Aave and Balancer collaborate to launch hybrid AMM liquidity pools and lending products

This article is from Cointelegraph Chinese.

In the latest feat of decentralized finance's Lego-like magic, the lending platform Aave and the automated market maker Balancer have teamed up to launch a hybrid liquidity and lending feature, which could significantly increase the yields for depositors.

In a blog post on Tuesday, Balancer CEO Fernando Martinelli unveiled the project plans, referring to it as the Balancer V2 Asset Manager. Essentially, this integration will allow users to earn two forms of returns from their deposits, in addition to the interest earned from borrowing on Aave: Balancer's trading fees and liquidity mining rewards, as well as the loan interest from Aave.

In Balancer's current architecture, users deposit funds into liquidity pools for decentralized asset trading. In exchange, they receive a portion of the trading fees, along with liquidity mining rewards in the form of Balancer's native governance token, BAL.

However, most assets in AMM pools are typically idle, as they are not needed unless there are particularly large trades.

The article states, "Large trades lead to significant slippage, so traders avoid making such large trades. This means that as long as price movements are not substantial, the pool can facilitate exactly the same trades with much lower actual available liquidity."

Through the Aave-Balancer Asset Manager, unused tokens in Balancer's liquidity pools will be lent to Aave to earn additional yields, while the automated asset manager will assist in the transfer of funds between the protocols.

This allows for the fusion of the two most powerful and common Lego blocks in DeFi. Martinelli stated in a comment to Cointelegraph that this is a "win-win" situation.

If potential users want to estimate the possible returns, Martinelli suggests simply combining 80% of Balancer's yields with Aave's yields.

"I would say that (the returns) could be the average 80% AAVE yield of different tokens plus all of Balancer's trading fees. The 80% is because we will reserve part of the cache in the treasury for potential swaps (I estimate around 20%)."

Many architectural details remain to be resolved, particularly the parameters for swaps between protocols. Placeholder Ventures researcher Alex Evans is studying the optimization of swaps, and Martinelli noted that the "custodian" responsible for executing the swaps has yet to be chosen, with research ongoing regarding how to incentivize the custodian.

This feature is expected to be released shortly after the launch of Balancer V2 in March.

The article also notes that the two protocols may engage in deeper collaboration, such as using Balancer LP tokens as collateral for Aave. Similarly, this cross-protocol yield plan is just one of many other integrations between the two projects, which also includes the AAVE / ETH Balancer pool playing a key role in Aave's security module insurance architecture.