One challenge with explaining what Aura Finance does is that you first have to understand a bit about Balancer.
This article aims to provide you with the necessary prerequisite information about Balancer and its tokenomics so that you can understand why Aura exists.
It isn’t a deep technical dive showcasing all of the impressive innovations Balancer has built – and there are many of them. Instead, this is going to be closer to an “Explain it like I’m 5” version, aiming to arm you with the minimum necessary knowledge before we get deeper into the Balancer-Aura flywheel.
An Absurdly Brief Explanation of Balancer
Balancer is a decentralized exchange (DEX) that runs on multiple blockchains. It makes it possible for users to trade between crypto assets without needing an intermediary to custody them.
For a user to trade assets, there has to first be liquidity. That’s where liquidity providers (LPs) come in. LPs deposit their assets into a pool and earn fees when users swap between tokens. There are also other sources of yield that we’ll discuss later.
Liquidity pools and the decision to become an LP are beyond the scope of this article, but if you want to learn more, the video below would be a good start.
Guide to understanding liquidity pools
BAL Token Emissions
To keep things brief, we’ll skip many details about the BAL token and only cover what you need to know to understand Aura. But, as always, the Balancer docs are a great source of information if you’d like to dive deeper.
BAL tokens are continuously released into circulation every block. Like Bitcoin, the inflation rate halves every four years, but for BAL it’s smoothed out to be a reduction of ~15.9% per year.
Where do these new BAL tokens go?
They are emitted into the various pools as an incentive for users to provide liquidity. To be eligible, a pool needs to be approved by veBAL voters for a ‘gauge’.
Wait. veBAL? Yep.
We’re ready to move on to the next step, which will help you understand why somebody might be interested in the BAL token despite the inflation.
What’s veBAL?
veBAL stands for vote-escrow BAL. Holding veBAL has a variety of benefits, including:
A portion of Balancer protocol fees
Balancer earns fees when users swap between assets along with a portion of yield from yield-bearing assets. I’ll again refer you to the Balancer Docs for the most up-to-date fee splits.
To keep it simple, Balancer makes money, and some of that goes to veBAL holders.
Boosted yield for liquidity providers
Remember how BAL emissions get sent to the various pools? Well, LPs in those pools can earn extra yield if they hold veBAL.
Balancer pools will show a yield range, with part of that yield coming from BAL emissions. LPs without any veBAL will earn the lowest yield, while those eligible for the max will earn up to 2.5x.
To be eligible for the max 2.5x boost, you need to hold a significant amount of veBAL relative to the size of your LP position. But for a more nuanced understanding, you can refer to the docs.
Governance, including directing emissions
veBAL holders govern the Balancer protocol. This includes deciding which pools will receive BAL emissions.
Because protocols often want deep liquidity for their tokens, they’re willing to pay veBAL holders to vote for their pools via vote marketplaces like Hidden Hand, Warden, and Votemarket. These incentives substantially impact the revenue that flows to veBAL holders.
How to get veBAL?
Bear with me here, it might sound complicated, but it’s not that bad.
To get veBAL, users would need to lock a BAL/WETH LP position for up to 1 year. It’s an 80/20 pool, meaning, that 80% of the pool is composed of BAL and 20% WETH. This is useful as it ensures the BAL token always has deep liquidity.
By locking this BAL/WETH LP position, users will receive veBAL which gives all the benefits discussed above. However, the amount of veBAL a user receives will depend on how long the LP position is locked.
As a simplified example, you might receive 1 veBAL for locking your position for a full year, but if you were to only lock for 26 weeks, you’d receive ½ veBAL. In short, the longer you lock, the more veBAL you’ll receive.
The position also decays. If you lock for a year and receive 1 veBAL, after 6 months, you’d only have ½ veBAL. However, you can always extend the length of your lock to receive the maximum amount of veBAL.
This creates the effect of constantly relocking veBAL or facing diminishing benefits over time.
This also leads us nicely into Aura.
The Aura-Balancer Relationship
Now that you understand the basics of Balancer, we can finally discuss Aura.
It was built on top of Balancer and separates each of the three veBAL benefits so they can be delivered to the party most interested in them. By doing so, Aura expands the pie, increasing the number of users willing to lock veBAL.
In our next article, we’ll explore Aura and how it works exactly.
