ARC: Extend AAVE Liquidity Mining Rewards

Liquidity Mining v1

Liquidity mining incentives were introduced for Aave v2 on 4/26/21.

2,200 stkAAVE per day will be allocated pro-rata across supported markets based on the dollar value of the borrowing activity in the underlying market. stkAAVE was distributed over AAVE to further align users with the Aave Protocol and increase the amount of AAVE staked in the safety module.

Liquidity Mining Recap

  • Value Distributed: During the liquidity mining campaign, 198,000 stkAAVE will be distributed to borrowers and lenders on Aave v2, using ~7% of the Ecosystem Reserve. This equates to $82MM in rewards (AAVE VWAP since LM program started).

  • TVL: v2 TVL rose from $7.8 billion to a high of $14.4 billion in mid-May. Stablecoin liquidity accounts for more than 60% of total Aave v2 liquidity.

  • V1 to V2 liquidity migration: v1 liquidity decreased from $2.5 billion to $372MM since the liquidity mining program started. 40% of Aave liquidity was deployed in v1 before the LM rewards started. Aave v1 liquidity now accounts for less than 3% of all liquidity on Aave. This allows the community to remain focused on v2 and upcoming money markets.

  • Growth in dollar value supplied and borrowed: The USDC and DAI markets experienced the largest increase in dollar value supplied and borrowed. Note - many users on these markets have recursively levered their position to maximize yields. Recursive leverage accounts for ~32% of all deposits on v2. This compares to ~40% on Aave’s Polygon market.

  • Reserve Growth: Aave reserves help provide the first layer of protection for borrowers and lenders. Since liquidity mining rewards launched, Aave’s v2 reserves have grown by ~$7MM.

Change in v2 markets from 4/26/21 to 7/15/21

Liquidity Mining v2

In v2 of the liquidity mining proposal, we propose the following:

  • Keep the same 2,200 stkAAVE per day distribution. Over a one year period, this equates to 803k stkAAVE distributed or ~27% of the ecosystem reserve.
  • Include LINK in the liquidity mining program. We have seen close collaboration between the LINK and AAVE communities. The Aave community signaled support for adding LINK.
  • We propose the Aave Risk DAO explore a separate shorter-term liquidity mining proposal for new assets. For example, this program would allow newly onboarded assets to benefit from LM rewards. This program would facilitate shorter and targeted LM distributions.
  • Update the LM distribution - applying the same, formulaic approach to current borrowing demand on Aave v2 as of 7/15/21. Note - this distribution does not adjust for recursive leverage. While this distribution allocates a relatively low amount of stkAAVE to the LINK market, this number can be scaled up over time. Similar to other markets, current borrowing demand is used to determine the allocation of stkAAVE to the LINK market.

We would love to hear the community’s feedback on these parameters.

Should Aave extend liquidity mining rewards?
  • Yes
  • No

0 voters

9 Likes

Fully in support of continuing the liquidity mining program. The outcome has been until now positive and incentivized protocols attract more capital during bearish phases.

1 Like

I fully support the extension of the liquidity mining program. It has been highly successfully in attracting deposits and borrowing activity for the Aave protocol, ultimately resulting in Aave becoming the largest DeFi protocol by TVL. The addition of LINK is also appreciated and makes since in my mind given the community support showcased by this ARC to add LM rewards for LINK back in May. My rational regarding adding LM rewards for LINK deposits and the synergies between the Chainlink and Aave communities can be read in that ARC.

However as you noted, I do think the rewards allocated to LINK are too low. With ~$311M of LINK currently deposited and ~$8.5M borrowed on Aave v2, implementing 4 stkAAVE per day in LM rewards (considering a USD value of $250 per stkAAVE), which is split 95% to depositors and 5% to borrowers (similar to WBTC and ETH), would result in a LM reward APR of 0.1% for LINK deposits and 0.2% for borrowers.

In comparison, Compound’s LM program currently offers 2.22% APY for LINK deposits and 14.52% for borrowing (although to note the collateral factor is currently 0%). As Compound turns up the collateral factor to allow borrowing against LINK though, Aave may become less competitive within the LINK token borrowing/lending/collateralization market. Therefore, I believe the current allocation for LINK LM rewards would have a negligible effect on attracting activity for LINK versus competitors (who now also use Chainlink price feeds making it a viable option).

Generally, I think it makes sense to determine LM rewards for stablecoins by looking at the amount borrowed, but I don’t think this approach works for non-stablecoins as most people use non-stablecoins like LINK as collateral to borrow stablecoins. Really the only reason to borrow LINK is to short it, which is not a common activity, especially for the Chainlink community which is the targeted audience for attracting LINK deposits (which would lead to greater amount of stablecoins being borrowed and higher yield for stablecoin lenders).

I propose increasing the LM rewards for LINK one order of magnitude from 4 stkAAVE per day to 40 stkAAVE per day which would put the allocation on a similar level with ETH and WBTC, resulting in an APR of 1% for depositing and 2% for borrowing, which is more competitive. Open to discussion, particularly how the rewards would be rebalanced from other markets or if the aggregate allocation as a whole is increased. Thank you for creating this proposal and listening to my point of view.

2 Likes

I support continuing LM and this proposal.

Aave’s usage has increased a lot, fees are accruing much more quickly to the ecosystem collector, and rates are lower and more stable, making Aave more attractive to borrowers than before LM was instantiated.

To @ChainLinkGod point, perhaps the proposed rewards to LINK are on the low side, but given that current LM program is going to end soon (25th july), I think the priority would be to have it proposed in a timeline where aave voters have the chance to enact LM without interruption if they want to.

But it’s an interesting point. Maybe this could see a further proposal in the future to change the way rewards allocation work for non-stablecoins. For example there could be research on calculating how much borrowing activity happens using certain non-stablecoins collaterals, and allocate rewards based on that?

3 Likes

Hello @Anjan-ParaFi , thanks for starting the discussion !

I voted no because i don’t think the LM program should continue this way, but I’m not saying we should stop it either.

I agree about the fact that the TVL and the revenues have grown since the beginning of the program, however, this also lowered the security of Aave by diluting the safefy module, which led to less borrow covered by the SM than before.

The preoccupation of a downside pressure was mentioned in the comments of the first proposal, and the price action shows that’s what happened. If we look at the price evolution between the start of the LM and today, AAVE price is down 30% (and 63% from ATH) which means the value of the ecosystem reserve and the safety module lost around 30% value too.

If we look at the chart, the LM program started on April 25th, the first cooldown call was possible on Mai 5th. We can observe a first dump on the 4th (probably anticipation) then a small downtrend until Mai 11th. It could be simply because the program just started but AAVE token has reached an ATH of 660$ only 24 days after the launch of the LM. Surely the all market is going down and the LM is obviously not the only reason of the dump, but it’s probably a part of it.

It would be very interesting to get some statistics about cool downs activation on this period although it’s very possible that a lot of users sold their StkAave on Uniswap directly, bringing a potential slippage on the pool in order to avoid the cooldown period.

The main goal of the ecosystem reserve is to be used for the protocol outflow until it generates enough revenues to cover everything that’s paid by the DAO.
I think spending as much as almost 1/3 of the ER in only one year could lead to a lot more downside, hurting even more the reserve treasury, the safety module and the token holders.

Also, does it really make sense to distribute twice more rewards to stakers who take risks to cover the protocol than to liquidity providers (even if the risk remains low) ? Especially considering that the rewards are in StkAave, which dilute even more the StkAave yield.

One potential solution could be to start the next program with Aave tokens instead of StkAave (considering that the cool down period does not reduce the dump), add a linear vesting for the farming rewards, with a lower distribution and even if Aave should continue to stablecoins on V2, it could also targeting specifics markets/assets, which could help regulate/lower the selling pressure.

Another possibility for the liquidity mining could be to start an incentive on a 50/50 pool on Polygon (could be a double reward with sushi, quickswap on balancer) to help maintain the price when there is some big market movements. As the LTV on Aave is only 50%, it’s probably one of the assets liquidated the most. An attractive pool like this also remove the cool-down constraint and the high gas fees with it for small wallets, bringing more liquidity.

There is an issue remaining, not directly related to this proposal but StkBPT holders still can’t vote, that’s around 1M of Aave (6.25% of the total supply) token that can’t take part to the protocol decisions. This needs to be implemented as soon as possible imo.
Moreover, at the time of the first proposal, Aave holders on Polygon were not able to vote either, so I’m glad they can now.

Finally, about the first proposal, even if the poll passed, we see on the comments that a majority of known community members were against it (16 Against, 6 For and 5 uncertain / 27 comments on an opinion about the LM proposal)

I hope these community members will take part to the discussion as I would be happy to know if some of them changed their mind about this.

Thanks for reading and looking forward to get the view of the community on this.

14 Likes

There should be a ‘cool down’ period with 0 LM rewards before this is even considered. I think it would be very beneficial to observe how liquidity providers react.

2 Likes

During the discussions regarding the first wave of liquidity mining, I’ve expressed my concerns regarding the use of non-targeted incentives, especially on the borrowing side. I’ve also noted that it would create recursive loops on Aave, and dilute the efficiency of the Safety Module budget since borrowing skyrocketed.

I recognize the success of the first wave of liquidity mining, it helped tremendously to grow Aave’s awareness and utilization. However, we must note that the AAVE token has not performed that well in the meantime, lowering even further the effective Safety Module budget. I’m also still looking for a documented analysis of the behaviors of the farmers who received the Ecosystem Reserve tokens: do they unstake? what’s the 1/2/3 months StkAave retention rate?

Given that Aave is now the most prominent money market, I strongly oppose any non-targeted liquidity mining program such as @Anjan-ParaFi suggests.

If the community would like to move forward with this, I would suggest at least revising the proposal to consider the following adjustments, inspired from the discussions on the first wave:

  • Budget: The current proposal suggests using more than ¼ of the Ecosystem Reserve over the course of a mere year simply for growth. I find it almost indecent to even suggest something like that. I see Aave as base layer, here for decades to come. Growth-focused spending should not be this excessive.

  • Profitability: As Anjan highlighted, Aave’s reserves have grown by about $7M. It’s a neat achievement but let’s not forget to place it back into its context. We’ve pulled ~ 200K AAVE so far from the Ecosystem Reserve to sustain the liquidity mining ~ 52 M $ at present price.

  • Gamification: Could we adjust or skew the reward in favor of users maintaining a responsible health factor? There could be bonus for sustaining a >1.8 HF for prolonged periods for instance. We could also skew the StkAave allocation to in favor of users who stay staked into the Safety Module with the tokens they earned.

  • Borrow-side incentives: do we actually need them? What are we trying to accomplish with this? We must note that the introduction of borrowing incentives created a recursive usage of Aave that was almost non existent before and now represents ~1/3 of the TVL.

  • Proposition framing & objectives: What are our objectives with this liquidity mining plan? Numbah go up? Even we’re this basic, I think there should be some form of common understanding of what we are trying to achieve and how success will be measured – especially if we spend the sizable amount of AAVE initially suggested.

  • Proposed tokens: while I understand the potential need for incentives on stablecoin deposits given the competitiveness of this market and its critical need for Aave, we can wonder if we need incentives for established tokens like ETH or wBTC that were already abundantly used as collateral on Aave without liquidity mining rewards.

  • Duration: liquidity mining is great to make capital flow quickly. Why not harness this to help launch new markets/tokens with limited 1-2 week mining plan?

Given that this proposal seem to already have the team support before the community discussion even happened, I don’t think this message will produce any result, but allow me to try one more time. For the long-term sake of the Aave’s protocol, I hope the concerns of long-term holders and community members will not fly unanswered one more time.

20 Likes

I don’t think the community’s opinions matter anymore. DAO decision making is totally controlled by VCs now. This is depressing.

4 Likes

Will the user of InstaDapp benefits the LM program ? @Anjan-ParaFi

If so, I will support the proposal

Over a year, it is 1/4 of the ecosystem reserve, but it’s actually only 1/20 of the total market supply. If the goal is decentralization of the protocol, this is actually pretty slow in my opinion.

Isn’t the core value offered by AAVE realized by the process of borrowing though? I think pushing users to a higher health factor is the wrong approach to prevent things like insolvency to the protocol. The user should feel comfortable taking as much of a risk as the AAVE protocol lets them which means that real solutions need to focus on getting positions liquidated on time and seting liquidation parameters appropriately.

You point out recursive borrowing, but I’m not really sure why that would be a bad thing. I think it’s wonderful that people can take whale-like positions with small amounts of capital as long as the liquidation mechanics are solid. Overall, I think it should be AAVE’s goal to invite users to play with as much liquidity as the protocol allows. If we think things are too risky, AAVE should adjust the liquidation parameters.

I think this is a little disingenuous… This was posted early in the thread that you linked in your post. Or perhaps you’re asking for it to be posted in this thread as well. In which case I can agree. There’s no reasoning in this thread.

I mostly agree with everything else you wrote though. I think these proposals could align a bit more with community desires, especially considering that there are a few threads that requested LM rewards with pretty good support but aren’t mentioned in this proposal at all. TUSD SUSD

1 Like

I don’t believe this is really true, the Safety Module is backed by users staking their AAVE (currently $746M of AAVE has been staked, which 30% ($233M) can be used during a downfall event) and AAVE/ETH Balancer pool shares (currently $260M of AAVE and $65M of ETH, where 30% ($97.5M) can be used during a downfall event). This means the Safety Module already has $330M in funds that can be used to recollateralize the system if any significant undercollateralized loans are created on the platform (which has never happened but the SM provides additional protection). Even if this entire budget was used up, the Aave protocol can issuance new AAVE tokens to cover any holes (just like MKR in the MakerDAO protocol like during black thursday).

“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.” - Safety Module Documentation

As shown above, LM programs do not reduce the Safety Module budget and the reason we have seen a decrease in the value of the AAVE token cannot really be attributed to the LM program (at least I have seen no evidence of such), but more than likely because the entire crypto market has crashed since the LM program started (BTC has gone from $60k to $30k), all cryptos are highly correlated and AAVE has dropped a similar amount.

Aave has become the prominent money market precisely because it has a liquidity mining program that incentivizes adoption. If the community wants it to keep it that way, it needs to stay competitive against other money markets like Compound that have such LM programs. Seeing success and cutting the LM program in my mind is like a patient who stops taking their anti-biotics because they feel better and thinks they don’t need them anymore. Without such a program, TVL will drop and this position will be lost against competitors like Compound and even Cream when they launch a LM program.

Incentivizing low capital efficiency of loans results in lower yields for lenders, especially for larger positions (seems people would be more likely to borrow less rather than deposit more collateral). The Aave system has proven it can handle market crashes and keep the protocol collateralized. I don’t think this is really necessary as users should be able to open positions within their risk tolerance and not be disincentived from opening capital efficient positions that the protocol can handle, then would likely switch to other platforms like Compound that don’t have such a dynamic.

Money markets are a two sided marketplace. Incentivizing borrowing increases yield for lenders (particularly stablecoins), which incentivizes more deposits to capture these yields (e.g. from users and protocols like Yearn), thereby lowering rates for borrowers, increasing borrowing activity, leading to higher lending rates, and repeat. This creates a virtuous cycle which cannot be achieved by only incentivizing deposits, which would crush yields, disincentivizing deposits, not ideal for a two-sided marketplace.

To incentivize adoption and usage, as well as get users to switch from Aave v1 and other markets like Compound over to Aave. Goals were defined in the original LM program proposal, which haven’t changed, which is likely why it isn’t in this proposal. Quantifying such metrics would indeed help but I think the goals are clear: market dominance.

If Aave wants to stay competitive against other markets like Compound who offers LM rewards for such collateral, then yes. LM rewards incentivize people to switch their loan positions from other platforms to Aave and incentivizes people who don’t use money markets to start using them. As a two sided marketplace, deposits and borrows should both be incentivized.

Interesting idea, but would increase governance overhead proportionally. I think this is a bit of scope of this proposal but would be interesting to hear this fleshed out in another proposal.

I feel this ignores the all of the people who have publicly supported such LM programs like myself and others, who see the competitive advantages that such LM programs provide. This proposal wasn’t created by the Aave team but a community member, so not sure where this assumption comes from. This proposal was created to get community feedback such as yours.

I agree with many of your other points regarding adding other tokens to the program and recursive borrowing (although this doesn’t really introduce risks, just is capital not being used efficiently, not sure what the solution here would be as we need to incentivize both sides of a two sided marketplace to get that virtuous cycle that has lead to Aave becoming the #1 protocol by TVL).

I would be interested in seeing some of the metrics quantified from the data we now have from the previous LM program like the retention rate and number/percentage of people switching platforms versus using money markets for the first time. In general, a LM program enshrines Aave’s position as the largest money market which is more important during its early life (which justifies such capital usage) compared than later when it has a greater network effect through liquidity and integrations.

3 Likes

Loving the discussion here!

I’m mostly in accordance with @pakim249 and @ChainLinkGod on the topic. I think that the current Liquidity Mining program has been essential to drive Aave at the top of the rankings across liquidity protocols, and it’s too early to stop now. Especially as all the farming opportunities dried up, liquidity now concentrates, of course, in protocols that provide long term, valuable governance power redistribution (that’s why curve climbed the TVL rankings so quickly).
What i personally care about is long term sustainability of the protocol and ecosystem growth. I see liquidity mining propaedeutic to both (growth of the ecosystem reserve thanks to the increased outstanding debt and leading market metrics).
I usually avoid talking about price but since it looks like is the concern of many, will give my personal opinion - i don’t see strong correlation between the current AAVE price and the LM program. Aave reached the ATH way after the LM program had begun and we can’t ignore the fact that the market dropped 50+% and there is strong correlation between assets.

The aave reserve is on it’s way to collect 30M+ in stablecoins by the end of the year. That’s a multiyear runaway for protocol development and ecosystem growth, and even at the current market APY of aroun 2% it would generate 600+K/year out of interest only (the stablecoins collected by the aave reserve are automatically deposited in Aave).

As a community we need to aim long term, the future of finance will play out in the next 10 years and the aave protocol will be the leader.

5 Likes

@ChainLinkGod regarding the LINK emission, it is true that currently compound offers 2% LM APY on link, but it must be noted that it only has 60M worth of LINK deposited. Aave has more than 5 times that amount, if the same deposits would be in compound it would have a comparable LM APY.

2 Likes

I also support @pakim249 and @ChainLinkGod viewpoint. The liquidity program incentive is what made me deposit and use AAVE for the first time. I compared the APR of different platforms and also different strategy to accumulate more ETH or discover another great token to hold. AAVE offered a similar return then others AND had in my opinion a better long term vision and community lead projects. So I deposited here and I plan to earn AAVE and keep every single AAVE earned.

It reminds me of Paypal 20$ referral program when they first started, it seemed expensive at the time but it got them their first few million users and where they are today. So in the light of my personal experience, the LP program seems successful in creating new AAVE long term holder and onboarding new user of the platform.

2 Likes

Glad to see the message stirred some reactions and was not ignored this time.

I want to focus on clarifying an absolutely critical point that seems deeply misunderstood in this discussion, what I call the dilution of the safety module budget.

Ignore AAVE price going down, since indeed it’s not directly correlated to the liquidity mining. Even consider that the deposit to the safety module stayed the same (they lowered).

The safety module is to be used in case of critical failure, so we measure its effective coverage against the borrow side of Aave. I did the maths in February when I published my risk assessment article:

Let’s redo the maths for today’s situation, all in USD:

  • Safety Module Total Deposit = $ 1.05B
  • Budget that can be used (30%) = $350M
  • Total Borrows on V1 + V2 = 56 M + 6.3 B
  • Effective coverage offered by the safety module = 16.6%, roughly 3.5x times less that the figure observed in February.

This is precisely what I meant by “dilution of the safety module budget”. Even if the budget stays the same, it got diluted by the massive increase in borrowing. This is the main reason why I’m worried about borrowing side incentives as it’s essentially driving a reduction of efficiency of the insurance budget — especially if nothing is done to stimulate deposits to the SM simultaneously.

To clarify the rest of my points, allow me to restate that I do not oppose liquidity mining per se, and I recognized the results of the first wave. What I oppose is the untargeted dimension (both sides, all major tokens) & the excessive budget, amongst other concerns.

9 Likes

Thanks for all the great input! Aligned with @ChainLinkGod, @pakim249, and @Emilio.

@ChainLinkGod Fair points on the allocation towards the LINK market. 4 stkAAVE is relatively low, but this can also be seen as a starting point before scaling rewards up further. LINK would be the first asset added to the program. Once added, we can monitor borrow/lend activity and further refine. On new assets in general, the risk DAO may be best positioned to add/remove assets in a scalable process.

Given the liquidity mining program will end this week, we are supportive of extending the current program by 4 weeks to give the community more time to deliberate. There is a lot to unpack on revising the distribution. By extending the program for a short period of time, we avoid a sudden pause to the rewards while giving the community enough time to revise the distribution (i.e add/remove assets, adjust the allocation across assets).

5 Likes

In favor of extending to allow the community to have a more articulated discussion.

1 Like

Very interesting community discussion so far. I have to say that liquidity mining has been quite interesting experiment. Would also favour on continuing the liquidity miming program for 4 weeks to give time for the community to reach wider consensus.

7 Likes

In my opinion, there are some valid and constructive points in the discussion and probably the proposal should be refined a bit.
It could be a good idea to start a series of Snapshot votes proposing different models, considering as mentioned the option of liquidity mining on others assets like TUSD and SUSD, to really understand how is the community sentiment about it. Taking into account the flexibility of Snapshot, sounds the most natural next step.
In what rewards the temporary extension, I’m also in favour, as:

  1. The current liquidity mining is quite neutral and can be sustained for 4 weeks by the Aave DAO treasury without problem.
  2. It is quite important for the community to take a really well reasoned decision on the topic. Those 4 weeks will give room for it.
6 Likes

Agreed with the extension because we do not have the time to produce a well crafted counter proposal before the end of the vote.

However, let the community realize that this extension of one month is essentially a one month enforcement of the revised proposal (which extrapolate the initial 3 months proposal and its budget over the course of a year).

It’s not a satisfying decision, and it’s taken with a light consensus, aka a failure of governance. This proposal should have been submitted much earlier (especially considering how rushed it is) to allow ample time for comments and discussions.

I’m willing to help lead the effort for the revised proposal, starting right after the end of EthCC. Other people who commented on this post reached out to help too already, feel free to do it too if you’re interested in getting involved.

7 Likes