Aura is the rare protocol in decentralized finance (DeFi) showing double-digit growth over the last month, with $419 million in assets committed to it.
Why it matters: In a bear market and an economic downturn, people are less hungry to put their wealth in a risk asset like crypto, and even less likely to entrust that asset to some weird third-party piece of code. So if one risky arrangement is growing, something unique must be going on.
How it works: The Aura Protocol, which only launched in June, is a meta-protocol, in that it depends on another protocol.
- Specifically, Aura improves its users returns when they make a long-term bet on Balancer, a self-balancing index that started on Ethereum.
Balancer’s basic function is to manage pools of tokens that automatically rebalance as prices change.
- So a 50/50 ETH/USDC pool would automatically trade ETH for USDC as the price of ETH went up, and vice versa.
Balancer had previously been governed by its BAL token, but in March it switched to a new token, veBAL, a BAL derivative.
- People who enable Balancer to work by entrusting assets to it collectively earn around $700,000 in fresh BAL tokens each week for doing so.
What changed: The March switch required users to commit their BAL to one of Balancer’s pools in order to vote. This has the effect of taking BAL off the market, to an extent (which supports its price on the market).
- When they do that, and if they commit not to remove their BAL deposit for a certain amount of time, they get veBAL (the derivative). This is what has the voting powers now.
Crucially, veBAL’s voting power is time-weighted. The longer the lock, the bigger the vote.
- Additionally, veBAL gets a revenue share. Every time someone uses Balancer to trade tokens, they get charged a small fee (it varies by the pools used).
- Those fees get split between the people who provided funds to the pools used for the trade and Balancer protocol itself. Of the latter, 75% goes to holders of veBAL (the rest is held by Balancer…
