The Aave Protocol facilitates decentralised liquidity via a multi-pool approach, enabling users to access liquidity across various assets. In addition, the AMM Liquidity Pool allows Uniswap and Balancer’s liquidity providers (“LPs”) to use their LP tokens as collateral within the Protocol.
The Rise of Automated Market Makers (AMMs)
The advent of Uniswap in 2018 and the introduction of Automated Market Makers (AMMs) to the DeFi space have enabled Ethereum users to exchange assets without depending on centralized third-party middlemen. Furthermore, those providing liquidity can reap rewards from collecting fees.
How LP token works?
By offering liquidity, users will automatically obtain LP tokens from the AMM. Generally, LP tokens symbolize the crypto assets that were placed into the AMM along with a portion of trading charges gathered over time in the specific liquidity pool where assets were deposited. (Generally, the LP token stands for a 50/50 ratio with ETH and another crypto asset, making them potentially more secure than their underlying assets.) Given that LP tokens usually accumulate trading fees as long as the user’s resources stay in the liquidity pool, they may gain worth over time too.
AMMs are still one of the most reliable sources of passive income in the DeFi environment, even after all this time.
A first successful Proof of Concept
Last year, the Aave Protocol created a proof of concept entitled “AMM Liquidity Pool” facilitated by the “Aave Uniswap V1 Market”, allowing users to place their Uniswap v1 LP tokens in the Aave Protocol as security. Due to the interest surrounding this pool, users will now be able to take advantage of LP tokens from multiple AMMs, with suggestions and conclusions from Aave Governance deciding which AMM protocols and collateral are included.
The Multi-Market Approach
The AMM Market is Aave’s pioneering venture into the realm of markets, situated on Ethereum and possibly other networks too, giving users the opportunity to explore “new frontiers” with Aave.
Launch Collaterals and Protocol Support Phase 1:
Starting today, people can start transferring LP tokens from both Uniswap v2 and Balancer.
Uniswap has become the main force driving AMM protocols. Its strong, straightforward code and creative approach have motivated participants from a variety of blockchains.
Uniswap sees tremendous daily activity and holds $4 billion in liquidity.
At the beginning, the following Uniswap V2 LP tokens are available:
- DAI/USDC
- WBTC/USDC
- DAI/WETH
- USDC/WETH
- AAVE/WETH
- LINK/WETH
- BAT/WETH
- SNX/WETH
- UNI/WETH
- YFI/WETH
- CRV/WETH
- MKR/WETH
- REN/WETH
- WBTC/WETH
Balancer, a pioneering AMM in the space, has altered the conventional 50/50 ratio with its advanced smart pool system.
Balancer and the Aave Protocol have important mutual benefits. Balancer helps to secure Aave liquidity providers by co-hosting part of the Aave Safety Module.
Furthermore, due to its smart pool architecture, holders of Balancer LP tokens will receive BAL rewards on a weekly basis.
The following Balancer LP tokens (BPT) are supported:
- WBTC/WETH
- BAL/WETH
At present, those who put in LP tokens can obtain a loan of the following cryptocurrencies: DAI, USDC, ETH, wBTC and USDT. Additionally, people who deposit DAI, USDC, ETH and wBTC are allowed to borrow tokens.
To calculate the worth of the LP tokens from Uniswap and Balancer, Aave Protocol is using Chainlink’s decentralized oracle service. The smart-contract for this calculation has been examined by ConsenSys Diligence.
Launch Collaterals and Protocol Support Phase 2:
Once established, it will be feasible to deploy extra AMM liquidity pools in the future, especially if Aave Governance suggests it. Such pools will be available in a second stage (coming soon). The entire AMM liquidity pools will be presented to Aave Governance promptly.
At the outset, the Aave Safety Module will not provide coverage for AMM Liquidity Pools; however, Aave Governance has the power to include them in their processes via an AIP (Aave Improvement Proposal).
The Aave community will decide on the following steps
The Aave Protocol is not managed by any single entity but is instead controlled by its AAVE token holders (known as “Aave Governance”). If you would like to suggest new collaterals or AMM protocols, please post your proposals in the governance forum and contact your community representative to whom you have delegated your votes.
We look forward to your involvement in the growth of the AMM Liquidity Pools.
