ARC : When profits sharing?

Governance
1

Hi all,

If I come to you today, it is to talk about the treasury of the Aave protocol.

The various Liquidity Mining programs on Polygon, Ethereum and now Avax have significantly helped to increase the TVL on the protocol as well as the funds raised on the treasury contract (Aave: Aave Collector V2 | 0x464c71f6c2f760dda6093dcb91c24c39e5d6e18c)

It cannot be denied that this is a good thing, but it comes at a cost for the protocol concerning the LM on Ethereum. A little too expensive since already nearly a third of the reserve ecosystem has been spent between the LM and stacker rewards (SM and aBPT).

Of course, the part of this sum distributed to reward the Safety Module stackers is a good expense, but the sums collected on the treasury contract are not sufficient to ensure total autonomy of the protocol in the short term.

If we compare the sums spent on LM for incentives which are in the order of several hundred of thousand Aave, these grants are awfully expensive.

According to my estimates and the various discussions I have had on this subject, if we arrive at a minimum treasury of $ 50 million for the protocol, the returns generated by the work of this treasury should be able to make the protocol financially self-sufficient.

Today, we are still far from those 50 millions (~ 17 millions at the moment) and the ecosystem reserve is emptying at great speed. (I have already addressed the LM’s concerns with Aave as rewards and the concentration of these incentives in Aave in few hands as well as the selling pressure on the token price that this induces …)

This is why I would like us to have a more in-depth reflection on how to quickly get to a minimum of 50 million stablecoins in the protocol treasury.

There are several solutions I am sure, and I will suggest one but that is obviously not the only possibility.

Can we imagine creating bonds worth at least $ 35 million?

The funds thus collected would be paid directly into the protocol treasury.

These bonds would be NFTs (erc 721) allowing to instantly redeem the same amount plus a bonus payable in Aave by the reserve ecosystem (Aave: Ecosystem Reserve | 0x25f2226b597e8f9514b3f68f00f494cf4f286491), we can imagine 15% of incentives by example, once the fee distribution mechanism has been fully operationnal.

The participant would deposit an amount directly in stablecoins on the treasury contract and in return would receive a redeemable NFT in Aave from the ecosystem reserve.

We could, once the fundraising is over, do the job to activate the distribution of fees return for the holders of Aave and start to share the revenues of the protocol between Aave holders (even if these were to be quite reduced, it is a matter of principle and direction.)

By putting in place a system allowing the protocol autonomy to be achieved as quickly as possible, we would not only gain credibility and traction, but also, we would reduce the risk of seeing Geist.finance-type competition eating away at our TVL.

In addition, the amount of just over 30 million needed does not appear unrealistic when you consider the number of Aave to be distributed in exchange.

Here I have exposed my thoughts on the subject and although I am sure that it remains incomplete and perfectible, I hope that it will have the advantage of triggering a reflection on a problem which begins to persist in what concerns the remuneration of Aave holders for the direct operation of the protocol.

Thanks for reading me.

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Definitely something on what I agree thinking power needs to start moving @EmmanuelD .

In addition to the treasury contract you point to on Ethereum mainnet, the Aave treasury on Polygon also holds ~$5.8m and Avalanche’s even if just launched is approaching $100k.

I would say there are 3 good initial steps to proceed with, before entering into more advance models like the one you propose:

  • Put all non Aave-deposited assets to work. Some funds on the treasury on mainnet, because on how they get collected are still not aTokens (~$400k), which means losing a meaningful profit, so at least they should just be periodically re-deposited on v2 until the source of revenue (mainly v1) is not important.
  • Put all assets to work in the most efficient way. Aave is by principles a welcoming ecosystem, really risk aware, but trying to find synergies with strong projects out there. At the moment, it’s clear that at least would be worth it to consider using aTokens of the Aave treasury (or even underlying) in other platforms. This usage can be considered in a broad way: simply provide liquidity, participating in voting dynamics, etc. Even more than just the pure “profit” aspects, in a lot of cases out there, providing liquidity implies getting governance tokens, and the Aave ecosystem should have a say on those systems.
  • Claim rewards on the Aave treasury. At the moment, just by depositing on Aave on all networks, the treasury has multiple pending claims, which could be re-invested on whatever is determined by governance. Taking into account a simplistic performance of those claims just using the Aave ecosystem, it’s possible that the treasury is not getting in the order of 5-10% over those claims at the moment (usually they are just governance power, but as reference).

So my proposal is creating an AIP to initiate all the previous, at least the initial versions, and in parallel activate the channels of communication and research on how to optimize the treasury.

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This will be interesting to monitor because the proposal to launch Aave on Fantom (FTM) is soon submitted as an AIP and eligible for voting.

If the Snapshot or past proposals to support Polygon or Avalanche are any indication, I suspect this proposal will pass easily. Fantom will be another EVM chain to monitor treasury growth, as @eboado notes.

1 Like
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To continue the reflection, I agree with @eboado regarding the repatriation of fees from V1 to V2.
It would also be necessary to decide later whether the fees collected on the other chains should be brought back to the mainnet or else put to work on these side-chains.
Perhaps once the work of the genesis team on the inter-aave markets bridges will be live, this will include a solution to this problem.
Regarding yield-farming strategies in order to make this cash flow grow and to set up farming strategies, I leave it to @llamaDAO to think about the best possible choices and I count on @gauntlet to work (and justify its costs) on the risks involved in these strategies.

Initially, the goal of this reflection is to arrive at the financial autonomy of the protocol itself in a concern of decentralization.
The considerations on yields-farming or investments resulting from the putting to work of the treasury will come in a second step.

I will therefore propose a snapshot shortly on the community’s desire to complete the cash flow in a short time but before I would like to have a feedback on the technical feasibility of what I have proposed.
Both on the possibility of depositing funds on the treasury and recovering aave from the reserve ecosystem in return as on the possibilities concerning a premium for investors, the use of a nft, etc.
We must also keep in mind that the technical realization must be simple and implementable within a reasonable period of time.

Do not hesitate to continue to comment if the subject seems important to you.
The goal of this reflection ultimately remaining decentralization and the possibility of activating one way or another the redistribution of the profits generated by the protocol and thus to encourage other than by subsidy in aave the aave holders.

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I agree we are probably overspending on the LM currently, would be quite interested in a proposal on what would show what a significant reduction could look like.

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@EmmanuelD could you elaborate a bit on your proposed model?
If I understand correctly, you propose having a new type of liquidity providers that, instead of providing liquidity by supplying in the protocol, will provide liquidity directly to the Aave treasury. The Aave treasury then will supply into Aave, getting the corresponding yield, and the liquidity providers will get some AAVE as incentive of this action.
If that is the case, some questions:

  • The goal is to optimize the “pure” returns of the liquidity mining program? Meaning paying X annualized % to treasury’s liquidity providers, but getting in return Y (interest of aToken) instead of Y * reserveFactor / 100.
  • How the payout of this kind of “bonds” will be paid? You mention “instantly”, both principal and payout (proportional to seconds).

In technical terms, it is potentially feasible, I’m more concerned about the economics of the model.

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Hi @EmmanuelD
I agree with the goal completely of making sure the protocol remains solvent and viable in to the long-term future and it is great that you and others are thinking about this.
Could you help me understand what the incentive is for the bond holder to purchase these bonds please - I mean when compared to all the other options they have for their capital like staking directly in the protocol

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