In the new feat of decentralized finance money Lego magic, Aave’s lending network and automated market maker Balancer have teamed up with a hybrid liquidity and lending functionality that can dramatically fatten depositor yields.
In a blog post on Tuesday, Balancer CEO Fernando Martinelli announced plans for the project, renamed Balancer V2 Asset Manager. In effect, incorporation would allow users to receive two types of return on their deposits: trading fees and farm yield from Balancer, in addition to lending interest from Aave.
In Balancer’s current architecture, consumers are depositing funds into a liquidity pool to allow for decentralized asset exchange. In exchange, a portion of the trade fees is granted, in addition to yielding farm returns in the form of the Balancer’s native governance token, BAL.
However, most of the reserves in AMM pools are always wasted, since they are not needed unless there is an exceptionally significant exchange.
“Large trades cause a lot of slippage, so traders avoid them. This means that as long as prices don’t shift too much, a pool would be able to facilitate exactly the same trades with much lower liquidity actually being available,”
Please enter the Aave-Balancer Fund Manager. Unused balancer liquidity tokens will be lent to Aave for extra earnings, with the electronic asset manager enabling the movement of funds between protocols.
This allows two of DeFi’s most strong, most popular Lego bricks to be merged—what Martinelli said in his comment to Cointelegraph is “the best of both worlds.”
If prospective users want to predict the types of returns that might lead to, Martinelli proposed a basic mix of Balancer yields with 80% of Aave yields at the top:
“I’d say maybe around 80% of the average of the AAVE yields of the different tokens + all the trading fees from Balancer. 80% because we will keep a buffer (20% I’d estimate) for swaps to be able to happen.”
Many architectural specifics are still being ironed out, especially with regard to the criteria of swaps between protocols. Researcher Alex Evans at Placeholder Projects is researching swap optimizations, and Martinelli noted that “holders” responsible for swap execution have yet to be selected, and there is ongoing research about how to promote keepers as well.