The Complete Guide to Balancer
A plain-English guide to Balancer, the automated market maker (AMM) with weighted pools. It covers how the pools and the Vault work, the BAL and veBAL token system, what changed in v3, where the yield comes from and what can go wrong.
What is Balancer?
Balancer is a decentralized finance (DeFi) protocol that runs an automated market maker (AMM): a set of smart contracts that let users swap tokens against pooled liquidity instead of matching orders. It launched on Ethereum in March 2020, founded by Fernando Martinelli and Mike McDonald of Balancer Labs. Its distinctive idea is the weighted pool. Where first-generation AMMs hold two tokens at equal value, a Balancer pool can hold several tokens at custom weights, per the Balancer whitepaper (see Sources).
Balancer generalises the constant product formula used by Uniswap into a weighted constant-mean formula. A weighted pool can hold up to eight tokens in any ratio, per the Balancer docs: for example 80% ETH and 20% USDC, or three assets at 33/33/34. Because arbitrage trades keep the pool at its target weights, liquidity providers hold something like a self-rebalancing index fund that collects swap fees rather than paying a management fee.
Programmable Liquidity
Pools can be created with custom token weights, swap fees and logic. Developers can build new AMM curves and, in v3, attach hooks to existing pool types.
Portfolio Manager
Arbitrageurs trade against the pool whenever it drifts from its target weights. Liquidity providers (LPs) earn fees on those trades instead of paying for rebalancing.
Capital Efficient
The Smart Order Router splits trades across pools to find a better price. The Vault settles only the net token transfers of a multi-hop swap, which saves gas.
How Balancer Works
Balancer's core is its weighted math, a generalisation of the constant product model (x * y = k). Each token in a pool has a weight, and the pool keeps a weighted product of its balances constant across every swap. This lets a pool hold uneven allocations while still quoting a price for any pair of its tokens. The formula is set out in the whitepaper and the Balancer docs (see Sources).
When a trader swaps on Balancer, the Smart Order Router (SOR) looks for the most efficient route across the available pools. For a large trade it may split the order across several pools to reduce price impact.
Weighted Pools
The original pool type. Each token has a weight (for example 80/20 or 60/20/20) that sets its share of the pool's value. The pool's invariant keeps the weighted product of the token balances constant.
An 80/20 ETH/USDC pool aims to keep 80% of its value in ETH and 20% in USDC. As market prices move, arbitrageurs trade against the pool until it is back at those weights, and LPs earn a swap fee on each trade.
Smart Order Routing
The SOR queries Balancer pools to find the best path for a trade. For large swaps it can split the order across several pools to reduce price impact. Traders get a better price and more pools see volume.
Aggregators such as 1inch, ParaSwap and CoW Protocol also route some of their trades through Balancer pools, so pools receive volume from users who never open the Balancer app.
The Vault
Introduced in Balancer v2 in 2021, the Vault is a single contract that holds and accounts for the tokens of every Balancer pool. Pool contracts only hold the pricing logic. Per the Balancer docs, this split is what makes the rest of the design possible.
A multi-hop swap through the Vault only transfers the net difference at the end of the transaction, which lowers gas costs. The Vault also offers flash loans: tokens borrowed and repaid within one transaction.
Flash Loans & Batch Swaps
Batch swaps run several swaps in one transaction and settle only the net token transfers. This makes routes with many hops cheaper than running each hop separately.
Flash loans let arbitrageurs borrow tokens from the Vault for the length of one transaction, use them to close a price gap between pools, and repay them before the transaction ends. This keeps pool prices close to the wider market. The flash loan fee is set by governance, per the Balancer docs.
Balancer Pool Types
Balancer supports several pool types, each built for a different use. The current list, and which types are deprecated, is in the Balancer docs (see Sources).
Weighted Pools
The most general pool type, with up to eight tokens at custom weights, per the Balancer docs. It suits index-style portfolios that earn trading fees. A common setup is an 80/20 pool that pairs a protocol's governance token with ETH; Balancer itself uses one for BAL/WETH.
Stable Pools
Built for tokens that trade near a 1:1 ratio, such as stablecoins (USDC, DAI, USDT) or liquid staking tokens against ETH (wstETH/WETH). Stable pools use a StableMath curve that keeps the price tight around the peg, so swaps between similar assets see less slippage. In v2 this type is called the Composable Stable Pool.
Linear Pools (v2, deprecated)
A v2 pool type that paired a base token (for example DAI) with its yield-bearing wrapper (for example aDAI from Aave) using a linear pricing curve. Linear pools were the building blocks of v2 boosted pools. Balancer deprecated them after a vulnerability disclosed in August 2023, per the Balancer forum. v3 replaces them with liquidity buffers.
Boosted Pools
Boosted pools send liquidity that is not needed for swaps to a lending market such as Aave, so LPs earn both swap fees and lending interest. In v3, a 100% boosted pool holds its whole balance in yield-bearing tokens (ERC-4626 vault shares), and a buffer of the underlying token handles swaps, per the Balancer v3 docs.
Providing Liquidity on Balancer
A liquidity provider (LP) deposits tokens into a pool and receives Balancer Pool Tokens (BPT) in return. BPT is an ERC-20 token that represents your share of the pool. Its value grows as the pool collects swap fees.
How to Provide Liquidity
Choose a Pool
Browse pools in the Balancer app. Check the annual percentage rate (APR), total value locked (TVL), token mix and pool type. A high APR often comes with higher risk.
Deposit Tokens
You can deposit all of a pool's tokens in proportion, or a single token. Single-token deposits are simpler but cause some price impact, depending on the pool's depth.
Earn & Stake
You receive BPT for your share. Stake the BPT in the pool's gauge to earn BAL rewards on top of swap fees, if the pool has a gauge.
Understanding Impermanent Loss
Impermanent loss (IL) is the gap between the value of your pool share and the value of simply holding the same tokens, when their prices move apart after you deposit. The larger the move, the larger the gap. Pool weights change how much IL you take:
50/50 Pools (Higher IL)
If one token doubles in price against the other, a 50/50 pool loses about 5.7% compared with holding, using the weighted pool formula in the Balancer docs. These pools tend to earn the most fees from two-way trading but carry more IL.
80/20 Pools (Lower IL)
With 80% of the pool in the volatile token, the same doubling produces an IL of roughly 3.3%, from the same formula. The pool keeps most of its exposure to the token that moved. This is one reason many protocols use 80/20 pools for their governance token.
BAL Token & veBAL Governance
BAL is the governance token of the Balancer protocol. Since 2022 its main use is the vote-escrow model, veBAL, which rewards holders who lock their position for longer. The full tokenomics are in the Balancer docs (see Sources).
BAL Tokenomics
veBAL System
To get veBAL, you first provide liquidity to the 80/20 BAL/WETH pool and receive BPT. You then lock that BPT for a period of up to one year. The longer the lock, the more veBAL you receive, and the amount decays as the lock runs down, per the Balancer docs.
Vote on gauge weights to direct BAL emissions to chosen pools
Receive a share of protocol fees; the split is set by governance vote (current figures on the forum)
Boost BAL rewards on your own staked liquidity by up to 2.5 times
Vote on Balancer Improvement Proposals (BIPs) through Snapshot
Gauge Votes & Vote Incentives
As with Curve, a market for gauge votes has grown around Balancer. A protocol that wants more BAL emissions for its pool can offer payments to veBAL holders who vote for that gauge, through vote-incentive platforms such as Hidden Hand. These payments add to the income of veBAL holders beyond protocol fees. Aura Finance pools veBAL on behalf of depositors and passes the boost and vote incentives through to them (see Sources).
Balancer v2 vs v3
Balancer has shipped three major versions. v1 (2020) had one contract per pool. v2 (2021) introduced the Vault. v3, launched on Ethereum mainnet in December 2024, adds hooks, simpler pool creation and native boosted pools, per the Balancer v3 docs. v2 pools still run alongside v3.
Feature
Balancer v2
Balancer v3
The most notable v3 feature is the hooks system. A hook is a separate contract that runs custom logic before or after a pool operation (a swap, a deposit or a withdrawal) without a new pool type. Per the Balancer v3 docs, this makes it easier to build things like dynamic swap fees or pools that adjust their own liquidity.
Yield Strategies on Balancer
Balancer LPs can earn from several layers at once. Each layer has its own source and its own risk. Live APR figures per pool are shown in the Balancer app, and live TVL on DefiLlama (see Sources).
Swap Fees
The base layer. Every trade through your pool pays a swap fee that stays in the pool, so the value of your BPT rises. Each pool sets its own fee within the range the protocol allows (0.0001% to 10% in v2, per the Balancer docs). Nothing needs to be claimed.
BAL Emissions & Gauge Staking
Stake your BPT in the pool's gauge to earn weekly BAL rewards. How much a pool receives depends on the veBAL votes directed to its gauge. veBAL holders can boost their own rewards by up to 2.5 times, per the Balancer docs.
Boosted Pool Yield
In a boosted pool, liquidity not needed for swaps sits in a lending market such as Aave or Morpho and earns interest. That interest comes on top of swap fees, so one deposit earns from two sources.
Composability & Advanced Strategies
BPT is a standard ERC-20 token, so it can be used in other protocols. Some common patterns, each with its own extra risk:
Nested Pools
Use the BPT of one pool as a token inside another pool, so one deposit spans several pools.
Aura Finance
Deposit BPT into Aura to receive boosted BAL rewards plus AURA tokens without locking veBAL yourself, per the Aura docs.
BPT as Collateral
Some lending markets accept certain BPT as collateral, so you can borrow against an LP position while it keeps earning fees.
Yield Aggregators
Platforms such as Beefy auto-compound Balancer rewards back into the position for a performance fee.
Risks of Using Balancer
Like every DeFi protocol, Balancer carries risks. Understand them before you deposit into any pool.
Impermanent Loss
When token prices move away from the ratio at which you deposited, your pool share is worth less than holding the tokens. The loss becomes permanent if you withdraw at that new ratio. Volatile pairs carry the most IL. Correlated pairs (stablecoins, LST/ETH) and weighted pools that lean toward your preferred asset reduce it.
Smart Contract Risk
Balancer's contracts have been audited by firms including Trail of Bits, OpenZeppelin and Certora (reports are in the GitHub repositories, see Sources), and the protocol runs a bug bounty. Audits do not remove risk. In August 2023 a flaw in some v2 boosted pools was exploited, and in November 2025 a rounding flaw in v2 Composable Stable Pools was exploited for more than $100 million across several networks, per the post-mortems on the Balancer forum. Check which pool version you use and read the latest security notices.
Pool-Specific Risks
Pool creation is permissionless: anyone can create a pool. Some pools hold tokens with malicious contracts, rebasing supply or fee-on-transfer logic that behave badly inside the Vault. Verify each token contract in a pool before you deposit, and prefer pools that Balancer governance has approved for a gauge.
Governance & Economic Risks
veBAL voters can move BAL emissions away from your pool, which cuts its reward APR. A large part of many pools' yield comes from BAL incentives, so if the BAL price falls, that yield falls with it, liquidity can leave and spreads can widen.
Frequently Asked Questions
What is Balancer?
How does Balancer differ from Uniswap?
What is veBAL and how does governance work?
What are the risks of providing liquidity on Balancer?
What is the difference between Balancer v2 and v3?
Continue Learning
Related articles and guides on DeFi liquidity and yield.
What is Balancer?
A short overview of the Balancer protocol, its main features and where it fits in DeFi.
Beefy Finance Guide
How Beefy auto-compounds Balancer and other DeFi yields across many chains.
Morpho Guide
How the Morpho lending protocol works, one of the lending markets that boosted pools can use.
Sources and further reading
The figures and claims on this page rest on the documents below. Time-sensitive figures (rates, yields, fees, market data) move: check the live value at the source before acting on it.
- Balancer documentationdocs.balancer.fi
Pool types, weighted math, the Vault, swap fee ranges, veBAL, gauges, boosts and the v3 hooks system.
- Balancer whitepaperbalancer.fi
The weighted constant-mean formula behind Balancer pools and the original design (2019).
- Balancer v2 monorepo (GitHub)github.com
Source code of the v2 Vault and pool contracts, plus the audit reports folder.
- Balancer v3 monorepo (GitHub)github.com
Source code of the v3 Vault, hooks and boosted pools, plus the v3 audit reports.
- Balancer governance forumforum.balancer.fi
Balancer Improvement Proposals (BIPs), the protocol fee split, and post-mortems of the August 2023 and November 2025 incidents.
- DefiLlama, Balancerdefillama.com
Live total value locked (TVL) and volume across Balancer deployments.
- Aura Finance documentationdocs.aura.finance
How Aura pools veBAL to boost BAL rewards for depositors.
Last reviewed: September 2026. External links open in a new tab; Coinstancy is not responsible for their content.
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