Balancer Weights

In order to understand the behavior of the vault, it's important to understand how Balancer weights are linked to reserve amounts and spot prices.

Balancer weights define Balancer's relative internal valuation of pool reserves. For example, an 80-20% weight distribution between ETH and USDC means that Balancer will price the ETH reserves as 4x more valuable than the underlying USDC reserves. When Balancer quotes trades, the spot price (price between 2 assets assuming a very small trade amount) converges to a ratio between the weights and reserves in the following way: the larger the weight of the asset, the higher the spot price; the bigger the reserves of the asset, the smaller the spot price.

Reserves are controlled via trading, deposits and withdrawals. Spot prices cannot be controlled directly but weights can. For that reason, we see the Balancer weights as a control parameter for spot prices. Our objective in Aera is to control this parameter so that spot prices are as close as possible to the market price and arbitrage opportunities are minimal.

One mechanism with which we achieve that is when a deposit is made where the proportion of reserves will change, the weights are readjusted to maintain the pool spot price. Note: there is no guarantee that the spot price prior to a deposit was tracking market price so we always recommend disabling trading between making deposits/withdrawals in order to mitigate the risk of front running.