ARC - Fees & Rewards: How to improve the $AAVE token value?

Hello everyone!
This proposition is an overview of the main questions actually discussed on the governance forums and a potential solution.

Topics covered :

  • Generated fees from the protocol
  • Treasury
  • Use and distribution of Ecosystem Reserve
  • Aligned interests between Stakers, Liquidity Providers and the protocol
  • Migration dead line
  • Positive impacts on $AAVE token, and rewards overview

I) Generated fees from the protocol :

Regarding previous discussions and after some research, fees will be collected in several possibility with V2 coming soon. The main interest is the protocol to grow, and we need more liquidity for that.

This wouldn’t make sense to setup an origination fees on the liquidity deposited, and if we want to maintain traction to the Aave ecosystem, the origination fees on the borrowed liquidity could be very low as well, somewhere between 0.005% and 0.01%. Yes, it’s very low, but this is not where Aavengers will earn the most, and this avoids cutting users.

Liquidators, on the other side, are making money out of pretty much nothing, considering they are using Aave liquidity with flash loans, so they just need to pay the fees. The idea is not to cut the liquidators profits as they are essentials to a healthy protocol, but we could raise the fees from 0.09% to 0.1% of the borrowed amount.

Another way to earn fees could be a small % of the profits earned by liquidators, considering they are doing it using Aave. The fee could be between 0.5% less than 1% of profit.

As Aave offers a choice between stable and variable borrowing rate, we could add 0.1% fees when someone switch from one to another.

With V2, users will be able to change the collateral used, or to payback a loan with collateral, and fees on this could also be 0.1% or even more, as this is an innovation only available on Aave.

We may also add a fee when someone open a delegation credit line, and there Is probably more with all markets already there or potentially coming soon (UniV2, Token Set, Realt, Centrifuge, Aavegotchi, Jarvis and probably more)

The % of fees are only examples, and some people more experimented might tell us the proper rate for each interaction. Maybe @MarcZeller ?

How to use the fees?

As mentioned in previous discussions, this would be a good point to make a treasury for the protocol (maybe 1M $). Instead of using ecosystem reserve, we could use the generated fees to swap it into stablecoins until this the treasury reach amount defined.

Once we get full treasury, all the collected fees could be used to buy AAVE or Staked AAVE on the market and distributed to stakers.

II) Treasury :

The idea of the treasury is to get a DAO growing fund in addition to the ecosystem reserve. The first fees generated will start generate interests with a farming strategy allowing the DAO to compound interests earned in order to fill the treasury faster.

The treasury could have several use cases:

  • Incentivize Devs building up on top of Aave
  • Incentivize Non Devs community members
  • Additional Safety in case of short fall event
  • Additional Incentive for stakers
  • Create a DAO farming fund with credit delegation
  • Others possibilities …
    As the funds will rise every time with compounding, the interest could be spent like this:
  • 50% of interests used to buy AAVE and send it to stakers
  • 50% compounded to raise treasury and interests to stakers

III) Use and distribution of the ecosystem reserve :

The ecosystem will not last forever, and so, we’re betting on the fact that revenues that come from the protocol fees will earn more than incentive once ER is done. So, in order to play safe, this reserve should last a couple years.
This is a new potential decreasing distribution of the Ecosystem Reserve over 4 years, considering both SM and staking would start in November but it could be later.

As mentioned in a previous comment, stakers should earn more $AAVE, because they keep the SM running and a safe protocol.

Moreover, liquidity providers earn $BAL + fees from the pool + the LP % in the estimation above. This should be more than enough to prevent any impermanent loss, which should already be low because of the 80% AAVE/20% ETH Ratio.

According to other projects with liquidity mining, there is between 0.005% and 0.02% of the supply allocated every week for LP, which is less than the rate for year 1 as (500*7)/16M *100 = 0.021%

If we incentivize more, this could bring farmers, so potential price dump.

However, you can see there is a third use for ER (Bonus compound earned AAVE into SM) explained in the next point.

There are also 498000 $AAVE remaining, I know finding how to spend money is not the hardest part, but here is some ideas:

  • Airdrop for every address that used AAVE before migration and migrated Lend
  • Airdrop to stakers
  • Credit delegation if we get Staked AAVE market to use it as collateral
  • Reward the community
  • Additional safety in case of short fall event
  • Burn

IV) Aligned interests between Stakers, Liquidity Providers and the protocol :

The more AAVE there is in the safety module the better, and as @stani mentioned it several times, we need to keep the incentive aligned with stakers and LP, while keep protecting the protocol.

The main issue to incentivize LP is the risk of them selling rewards, which could create a down pressure on the $AAVE token. However we can’t make them stake the rewards, but we can incentivize the ones who does.

This where the bonus for compounding $AAVE interests into the SM come in: In the simulation above, the bonus for the LP is the same than the bonus for compounding. This bonus is shared equally between stakers and LP (50/50).

Which means, LP’s could decide to earn more by staking the LP rewards, and so become stakers. Stakers could also earn more by choosing the compounding option, everybody wins.

I believe we could add a function “compounding” for the stakers, and they would earn the bonus every week or month if the function still activated at the end, maybe even an “Auto compounding” function that claim and stake automatically? It could maybe do the same for LP if the rewards for LP are claimable into Aave, and otherwise a system with snapshot could work.

Maybe @Emilio can tell us if this seems technically possible?

If yes, it might motivate people to stake a lot more, which would increase safety for the protocol and increase rewards for everyone.

V) Migration dead line :
At the time of writing, there is 69% of lend migrated, so there is approximately 403M Lend left to migrate.

  • Left in exchange : Around 30M
  • Tokens in LP : Around 25M
  • aLend waiting for swap : Around 156M
    It’s reasonable to consider these will migrate before end of year. If so, there would be around 192M tokens left, that’s 14.75% of the total supply, also, 1.75% was burned, so more like 13% left.
    According to the big amount of addresses with no movement and a fixed amount that seems to be ICO participations and most of those are probably lost.
    Considering all of this, I think it’s reasonable to set up a dead line by end of year, which leaves still 2.5 months for the 13% latecomer to wake up and migrate, if the funds are retrievable.

VI) Positive impacts on $AAVE token and rewards overview :
In order to be able to protect the protocol, we need to increase the scarcity, and a good price action this goes by:

  • Keeping the ER to incentivize Stakers and LP instead of using it to fill the treasury
  • Create a bonus to incite people to stake rewards instead of selling
  • Using the fees to buy $AAVE on the markets without forcing people to pay fees with $AAVE
  • Reduce incentives over the years for both LP and stakers
  • Use the Staked Aave as collateral to generate more funds for the DAO without selling ER
  • Set up a migration dead line to reduce the supply

Rewards overview:

Stakers could earn:

  • $AAVE staking rewards (5x more than now distributed year 1)
  • Fees (in $AAVE?)
  • Bonus from compounding (in $AAVE)
  • Interest from treasury (in $AAVE or stablecoins?)
  • Yield from DAO farming funds (in Stablecoins?)

LP could earn:

  • $AAVE rewards
  • $BAL rewards
  • Fees from the Balancer pool
  • Bonus from compounding (in $AAVE) – (If so, this add all the stakers earning above :slight_smile: )

Thank you everyone for taking time to review this proposal, really looking forward to the opinion of the Aave community on every topics, and I can’t wait to see the finale AIP dealing with all of this! :slight_smile:

Proposal co-written with @EmmanuelD

20 Likes

Nothing to add here from my side. Looking solid and not extreme in any way. Happy to see such a good proposal. Still interested in the opinion from the team.

8 Likes

This is a great talk and a great proposal!

From a purely technical perspective, V2 will feature something that is not currently available on V1: What is commonly called the reserve factor, or as other lending protocols implement the feature, a percentage of the depositors accrued interest is reserved as protocol treasury.
One important distinction that the V2 implementation will have compared to the competing protocols, is that the percentage of the interest reserved to the treasury will be minted to the governance in the form of aTokens. Eg
Considering for USDC a reserve factor of 10%:

  1. an user borrows 1000 USDC
  2. after one year, the user accrues 100 USDC of interest on top of the 1000 USDC debt
  3. The borrower repays: Depositors will receive 90 USDC, 10 aUSDC get minted to the governance (can either be the governance contract or the current AAVE vault)

Other protocols just keep the reserve treasury in the protocol itself, either available to borrow (which generates more interest) or sitting there doing nothing. Receiving aTokens might seems a subtle difference but this allows many cool things:

  1. The AAVE governance actually becomes participant to the protocol itself, accruing interest on the treasury and directly receiving flashloans premiums
  2. Leveraging the V2 credit delegation capabilities, multiple interesting possibilities open:
  • The governance might delegate borrowing power to farming strategies to actually earn from liquidity mining
  • The governance might use the treasury to allow the issuance of grants (in the form of delegated credit) for the ecosystem growth
  • The governance might use the interest accrued by the treasury to improve various other aspects (eg grant gasless transactions to the protocol users or for the voting, generate liquidity to cover oracles costs, etc)

This alone will probably be game changing for the AAVE governance itself. Having a treasury that can be actually leveraged for growth is for sure something that can speedup the advancements of the AAVE ecosystem.

This adds on top of everything that was proposed by @dydmoon. From a protocol perspective, it is possible to add fees in various functionalities that are unique to Aave and a value added for the users.

Regarding the AAVE distribution and staking:

Blockquote I believe we could add a function “compounding” for the stakers, and they would earn the bonus every week or month if the function still activated at the end, maybe even an “Auto compounding” function that claim and stake automatically? It could maybe do the same for LP if the rewards for LP are claimable into Aave, and otherwise a system with snapshot could work.

Although the governance will decide what the distribution for protocol LPs will be, it’s important to note that the incentives distribution smart contracts that have been developed for V2 already have a positive incentive feeback built in: staking your LPs rewards in the SM can be obtained directly with a positive bonus in AAVE.

I probably missed some points so waiting for your feeback!

8 Likes

Hi Dydymoon,

Very nice and complete post ! I believe each one of the topics should be discussed separately as they are all equally important.

However, on this post I would like to focus on the Migration. I start seeing here and there exchanges about this topic and community willingness to put a deadline (and sometimes very short ones, maybe hoping to scalp some % on small and less aware hands).

I might miss things here, but what value does it brings to add a dealine?
As an example: It takes 2 secondes to search in reddit to see Tezos as an example where some people still asking how to unlock investment 3 years after ICO - I am not justifying the project here, just saying that people are different.

There is as many reasons to invest as there is investors/ community members. Of course most of us reading and writing here are spending slightly more time than others on the rabbit hole, but we cannot punish, blame and steal from others for being absent.
The questions are:
Are we building tools for the mass or for early well aware crypto geeks only?
Are we trying to un-bank people or steal from them? ***
Is it really democratic to vote on this topic ?(I could easily see deviance here.)
Decentralised and fair is not equal.
What is our Ethos?

I believe as a duty to keep the migration open-end. We changed the token and the rules on the way so the burden shouldn’t be on investor’s hands.

*** A small shortcut here but small wallets might find it not even relevant to migrate due to gas costs.

TL/DR: Only crypto gods know why some people joined the project, but we cannot expect everyone to follow closely development and to read governance forum to express their opinion on the matter. Imagine if there is one single person who put 10$ on Lend which for some might be expensive and there, WE should not vote on his fate to keep his money(reduce supply) or not just because he couldn’t (or wouldn’t) pay for the migration today or because he didn’t open twitter/telegram in 5 months.

Let’s earn the Aavengers name !

5 Likes

Totally agree with you. Why do we need a time line? If nobody is going to migrate the supply will always be low. So doesn’t matter if we force to close it or just leave it open.
Everyone should have the chance to migrate. And even if the community wants to see a deadline it should be at least 1 year from now on.

3 Likes

This is a very interesting proposal and once V2 is out, it should be put to a vote to implement some or all of the points elaborated in the AIP.
One very important thing to note is the time frame that we are looking at and what the protocol is capable of accomplishing long-term.

There is a case to be made that Aave treasury can be used as an investment vehicle operated by Aave stakeholders. V2 is the real catalyst for attracting liquidity into the protocol and in terms of liquidity amounts I believe we’ve seen nothing yet compared to what will be achieved in 2 years from now.

Just as a simple example, echoing one of the points in the proposal, at 100 billion TVL with an average weighted interested of about 2% per year, the protocol can bring the depositors about 2 billion in interest. 10% of this interest can be diverted to the Aave Treasury, which means 200 million in liquidity per year available for investments in promising established companies or startups, vetted by Aave stakeholder who can take on the role of Venture Capitalists as well. With so many people coming into the space from different industries the knowledge base for investment purposes expands considerably and becomes an very valuable asset in maximizing the number of long-term winners picked by the treasury.

I believe a separate more detailed proposal has to be made in this sense and now it is not the time for it, as the protocol still has to gain critical mass. Yet we must nurture a vision that brings more than money to the token holders, that provides Aave stakeholders with the ability to change the world by stimulating financially organizations in sectors such as healthcare, biotech, renewable energy, AI that will be ultimately the bedrock of the 21st century societies.

3 Likes

This should be 0.05%
We need to see that the system actually works for AAVE holders, and borrowers are willing to pay for the service.

Hi @Sunshine , is it really important to know whether to set a migration deadline or not? This is not the main topic, although I understand that we do not want to defraud anyone.
On the other hand, it is still essential to know the exact circulating supply of aave. We calculated that there was roughly 13% of potentially non-swap lend after migrating from centralized exchanges. How many are lost? I do not know.
What I know is that the less there is aave the more rare and therefore expensive it is.
We can also offer an additional period where the lend would be swap against aave with a ratio of 101: 1 or 105: 1 for 3 more months to encourage people to hurry up.
Maybe for the people who participate to the ICO, AAve can mail them to swap their lend if they still have some?

2 Likes

It’s important to note that V2 will start without any origination fee. It will be up to the governance to decide for one. What needs to be highlighted and what it has been observed with V1 is that origination fee brings relevant UX frictions, as it makes really complicated to move your positions between assets or open and then close very short term loans (would result in not competitive and very high APRs)

4 Likes

this was an interesting read and generally a good discussion to be having. i’d like to read again and hope to have some concrete feedback.

one thing though – is this actually an AIP? i would imagine an actual AIP to be much further progressed, with a very clear prescription of the changes to be made.

apologies if this seems petty, but i actually think it’s pretty important and likely to be a structural competitive advantage longer term to have clear and simple procedures around orienting our views, deciding and acting on them.

3 Likes

HI @oaksprout, this is not an AIP! Just an extensive discussion and ideas to value the token and the ecosystem. I agree that we have to privilege the long-term (3-4 years) and debate with all had been posted and more.

1 Like

Not agree with this opinion. So much more to do with the V2.
We don’t need to fight with others protocols to see who has lowest originated fees.

2 Likes

Excellent post. Some truly well articulated suggestions.

2 Likes

This is not an AIP, more like an initial discussion that would eventually bring one (or more) AIP(s) ;)

1 Like

this is a good one, lets take it to the next step sirr.

2 Likes

very good job, a global vision, objectives and a real long-term strategy. No complaints.

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Hey @Emilio, thank you so much for this great feedback !
The reserve factor is a very good news, that’s awesome !
Possibilities with V2 are so cool, and i believe there is a lot more to come, can’t wait :smiley:
What do you mean by the current AAVE vault ?

Just to be sure i got this right, is there some kind of bonus in AAVE already implemented into V2 ? :smiley:
My question about auto compounding was more on a technical side like is it possible to do the same that Harvest profits sharing, when you have to tick “auto-copounding” so there is no claim & restake anymore. Could this be implemented into Aave interface ?

Hi @Sunshine, @EzR3aL, thank you for the feeds back.
The dead line is usefull because there is no need for lend to keep existing as it as no use to the ecosystem anymore.
The migration is already announced for quite some time now, and there is still 2.5 month to come before EOY.
Also you’re right we cant blame people for not following discussions on the forums, but if you ask me, every person who DHOR should at least check a few times a year the progression of his investment and project, the migration was posted everywhere on Aave channels.
Even if the remaining 13% are not all lost (which is also possible when you check all the old address probably from ICO with numbers like 100K lend that were never moved ), they still get time to swap it.

As @EmmanuelD said, we could add a decay period that reduce the amount of AAVE you get with LEND, which would leave a few month left, but this should not change much and i believe 1 year is really to much time to really move on with $AAVE token only.

Hey @oaksprout, thank you, and no you’re right it’s not an AIP, like i said in my last sentence, it’s only what we would love to see as an AIP once finished. :)

Hey @depressedape, that’s a very interesting idea, and i’m looking forward to the detailed proposition about VC investments once it’s time, this would be so cool and probably very profitable :smiley:

Hey @Crodder, @Blackmagic96, @Granpiks, thank you for the feedback, we spent time to structure all this with @EmmanuelD, very glad to see that the community like it !

5 Likes

As you probably already know V2 will bring the possibility to incentivize liquidity provisioning through mining. What the distribution logic of V2 will implement is that there will be the possibility to directly stake your earned liquidity mining rewards in the SM, which will bring an automatic bonus percentage in AAVE. Eg. if we imagine a staking bonus of 1%, i get rewarded 10 AAVE for providing liquidity to V2, i can directly stake them and upon staking receive 10.1 AAVE.

The AAVE Vault is the smart contract currently holding the AAVE treasury

5 Likes

Very interesting points regarding the creation of an investment fund to search for high-yielding opportunities. There’s tremendous potential to bring talent/capital into this platform and, as you said, nurture the vision of ‘transformation’ that DeFi stands for, by investing in projects that are changing the world for the better.

3 Likes

I agree wit most of the proposals being discussed here, but the deadline on LEND swap. Reducing the supply by removing the value from some token owners it’s not fair, and also is not smart because… lawyers. If those tokens are already lost, the market will weight that in the price. If governance definitely thinks a deadline should be imposed then do it in a way no one could object to, like 5 years from now. Maybe having one deadline may help investors signal that these ~14% of tokens are lost and will be removed, thus helping the price. But a three months deadline is too easy to be portrayed as simple greediness and make us open to FUD and bad press attacks,

1 Like