From DEX to Token Value Discovery Platform? It's time to re-evaluate Balancer

This article is from Mars Finance, authored by Liang Yushan.

If Sushiswap had not taken the initiative to enter the fray with a blood-sucking attack and token issuance, what would the current DEX market landscape look like?

Bold speculation: Uniswap and Curve would still firmly hold the top two positions, while Balancer would secure a spot among the top three. The status of Uniswap and Curve needs no elaboration, as their combined market share occupies half of the DEX landscape. What is the reason for Balancer's standing alongside the former?

Looking back to last summer during the DeFi explosion, Balancer, as the first DEX to introduce liquidity mining, saw its liquidity grow by 3400% from June to September, becoming a decentralized exchange that could "stand shoulder to shoulder" with Uniswap and Curve at that time.

Unfortunately, in the subsequent "Sushiswap vs. Uniswap battle," Balancer was forced to "exit" and dropped out of the top three. At the same time, influenced by Uniswap's successful validation of the AMM model, various swaps emerged in the market, increasing Balancer's competition…

Has Balancer thus been submerged in the fiercely competitive DEX market? Not at all; it is poised for a resurgence. According to the latest data from Defipulse, from the beginning of the year to now, Balancer's locked value has increased from $580 million to $1.64 billion, a rise of over 175%, and its DEX ranking has jumped to fourth, surpassing competitors like Bancor and 1inch. During the same period, its user base has grown by over 40%, exceeding 110,000; the native token BAL has risen by 270%, approaching its historical high.

What forces are driving Balancer's quiet growth? Is it poised to re-enter the center of the DEX market? From the perspective of market environment and trend evolution, Mars Finance APP invites you to re-examine Balancer (BAL).

1. Balancer Rides the Wave of IDOs to Regain Momentum

Let’s understand the truth behind Balancer's quiet growth from the details.

Since the beginning of the year, all indicators for Balancer have been on the rise. Among them, mid-February became a key node for its rapid development. According to data from Duneanalytics, Balancer's weekly trading volume, new users, and BAL price showed significant upward trends during this period.

（Balancer Weekly Trading Volume）

Specifically, Balancer's weekly trading volume reached $700 million in the week of February 22, hitting an all-time high; the number of new traders increased by over 6,000 in a week, also reaching a peak. By then, Balancer had approximately 110,000 users, a 4.4-fold increase compared to last summer.

（Balancer Weekly New and Old User Count）

（As of March 10, Balancer had a cumulative user count of 112,562）

From the timeline perspective, Balancer's growth period coincides with the popularity of IDOs. IDO stands for Initial DEX Offering, referred to as the first decentralized exchange token issuance （another term is "first DeFi issuance"）. Since February, many new DeFi projects have chosen to complete their initial token offerings through DEX, leading to the rise of the IDO concept.

According to incomplete statistics, from February to now, new DeFi projects choosing to conduct IDOs through Balancer include:

● DeFi insurance protocol InsurAce

● Decentralized code collaboration platform Radicle

● Decentralized options protocol SIREN Markets

● Polkadot ecosystem data infrastructure component Kylin Network

● Cross-chain liquidity provision protocol HydraDX

● Oracle project Razor

…..

Due to the IDO craze, user trading activity on Balancer surged, with its locked value sharply increasing in February, adding nearly 10,000 ETH on the 13th, reaching the highest level since December last year.

February Balancer Locked Value

2. From DEX to Token Value Discovery Platform

The birth of the IDO model can be traced back to June 2019. At that time, Binance announced that Raven Protocol (a distributed deep learning protocol) would conduct its IDO on its DEX. However, due to the lack of positive user response, the IDO did not create much of a stir.

By last summer, with Uniswap successfully experimenting with the AMM model amid the liquidity mining craze, many DeFi projects began to create funding pools and issue tokens by deploying smart contracts. It can be said that Uniswap played an enlightening role in the early development of IDOs.

However, this does not mean that conducting initial token offerings on Uniswap is without drawbacks. We know that transactions on the Ethereum network require gas fees. With the network becoming increasingly congested, gas fees have skyrocketed, putting retail investors at a disadvantage compared to scientists and large investors, as the latter can use machine algorithms and high gas fees for front-running trades.

When scientists holding large amounts of capital enter the market first, the token prices in the funding pool can be significantly inflated, which is unfair to retail investors and detrimental to token price discovery.

In Balancer's design, it addresses this issue by introducing liquidity guiding pools. Unlike Uniswap, which requires a 1:1 ratio of tokens stored in the pool, Balancer allows project teams to customize the token ratios in the funding pool (with a maximum deviation ratio of 2:98). At the same time, project teams can adjust the asset ratios to lower token prices, preventing prices from skyrocketing due to a flood of speculators in the early stages.

Additionally, retail investors do not need to worry about being front-run and can use any token to purchase the tokens promoted by the liquidity guiding pool. In the design of the liquidity guiding pool, all investors can fairly participate in token purchases, reducing the volatility of new token prices.

In fact, Balancer introduced liquidity guiding pools earlier last year, with derivative protocols like Perpetual and liquidity mining aggregator APY.Finance completing token issuances on its platform. However, due to the sharp decline of most liquidity mining tokens in the fourth quarter of last year, the DeFi investment market tightened, and the number of projects issuing new tokens decreased, causing Balancer's advantages in token value discovery to be overshadowed in the market.

As of February this year, with more DeFi projects issuing tokens, market enthusiasm has rebounded, and Balancer's advantages in liquidity guiding pools have once again come to the forefront, making it a preferred platform for token issuance by more project teams. It can be anticipated that if the IDO craze continues, it will evolve from an AMM-based DEX to a token value discovery platform.

3. Conclusion

From Balancer's development process, it initially occupied a favorable market position as the first DEX to launch liquidity mining during the early explosion of DeFi. However, the subsequent breakthrough by Sushiswap and Uniswap's counterattack to fill gaps forced Balancer, which once thrived in the market center, to retreat to the sidelines.

However, during the IDO craze that erupted in February, Balancer leveraged its liquidity guiding pool mechanism to seize competitive opportunities. It is important to note that in the short term, it is unlikely to surpass Uniswap, Sushiswap, and Curve. Furthermore, although project teams choose Balancer as their token issuance platform, they ultimately tend to migrate their funding pools to Uniswap, as seen with the decentralized privacy protection protocol HOPR.

While Balancer may struggle to compete with Uniswap, Sushiswap, and Curve in the short term, it is expected to break through in the secondary DEX arena, leveraging its early accumulation and the support of IDOs.