Aavenomics Questions

Hi everyone,
After waiting anxiously for months, the docs are finally here! What a pleasure it was reading them.
As always when releasing new information, questions start popping up. After checking the Aave discord, I saw team members forwarding questions towards this forum. So here I am. Starting off myself.

Nr 1: It is made very clear that the Genesis Team will code the AIP’s. Sure, the community will discuss it before hand, and approve it afterwards, but still, there is explicit wording that the Genesis Team will be between. Other teams in this space often say that anyone can implement an approved proposal in their project, if it is voted in. Why the emphasis on having the Genesis Team doing it?
Not saying I don’t like the team, it just seems unnecessary to have the focus on one team, in such a decentralized project.

Nr2: “ In case the SM is not able to cover all of the deficit incurred, the Protocol Governance can trigger an ad-hoc Recovery Issuance event. In such a scenario, new AAVE is issued and sold in an open auction for market price prioritizing the Backstop Module .”

Does this mean creating new AAVE out of thin air?

Nr3: “ The Safety Module is built on top of existing AMM technologies. An 80% AAVE/20% ETH liquidity pool using Balancer will be used to provide benefits in terms of market depth for the AAVE token and earnings from locking AAVE. This also extends to BAL tokens and trading fees on top of the SI and protocol fees, while reducing the impact of a Shortfall Event on the AAVE token itself.”

"Since Balancer Labs is distributing BAL governance tokens to liquidity providers, having the SM liquidity in Balancer enables the users to receive BAL tokens on top of trading fees, protocol fees and SI rewards.”

It’s quite a move to include Balancer in the design like this. What if Balancer quite/breaks/gets hacked. This introduces new risks quite vital to the AAVE system. It also means stakers will earn BAL. I guess it is a seen as a risk worth taken? I am curious to see what the community will think.

Nr4: am I correct in seeing burnings are no longer part of the tokenomics? Fees will now completly be used for incentives?

7 Likes

This is a good set of questions and require an equally articulate set of answers.

  1. There is explicit reference to the Genesis team as the team who will take care of implementing the proposals in the initial phase of the governance. This is done on purpose to bootstrap the first phase of the governance decentralization. Although i personally love compound governance (which you are implicitly referring to as the one that allows anybody with enough voting power to submit executable proposals), their model works because their governance focus on small parameters change which don’t necessarily requires large change to the protocol, the goal here is to make sure that if a big change to the Aave protocol is proposed as an AIP, the genesis team is involved in reviewing code and in the implementation of the smart contract proposal for security purposes. The Genesis team is not the main developer going forward but is a facilitator to implement big changes to the protocol while being compliant to the existing code base during a time where everyone gets familiar with it. What it means is that anyone can propose changes as AIPs with very big upgrades to the protocol but following a particular process. Once those smart contract are audited and reviewed the Genesis team will facilitate the implementation and put the contract to the vote, without opinion on the content of the proposal but, as a smart contract implementation facilitator. Eventually the Genesis team will be deprecated as risk and audit team are incentivized to fully contribute to the protocol but it would not be smart to not take advantage of the in-depth knowledge acquired by those who architecture the protocol for the sake of apparent decentralization.

  2. Correct. Similar to the recovery procedure of Maker, the last resort to rescue the protocol is an one time emission of AAVE to cover the debt. That’s extremely important to guarantee that even if the protocol isn’t completely covered by the Safety Module, there is still margin to avoid having the protocol completely underwater. Although some holders might turn their nose up at it, it’s important to understand that if there isn’t Aave protocol, there isn’t AAVE. Eventually this comes as a great incentive for the community to take proper governance decisions and avoid unnecessary risks.

  3. To understand this choice it’s important first to understand how Balancer works under the hood. Balancer architecture is quite different compared to, for example, Aave or compound: When we say “Deposit to Balancer” what we actually say is “deposit into a very self contained contract, separated by the other ones, that has risk related to that contract itself and the tokens contained in it”. So it’s substantially different from providing liquidity to Aave, where all the liquidity is shared. In the case of the safety module, the Balancer pool will be a specific pool contract, customized by us and under the control of the Aave governance, that will be also audited by us prior to the deployment. So can be considered by all means a contract that belongs to the Aave ecosystem and that leverages the Balancer technology. This is a very important aspect to understand - there is no intrinsic risk of “Balancer getting hacked” rather the “Contract where AAVE are deposited getting hacked”. It’s worth to note that of course we reviewed internally the Balancer contract that we are going to use. Their pool contract is relatively easy to understand and with little additional smart contract risk.
    As for the benefits of having part of the stake as an AMM, i would suggest the proof of liquidity paper https://www.placeholder.vc/blog/2020/5/22/proof-of-liquidity that very well explains how pure staking systems suffer from price manipulation, low market depth and extreme volatility. That is of course, besides the additional yield farming and fees that stakers will unlock.
    Also mind that the implementation is not tied to Balancer - it will also possible deposit plain AAVE, that will be locked in the Aave SM contract, or in the future add multiple AMMs underneath - it’s very flexible.

  4. burning will remain active and the Aave governance will decide how to handle the fees.

9 Likes

Much appreciated, both the speed of answering, and the size of the answer.

  1. Glad to see the thought process is as I hoped it to be. Just a follow up question. This facilitating. Could, in theory, this be done by others? Or is there any admin key the Genesis Team is using for now to ‘facilitate’ those upgrades? I assume there isn’t, since the holders have the final say. But just trying to understand what the facilitating practically means.

  2. Yeah it reminded me of MKR as well. I am super excited to see how much value the safety module will hold, with the incentives being there.

  3. I must admit, I did not know Balancer could be used in this way. Very interesting. I know I could ask this/find this in the Balancer community, but, is this how all Balancer pools work? All stand alone contracts? Pretty cool!

  4. Great. Can’t wait to participate when it’s time to do so.

I see I didn’t hit the reply button, just posted. But if you have time, I would be happy to hear your follow up answers :)

when will the proposal really be put into practice?

Hi, I will follow up on @dvrij great questions and @Emilio similarly enlightening answers with one more question.

  1. Is the Genesis team designed to be paid by Aave governance in the future ? Or is it expected that it remains part of Aave the company? Meaning than third parties can propose evolution but the underlying work need to be sponsored by either Aave the company or done by the third party (a bit like an open source project, Aave protocol doesn’t have the structure nor the resources to paid directly).

Thanks

We are waiting until the discussion is finished in the corresponding governance thread, and then collect all the information needed and proceed with the AIP

1 Like

Hello @sebastien - the goal is to allow anyone to submit executable proposals, same way as compound - the genesis team will simply favor the transition between LEND and AAVE and the initial assessment of the Aave governance and protocol V2, to then leave the executable proposals completely open to anybody with enough voting power.

1 Like

Hi everyone - following up on @dvrij & @sebastien questions.


6. Fees: in the image above I understand the ER now is the one that gives incentives to the LP, and not by the market anymore (as it is today), is that right? The fees to the SM, but don’t they also have to go to the ER to keep the incentives running?
If the fees are in the native token, how are they converted into Aave or eth for them to be usable in the SM or Backstop module?

  1. I understand that Aave is only emitted when rescuing the protocol. Is there another way the system could increase supply?
1 Like

I understand the ER now is the one that gives incentives to the LP, and not by the market anymore (as it is today), is that right?

By incentives as of today, do you mean the interest paid to those providing liquidity? The interest will continue to be paid as it already is, however the ecosystem incentives being paid to liquidity providers would be in addition to the interest paid.

The fees to the SM, but don’t they also have to go to the ER to keep the incentives running?

They would if this extra incentive for liquidity providers was going to be endless (which isn’t good for inflation) - but in this other thread it’s discussed that the additional allocation is for a year worth of incentivizing liquidity, of course this incentive is on top of the interest rates for depositing. So there would be no need for the fees to feed back into the ER.

If the fees are in the native token, how are they converted into Aave or eth for them to be usable in the SM or Backstop module?

So with the SM, the fees aren’t necessarily being used to contribute to the SM itself but the fees are what is being used to incentivize users to deposit into the Safety Module, which uses AAVE/ETH. Those who deposit are taking on a risk in the instance of a shortfall event, as such are rewarded with fees and part of the safety incentives from the ecosystem reserve. For the fee itself, the governance will be able to choose what token it’s in, ETH/stablecoin.

I understand that Aave is only emitted when rescuing the protocol. Is there another way the system could increase supply?

Other than increasing supply to rescue the protocol, governance has full control over the token so it could increase it if there was a reason to that aligned with the token holders in the future.