Recent events showed again that Ethereum scalability quickly reaches saturation during alt coins rally or over-hyped narratives, small users are hindered by prohibitive gas fees resulting in lesser activity and revenue for dApps.
Ultimately, many protocols are seeking to move part of their activities to L2 that allows on-chain interactions orders of magnitude faster and cheaper.
However, DEXes on Arbitrum are still relatively illiquid, bottlenecking a number of DeFi applications, on the other hand it is admitted that swaps on highly liquid pools to touch only a fraction of its depth and leaving a big chunk of idle capital.
In this article, we will study the opportunities brought by Balancer Boosted Pool for the development of DeFi activities on L2s.
Boosted pools
According to Balancer doc, Boosted Pools bring the best of both worlds to Liquidity Providers (LPs) and Swappers. Swappers get access to deep liquidity with minimized price impact while Liquidity Providers get their liquidity positions sent to external protocols, such as Aave, Idle, Morpho or Gearbox.
https://twitter.com/Balancer/status/1651269989595484160?s=20
To understand Boosted Pools, it's important to understand their core building block: Linear Pools. One critical feature is that they allow users to swap directly to BPT; no joins or exits are needed, thus it is possible for a project native token to route its pair liquidity with Aave wrapped stablecoin for example.
https://twitter.com/Balancer/status/1651820160729358336?s=20
This is also a great building block for projects offering stablecoin or ETH staking vaults, by creating a boosted pool with staked assets and pair it to their native ecosystem token, it will allow to passively attract liquidity as well as increase return for stakers.
Aave TVL on Arbitrum
By competing with Ethereum in terms of volume while have only a fraction of its liquidity, Arbitrum offers liquidity providers higher yield rate on trading fees, on top of that Balancer brings a significant strategic advantages to the table relative to its dominance over stablecoin, LSDs and wrapped assets with the integration of boosted pools as well as its flexible fee structure.
Governance layer
Since Balancer native token emissions are ruled by a gauge tokenomic model, it is necessary for Boosted Pool strategies to embrace the voting incentive market to unlock the full flywheel of Balancer composability.
During the last few rounds we can observe a visible growth in L2 boosted pool incentivized, which recently flipped for the first time the number of boosted pool incentivized on L1.
We can expect the Liquid Lockers to play a great role as usual in multiple aspects of the flywheel, starting with governance and gauge emissions.
CDP protocols like @Vestafinance will be able to combine Aura's efficient voting incentive system and elevated APRs from Balancer Boosted Pools to bootstrap liquidity for their own stablecoin.
https://twitter.com/AuraFinance/status/1641471037752631297?s=20
Risk
Eventually, by harnessing composable and fractional liquidity for the sake of capital efficiency, protocols are ultimately creating additional risk tranches that need to be addressed to avoid snowball/contagion reactions as was the case with the recent Euler hack.
https://twitter.com/Balancer/status/1655905457566015488?s=20
https://twitter.com/tzedonn/status/1635588117175365632?s=20
In conclusion, Balancer boosted pool is a powerful yield engine that is a good fit for bootstrapping Layer 2 development and increasing liquidity depth. However, it is important to keep in mind that like any investment, it is subject to market and operational risks.