The Aave Protocol is a decentralised liquidity protocol, which allows users to unlock liquidity across various assets in a multi-pool approach. The new AMM Liquidity Pool enables liquidity providers (“LPs”) of Uniswap and Balancer to use their LP tokens as collateral in the Aave Protocol.
The Rise of AMMs
With the rise of Uniswap in 2018 and the emergence of “Automated Market Makers” (AMMs) in the DeFi ecosystem, users of Ethereum are now able to swap assets without the need for centralised third-party intermediaries. Users are able to facilitate the provision of liquidity and earn fees for doing so.
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. (Frequently, the LP token represents a 50/50 ratio with ETH and another crypto asset, making them potentially less volatile than their underlying 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.
AMMs were one of the first ways to earn a passive income in the DeFi ecosystem and remain so today.
A first successful Proof of Concept
Last year, the Aave Protocol developed an “AMM Liquidity Pool” proof of concept with the “Aave Uniswap V1 Market,” which allowed users to deposit Uniswap v1 LP tokens in the Aave Protocol and use them as collateral. Given the community’s interest in this pool, users will now be able to use LP tokens from several AMMs, with proposals and decisions from Aave Governance about which AMM protocols and collateral to add.
The Multi-Market Approach
The AMM Market is the first of many markets of Aave, on Ethereum, and potentially also on different networks, allowing the community to explore “new frontiers” with Aave.
https://medium.com/aave/aave-amm-market-released-73ae76a7cbc0