ARC: Deepen cooperation with Yearn

Authors: Ali Atiia, @lehnberg, Sam Bacha, @Wot_Is_Goin_On

Our first post here, a warm hello to the Aave community from Yearn! :wave:


In short

Strengthen the symbiotic relationship between Aave and Yearn by taking the following actions:

  1. Disable YFI as a borrowing asset in order to prevent governance and shorting attacks, which in turn enables aYFI to be accepted in Yearn Governance, thereby increasing the utilization of Aave within Yearn products.
  2. Extend a special 3% fixed interest facility to Yearn’s Treasury, which commits to making a 1,000 YFI deposit maintained with up to 65% utilization (loan-to-value).
  3. Enable access to Native Credit Delegation for Yearn vaults, allowing Aave Liquidity Providers (LPs) to delegate to Yearn vaults directly from within Aave’s interface. Aave in turn can earn a share of the revenues generated from the vault fees.

Rationale

Individually, each action creates value. Taken together, these actions reinforce each other and the positive impact on both Aave and Yearn:

Disabling YFI as a borrowing asset

  • Makes Aave more competitive, as it eliminates concerns of governance [1] and shorting attacks using borrowed YFI. This allows Aave to compete with Maker as the preferred place to deposit YFI as collateral:
    • Yearn Strategists can include Aave as part of YFI vault strategies without exposing it to the concerns above
    • Yearn Treasury can use Aave in the same way it recently used Maker to open up a 9.7m DAI position[2]
    • Large holders would be more willing to deposit into Aave
  • Increases demand for aYFI. Once governance attacks are no longer possible, aYFI could be supported in Yearn’s guest-list repo[3], making it eligible to vote in Yearn Governance. Aave’s aYFI is explicitly excluded today[4] due to the above concerns.
  • Comes at low opportunity cost to Aave. There is negligible demand to borrow YFI today. Only 3.57%[5] of deposited YFI is being borrowed.

Extending a special 3% fixed interest facility to Yearn’s Treasury

Yearn recently minted 4,444 YFI for their Treasury.[6] Of these, ~2,600 YFI have so far been deposited into Maker and used as debt collateral[7]. By offering favourable terms to Yearn’s Treasury, Aave can attract these deposits. The size of deposited funds and the accrued interest thereof warrants special treatment.

A fixed interest rate works in the favor of both projects: Yearn gets predictable debt servicing costs, while Aave earns predictable yield.

Enabling access to Native Credit Delegation for Yearn vaults

Yearn has been supporting Aave’s credit delegation functionality since it was launched[8] through yborrow.finance[9] and more recently in the yet-to-be-released yDelegate[10]. Native Credit Delegation[11], a feature part of Aave v2, allows LPs to delegate into Yearn vaults directly from within Aave’s own interface.

As an example, an ETH depositor wanting to maintain their ETH long exposure while at the same time earning interest in Yearn’s yDAI vault, could draw DAI and delegate it directly to the vault from Aave’s interface.

This would allow Aave to become one of the first participants in Yearn’s recently announced Partnership Program[12], earning a share of the revenue from Yearn vault fees that Aave users would generate.

Requirements

1. Disable YFI as a borrowing asset

YFI should no longer be lent out as a borrowing asset by Aave protocol to its users.

2. Extend a special 3% fixed interest facility to Yearn’s Treasury

Offer a special facility to Yearn’s Treasury under more attractive terms, in exchange for a minimum deposit being met.

Proposed parameters

Parameter Value
Min deposit 1000 YFI
Interest rate (fixed) 3%
Maximum loan-to-value 65%
Liquidation threshold 85%
Liquidation bonus 5%

3. Enable access to Native Credit Delegation for Yearn vaults

From a technical standpoint, the only thing required would be to interface with the deposit() and withdraw() calls of vaults. There’s an in-progress Yearn SDK[13] to make integrations such as these easier, and the Yearn development team is at Aave’s disposal to help with integrating.

Aave can then earn rev share on the TVLs contributed through Native Credit Delegation from its UI, by passing deposits and withdrawals through an Affiliate Wrapper[14] contract.

By using the wrapper, up to 50% share of the net revenues can be earned, based on total TVLs contributed across all vaults in a given time period.

Sentiment poll

Adopt the proposal?
  • Yes
  • No

0 voters

References

  1. https://governance.aave.com/t/request-for-brainstorm-thoughts-on-money-market-powered-governance-attack/
  2. https://twitter.com/iearnfinance/status/1359108691677614080
  3. GitHub - banteg/guest-list
  4. YIP-56: Buyback and Build - YIPs - yearn.finance
  5. Aave - Open Source Liquidity Protocol
  6. YIP-57: Funding Yearn's Future - Protocol and Governance - yearn.finance
  7. Oasis Borrow
  8. https://medium.com/aave/first-credit-delegation-on-aave-protocol-to-deversifi-is-here-c6c0aedb70d4
  9. https://yborrow.finance
  10. yDelegate | 0x61025859c349dfbe6ef0dfca202ef3e84ca05f83
  11. https://docs.aave.com/developers/v/2.0/guides/credit-delegation
  12. https://twitter.com/iearnfinance/status/1360317544138219521
  13. GitHub - iearn-finance/yearn-sdk: 🦧 SDK for the yearn.finance platform. WIP
  14. feat: add deposit wrapper by fubuloubu · Pull Request #185 · iearn-finance/yearn-vaults · GitHub
6 Likes

I understand this as a defensive moat for Yearn. However, increased demand for Yearn would increase the borrowing demand for Aave wouldn’t it? Thus, Aave would be giving up its opportunity for a set/fixed interest. In some ways couldn’t this potential push away Locked value from earn because it removes the capacity to structure financial positions for users?

Can you further explain how this benefits Aave users/borrowers/lenders?

6 Likes

Welcome to the forums!

I really like where this is going. Yearn is pioneering DeFi like nobody else, and it’d be wonderful to work together! This is exactly what I like to see.

Going to have to give this more thought but interoperability’s the name of the game! Let’s see if we can get something going!

6 Likes

While you’re at it, could you pls also turn off borrowing of MKR? There is a similar attack vector against Maker that means if a lot of MKR was deposited to Aave, it would create a risk of a governance attack or emergency shutdown against the Maker protocol which would damage the entire defi ecosystem, Aave included.

2 Likes

I’m in favor of deeper collaboration in principle. But I’m very skeptical that the loan request portion of this proposal will work.

Based on the min deposit and liquidation threshold params, this is implicitly assuming that liquidating 1000 YFI would cause less than 15% slippage - this seems like a risky assumption, made worse by the fact that Yearn’s treasury position getting liquidated would be bearish for long term fundamentals.

With stablecoin borrowing rates consistently far over 3%, Aave or depositors would be transferring value to Yearn, with arguably worse risk exposure than before. It’s not clear to me what Yearn is offering to make up for this.

5 Likes

We should be able to disable borrowing for any asset.

No special interest rates for YFI. It punishes users existing users by raising rates and reduces the available capital for borrow.

They frame this like a favor. It isn’t. They can deposit the same way everyone else does. This is a threat. “We’re currently using your competitor.” Ok. Fine. “Requirements to pass?” Do you want to be a lending platform for actual users or a dev dictatorship? This is manipulation. HARD PASS.

5 Likes

They were hacked a month ago. That happens again and the slippage would cost AAVE money. The arrogance of this proposal is astounding. “Break the proper risk parameters you have in place and give us favorable rates that on chain users don’t get.”

The only people voting yes for this are YFI bagholders because this is a horrible idea for AAVE. It’d be great for YFI though.

11 Likes

Is the specific fixed interest rate the part that you most object to and is it the offered percentage point or the idea behind the offer itself? AAVE holders are being offered governance and voting rights for aYFI holders and the ability to delegate straight from the AAVE interface into Yearn and earn a % of those fees. I hold such small positions in both AAVE and YFI that it’s not reasonable to assume I’m a biased whale my entire crypto portfolio’s value is less than one YFI token. I just see this as a good synergistic opportunity for both protocols and a great way to grow value in Defi in general.

1 Like

I would assume that the estimated opportunity costs to AAVE would be the difference between the probable potential rate of borrowing YFI and the fixed rate and the potential benefits are the governance rights ( more research needs to be done to really model the value of voting/delegation power imo but setting it at zero is wrong) for aYFI and the revenue generated from the direct symbiotic relationship forged between AAVE and YFI

But these net revenues compound and accrue value faster than receiving interest on YFI borrowed and again afford AAVE golders/users a specific advantage from directly delegating funds to yearn and having AAVE receive fees from that, which in turn promotes interest in governance of both protocols.

1 Like

My understanding is, aYFI holders will be given YFI voting rights, but AAVE governance won’t have any additional direct influence in Yearn governance. So this could make Aave’s borrowing products more competitive for YFI holders but I’m not sure I consider it a direct benefit to Aave.

Yearn’s referral program is (presumably?) open to any apps/protocols/interfaces that deliver them AUM/TVL. It’s a great idea for a partnership, but I don’t think it provides Aave excess value in a way that would justify the requested credit facility.

1 Like

Still collecting my thoughts on the proposal, and will post afterwards. @Runekek @lehnberg regarding the possibility of disabling borrowing, technically speaking this has a positive network effect for the governance of that particular asset, but also a negative effect for the Aave governance (inability to acquire governance token through the reserve factor). Since the genesis team understands perfectly the need of defending other protocols from governance attacks (there was a discussion here on the forum already created by @jordan) a borrow cap functionality is going to be introduced in Aave 2.5, currently in development. This will both derisk the aave from potential infinite minting and allow more fine tuned parameters to avoid governance attacks on other protocols.

8 Likes

Thank you for your comments/questions.

Q: I understand this as a defensive moat for Yearn.
A: This proposal seeks to benefit both Yearn and Aave.

Q: However, increased demand for Yearn would increase the borrowing demand for Aave wouldn’t it?
A: All loans on Aave increase the borrowing demand, which increases the utilization ratio and therefore leads to higher interest rates.

Q: Thus, Aave would be giving up its opportunity for a set/fixed interest. In some ways couldn’t this potential push away Locked value from earn because it removes the capacity to structure financial positions for users?
A: I think you’re asking whether the higher interest rates due to Yearn’s loan could discourage other borrowers on Aave. This would be true if nothing else changed. However, higher borrowing interest rates mean higher lending rates and this would incentivize more lenders on Aave which could further increase total value locked (TVL).
Aave risks giving up the opportunity if Yearn chooses to borrow from another lending protocol.

Q: Can you further explain how this benefits Aave users/borrowers/lenders?
A:
Lenders
Increasing the amount borrowed will increase the stablecoin utilization ratio and therefore the interest paid to lenders. Lenders will therefore benefit from the interest paid by Yearn on the loan.
There are circumstances (e.g. when utilization ratios are high) that lenders might earn higher rewards without Yearn’s fixed rate loan, however, lenders would generally prefer to have the certainty of a large borrower (which is what is being proposed) than missing out on higher rates in certain circumstances.

Borrowers
Stablecoin borrowers will pay a higher interest rate if Yearn takes out a loan on Aave because the utilization ratio will increase. The increase in interest rates would be caused by the higher utilization ratio, not because of the proposed fixed 3% per annum borrowing rate. Any sizeable loan on Aave would increase the borrowing rate. If borrowing rates increase on Aave, then lending rates increase, and this incentivises more lenders to supply stablecoins on Aave, thus potentially increasing Aave’s (TVL).

6 Likes

AAVE governance wouldn’t have any direct specific extra YFI voting rights unless the members of governance held YFI or aYFI or had delegated authority from a holder of aYFI or YFI but also ARC would deliberately and specifically closer align AAVE’s success and benefit to that of existing YFI holders. I hold both and care about both.

Question. What excess or extra or added value or benefit might justify the requested credit facility?
I see it as a good synergistic opportunity for AAVE to grow more as Yearn grows without a great deal of sacrifice or risk or overt effort after the discussion of details which for the long run is very attractive in my view long term. Years after ARC passes (if it passes) the value added will continue to grow and compound and benefit AAVE.

I think there is a lot of additional risk to the proposal. The current liquidation ratio for YFI on Aave is 55%, which leaves a lot more room to accommodate volatility and price declines before Aave starts to lose money (versus proposed 85% ratio).

Stablecoin rates were averaging above 10% for the past month, so some combination of other borrowers, depositors, or the Aave platform would be subsidizing yearn to the tune of 5-10% APY on their borrowed amount.

I’m open to hearing how this could be mutually beneficial, but so far it seems one sided.

3 Likes

I’m not sure if I could word it differently, not only would aYFI get voting rights ( which I will just admit I see governance rights even unused governance rights as having high intrinsic and potential value for any protocol and I am most likely valuing them higher than most people reading this) besides that I guess I’m just more optimistic about the efficiency of Yearn and think that 10% APY yield sacrificed would be quickly dwarfed by affiliated fees earned and accrued due to the program and the LPs and the opportunity to (imo relatively safely) grow TLV for AAVE and have AAVE users be able to get more options that benefit both AAVE and Yearn, AAVE from fees and loan interest and Yearn from AAVE liquidity, AAVE LPs of course get LP incentives and those who choose not to use such an offer aren’t negatively affected by those who do. There are extra fees and utilization of assets brought on by the offer. I would have to break out the old spreadsheets to do a proper modeled analysis but it’s my current understanding that the demand for borrowing YFI isn’t high and the value of accepting the offer would outweigh the value of interest earned from not accepting it. The concerns about it looking like an unfair deal biased towards Yearn is actually understandable and the systemic risks should be discussed but 1,000 YFI seems like a large enough number to me to be large enough that a more stable tier isn’t irrational. Maybe even a lower base rate with a variable rate based on the market or some other aspect to ensure that AAVE doesn’t just subsidize Yearn while everyone else faces higher and higher rates that would make it look like AAVE and Yearn whales/Devs don’t care about the greater ecosystem or the small users, that’s at least reasonable to me. I understand that I have a positive bias towards Yearn but I don’t actually see this as an unreasonable offer from anyone and would like to see more of why it’s not beneficial for AAVE. Because I’m only interested in it if it’s seen as a mutually beneficial symbiotic relationship and while I still think it is I understand that the community is large and varied.

yeah, completely agree, they want a higher rate, and the pool is not supposed to be able to lend YFI out to pay the rate?

3 Likes

This proposal is asking for a lot while representing very little gain for Aave.

I don’t see why Aave holders would vote for this.

2 Likes

This isn’t YFI. You can’t bully AAVE holders into accepting a bull shit proposal that puts the protocol at risk. YFI got hacked, doesn’t respect on chain governance votes to burn mint keys, and now you want to up the risk factor to a level where AAVE holders would get screwed if YFI gets hacked again… which already happened… AND you want beneficial borrow rates AND you want to take liquidity from actual protocol users.

Is this real life? Does this shit actually fly in the world you come from? This is pure bully tactics.

You want to work together? Fine. Don’t bring this “you don’t care about defi synergies and the space” bull shit in here. You want one sided advantages for your bags. Go back to the YFI holders you have left and bully them into shit.

Use Maker. That was the implicitly threat in the proposal. Keep doing that. Or is that the point? You’d rather use AAVE but “why not try to take advantage of them while we’re at it?”

Nah, the point of defi is that everyone has equal access. “muh grow value of defi in general”. More like “grow my bags”

Move along.

3 Likes

Could be wrong, but I think the affiliate program and fee sharing would be available to any protocols/interfaces that deliver TVL to Yearn. So Aave approving the loan request part of the proposal should be considered separate from the potential for referral partnership.

1 Like

This seems a little harsh.

1 Like