Aave and Balancer announce hybrid AMM liquidity pool and loan product
In the latest decentralized finance cash feat, lending platform Aave and automated market maker Balancer have teamed up on a hybrid liquidity and lending feature that could dramatically increase depositor returns.
In a blog post on Tuesday, Balancer CEO Fernando Martinelli unveiled plans for the project, dubbed Balancer V2 Asset Manager. In essence, the integration will allow users to earn two forms of return on their deposits: trading fees and Balancer Yield Farming, in addition to Aave loan interest.
In the current Balancer architecture, users deposit funds into a liquidity pool to enable decentralized asset trading. In return, they receive a portion of the trading fees, in addition to farm returns in the form of Balancer’s native governance token, BAL.
However, the majority of assets in AMM pools often remain unused, as they are not needed unless there is unusually large trade.
“Big trades cause a lot of slippage, so traders avoid them. This means that as long as the prices don’t change too much, a pool would be able to facilitate exactly the same transactions with much lower liquidity actually being available, ”the Pos blog read.
Enter the Aave-Balancer asset manager. Unused tokens from the Balancer liquidity pool will be loaned to Aave to earn additional returns, with the automated asset manager making it easy to transfer funds between protocols.
This allows for a fusion of two of DeFi’s most powerful and common Lego bricks – what Martinelli said in a statement to TBEN is “the best of both worlds.”
If potential users want to estimate the types of returns this could lead to, Martinelli suggested a simple combination of Balancer returns with 80% more Aave returns:
“I would say maybe around 80% of the average Aave returns of the different tokens + all of Balancer’s trading fees. 80% because we will keep a buffer (20% I think) so that the swaps can take place.“
Many architectural details are still being finalized, in particular with regard to the parameters of the exchanges between protocols. Placeholder Ventures researcher Alex Evans is studying swap optimizations, and Martinelli noted that the “gatekeepers” responsible for executing swaps have yet to be chosen and that research is underway on how to incentivize swap optimizations holders.
The feature is slated for release “not too long ago” after the launch of Balancer V2 in March.
The blog also notes that deeper collaborations, such as the Balancer LP tokens as collateral on Aave, may be on the way. Likewise, this cross-protocol performance initiative is just one of many other cross-project integrations, including an AAVE / ETH balancing pool that plays a key role in the security module assurance architecture of Aave.
