AMM Market

Aave's Automated Market Maker Market for Liquidity Pool Tokens

The new Aave AMM Liquidity Pool enables liquidity providers (“LPs”) of Uniswap and Balancer to use their LP tokens as collateral in the Aave Protocol.

It is the first of many markets of Aave, on Ethereum, and potentially also on different networks, allowing the community to explore “new frontiers” while segregating risk profiles within markets. The new market light deployment has been audited by Peckshield.

How do LP tokens work?

By providing liquidity, users automatically obtain LP tokens from the AMM. In most cases, LP tokens represent the crypto assets the user deposited into the AMM along with a proportional scale of the trading fees collected over time in the particular liquidity pool into which the user deposited assets. Because LP tokens typically accrue trading fees over the time the user’s assets remain in the liquidity pool, the LP tokens potentially accrue value over time as well. Uniswap V2 LP token holds a 50/50 ratio of the tokens. Balancer is one of the most innovative AMMs in the ecosystem. Their smart pool system broke the 50/50 ratio status quo and allowed for more sophisticated liquidity pools.

Risks

LP tokens risks are proportional to the underlying components. LP tokens are subject to impermanent loss that emerges from the difference in volatility of the underlying assets and the rebalancing of the AMM pools. This additional risk, is mitigated by the diversification benefits of having various assets as well as the fee accrual.

AMM Risk Map

Furthermore the structured nature of LP tokens, leads to more complex liquidations with an additional step to redeem the underlying assets on the corresponding platform. This results in higher gas costs with cascading effects in case of network congestion. To smooth the process, the liquidation bonus is set at 15% for all LP tokens.

At this time, users may borrow the following crypto assets: DAI, USDC, ETH, wBTC and USDT.

Risk Parameters

Asset

Currency

Collateral

Loan to Value

Liquidation threshold

Liquidation bonus

Reserve Factor

DAI

Yes

Yes

75%

80%

5%

10%

USDC

Yes

Yes

80%

85%

5%

10%

USDT

Yes

No

WBTC

Yes

Yes

70%

75%

10%

20%

WETH

Yes

Yes

80%

82.5%

5%

10%

Uniswap V2 AAVE/WETH

Yes

Yes

60%

70%

15%

5%

Uniswap V2 BAT/WETH

Yes

Yes

60%

70%

15%

15%

Uniswap V2 DAI/WETH

Yes

Yes

60%

70%

15%

10%

Uniswap V2 DAI/USDC

Yes

Yes

60%

70%

15%

10%

Uniswap V2 WETH/CRV

Yes

Yes

50%

60%

15%

15%

Uniswap V2 LINK/WETH

Yes

Yes

60%

70%

15%

15%

Uniswap V2 MKR/WETH

Yes

Yes

60%

70%

15%

15%

Uniswap V2 REN/WETH

Yes

Yes

60%

70%

15%

15%

Uniswap V2 SNX/WETH

Yes

Yes

40%

60%

15%

20%

Uniswap V2 UNI/WETH

Yes

Yes

60%

70%

15%

15%

Uniswap V2 USDC/WETH

Yes

Yes

60%

70%

15%

10%

Uniswap V2 WBTC/WETH

Yes

Yes

60%

70%

15%

15%

Uniswap V2 WBTC/USDC

Yes

Yes

60%

70%

15%

15%

Uniswap V2 YFI/WETH

Yes

Yes

50%

60%

15%

15%

Balancer WBTC/WETH

Yes

Yes

60%

70%

15%

15%

Balancer BAL/WETH

Yes

Yes

60%

70%

15%

15%

Borrow Interest Rate

Stablecoins - DAI, USDC, USDT can be borrowed at a variable rate with the following parameters:

  • Uoptimal = 80%

  • Base = 0%

  • Slope 1 = 4%

  • Slope 2 = 75%

Stablecoin Borrow Rate Curve

ETH & WBTC can be borrowed at a variable rate with the following parameters:

  • Uoptimal = 65%

  • Base = 0%

  • Slope 1 = 8%

  • Slope 2 = 100%

ETH WBTC Borrow Rate Curve

Oracle

To give an accurate estimation of the value of the LPs tokens from both Uniswap & Balancer, the Aave Protocol leverages Chainlink’s decentralised oracle service. The smart-contract to calculate the value of the LP tokens has been audited by ConsenSys Diligence.

Safety Module

The AMM Liquidity Pools will not be covered by the Aave Safety Module at launch, but Aave Governance can decide to include these pools through the AIP process.