ARC Round 5 Liquidity Mining Aave v2 Ethereum Market

aip: TBA
title: Round 5 Liquidity Mining Aave v2 Ethereum Market
status: Proposal
author: Governance House - @MatthewGraham, 3SE Holdings
created: 03/06/2022

Simple Summary

This Arc presents the community with the opportunity to reinitiate stkAAVE incentives on the Aave v2 Ethereum market for a 90 day period upon execution of this proposal.

stkAAVE rewards are to be provided to Users who borrow selected stablecoins and lend selected assets.


Liquidity mining incentives were introduced to Aave v2 on the 26th April 2021 via AIP-16, renewed by AIP-32, reduced by 30% with AIP-47, reduced by 30% with AIP-60 and are to be reduced by a further by 20% with this proposal.

A summary is shown below.

  • AIP-16: 2,200 stkAAVE per day from 26th Apr 2021 on Aave v2 Ethereum market
  • AIP-32: 2,200 stkAAVE per day from 24th Aug 2021 on Aave v2 Ethereum market
  • AIP-47: 1,540 stkAAVE per day from 22nd Nov 2021 on Aave v2 Ethereum market
  • AIP-60: 1,078 stkAAVE per day from 21st Feb 2022 on Aave v2 Ethereum market
  • AIP-X: 862.4 stkAAVE per day upon implementation of AIP on Aave v2 Ethereum market

Continuing with the trend of refining how incentives are distributed across the market to focus on encouraging borrowing demand on selected Stablecoins, USDC, DAI, USDT and FEI, along with lending ETH.

The inclusion of FEI recognises the contribution of the Tribe DAO community for providing lending and borrowing incentives upon listing. Through this proposal, we can encourage other communities to bootstrap their token listing with incentives.


This proposal continues on from AIP-60 with a further 20% tapering of incentives and shall last for another proposed 90 day period. The refined rational within this proposal is presented below:

  • Continue to reduce the quantity of stkAAVE being distributed over time.
  • Encouraging borrowing of stables with the expectation that borrowing demand will attract lenders.
  • Recognise the contribution of partners who provide incentives upon listing a new asset.
  • Attract ETH as collateral.

By subsidising borrowing costs with stkAAVE incentives, it is expected that the resulting borrowing demand will generate sufficient yield to entice Users to deposit stablecoins into the lending market to earn yield.

With the recent growth in borrowing demand for ETH and with the expectation other staking derivatives like stETH are to be added to the market in the future, this proposal seeks to grow the supply of ETH in the market. ETH is also the second highest contributor to the market’s AUM behind stETH.

The following more broader objectives of this proposal are as shown below:

  • Grow Total Value Locked (TLV).
  • Increase liquidity.
  • Attractive (low) borrow rates.
  • Increase the protocol income via growing the Reserve Factor.
  • Redistribute governance power towards Users of the platform.


The below section outlines the proposed liquidity mining incentives to be applied to the Aave v2 Ethereum market.

Key changes from the previous liquidity mining campaign are summarised below:

  • stkAAVE being distributed is down 20% from 1,078 to 862.4 per day
  • Borrowing of stables is subsidised
  • Lending of ETH is subsidised

The table below shows the intend stkAAVE distribution across the Aave v2 Ethereum market asset listings. In estimating the Borrowing vAPR, existing borrowing demand was used.

Note: TVL per token is as per the 28th May 2022.


This proposal continues the trend of refining the distribution of stkAAVE to be more closely aligned with revenue generation. The Aave v2 market generates revenue from Users who borrow funds. The most commonly borrowed assets are stablecoins and the majority of the DAOs revenue is nominated in stablecoins. By subsidising borrowing costs, it encourages Users to borrow stablecoins and this generates revenue for Aave DAO.


For further details on Aave v2 Ethereum market revenue, please see @llama’s financial reports.

The previous proposal, if implemented with no changes would lead to the following distribution of stkAAVE across the market.

If 1,078 stkAAVE was distributed as per the prior liquidity mining proposal, assuming a price of $95 per stkAAVE, then the vAPR on lending and borrowing is as shown above. This would cost an estimated $9.22m over a 90 day period.

This proposal reduces spending by 20%, with 1,078 stkAAVE reduced to 862.4 or from $9.22m to $7.37m. The borrowing vAPR from incentives on stablecoins are very similar for DAI, USDC and USDT, within 2bps. ETH yield from stkAAVE increases from around 10bps to 43bps. This would bring the current yield on ETH up from 64bps to to 103bps which compares favourably with stETH yielding 400bps and Compound yielding 6bps.

A 0.9 multiplier was applied to USDC to reduce the borrowing vAPR to be almost the same as DAI. A multiplier of 2.5 for FEI was used due to the small size of the market, $22.53m and this generates a subsidy of 179bps. Hopefully this encourages Users to deposit FEI as the current lending yield is 2.27% and the borrowing yield is the highest for any stablecoin on the v2 market. It is worth noting that even with the multiplier applied FEI receives 1% of the proposed incentives which is less than 8.85 stkAAVE per day.

Amending the stkAAVE rewards to be 100% on borrowers is thought to improve the capital efficiency relative to the previous 33% on Lenders and 67% on Borrowers. It is expected that the subsidised borrowing rates encourage Users to borrow funds such that the demand creates a lending vAPY sufficient to attract capital into the market.

Further to incentivising borrowing of stablecoins, this proposal is seeking to increase the amount of ETH deposits. Listing stETH has generated $2.52B in TVL for the community and the image below shows the change in revenue from Users borrowing ETH since stETH was listed. The change of colour represents when AIP-68: Optimizing ETH Rates as implemented. There are likely to be several other types of staked ETH derivatives listed on Aave in the future and having sufficient ETH supply enables lower borrowing costs without actively incentivising Users to recursively borrow ETH to purchase stETH. Users who deposit ETH and Borrow supported stablecoins will receive both lending and borrowing incentives.

Reference: Dune


Copyright and related rights waived via CC0.


Given the current trajectory of AAVE, I’m unsure of whether this is a wise implementation of LM. Is there a reason why we are not incentivizing the use of V3? And why would we only incentivize the Ethereum market at this point? I believe other AAVE markets are mature enough at this point to receive LM rewards. In fact, I believe we should be promoting the use of other chains, as Ethereum is simply not the best transaction layer anymore with its high costs. I think it is worth the effort at this point to come up with a fundamentally new LM system.


Hello Matthew. Thank you for this very complete summary. I am not sure to understand why the LM is going to last for a 90 day period (and not more or less). What are the motivations behind this specific timeline?

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Thanks Matthew for this ARC.

Liquidity mining acted as a very powerful bootstrapper for the distribution of governance power to the users of Aave and the growth of the protocol.

That being said, it can also be seen as a very costly subsidy program for both protocol and treasury growth.
During the “peak” of DeFi, around 3.5$ worth of StkAAVE were distributed for each 1$ of treasury funds collected.
With the current market condition, if the program was restarted now, it’s likely that a double figure of $ worth of StkAAVE would be needed to collect a dollar of treasury.

We also didn’t witness a large drop in TVL metrics when the program stopped, a couple of weeks ago.

Another point is that the future of Aave is the V3 and not the V2, a subsidy program for a soon to be obsolete version of the protocol doesn’t seem very fit.

Lastly, the Ecosystem Reserve is not infinite, and AAVE is a fixed supply asset, slowing down the depletion of the ER by pausing the LM program might keep more bullets in the magazine when it’ll be more efficient to fire them.

I’m personally in favor of keeping the statute quo for now, while waiting for the V3 upgrade proposal of the Aave L1 market and a rework of the AAVE tokenomics.

If not all the experimentations of the infamous “DeFi 2.0” period ended up with something great, the bonding system is a much more efficient way to build a non-speculative treasury.

1078/Day StkAave are more a less a 10-Day bond for 1078 (+staking rewards) AAVE
I think the market demand would exist even with small discount (50-75bps) for StkAave bonds.

At the current Market valuation of Aave and considering a 75 bps discount, a 90 day bond program in aDAI/aUSDC would add 10.6M$ of yield generating stables in the treasury.

at a conservative 2% yield for aUSDC and aDAI (current yield are lower but I don’t see this trend last), the discount would be “repaid” by interest collected in less than half a year.

Enough to fund both BGD labs and Most of Aave grant DAO budgets in 2023.

that’s up to the community to decide on this but I’m personally against this ARC for the time being.


Knew this was coming - now here it is!

Liquidity Mining has been quite helpful in bootstrapping activity and deposits for the protocol - however, I am afraid we have matured past this point. Aave has established a product-market fit.

TVL is a bit hard to measure with prices however looking at deposits this seems to be true:

I am in agreement of there is not an immediate need to restart this program.

Maybe there is a general lack of awareness among depositors - but still, the efficacy of these programs seems to be waning. Please see the graph below:

Screen Shot 2022-06-07 at 2.30.49 PM

You can see the full interactive chart here: Aave Daily Depositors - Flipside Crypto

Deposits following the first LM have slowly declined - in some cases, to a level less than the average daily deposits before. There are little to no upticks on AIP-32 and AIP-47 introductions.

As depositors react to the end of this program and volatile market conditions, I believe it is best to wait to see how deposits change before passing a renewal of this program. It is expensive - floating around $86k/day.

I am grateful for your initiative and encourage a revisit of this at a later date.


I think it is acceptable to keep on hold the stkAAVE distribution program, but my reasons are slightly different.
I’m a hard believer in the idea that what is denominated as liquidity mining is a mechanism to just give direct governance participation power to participants on the Aave pools. Obviously, those depositing/borrowing on the most used assets (stables, WETH, WBTC) should receive more, together with tokens of other communities close to Aave.
Considering that most probably the community will need to progress with some improved token-dynamics in the following months, I think it is a good moment to just stop and think a bit more the direction we should go in terms of AAVE governance power distribution (also with the next governance iteration coming pretty soon from BGD).
So +1 to not activate again, for now

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This is an interesting angle - and keen to think about it more.

Do we think their participation in Governance is worth that much? $7mm per quarter?

Why not incentivize depositors to actually buy the underlying asset, having more skin in the game?

I think it is more accurate to analyze in terms of the percentage of the total supply participating in the Aave main system (liquidity pools), which I don’t have numbers right now about it, but I think it was pretty low on what concerns distribution to the Aave pools (not counting Safety Module). That is why having a reference in USD sometimes doesn’t make much sense to me.
From my perspective, precisely depositors have skin in the game already: they use Aave. Distribution of the stkAAVE token on top is to factually give them direct influence.

@eboado thanks for your patience.

Did a bit further analysis, although not able to see exact Governance participation from stkAAVE recipients via the Liquidity Mining program.

The beneficiaries of this program seem stark, with Justin Sun receiving the most for a single address:

Screen Shot 2022-06-10 at 4.47.28 PM

His address, 0x3ddfa8ec3052539b6c9549f12cea2c295cff5296 (as verified by Etherscan), has received a total claim of 111,989.69 tokens.

This governance power you allude to - 19% seems to go to one individual and 42% to the top 5 address.

You can check out the rest of the analysis here - Aave LM Incentives Claim.