Balancer, a high-potential, permission-less automated market maker (AMM), has collaborated with popular lending portal Aave to launch Balancer V2 Asset Manager for investors. The new hybrid liquidity and lending solution will play a significant role in boosting earnings by routing idle assets in V2 pools to Aave for generating higher yields. The Balancer Labs released an official Twitter post stating:
Balancer is proud to announce a partnership with @aaveaave to build out the first V2 Asset Manager.
This allows idle assets in V2 pools to earn yield on Aave without increased gas costs for swaps.
All you need to know ⬇️https://t.co/qC5TYEpKI1
— Balancer Labs (@BalancerLabs) February 23, 2021
According to a post by Balancer CEO Fernando Martinelli, Balancer V2 Asset Manager will revolutionize the industry. The partnership will optimize the flow to find the most efficient way for Liquidity Providers to increase yield without additional costs to swaps.
Liquidity providers will earn returns on their deposits through trading fees and yield from Balancer along with Aave’s lending interest. Balancer allows investors to deposit their assets in a liquidity pool for secured asset trading. Traders earn a part of trading fees and yield farming income as BAL, the firm’s native currency. Most of the liquidity in AMMs is often unused.
The issue with AMMs is that as the token becomes more expensive, its balance will decrease as users buy it to a point where its amount in cash would be zero and any swap attempts to buy this token would fail. This is when the Asset Manager replenishes the cash amount of the said token by redeeming a portion of the invested tokens on Aave and sending them back to the Balancer vault to prevent swaps from failing. The teams at Balancer and Aave are reserarching to identify how often replenishments should happen and what the on-chain processes to trigger them are. This includes variables around the volatility of the token pair, the cost of wrapping and unwrapping tokens, Ethereum gas costs, and Aave lending rates.
The new product will solve this issue and will help traders maximize their income. The unutilized tokens in AMM pools will be lent to Aave to fetch additional yields. The automated and secured Asset Manager solution will facilitate the easy transfer of money between the two channels. This powerful collaboration of both BAL and AAVE protocols will further grow the DeFi space.
The partnership sets the stage for further integrations between the two protocols, including research around new money markets and ways for tokens on Balancer V2 to be used as collateral on Aave. Potential projects include an AAVE/ETH Balancer pool that is integral to Aave’s Safety Module insurance architecture.