Should you stake your crypto assets in liquidity pools or lending? This question might soon become obsolete, as liquidity in Balancer pools will be used in lending on Aave as well.
Balancer Builds Asset Manager in Cooperation with Aave
On their Medium blog, Balancer has announced a partnership with Aave, under which a part of each liquidity pool on Balancer will become available to deposit on Aave, where it will facilitate lending. This process will be controlled by Balancer’s asset manager, which automatically supplies tokens to Aave when they are not needed in the pool. This reduces the total amount of dead capital staked in the swap protocol’s AMMs.
In practice, AMMs profit from having a high amount of liquidity staked to them, as this reduces price slippage when traders use the AMM to process token swaps. This however means that a large percentage of the pool is theoretically not needed. Balancer’s asset manager will automatically deposit the unused liquidity on Aave, thus earning additional yield.
Only a small proportion of the liquidity will remain in the Balancer pool so that the pool will not run empty when a large trade comes in. The asset manager will occasionally supply more tokens to Aave if there is an overabundance, or withdraw tokens if they are needed in the pool.
The Aave-Balancer Asset Manager replenishes the cash amounts in the Balancer vault to prevent trades from failing and continually invests more tokens in Aave to maximize yield.
We're working on a number of ways to optimize these strategies leading up to V2 launch! pic.twitter.com/0IYNKOuayT
— Balancer Labs (@BalancerLabs) February 23, 2021
Another Addition to the V2 Protocol Upgrade
The asset manager will be part of Balancer’s effort on the protocol upgrade to version 2, which was announced earlier this month. Under the new protocol, all liquidity pools will be managed by a single vault, rather than having their swapping logic separated. This improves gas efficiency by saving the gas needed to request tokens from multiple vaults.
Moreover, Balancer V2 will allow users to hold internal token balances. Instead of initiating a transfer of ERC-20 tokens whenever a swap takes place, high-frequency traders can simply keep their tokens inside the pool through an internal balance update, which further reduces the gas costs. If needed, users can then withdraw their tokens through an ERC-20 transfer, or swap them into another asset as they wish.
Introducing Balancer V2 – the protocol for generalized AMMs
Balancer V2 is flexible, secure, and efficient.
Here’s what you need to know. 👇https://t.co/A0DbYJsmn4
— Balancer Labs (@BalancerLabs) February 2, 2021