ARC: Extend AAVE Liquidity Mining Rewards

If there is a sentiment against recursive activity and loops then it makes sense to decrease LM stkAAVE incentives for USDC which is the most loops producing asset due to the highest Maximum LTV = 80.00% and let in 15 loops create 482 USDC out of 100 USDC deposit.

And direct saved stkAAVE to other assets, not just LINK, but other DeFi blue chips like UNI, MKR, CRV attracting hodlers of these assets to benefit from AAVE not just in material way but also by bringing talent and sharing ideas from these new AAVE depositors.

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I see this discussion evolved a lot, really happy to see the community in action !

Actually, you missed a few points on the feedback brought by other community members and myself, and the some of the ones mentioned are not fully accurate :

I agree with @Alex_BertoG on an incentive for users keeping a HF > 2. It would motivate users to keep a safe position which can lower a bit the SM risk. Someone made a snapshot vote for this :

We could make another one with this solution, the net deposits one, and also the current way for the community to decide which way is better

I definitely think we should add AAVE if we add LINK too, however, we discussed that the rate should obviously be lower than the SM, so it doesn’t compete with StkAave yield and @Alex_BertoG said it too.

I fully agree on using a considerable part of the LM program to bootstrap new markets/assets, and personally, I’d allocate 40-50% of the LM program, but both the reward split between V2 and other markets and the modification of the allocation, should be voted by the community on Snapshot.

Special thanks to @state btw for building this amazing tool that finally allows all the community to have a voice in the governance.

This should also be decided by the community, and I believe there should be more voting options (for example 700/600/500/400K )

We’ll try to propose a new distribution in the coming days with some community members.

I shared with you my opinion about the inefficiency of the cooldown to avoid selling pressure and this was showed by the LM program, either because people can wait 10 days to sell it as it’s not any random token, or because some sell it with a slippage on a DEX.

My point would be to stop reward in StkAave and use Aave instead, or maybe even other tokens if we can get some from other projects as mentioned below.

From what i understand, 43% of StkAAVE have activated the cooldown, which means almost half of the rewards were either sold it or moved their AAVE on polygon, but the high rewards on polygon only lasted a month, so this can’t explain it all. Moreover, I assume these stats don’t take into account the StkAAVE sold on the market, meaning part of the 57% that did not called the cooldown could have sold too. Not later than yersterday, you could sell 1 stkAave for 0.984 aave, against 0.996 the day before.

Also, not sure if all the rewards for the LM are deposited on the SM and then distributed but i guess so, and in this case this also dilute the StkAave holders which already have a very low return.

As mentioned on our discussion, adding some vesting mechanism on the rewards with exit penalty could be very positive, as the penalty could be sent to the Safety module, solving two problems : reduce the dump and increase the safety module rewards (which is a pretty important point, we need to re balance the rewards between the SM and the LM)

A more detailed proposition on this will be shared in the coming days, working on this with a few community members.

Can you explain why you don’t think using LM to kickstart other markets like the AMM market is a good idea ?

Agree about the ability to adapt the LM and I believe a review every 3 months was mentioned above, but it could be much more often like every 2weeks or month, bot not sure this is what you meant by progressive bootstrapping phase with flexibility

This could be really great, but not sure if a lot of projects would agree to just give rewards for Aave, or the one that might agree could be some new/dangerous projects that what to be listed imo

@state Agree with everything you said, but I wonder, is it mandatory to have the LM running for 1 year ? Why couldn’t we vote on it every x month like the previous LM programs ?

These are some interesting ideas and i fully support the one about rewarding users with HF > 2, but the other seems a bit complicated and maybe it needs more discussions ?

No, it’s not imo, we don’t need VCs deciding every proposal.

I definitely agree with you on this, the protocol is still early and needs an active community.

Thanks for reading my comments !


Hey guys!

Love seeing this heated discussion around the very pertinent topic of liquidity mining. This is what DeFi is all about!

I wanted to give my two cents on some of these points, but before that let me echo @Emilio’s statements during the community call: we need to keep in mind that whatever mechanism we choose to implement should be technically feasible on-chain.

Okay, here we go!

Health Factor Incentivization

Let’s generalize this to just “incentivizing healthy behavior somehow” because of the technicalities. At the end of the day, I’m fully against this idea, and here’s why:
The protocol, by design, already has risk parameters set in place. These should be enough to maintain the protocol in a healthy state. This aspect of the protocol is, in my eyes, not connected to liquidity mining, but to proper risk parameter management.

The protocol should have no problem with users borrowing at near 1 HF, in fact, it technically benefits most participants via interest income and treasury income.

Incentivizing New Markets

This is interesting! However, I really believe the core aim of liquidity mining (in general) is to distribute ownership to active system participants away from passive participants.

With that in mind, I think it makes sense to place incentives in established markets, but using funds to bootstrap a new market may not be ideal. I think markets should develop around demand first, not incentives. I’m against this too.

Diverging from a 50/50 Split

I’m almost certain maintaining a 50/50 split is not the most efficient way forward. However, with that said, I don’t really have much backing to support that claim, it’s just a gut feeling.

I do have a few thoughts though:

  • Borrowers technically provide more value to the protocol by
    a. Increasing depositor interest and
    b. Increasing reserve factor earnings
  • Incentivizing borrows more than deposits reduces the maximum earnings from a “leverage loop”

Furthermore, if we incentivized borrows more than deposits, is it safe to say that the earnings for passive depositors wouldn’t actually be heavily negatively impacted, since more borrows would need to occur to reach equilibrium between borrow rate and incentive rewards?

My intuition says “yes,” and my conclusion would be that it may actually benefit the protocol to a greater extent to actually incentivize borrows more than deposits. Conceptually, incentivizing borrows already increases deposit rates, so passive depositors still benefit significantly. Do we really need to incentivize depositors more? I’m not sure. Leave your thoughts, let’s discuss!

Lastly, I wanted to bring up an idea that nobody really mentioned…

Raising Reserve Factors

In particular if we remain with a 50/50 split, I think it’s reasonable to increase reserve factors on major stablecoins. Here’s my reasoning:

  1. Depositors are already receiving “double counted” increased yield due to two-sided liquidity mining boosting borrow demand while also providing direct depositor incentives
  2. I believe the increase of ~$7MM in the V2 reserve is great, but I think we can do better, the Ecosystem Reserve did spend $82MM after all (of course, growing the treasury is not the main goal here, but still an interesting statistic)

Building up a strong treasury is an essential component to growing Aave into an even more self-sustaining DeFi protocol.

Also let’s not forget that an increase of a reserve factor from 10% to 20% essentially turns a 3% yield into a 2.67% yield (a reduction of 0.33%) all the while doubling the treasury’s earnings in that asset.

If we’re using up this much of the reserve (~27% per year) then I think we’d better shift some focus towards making the protocol self-sustaining.

I think it’s worth considering raising reserve factors, in particular if we maintain the same 50/50 split. What do you guys think?

Laaaaast thing! I just want to bring a little correction to the original post:

This is actually not true! Governance has not decided whether to use the ecosystem collector (which I believe is what is being referred to here instead of Aave reserves, right?) as a first line of defense. The first line of defense, by default, remains the Safety Module.

Thank you guys for the great discussion! Let’s keep it going, I’m curious to hear your thoughts going forward. Let’s design the best LM campaign we can!


Hey @Zer0dot. I agree with all of your points on : health factor, the borrower-depositor split, and the reserve factors.

I disagree with this in particular. New markets are notoriously hard to kickstart without incentives in DeFi, but once they’re big enough, if they’re fundamentally sound, they can maintain themselves pretty easily even once incentives stop. I think using LM programs for to kickstart new markets is a super powerful tool we shouldn’t ignore. For example we’ve seen how well $MATIC rewards helped the polygon market get a good start. We could for example boostrap the AMM market or the Arbitrum market using LM.

But I think this brings up what @Alex_BertoG said, we need to define what we want with this LM program. For me it’s not that much about distributing the token or rewarding active participants. We already incentivize AAVE holders to be active via stkAAVE or stkaBPT.
For me the main goals of liquidity mining on Aave are:

  1. Increasing liquidity for existing markets
  2. Making Aave the best place in the industry to borrow with lower rates.
  3. Kickstarting new markets

But i’d recommand this program to be specifically about Aave v2, so for this one it would be:

  1. Increase liquidity on Aave v2 markets
  2. Keeping the borrow rates attractive (low) on Aave v2.

I think the first program achieved those goals, so now we could look at maintaining this achievement, while trying to do it more efficiently (@spartan’s idea to target the optimial utilization is an exemple) while reducing the cost of the program ( lower amount of stkAAVE per day).


the points made on yesterday’s call were excellent: sliding scale for health factor, etc.

This leads to rewarding actual economic activity rather than recursive 5x apes (which are fine too).

In regards to funding, i’d like the ability to receive the economic equivalent of the staked BAL AAVE/ETH LP as it would allow me (and the protocol) to further diversify its risk profile. But maybe this should only be offered to current stkAAVE holders.

And in this regard, maybe there should be additional LM weighting to current stkAAVE holders as it seems theyre the most likely to leave the LM rewards in the insurance pool.

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.


  • :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.


Request for comment from @Emilio
What’s the technical feasibility of this? How hard or long would it be to implement it?


This is not doable either - let me explain why:

The accumulation of the rewards works this way - there is a certain emission per each unit of aToken/debt token that depends on the global emission per second and the total supply of the aToken/debtToken. Here is an example:

Let’s suppose we have 1000 aDAI deposited and there is an emission per second on aDAI of 0.01 AAVE/sec. It means that each aDAI receives 0.00001 AAVE/sec, or 0.864 AAVE/day.

Now imagine that someone comes and deposits another 1000 DAI, resulting in a total aDAI supply of 2000. Now the emission per second drops to 0.000005 AAVE/sec, or 0.432 AAVE/day.

The protocol essentially accrues what was cumulated since the last action with the previous emission, and recalculates what will be the new emission based on the total supply. So the rewards are cumulated on each action. So here is the important part - an action by a user is needed to accumulate the rewards. Therefore any reward scheme that relies on parameters that change without a corresponding action (for example, the HF that changes depending on assets price) is not doable or very expensive to do.
In this case the utilization rate changes continuously because of the interest generated each second, therefore it’s not doable onchain.

To be clear, i’d be completely against any reward scheme that requires reworking the incentives system in a more centralized way (eg periodic airdrops/claims).


I think we should simply ask ourselves what we are trying to achieve with the LM program. Here is what i think the goals should be:

  1. Improve the Aave metrics (TVL and outstanding debt) to keep Aave at the leadership of defi protocols.
  2. Increase the protocol income (Reserve Factor)
  3. Redistribute governance power

In my opinion, the current program achieved all three. sure it can be improved, but i wouldn’t try to reinvent the wheel here.
Many are specifically against borrowing loops, i don’t particularly get the reason why - they effectively increase the TVL and market size while providing good reserve factor.
Incentivizing deposits would only bring to the protocol opportunistic unproductive liquidity that would fail in increasing outstanding debt and more importantly the reserve factor.
Incentivizing only borrowing would unrealistically skew the interest rates to values that are not competitive against the rest of the market.
Eventually what i would do is reduce the emission on WBTC and USDT, and shift some of the emission towards DAI, LINK and SUSD (the synthetix community created the snapshot vote and got positive response).


A few comments on this great recap by @TokenBrice:

  • Increasing reserve factors lowers the competitivity of the protocol against other solutions. Right now if we compare side by side Aave has better deposit and borrow rates than compound because the curve is more optimized. (here screenshots for comparison)

If we really need to adjust the reserve factors, i wouldn’t change more than a couple of percentage points, that would hardly make a difference anyway.

  1. Lower the budget: i would agree on this, but not now. Let’s give it another 6 months. There will be a lot going on in 6 months from now and there will be good usage for additional aave rewards on L2s eventually. But till then, better to keep our leadership position.

  2. Factor HF in the LM rewards - i would discard, too much work and centralizes the reward scheme

  3. Adding vesting on LM rewards - i think here we should do a more accurate analysis of how many people actually unstake and sell after the claim - i think @alexandra had something here?

  4. switching to straight AAVE rewards -what is the rationale behind this? @dydmoon

  5. Factor asset utilization rate - hard to implement technically wise, i would discard

  6. Review supported assets: 100% agree, but personally i wouldn’t remove GUSD - the percentage allocated to it is negligible anyway and it still brings stablecoins to the reserve factor. I would rather substantially reduce the rewards on WBTC and USDT, and shift some towards DAI, LINK and SUSD.


This matter is becoming quite urgent as the emission will end again in 15 days.

In my opinion the current LM program works. I would propose some minor adjustments to the current emission:

  • keep the USDC emission as it is. USDC still gets the majority of the rewards.
  • drop the emission for USDT and WBTC. I would cut the USDT emission by 1/3 and the WBTC emission by 1/2.
  • I would redirect half of what has been gained from cutting the USDT/WBTC emission to DAI. Rewarding DAI more is beneficial for the whole defi ecosystem and for the good relationship of Aave and Maker.
  • The other half i would split between SUSD and LINK, with a higher percentage towards SUSD.

@TokenBrice @dydmoon @Anjan-ParaFi @state


It would be a disappointing outcome @Emilio, to say the least.

Essentially all the discussion happened in a vacuum because it seems like any significant change was impossible to implement within the given timeframe.

We’re gonna keep going with a blind LM program, and not even cut the budget. Seems like even a small increase of the reserve factor (that would improve the profitability of the program, with minimal impact on yields) is not something that could be envisioned.

Why should we redirect more to DAI? We’re already splurging so much on USDC, so at this point why not throw extra on-top for wUSDC DAI. If we want rewards that would be aligned with what is best with DeFi’s ecosystem long-term, we would be discussing incentivizing tokens like RAI or LUSD…

I feel useless and powerless, but I guess that’s a good insight for my first sustained forray into the trenches of governance.


From my side i’m in favour of something that reduces signficantly the amount of AAVE per day, gradually. Let’s try to present a proposal that does this! @TokenBrice @Dydymoon you guys down?


Adding a vesting or maybe a lock of the rewards with early exit penalty would benefit long term holders and avoid farmers / selling pressure + the penalty can be redirected to the SM to increse the rewards for stakers.

About the switch to Aave, as i said before a lot of whales sold their stkAave on Uniswap without even waiting for the cooldown (so this won’t be a part of statistics you can get about who activated it)

But, funny enough, a good part of the liquidity on this pool was removed a few hours after this was mentioned on the forum, solving the issue as the slippage is a lot higher now, so whales can’t dump there anymore.

Removing GUSD is not about the rewards allocated but more because it feels this doesn’t belong to an incentive program i guess (unless something is cooking but in this case the community should be aware of it imo). Pretty much no one uses GUSD in Defi (Gemini excluded)

Increasing a bit the reserve factor could help grow the treasury but i agree that we shouldn’t be aggressive about the %

But the most important part should be about reducing the incentives.

I don’t think we need to give another 6 months with 2200 Aave/day for VCs to accumulate even more, especially not all in V2, as we could incentivize the AMM market once it’s updated with the new pools, and markets like Arbitrum or some new money market not created yet.


Yes absolutely, let’s see what we can propose !

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i don’t think you should feel useless and powerless just because i provided a feedback to your comments.
What i have seen proposed here are alternatives that either

  • require a big rework of the LM program and a shift to handle offchain computations, which also brings serious centralization concerns - who is going to handle the program in that case? In these fall the proposals of incentivizing high Health Factor positions and incentivizing around the optimal utilization ratio.

  • Are arguably less efficient than what we already have (incentivize net deposits)

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i don’t have a strong opinion on GUSD, but the allocation is absolutely minimal so removing it or not frankly does not make much difference.

I would be ok with an increase of the reserve factor, particularly on certain assets (ETH, GUSD, WBTC). On those, it could be around 5% more.

I wouldn’t go higher than 1-2% more on DAI/USDC/USDT, if we want to remain competitive as a protocol.

I’m personally completely against lowering the emission now - there is no urge as even if we keep with 2200 AAVE/day the aave reserve would last more than 2 years.
We are in a critical moment for defi, the world is now discoverin its power and aave is at the forefront of this nascent industry - sacrificing the leadership position for a few hundreds less aave/day is suicidal.


Blockquote Why should we redirect more to DAI?

As much as DAI get criticized, it’s still the best alternative we have to fully centralized stablecoins. Sure it has its up and downs (and i’m perfectly aware that AT THE MOMENT, it’s mostly backed by USDC) but the Maker community is striving to improve.
Maker also chose Aave for its direct deposit module (which would bring additional DAI directly in Aave).

With all honesty, LUSD and RAI are not yet even close to what DAI has achieved until now. I believe RAI is promising, but too early still to bet on it directly.

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So you’re saying that the protocol should be able to generate enough revenues in two years with this emission rate to basically cover everything the protocol has to pay for, rewards for the safety module included ?

Considering the huge amount of tokens distributed and the value it represent, i doubt two years would be enough but i’ll be happy to be wrong on this.

Also really not sure that lowering the emission would result to a loss of Aave leadership.
With all the features that Aave should propose in the coming months, imo it seems logical to use Aave vs competitors like Compound.


I’d like to voice my support in keeping the liquidity mining budget high in this crucial period of growth for AAVE. Though I think there’s good reason to be concerned with the spending, I think it’s far more important to improve the metrics that @Emilio outlined. This is simply because incentivizing more users to use the platform and giving them a stake in governance is by far the best thing that can happen for AAVE imo. The rewards should at least be continued uninterrupted for another few months so that people don’t have to shuffle their positions around while we settle this. 27% of the treasury in what is essentially the first year of the treasury’s existence is not a catastrophic amount of money to spend on attracting users and capital.

I would prefer that the reward system remain as simple as possible for the end user, and the current system functions well in that regard. Rewards are already denominated in stkAAVE, and that’s confusing enough for a lot of people already. I think we should leave the method of distribution alone and work on a solid replacement over a longer period of time.

I do think the distribution ratio could be tweaked quite a bit. Like @Emilio suggests, I think USDT and WBTC could use a cut in emissions, while currencies like SUSD and LINK get added onto the list. I would add onto that list TUSD, PAX, and BUSD personally, but this is trivial for now.

I think a reserve factor adjustment should happen outside of the liquidity mining proposal. Reserve factors are supposed to be calibrated according to the risk that the asset brings to AAVE. But assuming that it is related, I don’t think it’s a good idea to raise the reserve factor too much. 10% may not seem like a lot when interest rates are only 2-3%, but small differences in interest rates between protocols drives up utilization for the more competitive protocol drastically. I think this is the entire point of why the interest rate curves are so low until the safe utilization parameter is reached.

And even if you don’t agree with all that, a reserve factor adjustment for the assets that generate the most revenue for AAVE should be carefully studied with strong evidence to make sure that AAVE community isn’t self sabotaging itself.