Cover photo

What is Aura Finance?

You may have heard Aura Finance referred to as many different things: a protocol built on top of Balancer, a yield optimizer, a meta-governance layer, or something else that made your eyes glaze over.

We haven't even gotten into the tokens yet: BAL, AURA, veBAL, auraBAL, vlAURA, and there are others still.

This article aims to explain Aura thoroughly but in a simple and jargon-free manner so that you don't feel like you kinda-sorta-maybe understand what Aura is.

Before we get into it, you'll first need to have some background knowledge of Balancer. If you haven't yet read our Intro to Balancer article, now would be a good time to do so.

TLDR: What is Aura?

Aura is different things to different people.

  • For liquidity providers on Balancer, it's how they earn boosted yield.

  • For BAL stakers, it's how they earn extra yield while avoiding token locks.

  • For protocols, it's how they deepen liquidity for their tokens.

Are you ready to take a deep dive into DeFi's liquidity layer?

Understanding the Aura Protocol

As we learned, veBAL has three primary benefits; however, each will appeal to slightly different groups of users.

  • LPs will care most about boosting yield.

  • Investors may want exposure to BAL price action and fee distribution.

  • Protocols care about being able to direct BAL emissions to deepen liquidity for their tokens.

The Aura protocol was designed to sit on top of Balancer. It separates each veBAL use case so that the different groups can receive the benefits they most care about.

Aura helps liquidity providers on Balancer earn more yield

As mentioned earlier, the yield that LPs on Balancer earn depends on how much veBAL they hold.

However, your typical LP will want to earn the maximum yield possible but may not be interested in holding veBAL.

Because the Aura protocol controls a significant amount of veBAL, it can provide boosted rewards to Balancer LPs without individual LPs needing to lock up veBAL themselves.

By staking Balancer liquidity positions on Aura, users not only earn higher yield without needing veBAL but also receive yield in the AURA token, which we'll discuss later.

LPs who stake their position on Aura pay a 22.5% performance fee on the BAL emissions they receive. This fee incentivizes more people to lock their BAL tokens into Aura, ensuring more pools can receive boosted rewards.

Aura helps investors earn extra yield without needing to lock veBAL

Investors may want exposure to BAL price action and revenue that the protocol distributes without locking (and regularly relocking) their tokens as veBAL.

To facilitate this, Aura has created auraBAL, a liquid derivative that can be minted 1-1 for BAL. auraBAL earns the same fees as veBAL, plus a majority of fees that Aura charges LPs for boosting rewards, along with AURA emissions.

Because of this, auraBAL earns more yield than veBAL without requiring locking tokens.

While 1 BAL can always be used to mint 1 auraBAL, this doesn't mean you can always exchange 1 auraBAL for 1 BAL. Any BAL locked in Aura remains locked in perpetuity, so it's not possible to withdraw your BAL from Aura.

Instead, incentivized liquidity pools exist for users wishing to trade between auraBAL and BAL. However, the price of auraBAL depends on market demand and is often discounted compared to BAL.

This Dune dashboard can help you see more statistics and historical exchange rates for auraBAL.

Aura directs the flow of incentives to Balancer pools

The final form of value that veBAL provides is the ability to vote on which Balancer pools receive BAL emissions. While an average LP or investor may not care much about this, protocols that need deep liquidity for their tokens do ‚Äď and they're often willing to pay for this liquidity.

auraBAL holders forfeit the right to vote on which pools receive BAL incentives in return for additional yield and a liquid token.

This is where the AURA token, particularly vlAURA, finally comes into play.

Understanding the AURA token and vlAURA

The final step in understanding the Aura-Balancer flywheel is to understand the role that the AURA token, particularly vlAURA, plays in the ecosystem.

Unlike other protocols, most AURA tokens aren't distributed based on time but depend on how many BAL tokens get locked into the protocol, with higher emissions earlier in the protocol's life.

Once again, we'll keep this a high-level overview rather than getting into all of the details. The Aura docs have more information about the AURA token distribution.

Protocols pay vlAURA holders to vote for their pools

As discussed, Aura separates the various benefits of veBAL into separate components. The final component is the right to decide which Balancer pools will receive BAL emissions and vote on other governance proposals.

To have this right, users must lock their AURA as vlAURA (vote-locked AURA) for 16 weeks. After doing so, users can vote on bi-weekly gauge votes, deciding which pools will receive BAL and AURA emissions.

For more details on the vlAURA voting process, refer to the Aura docs.

This ability to decide which pools receive emissions is particularly valuable for protocols that require deep liquidity for their token. Many protocols, such as Aave and Gnosis, have decided to accumulate and lock AURA.

Holding vlAURA allows a protocol to direct emissions to their pools indefinitely, much like buying a home means you can live there forever.

Similarly to the housing market, renting is common, and we see this with vote markets such as Hidden Hand. These markets enable protocols to pay vlAURA holders for their votes ‚Äď essentially renting liquidity for their pools.

This vote rental market has driven significant value to vlAURA holders. For the most up-to-date data, refer to Aura's Defilytica page.

Wrapping Things Up

I hope that this has been a good introduction to understanding Aura without going too deep into the weeds.

The gist of Aura is that it separates the various benefits of veBAL so users can get exposure to only the part they care about, which makes the value of veBAL available to more users.

Plenty more is worth discussing, and this could have been 10 times longer. If you have more questions, the Balancer Docs and Aura Docs would be good starting places. The Aura Discord is also great for asking questions or hanging out.

Collect this post to permanently own it.
Aura Finance logo
Subscribe to Aura Finance and never miss a post.