Thank you for sharing this proposal. Would it be possible verify if the below is the correct interpretation.
Reading this proposal, I will attempt to draw comparisons between this model and the one @Llamaxyz shared earlier, here. I am going to use an example, that assumes the DAO’s veBAL is used to support the following:
Three liquidity pools on Aave v3 Ethereum (no other network).
With 145,000 BAL tokens currently being minted and distributed each week across four networks and Aave holding 1.37% (153,920.38 units) of veBAL supply, this is equivalent to controlling the distribution of 1986.5 BAL per week, or $13,508.2 per week ($702,426 per year, assuming a BAL price $6.80). Reference: here.
This is enough veBAL to support $2.66M with max boost on before the boost reduces. The lending pool TVL will exceed $2.66M and it is fair to conclude the Boost will diminish rapidly.
If the veBAL is burden with supporting liquidity pools, then the veBAL position will be stretched increasing thin and the veBAL holding is not large enough to support many liquidity pools on Ethereum and less so if we include other networks.
Can Aave companies shows what happens when the Lending Pools are $100M in deposits assuming the Aave Snapshot votes to split BAL rewards and boost evenly over 3 pools ?
Users who deposit into Aave’s Gauges earn a portion of the Aave DAO BAL distribution and Boost plus swap fees.
As this proposal is reliant on a sizeable veBAL holding, it would be interesting to learn how @AaveCompanies intends to expand beyond a few high TVL pools on Ethereum, will other networks like Polygon be incorporated ?
How much more veBAL does the DAO need to acquire in order to create sufficient APR on deposits to entice deposits relative to alternatives which offer there native token as a complimentary incentive ?
I am conscious the BAL incentives should exceed the borrowing costs in order to a recursive borrowing demand revenue stream for the DAO.
Let’s consider the Llama proposal. Focusing on the left hand side of this infographic initially.
Users receive AURA + BAL + Swap Fees by depositing into Aura Finances Gauges. The Aura Finance veBAL holding many multiples more than Aave DAOs which means only a fraction of vlAURA needs to support a BPT listed on Aave to generate more BAL and Boost than Aave DAO can possibly offer.
Aave DAO is not offering an alternative to AURA incentives. Aave DAO would need to provide AAVE, or another token, as an additional incentive to compete with Aura Finances AURA rewards. The collateral utility is something both Aave Companies and Llama proposal provide.
Integration BPTs as collateral using Aura Finance gauges does not require Aave DAO to use its veBAL. This also means, the Llama ERC4626 strategy can be applied to Convex Gauges and can be scaled across any network where Aura Finance or Convex Finance are deployed. The Aave Companies proposal requires an increasingly large veBAL holding to scale which requires an ongoing commit from the DAO to acquire veBAL to maintain attractive APRs for deposits.
If the veBAL is not used to support Liquidity Pools on Aave, then all of the veBAL can be used for other initiates. The DAO can deploy funds from the Reserve Factor on Balancer and earn max boost. This is particularly profitable for the DAO and can be a good way to bootstrap GHO by providing a minimum amount of liquidity. 100% of the yield goes to Aave DAO compared to the small fraction of interest paid by borrowers.
Furthermore, Aave can vote for pools on Balancer that create TVL for Aave such as linear pools, bb-a-wETH, for example that deposit ETH into Aave to earn yield. This could be developed into a strategy to ensure there is sufficient liquidity in Aave enticing users to enter the recursive strategies as borrowing costs are lowered by liquidity from bb-a-pools. To expand, create bb-a-wMATIC, wMATIC flows into Aave v3 Polygon, borrowing costs are reduced and the recursive stMATIC/wMATIC loop is made more economical for users. Aave DAO can vote BAL rewards onto any pool that uses bb-a-wMATIC driving more TVL and liquidity into the wMATIC Reserve. Users enter the recursive yield loop, and Aave DAO earns revenue from the borrowing on wMATIC.
Another idea for the veBAL is to create gauges within the Safety Module and use the BAL incentives to reduce the AAVE incentives. This is a more complex proposal, but early work indicated the reduced AAVE emission will lead to a material reduction in AAVE emissions and therefore extend the runway of the DAO by improving it financial viability.
Of the ideas mentioned above, if we commit to using veBAL to support Aave Liquidity Pools or worse, try do a permutation that includes several ideas mentioned above, then there is insufficient BAL incentives and the DAO will need to acquire more veBAL. The DAO needs to be very careful how the veBAL are used when committing to a long term strategy. This is a big part of the reason why the Llama proposal does not rely on utilizing the veBAL holding.
The below is a comparison table summaries the two ideas:
Aave Companies Staked aToken
Scalability with many gauges and growing TVL on Ethereum
Requires additional veBAL investment to maintain APR
No additional veBAL investment required
Scalability beyond Balancer Ecosystem
Yes - Convex
Scalability onto other networks
Requires additional veBAL investment to maintain APR
Yes – wherever Aura and Convex are deployed with no additional veBAL investment required
Can Aave DAO utilise veBAL for other purposes
Yes – Will dilute APR on Aave Liquidity Pools
Yes – 100% can be used for other initiatives
Fortnightly Aave Snapshot votes for Lending Pool allocations
Yes – This determines which Liquidity Pools receive BAL incentives
No – Not required for Lending Pools.
BAL + Swap Fees – APR is limited by Aave DAO’s veBAL holding.
AURA + BAL + Swap Fees – Aura Finance has a larger veBAL holding and an AURA inflation schedule to attract TVL
Hi @MatthewGraham, reviewing your comparison table I noticed there is some technical comparisons that are not clear or wrong.
Balancer Staked ATokens would not require veBAL to work. Is desirable but totally optional and not needed for supplying LP assets and borrowing against the LP collateral, while being able to claim those rewards from Balancer liquidity gauges. This comes really handy and is a great utility not available in the current market, as far as I know, for Balancer LP suppliers.
The Staked AToken primitive could also support Curve, Convex or Aura LP assets, with minimal changes, and could be built in the meantime. A standard Staked AToken ERC4626 could be supported as well, to allow any protocols to integrate it.
I totally agree that using Aura LP assets would come with greater APR for suppliers, but it contains more complexity and smart contract risk due there is more protocols involved, and that needs to be properly managed, tested and audited.
In my opinion supporting Aura is a short-term desirable goal and I agree it will be both beneficial for Balancer, Aura and Aave users.
I see this proposal laying out the groundwork for Aave DAO to start and become an important participant in VotingEscrow economies. This new primitive intends to starting working with Balancer, but leaves the doors open to other ve-like protocols like Curve, Convex, Aura, Angle and so.
I do not see any obstacle for this proposal. Listing Balancer LP tokens will let the users use them as collateral with the extra benefit of receiving boosted rewards. The Aave DAO would need to use the BAL holdings for that but its use can be changed if there is other interesting BAL strategies down the line.
Just stopping by from the Balancer community to voice my support for this proposal. Giving LPs additional utility like depositing as collateral has been on our radar for some time, so it would be great to see an actual solution in place. AAVE and Balancer have been close partners for awhile now and I think a continuation of that can only lead to great things.
Great proposals by both @Llamaxyz and @AaveCompanies! We are supportive of the general scope of both proposals and look forward to seeing Aave accept an extended range of LP collateral types.
The differences between both proposals highlighted by Matthew are important if it comes down to choosing between both implementations (I assume listing both native BPTs and Aura BPTs are possible, but it likely leads to a confusing UX). It does seem that one of the selling points of the native BPT implementation is the associated boost provided by Aave’s BAL stack, however, as Matthew pointed out this quickly diminishes as BPT TVL increases due to the size of BAL owned by Aave.
If we consider implementing ERC4626 vaults and specifically Aura’s BPTs, there is a notable increase in yield (“Aura Boost”) for potential collateral types:
Note: Aura Boost is calculated as the increase in yield from utilizing Aura as opposed to the lower bound of native BPTs.
This makes things more attractive for users, increasing TVL, demand etc. But more importantly, users are likely more receptive to a fee cut for Aave (with a greater degree of freedom). Increased yield with a fee cut improves revenue generation for the DAO, and as Matthew said the DAO will now earn both BAL and AURA that can be locked to control greater BAL emissions and incentivize listed collateral.
I also echo the thought of creating and listing Balancer Boosted pools e.g. bb-a-wETH, bb-a-wBTC, bb-a-wETH/bb-a-wBTC etc. Not only does it further increase Aave’s TVL, but Balancer boosted pools automatically receive bribes from a portion of fees the pool generates.
Evidently, there is a strong case for supporting Aura BPTs over native BPTs ‘if’ it had to come to a decision between the two in the short term. However, I don’t think the heightened security risk should be ignored and it would be interesting to hear if an external audit of Aura would be feasible? (On a side note, Yearn has recently listed an Aura bb-a-usd vault. So it seems like they’re comfortable offering Aura vaults)
In my opinion, users would like to have freedom of choice. Let’s say an example where a big institution prefers lower yields with less smart contract risk, maybe they would be more aligned with using native Balancer LP pools with better audited risk profile.
An Aave AMM pool is really aimed for advanced DeFi users, so there is no UX constraint of listing both Balancer and Aura boosted pools with proper ticket symbols and information.
As I said in a previous post, is a common goal to support ERC4626 tokens and Aura, but it would require greater resources to analyze all the possible smart contract layers of risk and properly perform integration tests for a safe integration.
Once the core of Staked AToken primitive is audited and released, there will be an easier and secure way to onboard more LP assets with LM rewards, like Aura.
Personally I also would like to enjoy better APRs, but we must follow incremental steps to ensure the safety of the Aave protocol and their users.
We anticipate that the audits would indeed be conducted by Certora and Sigma Prime, both of whom have been given grants from the DAO, but welcome feedback from the community on any other audits.
Touching on the proposed reward boost and its impact on the suppliers of traditional ERC20 tokens, with this proposal, users would be able to use their Balancer LP tokens as collateral while earning Balancer Swap Fees, Gauge rewards and BAL LM. The positions of users of the Aave Protocol would be seen as a single position in the eyes of the Balancer Protocol. The Aave DAO currently owns a sizeable amount of BAL that, paired together with ETH, could result in 20/80 WETH/BAL BPT and finally, veBAL. It’s up to the community to decide whether to use this holding to create veBAL and use it to enhance the Gauge rewards and BAL LM.
Overall, although using Aura LP assets would result in a higher APR for suppliers, there is however additional smart risk involved in this approach given the introduction of an extra layer of smart contracts. The method we propose here could easily allow for the support of Aura in the future if the DAO agreed it should and once the risk has been fully assessed. Staked aTokens are LP agnostic, so can be made compatible with any LP tokens; this proposal focuses on Balancer LP tokens to initiate the market.
The native BPT integration has already been developed and presents a strong opportunity for the community. An Aura integration can be carried out if the community decides to do so. To your point @Callen_Wintermute, having the option to use both native BPTs and Aura would offer additional choice for users.
In our view, both Llama’s and Aave Companies’ proposals are complementary, and collaboration with Llama on future iterations of the approach here could include supporting Aura, Curve and Convex and others.
Further, regarding your points around the veBal strategy, the proposal purposefully left open to the community the strategy around the use of the DAOs veBal, and Llama’s thoughts in this area will be beneficial.
This proposal intends to lay the groundwork for the DAO to become an important participant in VotingEscrow economies more generally, and if approved, we believe the community has many opportunities to expand upon this idea, including through Llama’s proposals.
Highly supportive of this proposal and very excited to get these two protocols integrated more deeply. As a Balancer builder and Aave enjoyer, I hope this is just the beginning. Our team is here to help with this and any future endeavors. Great work, @AaveCompanies!
It is truly great to see Aave starting to play around gauge wars. Not only will this enable some very powerful lending strategies, but I believe crafting a good strategy around gauges will also play a key role in the bootstrapping of GHO.
Aave is creating net positive utility for the ve-based protocol ecosystem by enabling the option of allowing LP positions to be leveraged as collateral while earning increased yield.
This proposal also provides a significant upside for Aave through the revenue from staking rewards.
At StableNode we are glad to see this partnership reach an innovative and revenue bearing stage, as delegates in both Aave and Balancer this overlap in value creation is quite pleasing and a signal that we are headed in the right direction.
However considering Aave’s Balancer holdings, how does Aave plan to offer a competitive yield on the Native Balancer BPT without diluting the APR on Aave Liquidity Pools?
This proposal is very interesting, really excited about the future for Aave !
I’m a bit late as the post is already on Snapshot, but I wanted to share a few thoughts anyway:
Llama is also working on a proposal to upgrade the Safety Module. It might be a good way to accumulate voting power, which can then be used to incentivize and boost the StakedATokens but also the SM
To begin, this should be restricted to a few assets (max 5) on a specific market like v3 AMM, this would allow to not totally dilute the very low voting power owned by the DAO at the moment.
The Aave DAO holdings are definitely not sizable enough with an estimated 1,5% of the veBAL supply decreasing over time
It would help a lot to know the total Aave companies BAL or veBAL holdings if any, as I guess it will be used to bootstrap the protocol ?
When starting to work on the SM proposal a few weeks ago, the estimated share of the veBAL supply owned by AAVE based on the current BAL holdings was around 1,7%, is now around 1,5% and will keep decreasing over time.
As Matthew mentioned in his comment, this will require additional voting power to get a significant impact.
As mentioned above, the DAO doesn’t own enough voting power to incentivize either the lending pools, or the SM, so it would not be a big deal at the moment if Aave holders can vote weekly on the gauges, but:
In the SM proposal (still in work), Llama propose that current SM rewards should be partially used in bribes to increase the efficiency instead of direct liquidity mining.
POL staked into the SM is also part of the proposal, allowing to partially self insure the protocol, and generate yield on the treasury.
The same strategy could be used to kickstart the StakedATokens market too if any budget is allocated.
However I believe that asking Aave holders to vote weekly on gauges and optimize the DAO votes might not be the best way as it would create a precedent hard to change when/if the DAO veTokens holdings becomes critical in the rewards distribution.
Instead this should be actively managed (by a treasury committee for example) to decide the amount of vote needed for each pool, create the quests, try to maintain target APR for the SM, contact big stakeholders to vote etc
Also, it’s important to say that even if Aave voting power holdings are currently low and not very impactful right now, but the yield generated by Aave DAO POL in the SM would earn an important voting power over the next months if locked.
As the voting power is growing, it’s very important to actively manage and optimize the votes to reduce the rewards budgets, increase the amount of lending pools incentivized and the SM cover over time.
Of course later on, this strategy should also be replicated on Curve/Convex and maybe other protocols , to avoid depending on a single ecosystem for the majority of the incentives.
This is what I’m referring to by the SM proposal, it’s not necessarily more complex, but it would require more work for sure. We’ll try to share a draft here in the coming days.
This proposal also have another goal which is to incentivize the pools including native assets such as AAVE and GHO but also WETH and other stables.
In addition to the reserve factor and earning from collateral rewards, BAL and AURA acquisition are taken into account in the SM proposal with Grants + POL in the SM
This is true right now with a low voting power, however the SM proposal goal is that Aave has sufficient voting power to avoid spending incentives or at least reduce the budget over next years.
Awesome thanks a lot for the detailed feedback. How long do you think it would take to implement ERC4626 strategies ?
100% agree on this and this a very good conclusion : Both ERC4626 and StakedATokens proposal are basically the same with two key differences:
Aave proposal only focus on Balancer at first, but can implement others protocols, while Llama focus on Aura to maximize the rewards & can implement other protocols too
Aave didn’t designed the proposal with ERC4626 strategies, but can integrate it later while Llama proposes to directly start with it but didn’t built it yet
Overall, both StakedATokens and ERC4626 proposals are very similar and compatible.
Also fully agree, the same reasoning is used for the SM proposal, deposits on Balancer would be limited to the max boost it can provide, so the majority would be deposited on Aura. Then, the Aave DAO can over time accumulate more BAL and AURA, locked to increase their voting power and veboost power, to rebalance part of the position on Balancer.
Another alternative to limitate the deposits on Aura would be to buy veBAL boost on Warden to increase the Balancer max boost deposit capacity, but this would add another cost so needs to be included in the calculations.
This is actually what was initially planned in the SM proposal, as the goal was to implement bb-a-XX pools but we removed it as it would add too much correlation with the protocol in case of a shortfall event.
Llama is considering 3 pools which would require gauges on staked positions in the SM to avoid reward dilution.
WBTC/WETH is interesting, and could also fit on this list !
Some of these pools could be turned into core pools (50% in Interest bearing tokens) by replacing WETH by stETH for example. This would add extra bribes from Balancer paid by the 25% fees taken on the IBTs.
An external audit of Aura (or even several) would be very much needed if the DAO was to implement both strategies, and one solution could be a grant in AURA to help reduce the cost on the treasury (as the audit would be paid in stables and the AURA locked)
Agree, the proposals are very similar and compatible.
Added some thoughts about this above, a treasury committee managing the voting power owned and potential bribes would be much more efficient than asking Aave holders to vote each week imo.
Thanks very much for the proposal, @AaveCompanies. Our data science team is continuing to analyze this proposal, but we just published an analysis on the forums on the risks of enabling LP tokens as collateral, more generally. We hope that this helps the community assess the risk/reward tradeoffs.
Thanks for the question MerlinEgalite. It is important to take a conservative approach with asset listings in the current market.
Whilst the aToken primitive is in the process of implementation, there will be a separate proposal proposing which BPTs to list, for which community input on the proposed asset listings, and appropriate risk configuration is essential.
Further, as mentioned in the proposal, there is an option to list these assets on a V3 AMM. This would limit risk more broadly as these assets would be segregated from the regular V3 Ethereum market.
We appreciate the greater emphasis on risk at present.
This would make a lot of sense to separate it from the main protocol. This also reminds Compound’s new protocol, with only a few assets (even one single asset) as collateral and only one single asset to borrow.
I’m curious to see how it will play out, keep building!