Why Balancer Boosted Pools will be the mainstream of the next generation of AMM and have astonishing potential?

The author Joey Wong is a member of Balancer DAO. This is not financial advice.

Balancer releases a promotional video for Aave Boosted Pools.

The Current Dilemma of DEX

Back in early 2021, when discussing the issue of capital efficiency in AMMs with Balancer founder Fernando, he mentioned the development of Boosted Pools. I was fascinated and believed it was the future of AMMs.

Finally, in December last year, Boosted Pools officially launched, and I became a member of the Balancer DAO, taking on the task of promoting Balancer's innovative technology to the public.

It is well known that DEXs currently rely on distributing their own tokens to attract depositors as liquidity providers. The competition is fierce, and the current high APR for liquidity pairs is unsustainable, as emissions from all protocols will gradually slow down.

Boosted Pools is a long-term and sustainable solution. It provides liquidity providers with higher capital efficiency, deeper liquidity, and increased returns.

Boosted Pools: The Future of Liquidity Provision

Many people do not realize that currently only 10% of the liquidity in AMM pools is used for trading, while the remaining 90% is idle. By depositing this idle capital into lending protocols, additional income can be generated.

Boosted Pools is the first pool ever to generate income by depositing idle liquidity into lending protocols.

Balancer Aave Boosted Pools annualized yield distribution:

Unlike directly placing interest-bearing tokens like aDAI into the pool, which incurs high gas fees due to the wrapping and unwrapping process during each exchange, Boosted Pools easily solves this issue.

The innovation of Boosted Pools lies in keeping a small portion of tokens in the pool, eliminating the need to wrap/unwrap with every exchange. This makes Balancer's liquidity more efficient and increases capital efficiency. With this innovation, liquidity providers in Balancer Aave Boosted Pools can receive up to quadruple rewards: Aave interest rates and liquidity mining rewards + Balancer trading fees and liquidity mining rewards determined by veBAL holders' votes.

At the time of writing, this pool has an annualized yield of 10.34%-23.24%, depending on how much veBAL is staked as LP. It is evident that just from trading fees + Aave interest and rewards, there is a 1.74% return.

Furthermore, the Aave Boosted Pools token for bb-a-USD can be nested in other pools. Why hold a WETH/DAI pool with idle DAI when you can have a WETH/bb-a-USD pool? By pairing with Boosted Pool tokens, you can establish direct connections between all stablecoins in WETH and bb-a-USD (DAI, USDC, USDT), and liquidity providers can earn additional interest from Aave.

Not limited to Aave, this technology can also be used with protocols like Compound, Yearn, Badger, Fuse, etc., that offer yields. It is not limited to stablecoins either; the friendly fork protocol Beethoven X collaborated with Yearn to launch the Boosted WBTC/WETH/FTM/USDC pool.

Outlook for the Next Generation of AMM Applications

Balancer Boosted Pools perfectly solve the issue of low capital efficiency in standard AMMs and Uni V2 forks. Therefore, I am certain that Balancer Boosted Pools will become mainstream in AMMs, and AMMs will be the future of trading. Foreign exchange trading will be a major application scenario for AMMs. According to a 2019 survey by the Bank for International Settlements, the global foreign exchange market is valued at approximately $240.9 trillion, with a daily trading volume of $6.6 trillion.

In real life, there are times when I need to exchange foreign currencies and make telegraphic transfers. Looking at the bank quotes below, in such a high-volume market, a 1% spread exists. If this spread were shared among AMM liquidity providers, it would be wonderful. Currently, Balancer stablecoin pool trading fees are <0.01%, meaning the minimum spread is 0.02% with no minimum trade limit. Imagine using AMM for foreign exchange paired with blockchain transfers; the fees would be much cheaper than traditional banks and provide instant settlement, compared to telegraphic transfers that may take up to three business days. Remittances need to align with bank hours to determine the settlement time, which is no longer practical.

Let's do a simple calculation: with a daily trading volume of $6.6 trillion in the foreign exchange market, if Balancer captures a 1% share, that's $66 billion, with a 0.01% trading fee amounting to $6,600,000 per day. Balancer currently charges a 50% platform fee, with 75% of that going to veBAL holders, totaling $2,475,000 per day, or $900 million annually. Liquidity providers can earn $3,300,000 per day, equating to $1.2 billion annually. When combined with Boosted Pools' idle liquidity lending, earnings can be further increased. Anyone can be a liquidity provider.

Words from a Crypto Native

As a crypto native, every time I return to reality and use traditional banking services, it feels like a civilized person going back to the primitive ages, feeling frustrated by the inefficient, cumbersome processes and high fees. Without a premium account, waiting in line for half an hour just to get service, merely to open an account or update a bank passbook. How much time does it take to open a new wallet? To exchange on Balancer and deposit into Aave, no application is needed. That freedom, autonomy, once experienced, there's no turning back.

Long live DeFi!

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