![What is Balancer & the BAL Token? A Beginner's Guide 1 What Is Balancer](https://cdn.hodlin.com/blog/wp-content/uploads/2023/03/what-is-balancer-1200x675.jpg)
Balancer (BAL) is the native governance token of the Balancer blockchain, a Decentralized Finance (DeFi) protocol that combines crypto assets to incentivize a network of nodes to operate as a decentralized exchange.
The Balancer Protocol was initially developed as a research project by BlockScience in 2018, which Fernando Martinelli and Mike McDonald founded. In 2020, the project independently raised $3 million and started Balancer Labs to maintain the development of the project.
Like most DeFi projects, Balancer was built on the Ethereum network and improved on the ideas of other popular liquidity pool approaches like Bancor and Uniswap, becoming one of the most popular tools in the DeFi space.
From a total supply of 100 million BAL tokens, 5 million BAL tokens were sold during the funding round, and 5 million BAL tokens were awarded to shareholders and employers. The remaining 10 million BAL tokens were reserved for a second funding round and a fund used for contributors to the protocol.
The project’s core is open-source, which means it can be reviewed by any interested party to provide feedback on improvements, security vulnerabilities, or any other topic, which allows the protocol to grow by allowing the community not only to participate in the governance process but also in the development.
The Balancer Protocol has been audited by Consensys Diligence, Trail of Bits, and Open Zeppelin without any severe vulnerabilities being found. In addition to these audits, there is a bug bounty program that allows users to earn rewards for finding and reporting bugs or exploits.
What is the Purpose of BAL?
Investors have traditionally paid portfolio managers to rebalance their portfolios, but with Balancer, investors collect fees from traders who effectively rebalance their portfolios.
Balancer was created as a means for investors to take advantage of all the benefits of index funds without the need to incur the custodial risk and high fees associated with traditional finance.
While Balancer operates in a way similar to decentralized exchanges (DEXs) like Uniswap and Curve, it offers features that have made it more popular in certain trading circles due to the extra flexibility it brings to the table, such as the ability to bundle up to eight different cryptocurrencies in the same pool.
By decentralizing the crypto exchanging process and providing customizable ratios for liquidity pools, Balancer offers its users a platform where more investment strategies can be used in a trustless and transparent manner.
How Does BAL Work?
Balancer operates in a way reminiscent of index funds by allowing users to create funds, or Balancer Pools, based on their crypto holdings, which can then have liquidity added by other users. By using smart contracts, Balancer makes sure each pool retains a proportion of assets at every moment, effectively operating as a self-balancing index fund.
This proportion is kept by decreasing or increasing the amount of a specific asset in the pool depending on the variation of its price, which is possible by regulating the amount of each type of cryptocurrency available for trading in the pool.
Balancer pools can be private or public, a trait that will define who can provide liquidity or withdraw assets from it at any given time. In the case of public pools, anyone can provide liquidity to the pool to earn a portion of any trading fee paid to the pool, as well as BAL as an added reward.
By incentivizing users to provide liquidity to existing pools and create new ones, Balancer can create a market in which users can freely exchange cryptocurrencies without the need of a central authority, as in the case of the most popular exchanges.
As smart contracts are the base of the protocol, all the processes are automated, and the parameters of a pool are written in stone when it is launched, there is no need for a central authority to mediate in the transactions, and the risk each investor is eager to incur will define which pool they add liquidity to.