[ARC] - ERC4626 Strategies as Productive Collateral

[ARC] - ERC4626 Strategies as Productive Collateral
Status: Discussion
Author: @llamaxyz, @MatthewGraham @Dydymoon
Created: 24-10-2022


@Llamaxyz is proposing the introduction of a new productive collateral type that allows users to earn the rewards of other protocols by depositing into Aave v3 Reserves.

With the support of the community, Llama will develop ERC4626 strategies that enable Balancer v2 and Curve Liquidity Provider tokens to be deposited as collateral. Users will earn the rewards from the respective Aura Finance and Convex Finance gauges whilst being able to draw a loan against the productive strategies.

This new type of collateral is expected to drive borrowing demand for listed assets and generate additional revenue for Aave DAO by sending 5% of the earned rewards to the DAO.


To support the continued growth of Aave, new types of collateral are needed to unlock emerging segments of the market. Llama proposes onboarding productive assets that are supportive of enhancing capital efficiency through unlocking new utility for user funds.

Currently, there is $4.4B deposited in Convex Finance and Aura Finance, and when Optimism enabled liquidity mining on Aave v3, Total Value Locked (TVL) on Aave increased almost 13x from $36M to $460M. Llama seeks to create the new type of collateral standard and onboard the first BPT and crvLP as collateral on the Ethereum v3 Liquidity Pool.

The new collateral type will be listed with SupplyCaps in place, borrowing disabled, and eMode created to shape how users interact with the new pools.


To understand how this strategy works, we will first walk through an example that demonstrates the user experience. In this example, the user deposits a BPT into Aave and claims rewards generated by the Aura Finance Gauge.

The use,r having already invested in a Balancer v2 Liquidity Pool, deposits the BPT into the Aave Reserve and receives back aBPT. The Aave Reserve receives the user’s BPT and deposits it into an Aura gauge. The rewards generated from staking the BPT in the Aura Finance gauge are claimable by the user without needing to redeem the BPT deposit. When the user claims the rewards, 5% are sent to the DAO and 95% to the user.

The productive strategy can also be used as collateral.This creates much more utility for BPTs as users can then borrow against the productive strategy. Apart from levered farming of rewards, users can create buy-now and pay-later strategies that utilize future incentives to pay back the loans. This also creates an opportunity for other communities to build automated strategies that manage rewards and collateralization ratios for users that further streamlines the user experience.

The DAO can decide if pools such as Balancer Boosted Aave Pool (bb-a-USD) and future GHO pools, (bb-a-USD / GHO) can be listed as collateral. Leverage in this application would exhibit similar recursive behavior to that which is occurring on Optimism and could lead to significant volumes of GHO entering circulation over time. If this was to occur, it would have a positive effect on the DAO’s revenue.

It is important to note that, although this proposal mentions Balancer and Aura Finance, the same concept applies to Curve and Convex. The initial deployments are to utilize Aura gauges, with a Convex integration to follow.

Next Steps

A Snapshot will follow this ARC to determine whether the community would like to move forward with creating this new type of collateral.

If the community votes positively for the development of the upgrade to enable the new type of productive collateral to be onboarded, Llama will set about designing and creating the upgrade. Llama will commit to following best practices and working closely with other stakeholders within the community in developing the new collateral type. In the lead up to deployment on the Aave protocol, further governance approval will be required.

In the future, the community will also be able to decide via Snapshot whether to provide retroactive funding to reimburse the cost associated with the auditing of the new collateral type and how much funding to provide.

A separate Snapshot proposal will emerge where the initial asset listing will be proposed, with contributors such as Gauntlet and others potentially playing a role. Upon agreeing on the initial asset to be listed and whether audit costs are to be reimbursed, an on-chain vote will be submitted for governance approval to transfer funds and introduce the upgrade. This loosely follows the methodology presented in the GHO proposal.


This ARC is focused on introducing and getting community feedback on introducing Aave’s newest productive collateral to the protocol.

We look forward to hearing community feedback on all aspects of this proposal.


Introducing BPT’s as collateral while allowing users to continue to earn BAL & AURA rewards represents a huge milestone for the Balancer ecosystem. I expect to see significant demand for borrowing against these assets, particularly bbaUSD and wstETH/weth. I’d love to see Aave be the first mover here!


Both LSD and LPs tokens are high potential collaterals for the Aave ecosystem allowing several flywheel strategies while increasing both liquidity and borrow volume of Aave.

Money legos is what makes DeFi attractive and this ARC open the door to new opportunities in the Aave ecosystem.

Complete support for this proposal.


This proposal is a good way for Aave users to gain exposure to yield from other protocols, I see massive future flywheel mechanisms that could be applied through these ERC4626 token standard strategies.
Enabling users to tap into the gauge rewards while having the power to take a loan against the investment is an excellent incentive mechanism for Aave users, and in crypto, good incentives create momentum and significant upside.
Looking forward to seeing the numbers when this passes a governance vote.

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The onboarding of a new productive collateral type, in the form of ve-tokens, would be a positive step for the Aave Protocol. Llama has provided an interesting example of how ve-tokens could be integrated into the protocol, and we support the general sentiment in this proposal. We believe a similar proposal, with a few minor differences, would benefit the DAO further. You can find more details on our approach here.

The code detailed in our proposal is developed.

We invite Llama and the community to review our proposal and share any thoughts on the method expressed. We believe working collaboratively with Llama on this integration and related processes will be beneficial to ensure full transparency and community engagement.


Thank you @MatthewGraham and the @Llamaxyz team for this proposal. Gauntlet is analyzing the market risk implications and will come back to the forums.

Back in 2021, we published research (below) on the risks of LP borrowing. We would encourage the community to read through in the meantime to better consider the risk/reward tradeoffs.


Very good proposal !
But why not also redirect additional revenue to AAVE stakers to also boost token usecase ?

Instead of redirect 5% to the DAO, we can imagine something like 3% for Aave DAO and 2% to ABPT stakers

Hi Everyone :wave:

Llama has published a Snapshot vote for progressing this proposal toward the build phase.

Please do vote.

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Thanks very much, @Llamaxyz team, for the proposal. Our data science team is continuing to analyze this proposal, but we just published an analysis on the forums on the risks of enabling LP tokens as collateral, more generally. We hope that this helps the community assess the risk/reward tradeoffs.

Forum post here.

Among other factors, the risk depends on the type of LP token listed, what the borrow asset would be, and the risk parameter configurations. In certain situations, there may be complex market risk implications even if there are conservative parameters applied (supply cap + low LT / LTV, etc.).

Gauntlet is still conducting analysis, but below are my initial preliminary thoughts on BPT for wstETH/wETH pool as an example of a collateral asset to be listed.

At first glance, this asset seems low risk because wstETH/wETH are correlated, and the use case will be to borrow wETH (so the borrow asset has high correlation to the LP token as well).

However, upon closer look, there are more complex risk dynamics that the community should consider:

  • The user strategy is to deposit BPT, borrow ETH, stake their ETH, get wstETH, deposit wstETH into the Balancer pool, and repeat as much as possible to get leveraged yield.
  • This may be highly lucrative to the user because not only do they get yield from staking ETH, but they also get BAL rewards, Aura rewards, swap fee rewards, etc.
  • Thus, there will be high demand for borrowing ETH. This can increase ETH utilization in the V3 market.
  • This presents several problems.
    • First, if ETH interest rate curve isn’t high enough, then this won’t prevent high ETH utilization on V3 (the BPT strategy may be highly profitable, so the cost of borrowing ETH has to be very high until the strategy is no longer profitable), and high ETH utilization can interfere with atomic liquidations (for user positions that are using ETH as collateral). Also, there’s the standard issue of inhibiting users from withdrawing their ETH from the pool.
    • Second, if wstETH is already listed on V3 at that time when BPT for wstETH/wETH is listed, then under high ETH utilization, the high ETH borrow rate can put stress on the existing wstETH/ETH yield farmers on Aave V3 (at that time) who are depositing wstETH as collateral and borrowing ETH.
    • Third, if the utilization for ETH is high on V3 and the supply rate becomes attractive, this may incentivize users to withdraw ETH supply from Aave V2 and deposit it on V3 instead. The elasticity would depend partly on how the interest rate curves are configured. But if we imagine a scenario where a significant amount of ETH on V2 is withdrawn and supplied on V3 instead, ETH utilization on Aave V2 will spike. Now, the interest rate on ETH on V2 can put stress on existing stETH/ETH yield farmers on V2. You may argue that the additional supply that transitioned from V2 to V3 now alleviates the ETH utilization problem on V3, but that is not certain, and additional borrowing on V3 may fully utilize the additional supply depending on the interest rates. Additionally, you may argue that the high interest rate on V2 will attract more ETH supply on V2, but again, the elasticity is difficult to predict.

If Llama / the community proposes a list of the specific BPT tokens that are being considered, Gauntlet can help provide further analysis on the market risk side for those BPT tokens.

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Hi @Pauljlei,

The above is unlikely to be the most economic strategy. I believe a proposal will emerge that requests enabling borrowing on wstETH. It then becomes more economic to borrow wETH and wstETH which is then deposited into Balancer.

A user who attains the wstETH/wETH BPT can deposit into Aave, borrow ETH and wstETH on Aave v3 Ethereum, then deposit into Balancer pool to receive the BPT which can then be deposited as collateral again. This recursive strategy, leverages swap fees, bb-a-USD, AURA and BAL rewards from the Aura Finance gauge. There is no need to interact with the Lido staking deposit contract.

This is a parameter within the Aave governance control and something Llama can actively manage. It is not a barrier but rather a consideration much like similar Reserves on various Aave deployments.

There are numerous bb-a-wETH Linear Pools coming which will provide liquidity to the Ethereum v3 market. However, as you point out there are natural market forces at play. This to me is more stating we expect actors to be rational and profit driven, therefore users will leverage the BPT. Do note, there is always ETH and stETH liquidity on other DEXs which can be used to support liquidations. There are also likely to be other communities building something similar and it is therefore unlikely all of the BPT will be deposited into Aura Finance gauges via Aave.

This highlights a risk that is within Aave’s controls. It is fair to assume v2 markets should have the support of the Safety Module disabled, borrowing disabled and overtime the Reserve Factor can be increased to encourage liquidity to transit to v3 deployments. Reducing the LTV of old markets risk liquidating user’s positions and therefore an unfavourable path forward.

Similar to @AaveCompanies, I believe the intent will be proceed with enabling the collateral type and then presenting a proposal to list a BPT. The community can consider if to list the BPT at that point in time. All of the points mentioned by Gauntlet are already known and there is plenty of time to create a lower risk environment across Aave Liquidity Pools. As mentioned in the proposal, the Snapshot is indicative of what Llama intends to build, although I believe Aave Companies proposal is approaching audit.