ARC: Reduce flash loan fees, introduce a fee for 1-tx borrows and add a flash loans whitelist

ARC Summary:

Reduce the Aave v2 flash loan fees to 0.02% (with 0.01% going to lenders and 0.01% to the protocol), introduce the same 0.02% fee to borrowings that are paid back within the same transaction (a workaround that many use to avoid the flash loan fees) and add a no fees whitelist for flash loan users.

ARC Rationale:

The flash loans market is growing more saturated with sources for flash loaning or flash minting with lower fees - dYdX has no flash loan fees, WETH10 has free flash minting, Maker has voted on a 0.05% starting fee for their flash mint module. With the market gradually trending towards lower and 0% fees, the Aave protocol is currently lagging behind and losing its competitiveness.

DeFi Saver is the largest Aave flash loans user and we have gladly used Aave flash loans by default for all FL-powered features rolled out since early 2020 because of the number of available assets and great available liquidity. However, with the introduction of our Recipe Creator that includes both Aave and dYdX FL integrations, we can see first hand that many users will gladly take the time re-create leverage management transactions using dYdX flash loans to avoid the 0.09% fee, even though leverage management options are available as single click options in our protocol specific dashboards.

In order for Aave to stay competitive in this growing market and maintain its position as a major flash loan provider, we would like to propose three changes:

  1. Reduce flash loan fees from 0.09% to 0.02% with 50% going to liquidity providers and 50% to the protocol.
  2. Introduce a 0.02% fee for all standard borrowings that are made and paid back within the same transaction, a process that is currently being used as a way to avoid the flash loan fees.
  3. Introduce a flash loan users whitelist controlled by Aave Governance where integrators could be voted in to utilize flash loans without any fees as a reward for promoting Aave and introducing other benefits to the Aave protocol and its users.

This change could have an additional positive impact by pushing any integrators to switch to using Aave v2 flash loans from v1, as we’ve seen that ~40% flash loan volume is still done on Aave v1.

If you would consider supporting this ARC and the potential proposal, please consider delegating proposition power to 0x446aD06C447b26D129C131E893f48b3a518a63c7 (DeFi Saver Deployer account).

Looking forward to hearing more thoughts from the Aave community.

2 Likes

At the weekly report * I have read that the utilization was growing by 273%, so if it’s growing why reducing the income?

If someone has data of competitors and we recognize that it stops growing we can reduce the fees, I see no reason why

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I 100% agree with this proposal. In v2 currently the protocol isn’t earning anything from flashloans (the whole 9bps fee goes to liquidity providers). In an environment where multiple entities are coming with very cheap or free flashloans, there must be the possibility for integrators to keep accessing aave liquidity as long as they provide real value to the ecosystem. Defi Saver is for sure one of these integrators, always with Aave from day 1 and providing great accessibility for the Aave protocol.
Lowering the fee will greatly increase flashloan volume, which will compensate the fee reduction.

3 Likes

This is a great proposal! Flashloans are a great tool that make the market more efficient.
With other protocols offering flashloans too and flashmint slowly being implemented, fees will get competitive. In Refinancing operations compounding 0.09% to debt, in one transaction is a significant cost.

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Very good proposal !

I really like the idea of a whitelist that allows free flash loans for integrators.

3 Likes

I was really hoping the thread would catch more eyes and cause more discussion with time or at least bring in more replies on whether most agree or not, but so far it seems it hasn’t caught nearly enough attention it deserves - so let me please try to kick-start this talk once again.

Let me start with replies to comments posted so far:

Looking at flash loans volume at a weekly level isn’t very relevant, imho. Major flash loan volume happens in bursts, accompanying highly volatile market times (leverage adjustment, self-liquidations and liquidations), major farm rotations (refinancing) or major exploits (flash loans being applied to abuse open vulnerabilities).

This chart from AaveWatch shows this pretty well:

Both great points. Thanks for joining the discussion, Emilio!

I very much agree this should be the goal to strive for here, yes.

Exactly - this specifically is a HUGE issue right now. For example, we had a humongous Maker Vault owner reach out to us to ask about using our tools for refinancing. The protocol fee would’ve been multiple hundreds of thousands in their case, as the flash loaned amount would be their full debt amount. They of course decided against moving forward with the process. This is needlessly lost business for the Aave protocol, in my opinion.

This specific point is something I would assume will cause most controversy, so we would agree to have it left out if the rest of the proposed changes depend on it. However, if the community agrees, we’d love to see it included. It would allow us and other similar integrators to utilize Aave flash loans without any second thoughts, exclusively, wherever applicable.

For anyone seeing this thread - please post a comment sharing whether you agree or disagree and join the discussion.

I agree with everything but the whitelist. We don’t REALLY want to give preferential treatment to certain users in the protocol, do we? We have other ways to compensate value added. The protocol should not discriminate on fees whatsoever.

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Appreciate the response, pakim.

The whitelist is definitely not something we’d consider required for proceeding with the proposal.

It was just one idea for a way to drive certain trusted integrators to stick to Aave flash loans no matter what. For example, even with the fees reduced to 0.02% from 0.09%, there’s no reason why we wouldn’t allow our users to have dYdX flash loans utilised by default where applicable (e.g. for ETH, DAI and USDC), so in this sense the whitelist would allow Aave flash loans volume to remain higher or at least more stable, due to constant use within certain apps, which could be an important metric for the protocol.

I can understand your point about the protocol not discriminating against anyone when it comes to fees, though perhaps also consider that currently the same fee is paid to the protocol by a person using Aave flash loans to perform an exploit and by a different person using Aave flash loans to better manage their leveraged positions in DeFi Saver or similar apps.

Again, just to highlight this once more, the whitelist is definitely not something we’d want to insist on including in the proposal if the Aave community disagrees.

By the way, if convenient, please see my post that now showed up above yours, as it was previously temporarily hidden by a spam filter.

Thanks for the the thoughtful reply.

If we are concerned about flash loan volume, then can I suggest a more radical solution? Why not simply lower the flash loan fee to zero? According to the weekly governance reports, flash loan fees make up roughly about 1% of Aave’s revenue, which is many times lower than it used to be. As the ecosystem matures and offerings are diversified, this revenue will only decrease. This is not a source of revenue that Aave should be concerned about. However, Aave does have a chance to remain the market leader in flash loans and strengthen its image by simply removing this flash loan fee. Oh, and of course we wouldn’t need a whitelist if flash loans were simply free for everyone!

EDIT: Decided I have more to say. I also disagree with the 0.02% fee you propose for flash borrowers. The fact that we can do everything in one transaction from smart wallet applications is a modern miracle that creates a more even playing field for ordinary users. The entire ecosystem is becoming vastly more efficient, as can be evidenced by Uniswap and Curve’s protocol improvements. In my opinion, Aave must keep up with this efficiency, if not strive to be a market leader in that efficiency.