Aura Finance: A New Strategy to Drive LST Liquidity Growth on Optimism

Original Title: The Aura of Optimism

Author: Beethoven X

Compiled by: Deep Tide TechFlow

What is Aura?

Aura Finance is a liquidity layer that connects and builds on the Balancer protocol. Just like Convex's role for Curve, Aura Finance acquires Balancer's native governance token veBAL and plays a key role in providing an additional layer for network participants to build liquidity and incentivize liquidity.

Liquidity providers can stake Balancer Pool Tokens (BPT) to earn incentives in AURA and BAL; AURA holders can stake and participate in the veBAL voting market, while the protocol can provide voting incentives to effectively incentivize pools issued with BAL (and AURA). So far, Aura has hosted over 30% of veBAL governance power, allowing it to maximize LP rewards and guide most BAL issuance. Undoubtedly, Aura is a key player in the Balancer ecosystem.

Aura Finance currently hosts nearly $500 million in Total Value Locked (TVL) on the mainnet and has established and nurtured a range of interconnectivity partnerships between protocols. From the powerful capabilities of liquid-staking tokens and cross-chain infrastructure providers to lending markets and enhanced integrations, Aura has played an indispensable role in driving the growth of the Balancer ecosystem on Ethereum; now, Aura is ready to drive growth on Optimism.

Why Choose Optimism?

Optimism is currently the second-largest scaling solution for Ethereum, with a total locked value exceeding $835 million. With the recent Bedrock upgrade, the Superchain has become a reality. Coupled with the upcoming Base, opBNB chain, and the ongoing development of the OP Stack, Optimism appears ready to attract more attention and liquidity. With the launch of Aura, these developments lay the groundwork for deploying Balancer and Beethoven X as core technologies and liquidity hosting on the network.

Particularly over the past year, the liquidity of the liquid-staking token market has rapidly grown, becoming the largest DeFi liquidity category, with a total locked value of $20.754 billion. Moving liquid-staking tokens to layer two networks can provide higher speeds and lower fees. This is a model of capital efficiency, and we believe it has the potential for sustained growth. By providing the most efficient liquid-staking technology in DeFi, Aura is now ready to accelerate the growth of LST on Optimism.

Launched in 2022, the Optimism DEX is a unique DeFi partnership jointly deployed by Balancer and Beethoven X. Beethoven X is responsible for the front end, while the underlying "native" incentive contracts are governed by veBAL and controlled by BAL. The DAO governance of Beethoven X subsequently adopted an additional incentive proposal, committing to allocate 50% of its protocol fees to OP, matching the OP grant funds, and distributing them to the pools as liquidity mining or measurement incentives.

Since its launch in July 2022, the Balancer and Beethoven X Optimism joint deployment has showcased its innovative capabilities, becoming a major provider of LST liquidity, accumulating $60 million in TVL by April 2023, and generating approximately $370,000 in protocol revenue. While these metrics are indeed commendable, there is still room for improvement. With the recent emergence of L2 veBAL Boost, there is an opportunity to leverage the upcoming Aura and significantly increase market share on the network.

As a central hub, Beethoven X, Balancer, and Aura aim to play a significant role in promoting liquidity growth on Optimism. By introducing a new liquidity layer to help ignite the growth engine and implement efficient flywheel incentive programs, users will soon realize the benefits of this collaborative effort.

Incentive Structure and Funding

This unique project, collaboratively developed by Beethoven X, Balancer, and Aura, ensures that Optimism liquidity pools receive incentives in the most efficient and sustainable manner. Currently, Beethoven X employs a protocol fee pairing structure to incentivize liquidity pools. Beethoven X converts 50% of its protocol fees into OP, pairing it 1:1 with OP grant funds, and returns it to liquidity pools in the form of liquidity mining incentives. This approach aims to significantly increase the rewards distributed while maintaining a certain level of sustainability.

With the anticipated launch of Aura and cross-chain veBAL enhancements, Beethoven X will provide an additional liquidity layer for the Balancer ecosystem, enabling an efficient voting market. Therefore, Beethoven X's current OP grant pairing program can transition to using BAL and AURA issuance to increase voting incentives for protocol TVL. If voting market efficiency declines, the incentive program can continue to distribute liquidity mining incentives directly to liquidity pools.

Aura has also proposed an OP grant program that will distribute additional LP incentives or match rewards in the Aura voting market. The protocol aims to utilize their grants in one of two ways. The first method is to match OP tokens with voting incentives provided by the protocol to vlAURA holders, thereby increasing the Aura Optimism voting market and directing a larger proportion of BAL tokens to the Optimism pools. The second method is to directly distribute OP grants to LPs, matching them with BAL and AURA incentives at a 1:1 ratio. The specific method will be determined based on the efficiency at that time. If the grant program is successfully approved, the described incentive structure has the potential to return 100% of the protocol fees as rewards to users.

The Balancer pools have also implemented an effective liquidity flywheel designed to promote the growth of their pools. Pools that generate over 50% of revenue or 8020 pools have the capability to achieve core pool status. From these pools, 65% of the Balancer protocol fees will automatically be provided as voting incentives to their respective pools. More incentives, of course, mean more TVL, and since Balancer's innovative technology allows fees to be collected directly from revenue-generating assets, more TVL is now directly related to more fees. This creates a closed loop and ignites a perpetual growth flywheel within the Balancer ecosystem.

Currently, only 25% of protocol fees are being recouped on the Optimism DEX, but a restructuring of the Balancer incentive program is currently under discussion. If Aura's OP grant is approved, the proposal will yield an astonishing 260% of protocol fees as liquidity mining incentives (without Aura's grant, it would be 130%).

Future Potential

With high performance on layer two, the potential of the superchain, an efficient liquidity flywheel, generous incentive structures, and a thriving community, there is no doubt that Aura is well-prepared for development on Optimism, with all launch pools being LST-dominated or enhanced pools. This effort will combine some of the most effective features in the Balancer ecosystem with Aura's enhanced liquidity layer, creating core infrastructure capable of driving liquidity growth on Optimism.