also buy the pool token, the pool share, which is just exposure to gold. And yeah, to me, that's a very interesting example of of four that will be soon launched and we're working closely with the umma guys on that yeah that i you know i was chatting with my friends at open and they that's you know another problem that they face with unisop and that's also why they're looking at balancer to kind of do something similar as well cool so what are you what's like the future like you know what's scattered throughout like the docs it mentions balancer v2 but not a lot of details what's what what is what can we

expect to see. So Ballastor V2 will be a lot more efficient in terms of gas costs. We're going to go to this single vault architecture. So instead of creating like a new smart contract for every pool that's deployed, you're actually just creating like an internal accounting for the pool you created inside of this big contract that is Balancer V2. That will allow us to do cool things like huge flash loans. So all of a sudden, you have like all the MKR from all the pools sitting on the same contract. So we can have like flash loans that are huge. And that also will allow you to do arbitrage between pools in a much more efficient way because all you're doing is like you're changing internal accounting balances of the pools inside the same contract. You're not sending

EOC20 tokens like across different pools. You're not paying for all those ERC20. transfers. All you pay is at the end, this is what you're going to get, token A. So then Balancer Vault transfers you that amount and gets from you that amount of token B that you sold. So that will create a lot more, a lot more possibilities for arbitrage and for traders. Yeah, and we'll have like nice features as well, like more flexibility in terms of, for example, you can have circuit breakers. So you can set your pool to stop selling if, one of the tokens goes below price X. And this is something that NOSIS has been asking for,

because if you have prediction markets, one of the tokens can just outright go to zero, and that is a problem because the pool gets drained. So having circuit breakers allows you to say, okay, so whenever one of the outcomes is known, the pool will just freeze because the prices will go beyond the threshold that I'm willing to let people trade again.

lots of nice, nice features and cool things that we're getting like feedback from the community. Like you should do that and you should do this. We'll do a lot of, yeah, improvements also in terms of flexibility. It's going to be very cool. Awesome. Thank you. Yeah, thanks for taking the time to chat with us and teach us more about Balancer. Yeah, thanks a lot. Sending him in here. So yeah, if you want to know more about Balancer, you can go to our Discord channel. You can follow us on Twitter at Balancer Labs. I'm FC Martinelli on Twitter as well. Yeah, it's been a pleasure, guys.

Great questions. And yeah, looking forward to chatting more offline. Thanks. So what did you think of the project? I mean, I've always felt balancers are a great project. Yeah. I wrote like this long blog post a couple of months ago. called like the uniswap or dowifying uniswap in making the uniswap network.

And I wrote this like long thing. And then as soon as I published it, people are like, wait, you just go check out Balancer because that's exactly what they're doing. And I'm like, whoa. Because like I looked at Balancer early on when you first showed it to me. But back, I was just thought it's, oh, it was just like, you know, multi-dimensional uniswap. But like I didn't realize that they were so focused on like, all this generalization, which is what I find super fascinating. Because I just think that whole, yeah, like, I always thought like, look, okay, this X times

Y equals K. There's no way that that's the optimal, like, formula. That's just like, you know, someone just pulled that out of their hat. And it's like, but I'm excited to see that, you know, there's so focused on parameterization. And especially I imagine they're going to get even more, you know, we didn't get to talk about this on the thing, but, you know, I'm willing to bet that, you know, they're going to even start doing other types of curves, not just like the same constant product, but like, you know, there's other projects.

Hyperbolic. Yeah. There's other ones like curve finance, which are more flat for stable coins. Or you can, I don't know, you can do like some wacky stuff probably that. Yeah. So I'm excited about it from that sense. Right. I just feel that it's a very elastic primitive.

And it will end up. of entering into lots of different applications and much of the use cases of something like Balancer aren't just understood or imagine. What I love about this project is just its elasticity and how it can mutate and fill different niches. So what do you think, one of the questions I have, do you think AMMs in general are a long-term? sustainable concept, though? Like, just this, like, it feels like what balancer with all their parameterization, they're making AMM, or they're giving AMMs the opportunity to be smarter than X times

Y equals K. But at the end of the day, I still feel your automated market maker or, you know, algorithmic market maker, whatever you want to call it, like, you know, algorithmic market makers, like, even real market makers are algorithms. The difference is that a smart contract market maker doesn't have access to external data. And I feel that because of that, it will always be worse than like a real market maker who can quote you prices, but like has access to real world data. And it seems that what's happening is how I see automated market makers is that this is what they're doing. In a traditional market maker, you have someone with capital as well as knowledge or information or expertise, and they're providing quotes.

And it's the same entity. AMM seems to be splitting these into two different categories. One is the capital providers. And then there's the information providers. and the capital providers are like these dumb capital providers, these provide capital. And then all the information benefits are going to the arbitrages. And it seems that like the arbitrages are screwing over the capital providers.

And unless you can get your fees to be high enough, like, and this is the whole impermanence loss situation, right, where oftentimes the, if it's not, unless you have, have enough volume, your capital providers really get screwed over. And a smarter market maker could do better. So what do you think about this? I totally agree. So that is a downside of this generation of automated market makers that in the sense

that the automated market makers are, they are blind and they are dumb. blind because they are unable to see what's happening on other markets. And they are dumb because they don't have the information, but they don't even have the mechanisms to include that information into their own decision making. So. What would be said to say balancer is making them less dumb, but it's not making them less blind? Yeah, it's not making them less blind, right?

So it's still blind. So I do agree that this lack of blindness is a disadvantage for automated market makers. But it's also the case that we are so early in the game. I mean, Uniswap and Balancer combined this entire space is two years old. And there's an eternity of 50 years, 100 years to develop this thing. And a lot can happen. and I think eventually their blindness will go away. I'm not sure how they will acquire information from the real world

because it's a hard problem. So, but I do feel that it's just that the design space of these crypto protocols is just so massive that the challenge will be surmounted and we will have automated market makers that are way more efficient than today's variety. I think that's the optimistic case. Are they going to remain for more niche assets or do you think that like they're going to overtake like certainly where I see them going is that they are like great for like weird

niche assets like options or like like Wi-Fi tokens or whatever but it's like are they going to take over the BTC USDT pair like where that pair is just like the biggest pair on like all centralized exchanges is it going to take over that i think that's unlikely today that's unlikely i think i think i think i think you've identified the market it's the long tail of assets that automated market makers are really suited to today and that's the initial niche they end up populating now now the question is beyond that initial niche can they invade other

niches and then one day do BTCUSD not only BTCUSD but one fine day in the future you want to do all EuroUSD volume automate market makers is the future like that I think it depends a lot on how efficient

these things can be made to be and I think it boils down to the question of what kinds of data can be given to these automated market makers and how much intelligence you can put into them. And both are hard questions because getting data means developing a protocol by which you can trust the quality of that data and then intelligence probably means a lot of computation.

And on both those dimensions, blockchains are very limited today. Now, I think if those dimensions were to be solved, market makers would grow a lot. But if they remain at their current state, I think they are more suited to this long tale of assets. What do you think? I think that they're... Yeah, I don't know. I think that until they figure out how to solve that blindness, problem.

It will, as soon as there's a larger market for that pair than the AMM, it starts running into problems. When the largest pair for that market is the AMM, then it works fine because then the AMM is the price. It's setting the pricing. But when the real price, whatever that means, is being set somewhere else, then that's where the capital providers. start to really get screwed over because the arbitrages make all the profits there.

Right. Yeah. And it's one of those reasons I haven't contributed any liquidity to a UNISO pool because because it like as a like if I think of my ether or my Bitcoin, like really liquid crypto assets I hold. At some level I'm holding these crypto assets because you expect them to go up in price. But when assets grow up in price and you've put them onto a liquidity provider, you're making losses at exactly that same point.

So at some level, that is what has prevented me from actually putting assets into the market makers. Now, yeah, so I think for very niche assets like the real estate tokens or these wide. tokens or the the situation is different. But let's see how it evolves. I'm actually quite bullish on the space. Even though the solutions don't exist today, my instinct is that the design space is so massive that it will end up being solved. But it will take 20 years.

You were asking quite a bit about like the network effects of the balancer protocol. and you seem kind of skeptical. Do you still, are you, how do you feel after that discussion? So my impression is that Balancer has worked out a really good pool design. And at some level, you know, I mean, if this was to be an economics paper or something, if I imagine Balance has an economics paper,

this might end up becoming, I don't know, one of the most cited papers of 2000. 2008-19 in the far future. I have a design and ideas level of that pool design. It's amazing. That's my impression. But I'm not sure about the code quality, right? How the design transcended into code.

But let's assume it's, it's average, it's better than average or whatever. But where I feel, when I feel balancer is kind of lacking is that there is a great pool design. There's this code. and then there's this token, but the question of how this token actually captures value is not well addressed. Now, of course, you mentioned Sunny that the token will someday say that, hey, there's a certain fee that you can add to these pools and that is how it will capture value. But then the question just shifts to being, okay, if the token holders decide to add a fee,

what prevents these liquidity providers from migrating to the next protocol. And when you ask that question, what will prevent them from migrating to another protocol, it's then that you kind of realize that, okay, for this to be really viable, there has to be some network effect associated with multiple pools. Now, the answers that were given were, okay, smart order routing. But to me, smart order routing seems like completely off-chain. play. Like, KORUS can come and build a smart order router for Balancer as a centralized

entity and capture the value around smart order routing. Which is what one inch is doing. Which is what one inch is doing. So it doesn't feel a good way by which the protocol itself captures a defensive moat and captures value. And I think, like, to me, with current balancer, that is a. is the gap that I would think about when I would make a decision of whether to purchase BAL or not.

Because if that gap can be solved, then I think this is going to be one of the great investments of the crypto space. It could be one of the great investments of the crypto space. But the uncertainty around them not being able to solve the gap is what would make me skeptical of buying the BAL token. what is your sense? Yeah, I agree. I think the smart order routing isn't the solution.

I wonder if, yeah, like you said, there has to be some way of where the networks, all the pool of network of pools are somehow sharing information with each other such that they can help balance each other out in that way. that's sort of almost that's sort of the key I think that has to be figured out because earlier in the conversation we were talking about how these pools

are blind now okay so an individual pool is blind but even if you could make it less blind by having that pool get info from other pools then it's not the perfect solution but you're making it less blind.

But if you can make things less blind, then there could be some kind of network effect. That's my impression. He mentioned flash loans, right? And in the V2, is there a way where we can somehow restrict the flash loans such that you're allowed to use flash loans as long as you're arbitraging,

like within balancer pools? So you can use a flash loan from this pool. to go arbitrage another balancer pool. But you're not allowed to, but somehow place some restriction where you can't use the ballot, the flash loan to go do, you know, you can't go use it to do something on uniswap or compound or whatever, right? You know, free arbitrauds amongst balancer pools only. That, that seems like, you know, as there's more liquidity, then the arbitraging basically

gets better and better on balancer alone. That would be really interesting. That would be really interesting. So I think some mechanism like that is needed. And I also think it's probably coming. But if, thinking from an investor's perspective, I would want a very clear answer to that

before buying the BALT token. Well, you can't buy the BALT token anyways, right? You have to go. Well, I'm sure that you can buy it on a balance or pool, but. Yeah, perhaps I can do some liquidity mining to get that. tokens. I'm not sure. Right. Yeah, I mean, it's certainly I feel it's a

really interesting project and I respect the idea a lot. My nickname pick is how the idea translates into business model, but we have time to solve that, right? Like this is a long game, crypto is a long

game, so well, looking forward to seeing how it turns out. Yeah. I hope you enjoyed the interview debrief and you can get access to it every week by becoming a premium subscriber. As a premium subscriber, you'll get access to a private RSS feed where you can hear the debrief every week. And you also get enhanced features like full episode transcripts in your podcast player and interview chapters that allow you to easily skip to specific sections of the interview.

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