Uniswap
Uniswap was the first DEX to popularize the AMM formula, where liquidity providers deposit an equal dollar amount of two cryptos into a pool in exchange for liquidity pool tokens (LP). Traders can use this liquidity for a fee, and this fee goes back into the liquidity pool to be shared proportionally among all liquidity providers. Liquidity providers can withdraw their liquidity plus the fees they have earned from traders from the pool at any time by escrowing their LP token.
While this general model for structuring a DEX became popular and was replicated by other platforms, the AMM formula used by Uniswap was not exactly perfect for constant products. This relatively simple AMM formula was effective for trading most crypto assets, but slippage and divergent losses posed a problem for traders and liquidity providers in some pools. While anyone could create liquidity pools on Uniswap, the AMM formula limited the number of assets in the pool as well as the share of those assets.
curve financing
A major problem with DEXs using Uniswap’s AMM formula is that fees and slippage incurred by swapping cryptos are not ideal for trading between stablecoins and assets pegged to the same value, such as Liquid layout solutions. That’s where the Curve Finance DEX Curve modified the AMM formula to make it better for creating stablecoin pools that can be used for trading with low fees and low slippage.
Curve’s iterated AMM formula enabled new types of liquidity pools that made the DEX less rigid than its peers. For example, instead of limiting the number of assets in a liquidity pool to just two cryptos, Curve introduced tripools, which allowed the creation of liquidity pools with an equal dollar amount of three crypto assets. Additionally, the platform also introduced metapools, allowing a fourth asset to be traded with the three assets in an underlying tripool.
The lower trading fees and new types of liquidity pools made Curve one of the top destinations for trading stablecoins and synthetic assets on Ethereum and compatible Layer 2 networks. This is because liquidity providers could deposit their cryptos without taking on as much risk and traders could save money on swap fees while experiencing significantly less slippage. This ushered in the golden age of decentralized stablecoin trading, but more importantly, it opened the door for DEXs to develop even more flexible AMM formulas.
equalizer
Balancer took the AMM formula to the next level by making it even more customizable. First, we had Uniswap pools made up of equal parts of just two cryptos. Then Curve outperformed Uniswap by allowing the creation of tripools while reducing costs associated with fees and slippage. Finally, Balancer’s weighted pools removed these limitations by allowing the creation of liquidity pools of up to eight cryptos, as well as the ability to adjust the proportion of crypto assets in a pool.
This means that instead of liquidity pools that are either split 50:50 from two cryptos, like Uniswap, or made up of equal parts of just three cryptos, like Curve, weighted pools on balancers could be made up of any ratio from as to to eight cryptos. Therefore, liquidity pools on balancers are no longer limited to just three crypto assets, nor are they tied to the constant product formula that forces pools to hold an equal percentage of each crypto.
Balancer-weighted pools also showed how liquidity pools can be used beyond just facilitating crypto trading. While weighted pools generally function similarly to liquidity pools on other DEX platforms, Balancer believes their multi-asset liquidity pools bear a greater resemblance to crypto index funds, where liquidity providers are the investors taking exposure to many assets , and traders replace managers by rebalancing the pool with their token swaps.
If you evaluate them as crypto index funds, multi-asset pools are actually a much better deal for crypto investors than a traditional index fund because instead of paying fees to a fund manager, investors earn additional income from the swap fees, paid by traders using the liquidity pool. Balancer even goes one step further with managed pools, allowing the use of actively managed liquidity pools consisting of up to 50 cryptos.
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