We recently connected with Fernando Martinelli, the Co-founder and CEO at Balancer Labs, which supports the ongoing development of Balancer, an automated portfolio manager and digital asset liquidity provider.
As covered in May 2021, Balancer Version 2.0, the “most flexible” and efficient automated market maker (AMM) had gone live. Balancer Labs, which aims to become the “primary source” of DeFi liquidity by offering the “most flexible” and simple platform for asset management, had announced many new updates in May.
As reported, Balancer (BAL) is an Ethereum token that’s used to power the Balancer protocol, which is described as an automated market maker (AMM) that allows users to create or add liquidity to various trading pools.
Those who contribute liquidity can earn “customizable” trading fees. Balancer pools may have up to 8 cryptocurrency tokens and each token gets individually weighted within the pool itself, such that it is possible for one token to make up only 2% of the total.
As explained by its developers:
“Balancer is an automated portfolio manager and liquidity provider turning the concept of an index fund on its head: instead of paying fees to portfolio managers to rebalance your portfolio, you collect fees from traders who rebalance your portfolio by following arbitrage opportunities.”
Our conversation with Fernando Martinelli is shared below.
Crowdfund Insider: So first and foremost, this is a relatively new project based on some of your hobbies – like math. I’m not going to ask you to break down ‘multidimensional invariant surfaces’, but I would like to hear more about this continuous self-rebalancing of portfolios.
The way it’s been described as an inverse of an index fund, where you get liquidity and value at the same time. Is that accurate?
Fernando Martinelli: Yes. A good analogy to help us understand how this is possible is to compare how index funds in traditional finance work to Balancer. Index funds like for example on fidelity need to rebalance as their stocks change in value.
This is actively done by a fund manager that requires access to a trading venue (say NASDAQ). All of these pieces of the puzzle add complexity and high costs to investors. Balancer on the other hand brings these two sides together and lets traders buy token X directly from an index fund that needs to sell token X in order to rebalance.
All the fees saved from these removed middlemen flow back to liquidity providers (ie the index fund investors) instead. This is why investors receive a fee instead of paying a fee in Balancer’s new paradigm.
Crowdfund Insider: I did a little homework on liquidity bootstrapping pools.
It’s essentially a smart pool that uses tokens in a core asset pool. And it manages them in some way. Can you give a better description of what this functionality does for your platform?
Fernando Martinelli: LBPs are a great example of Balancer’s flexibility and unique value proposition. Startup teams can utilize an LBP, an implementation of Balancer smart pools that incrementally changes its weights over time, as a token sale mechanism.
It creates the effect of gradually swapping an amount of the project’s native tokens into a reserve asset, following a process similar to a Dutch auction- starting at a high price and dropping until a support level defined by the free market is reached.
It works as an effective “fair launch” crowdfunding tool. In an LBP, this typically lasts from 24- 72 hours, but teams can also use this mechanism over a longer period of time (ie 1 year) as a treasury diversification solution.
Crowdfund Insider: $3 million in an initial round is pretty impressive. Do you feel like you have the runway you need to do all of those impressive things with math and blockchain?
Fernando Martinelli: More important than the funds we got in our seed round was the incredible hands-on support our seed investors provided us with. Such a bold mission–to become the primary source of liquidity in DeFi– requires though a lot of work from the community which Balancer Labs is responsible for facilitating.
This is why Balancer Labs proceeded to sell another $24.25M worth of BAL tokens to some of the most strategic funds and investors in the space. This gives Balancer Labs a good runway of a couple of years to help Balancer Protocol achieve its vision.
Crowdfund Insider: Permissionless trading has been constantly underlined as a core part of Balancer’s offering. Isn’t that a fundamental benefit of decentralized finance?
Fernando Martinelli: Yes. Even though this is generally true, there are protocols that are built on Ethereum and part of DeFi that are not 100% permissionless. Balancer strives for minimized governance so that anyone can create new pools or trade with existing ones interacting directly with the Ethereum blockchain.
No need to ask for permission. Following up on that last question, decentralized finance offers so many opportunities. What do you see as the most consequential ones on a short list?
In my opinion, DeFi is going to be the rails of every financial application in 10 to 20 years from now. This is such a stark change from the status quo that is hard to grasp. Every financial product you see today will be built on DeFi, money, property, governance power and much more will be transacted on DeFi.
What excites me most though is all that will become possible with the exponential evolution of DeFi and crypto as a whole that we just can’t dream of today. AMMs are a great example of a new technology that just wasn’t possible before Ethereum’s smart contracts.
Crowdfund Insider: As I understand it, the Balancer Protocol token (BAL) provides for voting power. It also has value, and a good amount of volatility.
What kinds of factors do you feel have influenced BAL price swings?
Fernando Martinelli: That’s correct, BAL token holders are the governors of Balancer Protocol and have the ultimate decision power on all matters related to the protocol. Balancer Labs is only responsible for facilitating this process and has the obligation to implement/enact any decisions made by the governance. I’d prefer to not make any comments about the token price.
Crowdfund Insider: As we usually ask innovators, looking beyond the current horizon do you have either new things you would plan for the existing platform or some brand-new project to embark on?
Fernando Martinelli: I’m surely not planning on embarking on a brand-new project as I think Balancer is still only just scratching the surface of its potential. For Balancer I see my mission as CEO of Balancer Labs as facilitating a thriving ecosystem to emerge around the protocol.
That involves lots of moving pieces like smart contract development, integrations, community, etc. I like to say that Balancer will only be as successful as the projects and platforms that are built on top of it. My ultimate mission is to enable Balancer Labs to help these other teams to be successful.
Crowdfund Insider: Where do you see crypto going in the future? Are there particular exchanges that you see as having a lot of involvement? What about Bitcoin, Ethereum, and altcoins?
Fernando Martinelli: Crypto is only just in the beginning of a spectacular revolution, which as any revolution takes time. Regulators, governments or really anyone can’t stop a technology that makes relationships and transactions more transparent and efficient.
There will be some rough moments ahead as governments /regulators will realize there’s no turning back but still won’t understand the technology well enough. A new law framework will have to be put in place for a new money framework which are blockchains. We will all win as a society when we get to the other side together.
Regarding Bitcoin, which I’m a fan of, it’s clear to me that at some point the flippening will happen as Ethereum is simply superior in many aspects. More importantly, Ethereum continues to evolve at a breakneck pace. Bitcoin’s biggest strength — immutability– will eventually become its downfall relative to Ethereum (I don’t see it going down relative to Fiat in the long term though).