Great to see some solid community debate around the LM program
My observations are in line with the points shared above, below I compare the data from Aave Weekly 16 (pre LM) and the last Aave Weekly 30 (shared in https://governance.aave.com/t/aave-weekly-protocol-performance-governance-update); as well as from some blockchain transaction analysis.
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The LM has succeeded in increasing supplied (from $7.4b to $18.8b) and borrowed (from $1.9b to $8.2b) liquidity on Aave; with the overall utilisation increasing (from 25.4% to 43.6%) showing more capital efficiency
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As a result, the Safety Module coverage of just V1 and V2 borrows has decreased from 26.1% to 5.9%. One thing to keep in mind is that same asset on same asset borrowing holds little risk compared to borrowing against less correlated assets (about half of the current borrows)
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The current LM program encourages recursive user behaviors which drive 32% of the total liquidity on the V2 Pool
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57% of StkAAVE received via LM is held rather than redeemed (@Dydymoon I have observed many users unstaking the AAVE to deposit on the Polygon Market which had high yields)
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12% of the stkAAVE LM was distributed to users who had never staked AAVE which is good for decentralisation
Given the high budget dedicated to the LM program, I agree that more works need to be done to make the distribution harder to game. We also need to continue asking ourselves, what do we want to achieve with this liquidity mining program?
My risk-focused view believes this LM can help attract high-quality assets’ liquidity granting more liquidity for the Protocol’s users as well as liquidity that is more resilient to market movements. For this we need to focus on the most robust and stable assets: stablecoins + blue chips (not sure it makes sense to add AAVE as it would compete with the Safety Module but could be good to consider additional stablecoins).
In parallel, it also makes sense to favor the assets that contribute the most to Protocol Revenue
I’m not convinced about using LM to launch new markets; but rather favor a progressive bootstrapping phase that allows more flexibility to adapt risk parameters as has already been required. Would make more sense if the launch LM program comes from the listed asset like what Polygon did
Not sure about the idea of the committee feels the community could directly review regularly via snapshot or gov
Also a fan of the idea of increasing the LM risk mitigations benefits by focusing rewards on users with a high health factor >2 as per @TokenBrice gamification idea (also big fan of the soft-incentivize StkAAVE idea)
From my perspective, the recursive behavior does not significantly increase risks, given it’s mostly done same asset on same asset. However it does game the liquidity mining program, costing about half of the distributed rewards. This means that even with the generous distributions of $50m a quarter, its hard to compete with the yields of other platforms
As @pakim249 mentioned borrowing is the key activity on Aave so it makes sense to incentivise user to pursue it. Considering only net deposits or net borrows would limit this kind of behaviors increasing yields for honest borrowers. Though it might encourage users to adapt their strategy accross different assets generating more risk