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Balancer’s New Kind of Pool Enters Battle for Crypto Liquidity

Automated portfolio manager Balancer introduced a new mechanism to improve capital efficiency for liquidity providers as it aims to take a larger bite of the interest-bearing token market.

Balancer’s so-called metastable pools have a  “nesting” feature, facilitating cheap swaps between one pool’s tokens and those of a nested group of tokens, as though all tokens were in a single pool, according to a blog post published Monday. This type of liquidity pool is best suited for tokens with highly correlated, but not hard-pegged prices, like digital assets that gradually accumulate fees. Interest-earning tokens, or derivatives of staked cryptocurrencies, are examples of such assets.

“MetaStable Pools help users of Balancer Protocol list less liquid assets and prevent diluting existing pools,” Fernando Martinelli, Balancer’s founder, wrote in the announcement of the new feature.

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Helps Compete

Metastable pools should help it compete with the likes of Curve Finance and Uniswap, the leading DEXs for trading stablecoins, as all the decentralized exchanges work to become the single place for non-custodial crypto trading. 

Right now, stablecoins are important because they serve as a sort of bridge between different yield farming opportunities, but this era of outsized yield won’t last forever. Nevertheless, the stablecoin market capitalization is sitting just under $120 billion with nearly $100 billion in daily trade volume, according to CoinMarketCap.

Balancer has the added benefit of launching this new feature with a partnership from Lido, the staking derivatives platform helping the Ethereum community transition to Ethereum 2.0

Balancer allows traders to create token funds that automatically rebalance to hold pre-determined portfolio weights. To do so, it needs to make trades as needed, which means Balancer also functions like a decentralized exchange (DEX).

Lido Partnership

Lido and Balancer have agreed to incentivize a new pool of ETH and staked ETH (stETH) on Balancer with their respective governance tokens, BAL and LDO. Balancer will contribute 2,500 BAL and Lido will contribute 25,000 LDO each week for a month.

The aim is that the metastable pool will make it easier for other users to create pools that trade with ETH and stETH. 

Formerly, if someone wanted to create, say, a BAT pool that traded with those two tokens, they would need to find equal quantities (in dollar terms) of all three and then stake them to one pool.

And everyone else would have to do the same if they wanted to create pools with those two and other tokens; that could really be inefficient for the marketplace if some of the pools turned out to be unpopular. There would just be ETH and stETH sitting in those pools pointlessly.

“We only need to create the metapool once and then we can nest it however many times we want, so it saves resources,” Jake Brukhman, CoinFund’s founder and an investor in Balancer, told The Defiant over Signal.

With metastable pools it’s possible to simply nest the pool alongside each other token and the same set of ETH and stETH can be used across those pools. That’s the advantage.

Other Players

Balancer is not the first to do nested pools. Curve has long had metapools. Its most well-known one is 3pool, which contains DAI, USDC and USDT, the leading stablecoins tracking the U.S. dollar.

This means Curve can then pair those three giant stablecoins with any of the many smaller new stablecoins that come along and want to trade on Curve (which is all of them).

“Wherever there’s an opportunity that somebody sees to expand their market coverage without radically adjusting what their product offers it make sense to move in that direction,” Jake Dwyer, who runs DeFi and venture investing at the trading firm GSR told The Defiant in a phone call. “I think you’ll see Sushi [another major decentralized exchange] move more in this direction as well”

Similarly, Uniswap v3 introduced concentrated liquidity, which allowed it to compete with Curve on capital efficiency for assets with low relative volatility (like stablecoins or wrapped versions of Bitcoin).

It’s tough to judge who is in the lead right now. Curve has the largest total value locked of the DEXes right now, according to DeFi Pulse, but Dwyer said that he’s seeing a lot more founders come along looking to build atop Uniswap than he is on the others. “The people who push innovation either succeed in attracting all the liquidity or they serve as a stalking horse for the leaders,” Dwyer said.

There’s no reason, when a related project proves something is successful, not to try to scratch much the same itch as they aim to nail down market share. When the market gets gigantic, it’s very unlikely that there will be dozens of DEXes or stablecoins. 

“Long term it would be very surprising to me — as crypto gets increasingly mainstream — that you’re navigating against dozens of USD stablecoins, that people are having to navigate across all these different venues,” Dwyer said.

But right now, that market is up for grabs and the race is on.