[ARFC] Aavenomics implementation: Part one

Governance
1

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

  1. Aave Finance Committee Creation: Establish a 4-member committee with a 3/4 signature threshold consisting of Chaos Labs, Tokenlogic, Llamarisk, and ACI.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

  1. 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

  2. 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.

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

  1. Invite community & service providers to provide feedback on this proposal with the goal of reaching consensus.
  2. If consensus is reached on this ARFC, escalate this proposal to the Snapshot stage.
  3. 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.

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25 Likes
3

Amazing accomplishment here. A significant, basically $1mil/week target of AAVE buyback, some really innovative concepts to DeFi, and a believable timeline to get it done.

This proposal has my full support. Congrats! Just use AAVE!

3 Likes
4

Hello guys, not commenting a lot here despite reading quite a lot but I just wanted to congrat AAVE DAO for the amazing work. This improvement will not only massively enhance the AAVE protocol but will set standards in the DEFI space.
Onward and upward from now, keep up the good work!

2 Likes
5

Question: for those who haven’t utilize their GHO discount yet so far , will they get anti GHO retrospectively based on previous AAVE staking ?

1 Like
6

No, but they’ll start earning Anti-GHO if this proposal (or part II depending on implementation feedback) if approved by governance

1 Like
7

Thanks for the response. So the current GHO allowance becomes dormant as there is no more discounted GHO minting currently.

8

Excellent initiative, always impressed with Aave contributors ability to collaborate, innovation and execute upon a shared vision of a better future not only for Aave, but for DeFi as a whole. This will set a new standard for how DeFi protocols should look to utilize funds and continuously improve their nomics.

1 Like
9

“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”.

What does it mean - “all Aave distribution”? :thinking:

10

Great proposal thank you Marc

I have some concern regarding the closing of the LEND contract, I currently have 10k LEND stuck in a Dapper Labs legacy eth wallet and I am currently in the middle of a support ticket to be able to move those assets but they are very slow to respond.

Any solution for me ? The closing of the interface of the bridge was already not a good news but this would mean that my LEND are gone forever.

I can attest ownership of the wallet and even send eth from it, they just have an issue to support LEND transfer.
(dapper legacy wallet does not share the private seed (…) so there is not much I can do without them)

Another solution for everyone in my situation would be to map the LEND and airdrop the corresponding Aave amount to their address ? That would work for me

11

Pretty sure the migration interface was never closed: Aave - Open Source Liquidity Protocol

1 Like
12

Oh thanks, I was looking for it on the main aave dapp- this will be helpful if dapper allows me to transfer my lend in time

14

First of all thanks for this milestone ARFC. It has been a long time since announcement last year, but it was worth it.
I do have a few questions towards different parties within the DAO.

Is it possible that for example Gnosis or Sonic could say they want to offer protection for their native assets to incentivize usage of their token by lets say offering something like LM campaigns but focused on Umbrella protection?

Will @AaveLabs implement this in the UI so new user aren’t confused on where to claim their rewards? I know some have been confused that they needed to claim Merit rewards thorugh ACI website.

@TokenLogic would you please implement a dashboard for the buyback program? Similiar to what SKY has with Skyburn? I think visualization would help a lot.

5 Likes
15

Most definitely.

We intend to upgrade the Aave Swap contract to perform the daily AAVE purchases.

5 Likes
16

Great proposal.

Couple questions:

  1. What’s the rationale for ‘Buy and Distribute’ over ‘Buy and Burn’?
  2. How will the funds bought through ‘Buy and Distribute’ be distributed? Or how are they expected to be distributed?

Thanks.

1 Like
17

Do I understand correctly that the $27M of incentives mentioned include the Merit and Ahab programs, which are expected to continue ($20M annualized)? If so, how do you expect to reduce this amount? And how much do we expect to pay for stakers now in Umbrella, anything apart from the allocations for antiGHO?

18

Excited to see this go live! The details all make sense to us, especially the initial Umbrella assets based on the profile of most borrowed assets on Aave. This is a huge development for the protocol and the wider ecosystem, kudos to the teams who have worked so hard to make this a reality!

Regarding Anti-GHO and any other reward claiming, we’re aligned with @EzR3aL that there should be a unified dashboard, ideally on the Aave portal, that allows for easy claiming rather than through the ACI website.

1 Like
19

Cool down period AAVE unstaking remains same ?

1 Like
20

Hey folks. Fábio from Balancer here - I’m very excited about the Aavenomics update! Congrats everyone involved on this proposal.

I have two questions. First regarding the anti-GHO rewards distribution:

We propose distributing 80% of anti-GHO rewards to StkAAVE holders and 20% to StkBPT holders.

Will this proportion be fixed? I’ve analyzed the current staking distribution and it seems 80% of AAVE is staked via pure StkAAVE and 20% via StkBPT, so the proposal matches current state. But what if these proportions change? Could we ensure anti-GHO is distributed proportionally to # AAVE tokens staked?

Also, the diagram implies that both StkAAVE and StkBPT can participate/vote in governance. After a quick review of Governance v2 and Snapshot strategies, I didn’t find clear mentions of StkBPT. Could you clarify the governance participation status for StkBPT holders?

Balancer is keen to provide support and ensure StkBPT and its holders are first-class citizen in the Aave ecosystem.

2 Likes
21

Summary

LlamaRisk fully supports the proposed Aavenomics implementation. This proposal represents a significant evolution of the Aave protocol. The ARFC provides visibility on fundamental changes while appropriately deferring implementation specifics to relevant service providers.

We’re honored to be proposed as part of the Aave Finance Committee and are confident we can contribute with our Umbrella capitalization methodology. The proposed mechanisms for staking, revenue distribution, and buybacks are technically sound and well-aligned with the protocol’s growth objectives.

Given the evolving regulatory landscape for DeFi protocols, we’ve dedicated the remainder of our response to a focused legal analysis through the lens of European regulatory frameworks, particularly MiFID II and MiCA, examining key aspects of the proposal that may have regulatory implications. This analysis provides additional context for community decision-making but does not constitute formal legal advice.

Legal analysis

This brief provides key insights on the potential legal ramifications of this update:

Staking

ESMA and EBA are examining how staking aligns with lending services in DeFi. For Aave, assets are immobilized to cover potential shortfalls, with users receiving clear disclosures on rewards and slashing risks. Our analysis concludes Aave provides sufficient consumer protection through transparent documentation and (soon to be) programmatically enforced DAO-administered slashing mechanisms.

Detail analysis

Detail analysis

In the European Union, the regulatory approach toward staking remains in flux as authorities continue to evaluate its risks and impact. The European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) have focused on scrutinizing “staking-as-a-service” offered by centralized trading platforms.

In a recent Joint Report, these authorities are investigating how staking interacts with borrowing and lending services under the Markets in Crypto-Assets Regulation (MiCA). They seek to understand how lending, borrowing, and staking operate in DeFi ecosystems, how yields are shared, what disclosures are provided, and what protections exist in adverse scenarios like token slashing.

While this research doesn’t constitute formal legislation, it signals authorities’ perspectives and potential future regulatory developments.

For this report, “staking” is defined as “the process of immobilizing crypto-assets to support the functioning of PoS and PoS-like blockchain consensus mechanisms, in exchange for the conferral of validator privileges that can yield block rewards” per a Commission Q&A on staking and MiCAR. The French AMF adopts a similar definition.

In staked aTokens, assets are immobilized to safeguard against shortfall events. Participants receive rewards in AAVE tokens or other approved incentives by assuming slashing risk. This design both compensates stakers and strengthens protocol security by providing reserves to offset potential losses.

Slashing in this context differs from its use in PoS networks. Within the Aave Safety Module, slashing means reducing staked assets during a protocol shortfall to cover resulting deficits.

Regulators are primarily concerned about consumer protection—specifically that participants may be inadequately informed about terms and conditions. This concern appears mitigated for Aave, as reward structures and slashing risks are extensively explained in the official documentation. The user interface displays risk notices and directs users to additional resources in non-technical language.

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Source: Aave - Open Source Liquidity Protocol, Date: March 5th, 2025

Another concern is potential misuse of staked assets. Participants receive staked tokens recalculated based on the prevailing exchange rate, representing their share in the Safety Module. While starting at 1:1, this ratio evolves with slashing events or capital inflows. Users can verify this ratio on-chain through EXCHANGE_RATE_UNIT.

Slashing is the only way users can lose funds, and only addresses with the SLASH_ADMIN_ROLE can initiate it. This role is controlled by the DAO via the ExecutorLvl1 contract at address 0x5300A1a15135EA4dc7aD5a167152C01EFc9b192A. This “short executor” implements governance-approved measures for less risky proposals with shorter timelocks.

The maximum percentage of stAAVE that may be slashed is 30% of total staked holdings.

Based on this analysis, Aave mitigates consumer protection risks by providing comprehensive information on staking mechanics, purpose, anticipated rewards, and participation risks.

Revenue distribution

Under MiFID II, a crypto-asset is a financial instrument only if it is not a payment instrument, constitutes a security class, and trades freely on capital markets. AAVE serves a governance function rather than payment, meeting the first criterion. While AAVE trades on exchanges, it primarily grants protocol governance rights, not corporate governance powers typical of securities. Furthermore, cooldown periods restrict transferability. As AAVE must satisfy all three criteria to qualify as a transferable security, it fails to meet either the security class requirement or transferability standard.

Detail analysis

Detail analysis

AAVE token holders can stake their AAVE within the staking module, obtain staked AAVE (stkAAVE) as proof of deposit, and accrue additional AAVE derived from protocol revenue through the upcoming “buy & distribute” initiative. The Aave collector, holding the protocol’s net revenue, will allocate funds to the ecosystem reserve and distribute rewards to the staking module, reaching stkAAVE holders through this model.

A key legal concern is whether allocating protocol revenue to token holders could classify the tokens as securities. In many jurisdictions, if holders realize profits primarily attributable to external parties’ labor (like developers), the token may be deemed a security, subjecting the protocol to rigorous compliance obligations.

In the European Union, ESMA has issued guidance on categorizing crypto-assets as financial instruments under MiFID II. A crypto-asset will be classified as a financial instrument if it qualifies as a transferable security by meeting three conditions: it is not an instrument of payment, it represents a “class of securities”, and it is negotiable on the capital market.

Not being an instrument of payment

A crypto-asset is excluded from being an instrument of payment if not used as a medium of exchange. The AAVE token serves a governance function rather than a payment medium, likely fulfilling this criterion.

Being “classes of securities”

ESMA notes that crypto-assets conferring corporate voting privileges (electing board members, approving mergers) are more like shares. Conversely, crypto-assets whose governance rights concern only technical adjustments (protocol upgrades, fee modifications) lack traditional shareholder features and should not be considered securities.

Aave documentation specifies that AAVE and stkAAVE holders can vote on proposals or delegate voting power for protocol deployments, parameter modifications, and new features. These attributes don’t align with ESMA’s definition of a security class, making AAVE unlikely to meet this criterion.

Being negotiable on the capital market

A crypto-asset must be freely transferable to satisfy negotiability. While AAVE is listed on various exchanges, staking introduces limitations: users must start a cooldown interval (48 hours) to withdraw tokens, followed by a limited window (another 48 hours) to redeem them. Missing this window resets the cooldown. These lock-up provisions create substantial barriers to seamless transfer.

To qualify as a transferable security, an asset must satisfy all three criteria. Since AAVE doesn’t meet the conditions for being a security class and has transferability restrictions, it cannot be conclusively deemed a transferable security.

Furthermore, AAVE doesn’t qualify as other financial instruments:

  • It lacks a predefined maturity or redemption date (money-market instrument)
  • It doesn’t pool capital for a specified investment strategy (collective investment undertaking)
  • It’s not designed as a predetermined sale arrangement (derivative contract)
  • It confers no emission rights under the EU Emissions Trading System

Buybacks

Buyback programs may appear manipulative if they artificially influence price or volume. However, Aave’s proposed approach is transparently debated in governance, proceeds only via publicly approved proposals, and executes in a manner preventing concealed manipulation, significantly reducing exposure to MiCA’s market manipulation rules.

Detail analysis

Detailed analysis

Buyback initiatives pose legal vulnerabilities under MiCA’s market manipulation rules. A program could be deemed manipulative if it artificially influences a crypto-asset’s price or trading volume. MiCA prohibits transactions or conduct creating false signals regarding supply, demand, or price, as well as deceptive public communications. These prohibitions apply to all individuals and entities, as Article 91(1) states: “No person shall engage in or attempt to engage in market manipulation”.

Aave’s program structure provides strong counter-arguments to potential MiCA claims. Purchases occur on the open market or through arrangements with market makers, ensuring transparency. The ALC can only conduct buybacks under treasury management AIPs, each requiring thorough public discussion through governance forum, temp check, and ARFC phases before execution. Nothing is concealed from public scrutiny, making the token acquisition process fully transparent.

Given that the buyback measures are executed through a genuinely decentralized process relying on DAO architecture, MiCA’s scope may not extend to them. Therefore, proceeding with AAVE purchase orders or transactions likely won’t subject the DAO to significant risk of violating MiCA’s market manipulation provisions.

Disclaimers

All preceding observations constitute a broad overview of current legal instruments and regulatory guidance from competent authorities. This information aims to enhance Aave stakeholders’ understanding of the legal environment and aid decision-making when voting on issues with legal implications.

Nothing presented here should be interpreted as legal counsel or a definitive legal stance on referenced regulations, including MiCA, MiFID, or other applicable provisions.

This discussion does not preclude the DAO from seeking additional advice from legal professionals to obtain formal opinions on these subjects.

1 Like