According to Balancer’s announcement, this will enable users to put their capital to work when it’s not being used as swap liquidity. The Aave-Balancer Asset Manager will take idle tokens from the Balancer V2 pool and route them to Aave to generate additional yield.
The company explained that a small buffer of each token, called the cash amount, will always be left in Balancer’s vault to avoid failed trades. If a token’s price begins to rise on the market, it becomes more scarce in the Balancer pool and its cash amount begins running out. The purpose of the Aave-Balancer Asset Manager is to replenish the cash amount of a token in Balancer’s vault by redeeming portions of the invested tokens on Aave.
If a token’s lower price makes it more abundant in the Balancer vault, the Asset Manager will increase the number of tokens invested in Aave.
Aave and Balancer are yet to decide on how often replenishments should happen and what the on-chain processes that trigger these actions should look like. Balancer noted these factors could include variables around the volatility of the token pair, the cost of wrapping and unwrapping tokens, Ethereum gas costs, and lending rates on Aave.
“This partnership will optimize on the above flow to find the most gas efficient way for liquidity providers to earn additional yield without added costs to swaps,” the company said in the announcement.
Balancer also called on other projects to integrate their own Asset Managers and customized AMM pools into the Balancer V2 ecosystem.