Title: [ARFC] Aavenomics implementation: Part one
Author: @marczeller - ACI
Date: 2025-03-04
Summary
This proposal seeks governance approval for the first part of the implementation of updated Aavenomics, updating AAVE tokenomics, protocol excess revenue redistribution, deprecating LEND, and updating AAVE secondary liquidity protocol management.
Motivation
Before we start
This proposal is the natural continuation of the [TEMP CHECK] Aavenomics update presented in July 2024 and approved by governance in August 2024; it is suggested that readers of the current proposals familiarize themselves with the TEMP CHECK for better context. The current proposal is focused on implementing Aavenomics and is meant to be more concise than the TEMP CHECK for improved readability.
Introduction
The Aavenomics update TEMP CHECK was approved around six months ago, since then, the Aave protocol reinforced it’s leadership in the Defi vertical and became the #1 Defi protocol in general.
Aave’s market share has increased every quarter for the past two years, and GHO crossed $200m supply with healthy revenue despite harsher market conditions at the end of Q1 2025.
Every triggering milestone for implementation has been met, and Aave successfully upgraded to Aave 3.3 recently, thanks to the relentless efforts of @bgdlabs.
Aave protocol revenue remains strong despite market conditions, and the “cash” portion of our Aave DAO has increased by 115% since the adoption of the Aavenomics TEMP CHECK—now sitting at $115M. This growth occurred despite having the largest budget in Aave DAO history, due to V4 financing to Aave Labs (half of the DAO service providers budget but “one-off” expense) and the Merit revenue sharing experiment (around 20% of the Aave DAO budget).
While the downturn in interest rates affects the Aave DAO revenue, the protocol still maintains near-total dominance over revenue generated by lending protocols in the industry.
Expected growth of revenue in 2025
High revenue and high cash reserves put Aave in a comfortable position to initiate the Aavenomics update, and current market conditions allow Aave to become even more competitive and gain market share. Most competitors do not have cash in hand to finance incentives, so they must rely on distributing their native assets; yield farmers are wary of holding these tokens and are more willing to exchange them for cash as token valuations decline in secondary markets.
Aave is the only current protocol with an impeccable reputation for quality, making it the natural choice for most DeFi users even when yields are equal to or slightly lower than competitors’. Additionally, the protocol has the cash reserves necessary to distribute incentives in high-quality assets—a luxury no one else can afford in the current industry environment.
Aave revenue is also expected to increase with the introduction of Chainlink-powered SVR, allowing the protocol to extract revenue while protecting users from bad debt in market downturns. This revenue—while difficult to predict since it’s tied to market volatility that is inherently unpredictable—is expected to be significant (up to more than $10M/year) and can be mobilized to finance part of the Aavenomics.
Another exclusive Aave perk is Umbrella. With this new self-protection system, Aave will be the only protocol able to protect users from bad debt up to billions, as competitors have essentially given up on protecting their users. This unique advantage will make Aave even more attractive, especially for institutions concerned with on-chain risks.
Lastly, one “unexpected” side effect of Umbrella is the de facto commitment of liquidity that will remain in the protocol until cooldown maturity. This will secure liquidity, make potential bank run events less harmful, and, more importantly, can be mobilized to build new products and revenue streams around this “committed liquidity.” Examples include cross-chain position financing and “restacking” of Aave committed liquidity for the safety of third-party protocols. Aave is well-armed to enter this strategic DeFi vertical and generate significant new revenues from it.
Creation of the Aave Finance Committee and Umbrella focus
We propose utilizing Umbrella as both a protective mechanism for Aave users and a growth tool by redistributing part of the Aave DAO excess revenue to Umbrella aToken stakers. We also recognize a strategic opportunity in the L2 landscape to mobilize revenue from existing networks toward L2s that are most strategic for Aave’s growth.
For implementation, we propose mobilizing the talent of current Aave DAO service providers to form an Aave Finance Committee (AFC). This committee will be tasked with managing Aave collector contract holdings and defining the Umbrella liquidity target ratios and budgets tailored for both safety and growth. We propose founding members who equally represent risk, growth, and treasury management, with a 3/4 signature threshold.
By definition, the committee needs to be reactive to market conditions. Implementing every change on every network via AIPs is not compatible with efficient management. Therefore, we suggest that part of the AFC’s mandate execution stems from token approvals done by Tokenlogic during their monthly treasury management AIPs, which will allow the committee to pull and distribute budgets as needed.
This approach will also simplify implementation, as some L2 revenue is expected to be spent on other, more strategic L2s.
While cross-chain bridging by AIPs is theoretically possible (and done regularly between Avalanche, Polygon & Mainnet), it remains inefficient. This is why a new Bridge Steward connecting Collectors contracts on all networks is required, and Bgd Labs will propose one shortly. This will allow Treasury management AIPs to be slightly less complex and more focused on swapping major assets and delivering token approvals, making the risk surface thinner and review more seamless.
We suggest mandating both Tokenlogic and ACI to lead this AFC under the supervision and control of risk service providers who can block any potential collusion between them.
Umbrella Asset Focus
For efficiency and to reflect which tokens are the most strategic, borrowed and in need of Umbrella protection, we suggest focusing Umbrella on the following assets:
- wETH
- USDC
- USDT
- GHO (via StkGHO)
And when needed native assets to be defined separately such as wAVAX, wS, GNO
Rewards Distribution Tokens
For rewards tokens, we suggest the following tokens:
Sourced from RF collection:
- wETH
- USDC
- USDT
Sourced from the Ecosystem reserve
- AAVE
and if available, third-party funded incentives budgets.
Network Implementation
We suggest activating Umbrella on the following networks:
- Ethereum Mainnet, Core & Prime instances
- Avalanche Network
- Sonic
- Arbitrum
- Gnosis
- Base
Aave Finance Committee funding members
- Chaos Labs
- Tokenlogic
- Llamarisk
- ACI
AAVE secondary liquidity management
The Aave DAO currently allocates a significant portion of the Ecosystem Reserve—approximately $27 million per year at current AAVE valuation—to secondary liquidity incentives. While AAVE’s secondary liquidity remains critical for the protocol, the Umbrella upgrade has rendered the old Safety Module ready for deprecation in favor of a more efficient system.
We believe we can achieve the same or even greater amounts of secondary liquidity for AAVE at a fraction of the current budget. Since one of the main goals of the Aavenomics global project is to eventually have the DAO source all AAVE distribution through secondary market buybacks, maintaining tight control over spending efficiency is crucial.
Therefore, we propose gradually complementing the current StkBPT staking with a hybrid system. This new approach will continue to leverage StkBPT staking while allocating part of the budget to the current Aave Liquidity Committee (ALC). This will enable the committee to take a more hands-on approach to shaping secondary liquidity for the AAVE token. To implement this, the proposal seeks governance approval to grant the ALC a mandate for AAVE token allowance from the Ecosystem reserve, enabling them to define budgets and distribute rewards efficiently—similar to what has been achieved with GHO.
Close the LEND chapter
As announced multiple times over the past years and nearly half a decade after opening the LEND to AAVE migration contract, it’s time to close the LEND chapter and focus on AAVE.
This proposal will remove all remaining AAVE—320k tokens at the time of writing—from the migration contract and redirect them to the ecosystem reserve.
Given that the community has had multiple years of notice, we consider it fair to close down the migration process. These long-dormant funds (approximately $65M at current AAVE price) will then be available to the DAO to be mobilized for growth, safety, or burn proposals by governance.
Protocol excess revenue for AAVE stakers
The previous elements of this proposal will impact the Aave DAO budget, yet they are not expected to significantly harm Aave protocol excess revenue. Furthermore, the growth anticipated from updates, new products, and our substantial current cash reserves makes us confident that we can initiate and maintain a “Buy and distribute” program, even in the face of recent unfavorable market conditions.
The protocol has already successfully implemented and maintained a revenue redistribution program in the form of Merit for more than a year, distributing $12m/year of protocol revenue to GHO stakers at current GHO borrow rates and supply. This program is now self-sufficient and no longer financed by revenue from third-party stables, making the “Merit is forever” meme a strong reality.
It’s now time to increase our ambitions to match the current protocol economy and upgrade both StkAAVE & StkBPT tokenomics. This will enhance rewards to Aave ecosystem stakers with excess protocol revenue.
Creation of Anti-GHO
The “anti-GHO” name derives from “anti-matter.” Anti-GHO is a non-transferable ERC20 token generated by AAVE and StkBPT Stakers. It is produced linearly through the Merit/MASIv system, with boosts and diluters applied, and is claimable bi-weekly by all Aave stakers.
Anti-GHO can be used in two ways:
- Burned at a 1:1 ratio against GHO debt in the protocol (hence the “anti-GHO” name), allowing users to reduce their GHO debt in Aave at no extra cost
- Converted to StkGHO, which is fully eligible for Merit & other Aave incentives, and after cooldown, convertible to GHO
Anti-GHO is designed to fully deprecate and replace the current GHO discount. This represents a leap forward in excess revenue distribution, as the GHO discount was only available to StkAAVE stakers who also had GHO debt in the protocol, whereas Anti-GHO will be generated by all AAVE and StkBPT Stakers.
The Anti-GHO budget stems from GHO revenue generation by the protocol and scales linearly with it. A governance-defined percentage of all GHO facilitators’ revenue is dedicated to minting and distributing Anti-GHO. These parameters will adjust in line with the actual protocol economy, making it both a sustainable and scalable budget tied to Aave’s success.
The current large DAO cash reserve provides the protocol with a comfortable buffer to maintain Merit rewards on top of Anti-GHO generation, even if the protocol economy faces pressure from a cyclical industry “bear” downturn.
We propose setting the initial parameters of Anti-GHO generation at 50% of GHO revenue. At the time of writing, the GHO supply is 186M generating a 6.45% (non-discount) yield; therefore, GHO revenue is currently at $12M/year. The current proposal would generate 6M anti-GHO/year for Aave stakers.
We propose distributing 80% of anti-GHO rewards to StkAAVE holders and 20% to StkBPT holders.
Any slight deficit in the GHO balance sheet due to Merit & ALC budgets will be financed with excess revenue from other stablecoins in the Aave protocol, with the clear goal of reaching GHO sustainability and profitability in 2025.
AAVE Buy and Distribute program
The protocol still has substantial AAVE reserves. The closing of the LEND chapter will significantly contribute to these reserves. Nevertheless, we believe it’s crucial to begin the journey toward long-term sustainability of the DAO’s AAVE budget.
This proposal gives mandate to Tokenlogic to provide token approvals to the AFC during their monthly treasury management AIPs, allowing the AFC to execute and/or work with market makers to buy AAVE tokens on secondary markets and distribute them to the ecosystem reserve.
After the initial six-month period, Tokenlogic will include a quarterly buyback budget in their treasury management reports. They will size these buybacks according to the protocol’s overall budget, with the objective to eventually match—and even surpass—all protocol AAVE spending. These budgets will then be converted into token approvals for the AFC to execute the buybacks.
During the Aavenomics TEMP CHECK phase, it was stated that a conservative approach would be to always keep in the collector’s contracts an amount equivalent to 2× the “OPEX” or Aave service providers’ & incentives budget for the DAO to mitigate treasury risk in case of a prolonged market downturn and reduced protocol revenue.
The service providers’ budget is expected to evolve in 2025. Half of the 2024 budget went to support Aave Labs for the creation of V4—this large investment is not meant to be renewed in 2025. While we expect some compensation inflation from other service providers, we believe a $40–45M total budget (outside umbrella & buyback financing) is a credible conservative higher range scenario for the 2025 budget.
While staying extremely conservative with Aave treasury funds, the ACI considers this proposal can mandate the AFC to start an AAVE buyback and distribute program immediately at the pace of $1M/week for the first 6 months of the mandate. With new upcoming revenue during 2025 from various sources, the AFC will likely be able to increase the buyback budget via a subsequent proposal.
Tokenlogic has a mandate to define the tokens used to finance these buybacks according to Aave treasury holdings on a month-to-month basis.
Specification
This proposal can largely be executed in a single AIP, though not entirely. It provides an official mandate for committee creation and expands the ALC’s scope. Execution will continue through Treasury management AIPs and AFC execution. However, ending the GHO discount and implementing Anti-GHO might require additional development and audit time depending on service providers’ feedback. These elements will likely be implemented in a separate “Aavenomics Part Two” proposal.
The specification for this first part of the Aavenomics implementation includes the following key technical components:
Technical Implementation Details
- Aave Finance Committee Creation: Establish a 4-member committee with a 3/4 signature threshold consisting of Chaos Labs, Tokenlogic, Llamarisk, and ACI.
- Give mandate to Tokenlogic to implement financing of the proposed budget for the first 6 months of the Aavenomics via monthly treasury management proposals and setting token approval allowances.
- AAVE Secondary Liquidity Restructuring: Gradually reduce the current StkBPT rewards in favor of a hybrid approach combining StkBPT staking (with no slashing element) with defined liquidity targets and partial budget allocation and distribution via AIP allowances dedicated monthly to the Liquidity Committee.
- LEND Migration Closure: Remove all remaining AAVE from the LEND migration contract and redirect these tokens to the ecosystem reserve, formally ending the migration process after nearly five years.
- Protocol Revenue Redistribution: Deprecate the current StkAAVE slashing element entirely, maintain AAVE rewards, and implement a system to distribute 50% of GHO protocol revenue to StkAAVE & StkBPT stakers using the Merit/MASIv framework with Anti-GHO. Anti-GHO will be distributed monthly in sync with Merit Rewards.
- Buy and Distribute Program: Mandate the AFC to leverage Treasury management token allowances to acquire AAVE on secondary markets and/or through MM partners, then send acquired tokens to the ecosystem reserve. The program will start with a $1M/week AAVE acquisition for the first 6 months, after which it will be sized according to the overall protocol budget with quarterly reporting.
According to service provider feedback, especially @bgdlab, this might be implemented during an “Aavenomics Part Two” proposal to allow time for development and audit of these new features.
- Anti-GHO Implementation: Create a non-transferable ERC20 token that:
- Is generated by AAVE Umbrella Stakers through the Merit/MASIv system
- Can be burned at a 1:1 ratio against GHO debt
- Can be converted to StkGHO (eligible for Merit & other incentives)
- Will replace the current GHO discount mechanism
The key objectives of these specifications are to optimize the DAO’s AAVE distribution, improve secondary liquidity management efficiency, formalize the LEND deprecation, implement a sustainable revenue distribution model, and establish a pathway toward long-term sustainability of the DAO’s AAVE budget.
Disclaimer
The ACI and its team hold significant staked and unstaked GHO and AAVE positions and will directly benefit from this AIP alongside, and equally to, all GHO and AAVE holders.
The ACI is not presenting this ARFC on behalf of any third party and is not compensated for creating this ARFC.
Acknowledgments
The ACI extends its sincere gratitude to all Aave service providers, delegates, and community members who contributed to this proposal’s peer review. Your expertise and insights have been invaluable in refining and strengthening this proposal. Special thanks to @BgdLabs for their crucial input on this proposal and the conception of the Umbrella Safety module. This proposal reflects the collaborative spirit and dedication of the Aave DAO.
Next Steps
- Invite community & service providers to provide feedback on this proposal with the goal of reaching consensus.
- If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
- If the Snapshot outcome is YAE, give a mandate for the creation of committees, increase the scope of the current ones, and implement the rest of the proposal via AIP.
Copyright
Copyright and related rights waived via CC0.
