Clarification on Balancer Pools
There has been a lot of discussion around the balancer pools tokens losing value in the latest market downturn, despite the fact that they are delta-neutral. The point of this document is to clarify the details of the balancer delta-neutral pools.
It was our understanding that these pools were constructed in such a way that they were delta-neutral. However, we now realise that this comes with the embedded assumption that there is also constant rebalance within the perpetual pools. It’s more accurate to say that when the skew is one (equal value in both sides of the pool), the balancer pools are in fact delta neutral.
In the case where skew >1 (meaning the collateral in long pool is greater than the collateral in the short pool) actually favours the balancer pools as the short pool tokens increase in value greater than what the long assets decrease in value. This situation is likely to occur at a time when the market is upwards trending, and the long pools constantly accrue value from the short pool.
However, in the case where skew <1 (collateral in short pool is greater that long pool), this will (likely) result in the balancer pools losing money, due to the fact that the Balancer Pools’ long assets are losing more than the short pool tokens are gaining (due to the adverse skew). eg during the latest crash the leveraged gains on the 3p short tokens went below 3 (in some cases, as low as 1.8 leverage). In such a case, the gains of the short token are far less than the loss of the collateral in the pool.
This aspect of the pools was overlooked, as we constructed these balancer pools to farm the skew - meaning that they implicitly assume that the pools will most of the time have a skew >1.
We are sorry about this and would like to make everyone aware of this aspect of the balancer pools.
We are currently working internally to consider how to go forward given this situation.