Aura Finance: Why Driving LST Liquidity Growth on Optimism

Author: Beethoven X; Compiler: Deep Tide TechFlow

What is Aura?

Aura Finance is a liquidity layer connected and built on top of the Balancer protocol. Much like Convex is to 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 and incentivize liquidity.

Liquidity providers can stake Balancer Pool Tokens (BPT) to get incentives for AURA and BAL; AURA holders can stake and participate in the veBAL voting market, and the protocol can provide voting incentives to effectively incentivize BAL (and AURA) issuance pool. To date, Aura hosts over 30% of veBAL governance power, enabling it to maximize LP rewards and direct the majority of BAL issuance. There is no doubt that Aura is a key player in the Balancer ecosystem.

Aura Finance hosts nearly $500 million in Total Value Locked (TVL) on mainnet and has established and fostered interconnection partnerships across a range of protocols. From the power of liquid collateral tokens and cross-chain infrastructure providers to lending marketplaces and enhanced integrations, Aura has already played an integral role in driving the growth of the Balancer ecosystem on Ethereum; now, Aura is poised to Driving Growth on Optimism.

**Why choose Optimism? **

Optimism is currently the second largest scaling solution on Ethereum with over $835 million in total value locked. With the recent Bedrock upgrade, Superchain has become a reality. Coupled with the upcoming launch of Base, the opBNB chain, and the continued development of the OP Stack, Optimism looks poised to attract more attention and liquidity. With the launch of Aura, these developments provide an opportunity to lay the groundwork for the deployment of Balancer and Beethoven X as core technology and liquidity custody on the network.

Especially in the past year, the liquidity of the liquid collateralized token market has grown rapidly, becoming the largest DeFi liquidity category, with a total locked value of $20.754 billion. Moving liquid collateralized tokens onto a second-layer network offers higher speeds and minimal fees. This is a model of capital efficiency and we believe it has the potential for continued growth. Aura is now poised to accelerate the growth of LST on Optimism by providing technically simplified liquidity and incentives for the most efficient liquid staking in DeFi.

Launching in 2022, Optimism DEX is a unique DeFi partnership that was jointly deployed by Balancer and Beethoven X. Beethoven X is responsible for the front end, while the underlying "native" incentive contracts are controlled by veBAL governance and BAL. Beethoven X's DAO governance then adopted an additional incentive proposal, promising to allocate 50% of its protocol fees to OPs, matching Beethoven X's OP grants, and issuing them to pools as liquidity mining or measurement incentives.

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

As a central hub, Beethoven X, Balancer and Aura hope to play an important role in facilitating the growth of Optimism's liquidity. With a new liquidity layer to help ignite the fire of growth and an efficient flywheel incentive scheme, users will soon realize the benefits of this synergy.

Incentive Structure and Funding

This unique collaboration between Beethoven X, Balancer and Aura ensures that Optimism liquidity pools are incentivized in the most efficient and sustainable way possible. Currently, Beethoven X employs a protocol fee pairing structure to incentivize liquidity pools. Beethoven X converts 50% of its protocol fees into OP, which is matched 1:1 with OP grant funds and returned to the liquidity pool in the form of liquidity mining incentives. This approach aims to significantly increase the rewards issued while maintaining some sustainability.

With the expected launch of Aura and cross-chain veBAL enhancements, Beethoven X will provide an additional liquidity layer to the Balancer ecosystem, enabling an efficient voting market. Therefore, Beethoven X's current OP grant matching program can be transformed into using BAL and AURA issuance as a voting incentive to increase the TVL of the protocol. If the efficiency of the voting market decreases, the incentive plan can continue to issue liquidity mining incentives directly on the liquidity pool.

Aura has also proposed an OP subsidy program that will either distribute additional LP incentives or match rewards on the Aura voting market. The agreement aims to use their grants in one of two ways. The first approach is to match OP tokens to vlAURA holders with voting incentives provided by the protocol, thereby increasing the Aura optimism voting market and directing a larger proportion of BAL tokens into the optimism pool. The second method is to distribute OP grants directly to LPs, matching BAL and AURA incentives in a 1:1 ratio. The specific method will be determined according to the efficiency at that time. The incentive structure described has the potential to return 100% of protocol fees as rewards to users if the grant program is successful.

Balancer pools also implement an efficient liquidity flywheel designed to facilitate the growth of their pools. Pools or 8020 pools generated by more than 50% of the yield are capable of obtaining core pool status. From these pools, 65% of the Balancer protocol fee will automatically be given to the pool it belongs to as a voting incentive. More incentives of course means more TVL, which now directly correlates to more fees thanks to Balancer's innovative technology allowing fees to be charged directly from the yield-generating asset. This closes the loop and ignites a flywheel of perpetual growth within the Balancer ecosystem.

Currently, only 25% of protocol fees are recycled on the Optimism DEX, but a restructuring of the Balancer incentive program is currently under discussion. If Aura's OP subsidy is approved, the proposal would enable protocol fee recovery, OP subsidy matching, and an efficient voting market strategy to generate a staggering 260% of protocol fees as liquidity mining incentives (130% without Aura's subsidy).

Future Potential

With the high performance of the second layer, the potential of the super chain, the efficient liquidity flywheel, the rich incentive structure and the thriving community, there is no doubt that Aura is ready for the development on Optimism, and all the startup pools are LST-led or enhanced pool, this effort will combine some of the most efficient features in the Balancer ecosystem with Aura's enhanced liquidity layer to create the core infrastructure that will drive Optimism's liquidity growth