As we approach the launch of Balancer v3, I’m excited to share our vision for the protocol’s future.
Over the past three years, the Balancer ecosystem has made significant strides towards decentralization, becoming less reliant on Balancer Labs than ever before. A primary goal has been to create a community of service providers (SPs) sustainably supported by the DAO. Today, we’re proud to say that the Balancer DAO has over five different SPs covering various areas, from marketing to front-end and smart contract development, all working together to drive innovation and success.
As we look to the future, the vision outlined below is not a set path but rather a suggestion for the community and veBAL holders to consider. It’s an opportunity for us to collaborate and shape the direction of Balancer v3 together.
TL;DR
Balancer v3 narrows its focus to a few key areas:
- Fungible Liquidity: Balancer v3 doubles down on fungible liquidity, which enables composability and ensures equality across all LPs in a pool.
- Stablecoin and Long-tail Token Liquidity: As main pairs like ETH/USD are best suited for concentrated liquidity, Balancer v3 optimizes the handling of stablecoin and long-tail token liquidity.
- Yield-Bearing Liquidity: Balancer v3 will introduce new features to further optimize and simplify yield-bearing liquidity, allowing users to earn additional returns on their deposited assets.
- Hooks: Hooks introduces a new approach to managing a pool’s execution logic, enhancing operations, and allowing developers to customize pool behavior for specific use cases.
- LVR Mitigation: As all on-chain interactions move towards being executed in a fair, MEV-minimizing manner, Balancer v3 will enable third-party teams to innovate in this area with custom AMM logic and a hooks framework, supported by Balancer DAO and other partners.
- Developer Experience: Balancer v3 empowers developers to rapidly create, integrate, and attract users and liquidity for new AMM logic, further expanding our ecosystem.
The North Star Remains the Same
As emphasized in my previous vision post, Balancer’s long-term success is intrinsically linked to the success of the protocols and products built on our platform.
Since the launch of v2, Balancer has distinguished itself as the only platform enabling true AMM experimentation and innovation. Unlike other AMMs with fixed pool types, Balancer allows for permissionless iteration and complete reconstruction of pool designs. This unique flexibility empowers teams like Gyroscope and Xave to develop and deploy novel AMMs that are recognized by aggregators and seamlessly integrated into the DEX landscape.
Balancer v3 will remain a platform for AMM experimentation and innovation, allowing custom pools to iterate on existing or define entirely new swap invariants. With the v3 vault handling much of the responsibility previously delegated to the pool contract, internally developed pools have seen a significant reduction in complexity, resulting in a 10x improvement in pool developer experience (DX). In addition to custom pools, we’ve introduced a hooks framework, inspired by Uni v4, that allows developers to easily extend tried and trusted pool invariants at various key points throughout the pool’s lifecycle, unlocking a brand-new design space.
Clear Focus on Fungible and Yield-Bearing Liquidity
Fungible Liquidity for Stablecoins and Long-Tail Tokens
As the saying goes, “Jack of all trades, master of none.” Balancer’s expertise has always been in fungible liquidity, and this should remain a core focus for v3. While Uniswap has found great success with its concentrated liquidity model for major pairs like ETH/USD, it doesn’t mean this model works optimally for all AMM use cases. In fact, it has become evident that managing concentrated liquidity positions for volatile or less frequently traded long-tail tokens often becomes complex and impractical. Over two years after Uniswap v3’s launch, Paradigm’s Dan Robinson acknowledged that just-in-time (JIT) liquidity is detrimental to both LPs and traders. These issues do not affect Balancer’s fungible liquidity pools.
Additionally, major hacks, such as the one experienced by Kyber Elastic, have demonstrated that creating new concentrated liquidity (CL) smart contracts is a complex task that can result in vulnerabilities and exploits.
With a new bull market on the horizon, countless new projects are expected to launch in the near to mid-term. These projects will need a reliable DEX for their token liquidity, and Balancer is well-positioned to meet this demand. With unique tools like ve8020, yield-bearing tech, LVR mitigation, and a mature, battle-tested incentives mechanism, Balancer is a one-stop shop for new projects to manage their liquidity. Stablecoin projects also find in Balancer a unique alternative to Curve, offering more flexibility, native yield-bearing handling, and unique products like Gyroscope’s E-CLPs.
Yield-Bearing Liquidity
Liquidity providers (LPs) are increasingly aware of the hidden costs of holding non-yield-bearing stablecoins like DAI or USDC. With macroeconomic conditions suggesting that interest rates will remain significantly above 0% for the foreseeable future, LPs are actively seeking ways to ensure their liquidity can capture yield - the rapid rise of liquid staking and, more recently, restaking projects highlights this trend. Balancer’s unique and modular design allows rate providers to adjust the price of yield-bearing assets in pools, enabling LPs to earn both swap fees and maintain exposure to yield.
While concentrated liquidity has proven to be one mechanism for increasing LP capital efficiency, Balancer v3 reimplements an optimized version of boosted pools that directs 100% of LP liquidity to on-chain yield markets. In v3, boosted pools will provide 100% exposure to yield-bearing assets (like aDAI) while abstracting the wrap/unwrap complexity for external users.
To improve gas efficiency, an innovative buffer will be introduced at the vault level. This buffer will hold a small reserve of both yield-bearing tokens and their underlying assets, facilitating most trades within the buffer. By minimizing the need for costly on-chain operations, this approach saves on gas fees and simplifies the functionality of boosted pools for users compared to Balancer v2.
The Holy Grail for AMMs: MEV Capture for LPs
It’s clear that all on-chain interactions are moving towards being executed in a fair, MEV-minimizing manner. For LPs to become more profitable, our industry must seek solutions to capture the MEV that currently ends up in the hands of validators.
Many protocols are exploring the creation of their own app-chains as a possible solution. While moving across networks has become easier, bridges remain highly risky and present a major UX problem. App-chains also lead to liquidity fragmentation and hinder composability — one of DeFi’s most beautiful characteristics.
Instead, it feels right for Balancer v3 to explore collaborations with intent-centric projects like CowSwap and their (re)solvers. This approach aims to find ways for LPs to reclaim the majority of the MEV they generate. With custom AMM logic and a hooks framework, Balancer v3 will enable third-party teams to innovate in this area over the coming years, supported by Balancer DAO and other partners.
The recent proposal to team up with our long-time partners at CowSwap to deploy CowAMMs at scale is a testament to this movement and will be a significant addition to the value that v3 brings.
A Note on the Future
As we look ahead, Balancer is poised for an exciting and transformative period. Our commitment to innovation will be showcased through a series of significant developments in the months to come. From chain expansions to the launch of a new UI, a refreshed brand look and feel, and new AMM products, each step brings us closer to realizing our vision with the release of Balancer v3.
While our initial estimate for launching Balancer v3 was set for Q2, we have updated this to Q4 of 2024 to allow for several thorough rounds of audits, including code-review competitions. Security remains our highest priority and this rigorous process ensures that the code, which is feature-complete and close to being frozen, will be production-ready and secure.
At Balancer, we are deeply committed to the principles of open-source software. The code for Balancer v3 will be licensed under GPL 3.0, reinforcing our dedication to transparency, collaboration, and the open-source community. This approach allows developers worldwide to freely use, modify, and contribute to the Balancer protocol, fostering innovation and trust in our ecosystem.
I am excited for what the future holds for our ecosystem. The innovations introduced by Balancer v3 provide a robust and flexible foundation that empowers developers to push the boundaries of what’s possible with AMMs. We all stand on the shoulders of giants, and it is through our collective efforts and shared vision that we will drive this industry forward.
