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

[Gaurav]

What will happen to burn LEND token from the Flash loan fee? In new Aavenomice this mechanism will follow?

Reducing supply through protocol fees will create a positive feedback loop for Aave tokenomics.

[fresiastyle]

Lot of “aave v2.” but what do we know about it ?
I guess we need more info, i’d love more info @stani

[Zer0dot]

Love seeing the discussion starting!

Thanks for starting the topic, just a few comments and opinions.

@Dydymoon

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.

Origination fees are a mixed bag. I believe it’s essential to strengthen Aave as a leading money market protocol by prioritizing growth over fee generation. Origination fees would drive away some borrowers.

Recall that there is (as far as I know) no origination fee linked to borrowing on Compound. In fact, you earn COMP by borrowing on compound. Furthermore, Aave depositors are the greatest beneficiaries of the safety module.

Note that though regular borrowers are depositors, the majority of users just deposit without borrowing. It makes little sense to me to only charge those who borrow for the insurance of all depositors.

Instead, I believe a seamless, efficient method of value accrual for the protocol treasury is redirecting a portion of depositor interest, say 5-10% or something. In such a system, depositors would have no additional payment and would be contributing to their own insurance over time.

Lastly, though the possibility to implement various fees is appealing, I recommend we really take our time with this and be cautious. I can’t understate the importance of growth, and stacking fees can potentially pile up, we don’t want users feeling “double taxation.”

@Dydymoon

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.

Though your concern is valid in V2, as of now Aave flash loans are nonreentrant (as far as I know), you cannot use an Aave flash loan to liquidate an Aave position.

In other words, in V2, flash loan volume will potentially rise as native flash loans become reentrant, already giving more value to the protocol. I have concerns on raising the fee here. Aave’s flash loans are specifically attractive because of the low fee and ease of use. An 11.11% increase seems unnecessary to me.

On the topic of taking a slight percentage of profits from liquidated collateral, I think that’s worth exploring. As long as liquidations remain profitable enough for liquidators, this might not be a bad idea. I haven’t dabbled in liquidations yet so I can’t really give more input here.

@Dydymoon

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

I actually think this is a pretty clever idea. Interest rate switching is a fairly unique feature that Aave has, and it’s definitely worth exploring a potential fee, though I’m not sure how often this feature is utilized.

@Dydymoon

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.

I’m not sold on charging for features I would deem more or less integral to the protocol. This is where I fear end users might get close to that fee-stacking “double taxation” feeling.

I believe, in this case, that fees should only be what is necessary to pay for whichever features are needed for the collateral swap or repayment.

On the other hand, it is fairly innovative. Regardless, our fees should not significantly surpass what is possible with other products or flash loans in V2.

@Dydymoon

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)

I’m not sure how that would work for credit delegation, since it requires external agreements/protocols, but I do think a fee here is worth discussing.

On to the uses!

@Dydymoon

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.

I actually believe it may be more beneficial to directly distribute the converted aToken stablecoin, instead of market-buying and distributing AAVE.

This allows the staker to choose for themselves whether they would like to increase their ownership position, or simply use their rewards as revenue for their insurance provision in the safety module.

@Dydymoon

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.

If you mean you want the treasury to hold aTokens, I absolutely agree! If you’re referring to external farming strategies, I think we should limit the scope of the treasury holdings to the protocol itself. This prevents compounding risks from various DeFi protocols, and maintains the treasury’s independence.

If, one day, governance chooses to create an “Aave Investment Bank” or something, which would hold other governance tokens and vote, that’s a different story!

@Dydymoon

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).

I believe staking itself should be rewarding enough without the need for an additional bonus.

@Dydymoon

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.

I am working on potentially releasing a stkAAVE staking pool with pooled compounding, let me know if this is something you’re interested in.

@Dydymoon

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.

I don’t think a migration deadline is helpful as of yet. There could be people who just realized they had LEND, for instance, it would be real tough to be stuck with worthless LEND after the deadline.

Alright, so that was my (pretty long-winded) two cents! Thank you @Dydymoon for taking the initiative and starting the discussion!

[CryptoRand]

That all sounds great as well as maybe privacy features. What are your thoughts about that?

[drew]

So, can we start with something lower-risk, such as a small fee on the rate switching mechanism for loans? Where does the AAVE team currently stand on the issues outlined by @Zer0dot? Cheers for that overview btw.

[Dydymoon]

Hey @Zer0dot, thank you for your answer and sorry i took so long to answer you !

You mentioned some interesting ideas, and i will try to answer to your questions :

I think redirecting a % of generated interest with the deposits to an assurance for the protocol is a good idea, but isn’t that the same that a fee ? i mean, it sure is better as it’s not coming from user pocket, but at the end, there is a cut anyway.

Yes compound doesn’t charge anything and even pay you to borrow, but there is a lot less choice of assets, and a lot less functionalities, in my opinion this is not a issue to pay a bit more for a better service.

This is the same thing about other fees, i get that you’re afraid of double taxation feeling from users but regarding the functionalities that only exist on Aave (credit delegation, swap of collateral, payback loan with collateral), we can basically add the fees we want because there is no other protocol allowing to do that in my knowledge, and moreover, we are talking about really low fees especially comparing to what these features can offer.

However, i understand flash loans fees can easily reduce profitability, and you’re right, there is no reason for such an increase.
Maybe going from 0.09% to 0.095% is better ? But the point here is to keep these attractive, and if increasing those fees might drive user away from flash loans, we could of course leave it as it is.
Also, flash loans available liquidity is a important factor. Sure, people could use Dydx to make those but there is not the same liquidity as aave has. So, if someone needs more than what dydx can provide, they have to use aave.

The point of using fees tu buy & send aave to stakers was mainly to maintain a buying pressure but you’re right, stakers should have the choice between receiving atokens or aave tokens.

I really like the idea of the “Aave investment bank”, surely need a dedicated ARC :D

However, by farming strategy i meant yearn vault or else if there is better by then, that would allow us to get the tresury filled a lot faster than leaving simply the tresury in deposit. We could and probably should also split the funds between differents protocoles to reduce risks, and maybe accumulate governance token like you said, so we could use curve to accumulate CRV, Yearn to compound stablecoins, synthetix or uniswap etc

Regarding compounding bonus, it may depend on how much Aave will be released / day, but incentivise people to compound rewards increase the liquidity locked into the safety module and really reward long term players here. There is already one planned for LP, so why not one for stakers as they are the ones protecting the protocol ?

I read your proposal and some discussions on telegram about what you’re building, and i’m totally interested in. An auto compounding function would be huge news for stakers.
Can’t wait to try it out !

Finally, the dead line is not the most important subject we should be working on right now, but we can’t let lend for ever as there will always be confusion. We are almost at 90% migration, and we know there is a lot of tokens from ico that are lost (not the ones on contracts that will probably be saved, but people that lost private keys or else.

That’s why i think setting up a dead line for end of year or end of Q1 2021 is important, so we can bury $LEND and move on to the future of finance with one and only token, $AAVE.

Thank you again for your comments and your presence to the community !

[Zer0dot]

Cheers @Dydymoon! Loving the conversation.

@Dydymoon

I think redirecting a % of generated interest with the deposits to an assurance for the protocol is a good idea, but isn’t that the same that a fee ? i mean, it sure is better as it’s not coming from user pocket, but at the end, there is a cut anyway.

In a sense it is similar, however, the burden is shifted away from borrowers and on to depositors. Of course, borrowers are depositors, but only their “depositing” side is insured. I am not against a certain origination fee, though I need to put more research and thought into it.

@Dydymoon

Yes compound doesn’t charge anything and even pay you to borrow, but there is a lot less choice of assets, and a lot less functionalities, in my opinion this is not a issue to pay a bit more for a better service.

This is a pretty fair point. But it’s delicate, we need to make sure that whatever fee we end up implementing does not drive off new borrows.

@Dydymoon

This is the same thing about other fees, i get that you’re afraid of double taxation feeling from users but regarding the functionalities that only exist on Aave (credit delegation, swap of collateral, payback loan with collateral), we can basically add the fees we want because there is no other protocol allowing to do that in my knowledge, and moreover, we are talking about really low fees especially comparing to what these features can offer.

Doesn’t sound bad to me! After some discussion, it might be optimal and reasonable to attempt implementing fees in some of these places.

@Dydymoon

However, i understand flash loans fees can easily reduce profitability, and you’re right, there is no reason for such an increase.
Maybe going from 0.09% to 0.095% is better ? But the point here is to keep these attractive, and if increasing those fees might drive user away from flash loans, we could of course leave it as it is.

I think 0.09% is good enough for now, I’m not sure it’s worth the hassle going to 0.095%. We’ll have to see as things progress in time! Aave liquidity, and soon, batch flash loans are definitely a huge benefit though. 100% agree with that.

@Dydymoon

I really like the idea of the “Aave investment bank”, surely need a dedicated ARC :D

However, by farming strategy i meant yearn vault or else if there is better by then, that would allow us to get the tresury filled a lot faster than leaving simply the tresury in deposit. We could and probably should also split the funds between differents protocoles to reduce risks, and maybe accumulate governance token like you said, so we could use curve to accumulate CRV, Yearn to compound stablecoins, synthetix or uniswap etc

Haha glad you like it! Definitely worth considering an “investment” branch in the future. As for now, I still would recommend against depositing anything purely meant for the treasury into another protocol, as this increases Aave’s reliance on other protocols working as intended. Even using multiple protocols, the risk is still very real, despite risking smaller amounts in different systems.

I don’t think it should be the treasury’s duty to invest earned funds into other protocols. Instead, I believe it should be used to support the protocol. Some use cases could be funding for developers, further insurance for depositors, bug bounties and sponsoring/hosting hackathons. This is probably just the tip of the iceberg, but it should probably remain fairly liquid.

@Dydymoon

Regarding compounding bonus, it may depend on how much Aave will be released / day, but incentivise people to compound rewards increase the liquidity locked into the safety module and really reward long term players here. There is already one planned for LP, so why not one for stakers as they are the ones protecting the protocol ?

In this case, a bonus might be worth considering. I’m not sold on how much of an impact it would have though. Stakers might already want to compound their earnings by default, the goal here is really to get depositors to contribute to the safety module, I think.

@Dydymoon

Finally, the dead line is not the most important subject we should be working on right now, but we can’t let lend for ever as there will always be confusion. We are almost at 90% migration, and we know there is a lot of tokens from ico that are lost (not the ones on contracts that will probably be saved, but people that lost private keys or else.

That’s why i think setting up a dead line for end of year or end of Q1 2021 is important, so we can bury $LEND and move on to the future of finance with one and only token, $AAVE.

I agree that this isn’t really the biggest priority. In due time, (and ideally, in my eyes, after saving the stuck LEND and simplifying aLEND-aAAVE migration), we can set up a deadline.

Honestly though, I’m not sure if this will actually stop the confusion you’re referring to, or if that confusion will just fade out on its own without a deadline as liquidity for LEND dries up. Regardless, a good conversation to have.

Thank you for your contributions as well @Dydymoon! Love seeing a great community like this being built on a protocol we all know and love.

[CryptoRand]

Great token attributes you talk about here. As a staker I appreciate the rewards for taking the risk in being a liquidity provider. In terms of a vault, what assets could be put in the smart Yearn vault smart contracts?

Thank you

[Dydymoon]

Hey @CryptoRand, the governance could deposit stablecoins received from fees into yearn vaults, but also funds obtained by credit delegation for a farming fund for exemple, but of course there is several risk we have to consider for this.

[Freshprana]

Hello, Celsius wallet is now offering a better APY to stake my AAVE (7.5% versus 6.14%). May I propose that we increase the total emissions per day to match this? Otherwise, stakers will be incentivized to move their funds to Celsius. Let me know what you think. Thank you.

[Clucas]

@Dydymoon heyhey

I was wondering where/how you pulled this information —

“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.”

Thanks in advance homie