Hi @AaveLabs,
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 ?
The below image shows three liquidity pools and Aave DAO voting to distribute BAL rewards and Boost.
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 @AaveLabs 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 | Llama ERC4626 | |
|---|---|---|
| Requires veBAL | Yes | No |
| 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 | No | 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. |
| User Rewards | 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 |