How to Create a Crypto Index Fund
You’ve probably heard of an index fund like the S&P 500. The Balancer protocol is like an index fund for cryptocurrency. Using it on the Ethereum mainnet, and now on Polygon, you can invest into a constantly rebalanced portfolio of some of the best cryptocurrencies out there. Let’s talk about what Balancer is, how you can get started, and why you should do so as soon as possible.
The Balancer protocol: a crypto index fund
Balancer is an “automated portfolio manager and trading platform”. The team at Balancer made it to make managing your crypto portfolio easier and safer — and it shows with over $1.8 billion in liquidity on the platform. Like other automated market makers Balancer allows users to set up liquidity pools for trading one cryptocurrency with another. Unlike other AMMs though, it lets you invest in up to 8 tokens at a time, pooling them together to provide liquidity to others. When the pool gets rebalanced through trades or deposits you gain fees.
Balancer also includes more advanced features like the ability to customize what assets you’re exposed to in the pool and custom price strategies. Balancer pools can also dynamically price fees to adjust for market conditions (these advanced features are not yet available on Polygon). Balancer is also one of the most secure platforms in DeFi with audits by top security firms, and the biggest bug bounty program in crypto.
One of the things I love most about Balancer is their goal to pass on the protocol to the community. They are constantly increasing what choices the community votes on using their governance token, BAL. Check out their Discord for more!
Creating an index fund on Polygon using Balancer
Balancer recently launched on the Polygon network and is incentivizing their pools for extra rewards for those that provide liquidity (more on those incentives in second). You can start getting involved now and earning rewards and trading fees. Head to https://polygon.balancer.fi/ and then connect your wallet.
Choose an index fund to invest in
Currently, with Balancer on Polygon, you have a set number of pools to invest in. You can see the list at their main site. Some pools feature only blue-chip tokens (well-known, “safer” cryptocurrencies) like Aave, ETH, Link, etc. while others feature quickly emerging favorites on the Polygon network from the likes of the Qi DAO and Adamant Vaults. Balancer chose their initial pools on Polygon from the input of key community members (they call some of these distinguished members “Ballers) and based off the repution of those tokens on Polygon. That’s a big thumbs up for the Qi, MAI, and ADDY tokens.
I have some ADDY and WMATIC I want to invest with, so I am going to choose the SUSHI / WMATIC / USDC / QI / WETH / QUICK / BAL / ADDY pool to invest in. This pool gives an equal distribution to each token (in this case around 13%). Because I don’t have the other tokens the pool will automatically trade my ADDY and WMATIC for all the tokens in the pool, exposing my portfolio to each with equal distribution. I also chose this pool because it’s got a pretty good APY right now of 704.42% plus airdropped MATIC rewards (more on that later).
Deposit tokens: the protocol does the rest
When you deposit into Balancer you’ll need to approve the protocol to use each of the tokens in the pool. After you do so you get to choose the balance you deposit of each token.
I want to invest my max balance of ADDY, WMATIC, and USDC so I click on “Max” next to each. If I had balances for the other tokens I could enter those as well and customize how much I deposit of each.
Rebalancing a deposit
Since I don’t have all the tokens in equal proportion the Balancer protocol will need to rebalance my investment. Once I click “Invest” it does so automatically. You can see what price impact that has on my investment at the bottom. To lower your price impact you can make sure that you have the same value in USD of each token in the pool to deposit. I am willing to stomach the cost though and will make it back up very quickly with fees/rewards.
After I’ve deposited I can review my investments at the Balancer site and see their total value, each pool’s balance, and the token distribution.
Wait for your rewards to accrue
After you’ve deposited at Balancer you’re good to go. The protocol will do the rest for you, automatically rebalancing the pools each time they are invested in or traded from.
You’ll receive rewards of BAL and pool fees immediately (the UI will indicate that soon) and during the initial launch of Balancer on Polygon also receive airdrops of MATIC each week on Wednesdays starting July 7. The Balancer team uses hourly snapshots of the pools to determine airdrop rewards. You won’t be able to know your exact rewards until the airdrop happens each week but trust me they are coming to your wallet!
Withdraw at anytime
Once you’ve deposited on Balancer you’re providing liquidity to thousands of others, getting fees paid to you, and rewards from incentivized pools. If you need some or all of your tokens you can withdrawal them at anytime. You can do so with all tokens at once for the best price or just one single token.
Note: if you choose to withdraw all your investment at the best price you will receive the same proportion of tokens as the pool. In this case I would get around 13% of my investment in each token, despite only depositing ADDY and WMATIC. You can see when I select to withdraw a single token the price impact.
Incentives for investing in Balancer
Right now Balancer, the Polygon Network, and the Qi DAO are incentivizing certain pools on Balancer. The incentivized pools appear in the list with yellow stars next to their APY. The incentives are distributed across the pools, with some receiving more and some less. As well, the pool with Qi and MAI will receive additional Qi airdrops.
You can review a breakdown of the rewards for each pool here. Over the next 8 weeks the incentives will include the following:
- 25,000 BAL per week from Balancer
- 375,000 MATIC per week from Polygon
- 15,000 Qi per week has also been committed by the Qi DAO has committed for the pool with Qi/MAI
I hope you can check out the protocol and start investing in those rewards soon. Thanks to the Balancer team for their great work and coming to Polygon!
Interested in hearing more directly from the Balancer team on their launch to Polygon? Check out the fireside chat with Davis Ramsey and the Qi DAO here.
Want to learn more about Adamant Vaults and their unique long-term stake and lock strategy? Visit their site.
Learn more about the Qi DAO and their stablecoin MAI at Mai.finance.
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