Balancer is a decentralized exchange characterized for its self-rebalancing portfolios that behave like an index fund. Users can trade assets and provide liquidity to get exposure to all underlying assets of an index fund.
Balancer pools (composed of up to 16 different crypto assets) can be thought of as a self-balancing index fund, whereby the liquidity providers get paid when their deposited funds are automatically rebalanced by external arbitragers. When a Balancer pool is created, the ratio of tokens in the pools is set. This pool is then constantly rebalanced as users make trades within the pool to ensure that each asset maintains a proportional value to the rest of the pool. The Balancer system automatically determines the best available price from its range of available pools via its Smart Order Routing (SOR) system.
Balancer has several sources of revenue including trading, withdrawal and flash loan fees. Pool trading fees are highly customizable, ranging anywhere from 0.0001% to 10%. Trading and withdrawal fees were turned off at inception while flash loan fees started at a small value to ensure there is always a cost of capital to create flash loans on Balancer. Protocol swap fees were subsequently set to 10% following a governance vote in December 2021. This means a small portion of liquidity provider fee earnings are now diverted to the DAO treasury.
You earn rebalancing fees for maintaining the crypto equivalent of an index fund on Balancer. Some Balancer pools also offer additional incentives in the form of native protocol tokens and the BAL token, which represents voting power in the Balancer DAO.