The Aave lending platform and the automated market maker (AMM) Balancer have teamed up in the recent DeFi Geldlego-Magie (Decentral Finance) feat to develop a hybrid liquidity and lending function that can significantly increase depositor returns.
In a blog post today, Balancer CEO Fernando Martinelli revealed plans for the project, the Balancer V2 Asset Manager. In essence, the integration allows users to get two types of return on their deposits: trading fees and income farming from Balancer, and rental rates from Aave.
In the current architecture of Balancer, users put money into a liquidity pool to enable decentralized trading in assets. In return, they receive a portion of the trading fees as well as income returns in the form of Balancer’s Native Governance Token BAL.
However, most of the assets in AMM pools are often left unused as they are only needed when there is an unusually large trade.
“Big trades cause a lot of slip, so traders avoid them. This means that as long as prices don’t shift too much, a pool can allow the exact same trades with actually much less liquidity, ”the blog says.
Call up the Aave-Balancer Asset Manager. Unused tokens in the balancer liquidity pool are loaned to Aave for additional returns. The automated asset manager makes it easy to transfer funds between protocols.
This enables a fusion of two of DeFi’s most powerful and widely used Lego bricks – what Martinelli said in a statement to Cointelegraph is “the best of both worlds”.
When potential users want to estimate what returns this could lead to, Martinelli suggests a simple combination of balancer returns with 80% of the Aave returns:
“I would say maybe around 80% of the average AAVE returns on the various tokens + all of Balancer’s trading fees. 80% because we keep a buffer (20% I would estimate) for swaps to take place.”
Many of the architectural details are still being ironed out, particularly those relating to the parameters of the swaps between protocols. Placeholder Ventures researcher Alex Evans is investigating swap optimizations and Martinelli notes that the keepers responsible for executing the swaps have not yet been selected, and research is underway on how to incentivize keepers as well.
The blog also notes that closer collaborations like Balancer LP tokens may be pending as security for Aave.