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Decentralized Finance (DeFi) has come a long way, but there’s always room for innovation—especially around capital efficiency, permissionless lending, and reducing reliance on external oracles. Enter BAMM (Borrow Automated Market Maker), a novel protocol that merges AMM swapping and lending into a single, seamless system.
Below, we’ll take a closer look at how BAMM works, why it’s different from traditional protocols, and what it means for DeFi users—both lenders and borrowers.
What Is BAMM?
BAMM is built on top of Fraxswap, combining the functionalities of a decentralized exchange (DEX) and a lending platform. It allows users to borrow tokens directly from the same liquidity that powers swaps. In other words, instead of having a stand-alone lending protocol that pulls price data from external oracles, BAMM is self-contained within its own Automated Market Maker (AMM).
It’s designed to be capital efficient: Liquidity Providers (LPs) in BAMM pools earn swap fees plus interest from borrowers, ensuring that their capital is always actively working. At the same time, borrowers can access up to 3× leverage on various token pairs without relying on an external price feed.
The Problem with Traditional AMMs and Lending
- Idle Liquidity
In traditional AMMs, a large portion of the liquidity can sit idle when there aren’t enough swaps. This reduces the effective yield for LPs, who only earn from sporadic trading fees. - Oracle Reliance
Most lending protocols (like Aave or Compound) use external oracles to track asset prices. While this is often effective for blue-chip assets, it can be risky if oracles are manipulated or fail—particularly for long-tail tokens or memecoins, which may lack robust oracle feeds. - Sudden Liquidations
In oracle-based systems, your collateral value is calculated externally. If the feed updates and shows that your collateral’s price has dropped below a threshold, you can be instantly liquidated, sometimes at a discount. This can lead to cascading liquidations in volatile markets.
How BAMM Works
- Constant Product Formula
Like many popular DEXs, BAMM uses the formula:
X×Y=kX×Y=k
where XX and YY are the token reserves. This built-in price mechanism serves as the reference for both swaps andborrowing. No external oracle is required. - Borrowers “Rent” Liquidity
Borrowers put up collateral using the same tokens that are in the BAMM pool. This lets them “rent” part of the liquidity and open leveraged positions—up to ~3×. Because the borrowed assets and the collateral exist under the same AMM framework, both change in value along the same price curve. - Minimized Liquidation Risk
Since everything is priced internally, there aren’t any sudden external price updates. If the AMM price shifts, a borrower’s debt and collateral shift together. This removes the need for abrupt, oracle-based liquidations. - Interest Rate = Pool Utilization
LPs earn interest that depends on how much of the pool’s liquidity is borrowed. That means higher utilization = higher rates for LPs, on top of normal swap fees.
Benefits for Lenders & Borrowers
- Lenders / Liquidity Providers
- Higher Yield: They earn both swap fees and interest from borrowers, eliminating idle capital.
- Lower Risk of Bad Debt: The protocol design means the borrowers’ collateral always moves in sync with their borrowed amount, reducing the chance of under-collateralization.
- Borrowers
- Permissionless Leverage: Borrow any token pair available in the pool, including long-tail tokens or memecoins.
- No Oracle Liquidations: No abrupt margin calls triggered by external price feeds.
- Easy 3× Leverage: Boost positions seamlessly without bridging to another protocol.
Key Differences vs. Traditional Protocols
- No External Oracles: Eliminates a major point of failure and potential manipulation.
- All-in-One DEX + Lending: Capital efficiency soars by putting idle liquidity to work.
- Constant-Product Risk Model: Built-in price discovery ensures borrowers can’t exceed a safe borrowing limit.
- Fewer Liquidation Shocks: Collateral and debt are in sync along the same AMM curve.
Final Thoughts
BAMM’s novel approach to combining AMMs and lending could spark a DeFi renaissance, enhancing yield for LPs and granting new leverage opportunities for borrowers. By reducing dependence on external oracles and offering a more self-contained environment, BAMM addresses many pitfalls in existing DeFi markets.
If you’re looking to explore more efficient ways to swap, lend, and earn, keep an eye on BAMM and Fraxtal Chain. This might just be the upgrade that DeFi has been waiting for.
