Flexible. Personal. The most customizable thing in DeFi.
Before Balancer released the innovative weighted pool, every liquidity pool had to be an equal 50/50 split between just two assets. Weighted pools aren't confined by these rules and allow for customizable token weights with up to 8 different assets, revolutionizing indices on the blockchain. Weighted pools unlock a simple, laid-back, and personalized solution to portfolio management.
Weighted Pools are a generalization of the standard constant product AMM popularized by Uniswap. Each pool can contain up to 8 different tokens and each token is assigned a weight defining what fraction of the pool is made up by each asset. Balancer's weighted pool equation is a generalization of the x*y=k by accounting for uneven weights and more assets:
Where V is constant, Bt is an asset’s balance, and Wt is an asset’s weight in the pool.
Every time a trade takes place, the internal price of each token within the pool changes slightly. Traders and arbitrageurs are then incentivised to rebalance the pool by making swaps. This maintains the desired weighting of the value held by each token whilst collecting trading fees from the traders. This AMM design turns the idea of an Index Fund on its head. Instead of users paying someone to manage a portfolio, users are paid to hold assets in the ratios they choose!
Pool creators have complete control and can determine the weights of the pool upon creation. No longer are pools bound by simple 50/50 logic. There is limitless flexibility. Utilize the efficiency of an 80/20, build an 8 token index fund or choose a bluechip 33/33/33 pool. Un-lim-it-ed.
Users have a plethora of Weighted Pools to choose from on the DEX, but free reign is also given to users to build their own personal pools. The pool constructor allows users to select the specific assets and weighting for a pool they wish to invest in. The power of the weighted pool!
Flip the idea of an index fund on its head! Instead of paying portfolio managers to rebalance and organize asset allocations, weighted pools are rebalanced automatically by traders; instead of investors paying the fee, they earn a fee every time traders swap using their assets.
Whatever the market conditions, users can earn an additional extra yield on personalized liquidity pools that match their portfolio allocation. DeFi unlocks the possibilities for users to not only benefit from the appreciation of token prices but also earn yield from the swapping of tokens within liquidity pools.
Weighted pools that heavily weigh one asset over another (95/5) will experience far less impermanent loss (IL) compared to a pool with more equal weightings (50/50). Users can limit exposure to IL by choosing a pool with weightings that fit their risk appetite.
Weighted pools utilize dynamic swap fees. The fees set by the pool can constantly adapt to match the demands of the market. Rather than earn at a fixed rate, LPs can benefit from a dynamic swap fee that ensures optimal profitability is captured during all market conditions.