ARC: Extend AAVE Liquidity Mining Rewards

Governance
42

Glad to see the discussion is still healthy, there were some great suggestions shared by new participants too! Here’s my attempt at a summary so we have a basis to agree on to craft the revised proposal:

Issue #1: The initially proposed budget is excessive

(800K StkAAVE = 27% ER | $242M current price) + limited efficiency in terms of reserve growth ($7M accrued for $82M spent)

  • Solution 1 - Lower the budget. The range discussed by the community goes from 700k to 400k (50% reduction).
  • Solution 2 - Increase reserve factors (@Zer0dot). Increase the reserve factor on stablecoins which lowers yields (compensated by LM) but can greatly increase protocol revenues.

Issue #2: The current LM rewards are "blind"

Every user is treated the same and there is no further weighting - can we improve the effectiveness of the incentives by targeting them better?

  • Solution #2 - Factor the Health Factor in LM rewards (@Alex_BertoG, TokenBrice).
    Snapshot poll here | :warning: Technical feasibility Emilio? | :warning: Already accounted for / Redundant (@Zer0dot)
  • Solution #3 - Adding a vesting on LM rewards (@Dydymoon). Exit penalty could be used to increase the SM incentives.
  • Solution #4 - Consider switching to straight AAVE rewards (@Dydymoon)
  • Solution #5 - Factor asset utilization rate (@spartan): introduce dynamic LM rewards to target each asset optimal utilization rate.

Discontinued:

  • :x: Solution #1 - Factor net deposit per assets (TokenBrice @Alex_BertoG ). Disconsidered as it would actually incentivize loops in different assets, increasing the overall risk. Reasoning here | @FatherMalice & others

Issue #3: Review supported assets, split and weights

  • Solution #1 - Add LINK, Remove GUSD & rebalance (@ChainLinkGod @JeanBrasse TokenBrice). If we include some mechanism to reduce incentives on recursive usage, reducing the USDC budget should be considered (initially proposed =62%). We could also include AAVE, with a lower APY than the Safety Module.
  • Solution #2 - Consider uneven distribution split (@Zer0dot). Skewing rewards towards borrowing on stablecoins could help increase overall usage and value captured by the protocol.

Issue #4: The liquidity mining plan scope is unclear

  • Solution #1 - Clearly define the term & revision window. It seems like the discussion focused on a yearly plan. Could we also specify checkpoints for adjustments (ex: every 3 months?)

Note: The scope is currently limited to Aave V2, other markets will be handled by further proposals. :warning: To keep in mind while discussing the budget.

  • Solution #2 - Specify the goals. Proposed by State: 1/Increase liquidity on Aave v2 markets, 2/Keeping the borrow rates attractive (low) on Aave v2.

Additional notes

  1. From the discussions on this proposal, several ideas stemmed regarding the Safety Module. If this proposal passes, it calls for a discussion on the safety module (and potential slight re-adjustment of the LM).
  2. The adjustment of the rewards based on the HF could be excluded from the LM proposal and instead included at the protocol level. Essentially a protocol-wide game to normalize around a certain HF to maximize rewards. See Spartan’s answer.
  3. Incentivise a pool on Polygon to reduce the liquidation impact as the LTV is quite low (a few Aave/day should be enough as there are also other rewards on DEXes, maybe it could be paid in Matic to keep the rewards in Aave for mainnet)

Recap produced by myself, based on inputs from this thread, with the feedback of Jean Brasse and Dydymoon.

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