What is Borrow Automated Market Maker (BAMM)? DeFi Protocol Guide

The BAMM represents a borrowing and lending framework constructed atop Fraxswap infrastructure. In contrast to conventional borrowing and lending mechanisms, the BAMM functions without requiring external price oracles or supplementary liquidity sources.

Overview

Through the BAMM, lending and borrowing services can be established for token pairs that were previously unviable due to absent reliable price data or inadequate market depth.

Borrowers obtain liquidity from lenders and employ it to adjust leverage dynamically, maintaining solvency during significant market movements. This mechanism prevents abrupt liquidations, eliminating the necessity for high liquidation fees paid to liquidators, thereby benefiting both participants.

Every BAMM pool operates on a single Fraxswap pool containing two tokens. Borrowers can securely establish long and short positions on individual tokens without facing unexpected liquidation events.

Lenders supply their complete range liquidity LP tokens from Fraxswap to the BAMM pool. The supplied quantity is determined by the formula: sqrt(X×Y), where X and Y represent the quantities of the two tokens. Lenders receive compensation through trading fees from Fraxswap and borrower interest payments.

Difference between BAMM and other AMMs

The BAMM model differs from alternative AMM designs in the following ways:

• Liquidity providers transfer Fraxswap LP tokens rather than individual tokens and cannot directly swap assets. Other participants can exchange tokens using the underlying pool, causing the token ratio within the lent LP tokens to shift according to market conditions.
• Liquidity providers cannot establish custom fees. Instead, they earn interest from borrowers utilizing their LP tokens and receive swap fees from Fraxswap for unutilized LP token positions.
• Lenders' LP tokens may be allocated for borrowing activities and become temporarily unavailable for withdrawal. When borrowing demand increases, interest rates rise proportionally, providing compensation for this temporary unavailability.
• Borrowers benefit from non-liquidation mechanics distinct from other lending platforms. Since they borrow LP tokens whose internal ratios adjust with market movements, the BAMM ensures positions remain solvent at all price levels. Users experience automatic adjustments where positions reduce exposure during price declines and increase exposure during price increases.
• The BAMM does not implement fixed maturity periods for borrowing and lending transactions.

Providers of BAMM

The BAMM concept remains relatively nascent within decentralized finance, with limited institutional adoption. Key participants including Frax Finance, GammaSwapLabs, infinitypool, Timeswap, SushiSwap, and Panoptic_xyz are actively advancing this technology.

• Frax Finance: Frax Finance operates as a fractional-algorithmic stablecoin platform focused on creating more efficient and advanced stablecoin mechanisms. Frax Finance scheduled BAMM development for 2023, with integration planned for frxETH V2, a liquid staking derivative enabling decentralized validator participation. The Frax Finance team developed BAMM to facilitate leveraged positions across token types without reliance on oracle infrastructure. By introducing secure borrowing mechanics from LP pools, BAMM represents the initial implementation of a comprehensive DeFi infrastructure element that functions in a permissionless manner accessible to all participants. The BAMM architecture introduces greater complexity than conventional lending platforms. Lender exposure differs from traditional lending protocols like Aave, as lenders assume the same market risk as AMM liquidity providers, including directional price volatility.
• Timeswap: Timeswap functions as an AMM-based lending and borrowing platform active on Ethereum, Arbitrum, Polygon, and additional networks. The protocol provides fixed-term loan options and non-fungible loan instruments, comparable to BAMM mechanics. Timeswap positions itself as the inaugural AMM protocol supporting fixed-term lending and borrowing functionality.
• SushiSwap: SushiSwap operates as a decentralized trading and AMM platform spanning multiple blockchain networks. SushiSwap is constructing Kashi, a system enabling participants to establish customized lending and borrowing markets for any token combination. Kashi employs a specialized AMM framework called BentoBox, facilitating segregated risk management, customizable fee structures, and leverage mechanisms.