[ARFC] Enhancing Aave DAO's Liquidity Incentive Strategy on Balancer

Governance
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Title: [ARFC] Enhancing Aave DAO’s Liquidity Incentive Strategy on Balancer
Author: @Karpatkey
Date: 2023-10-06

Summary

This publication proposes Aave DAO to:

  • Mint auraBAL using existing B-80BAL-20WETH holdings and stake it on Aura Finance’s Classic Staking Pool;
  • Buy 400,000 USDC worth of AURA OTM; and
  • Swap $200,000 worth of AAVE for AURA and 200,000 USDC for AURA in an OTC deal with AURA DAO.

Background

AIP-42 resulted in a significant reduction in baseline AURA minted per BPT, while distributing additional AURA from the DAO treasury pro-rata to pool LPs based on their vlAURA gauge weight. This has effectively led to a decorrelation between veBAL’s and vlAURA’s emission power, with the latter becoming a more efficient liquidity incentive asset.

@Dydymoon pro-actively addressed this change by laying out a thoughtful analysis and proposing two options for updating Aave DAO’s Balancer ecosystem holdings.

We’ve expressed our concerns around both options, primarily because:

  • Balancer is historically deeply rooted in the mechanics of the Aave protocol and is a strategic partner of Aave DAO, and Option 1 would dump BAL; and
  • Aave DAO should avoid depleting its reserves of stablecoins to secure a sustainable runway, and Option 2 would require a significant investment in stables.

We then suggested a scenario to optimise the underlying objective while guaranteeing a positive outcome for every stakeholder, which, after some productive debate, evolved into Option 3.

Motivation

Despite receiving significant community support for this option, the overall proposal did not reach quorum.

This is an essential topic for the long-term strategic positioning of the Aave DAO; therefore, we are re-engaging the community towards reaching a consensus around Option 3.

Specification

The Aave DAO treasury currently holds 157,169 B-80BAL-20WETH and 443,674 AURA. To optimise Aave DAO’s voting incentives and maximise its emission power, we propose to:

1. Mint auraBAL using existing B-80BAL-20WETH holdings and stake it on Aura Finance’s Classic Staking Pool.

Aura Finance’s classic staking pool currently yields 17.46% APR: 9.61% in BAL and 7.85% in AURA. The rewards resulting from minting 157,169 auraBAL can be used to bribe vlAURA holders, generating a weekly budget of $4,907.87 that can bribe 701,124.38 vlAURA per week at current market prices.

It also increases Aura’s veBAL capture share, enhancing Aave’s vlAURA emission power by 1.15%.

2. Buy 400,000 USDC worth of AURA OTM

We recommend using CowSwap’s TWAP for the execution, dividing the purchase into ten transactions of equal amounts, each with a 1-hour duration. This reduces the price impact to 2,02% at current liquidity levels.

3. Swap $200,000 worth of AAVE for AURA and 200,000 USDC for AURA in an OTC deal with AURA DAO.

This action can be achieved by transferring 2,965.35 AAVE from the ecosystem reserve and 200,000 USDC from the collector to a token swap contract with properties similar to the one used for the CRV OTC deal.

We’d be exchanging 2,965.35 AAVE and 200,000 USDC for 477,088.51 AURA with the AURA DAO. The TWAP prices for AURA and AAVE were calculated for the period from September 29th to October 6th and can be found here.

Projected Emission Power

The acquired assets will be staked and locked into Aura Finance, generating the following emission power:

  • $17,713.16 in weekly emissions derived from 1,392,955.28 vlAURA holdings;
  • $8,915.97 in weekly emissions by minting 157,169.86 auraBAL staked on the AuraBAL classic pool and using the rewards to bribe vlAURA holders in incentive markets; which
  • Leads to a total of $26,629.73 in weekly emission power.

Details on emission power calculations and TWAP for AAVE and AURA can be found below:

Disclaimer

karpatkey is an active contributor in both Balancer and Aura’s ecosystems, the former as official Treasury Managers of the BalancerDAO, and the latter through GnosisDAO’s holdings (Mainnet & Gnosis Chain) in AURA ($1,882,810), auraBAL ($19,115.38), veBAL ($869,233) and stkauraBAL ($3,444,056).

Copyright

Copyright and related rights waived via CC0.

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I would like to express my gratitude to @Dydymoon and @Karpatkey for creating Option3 and explaining it thoroughly.

Regarding the proposal for a revote on Snapshot, I recommend setting the options as Option1, Option2, the revised Option3, and ABSTAIN.

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The reply has been edited to provide greater detail and clarity regarding the ACI’s position.

The ACI is in favor of this new streamlined proposal.

While we generally oppose “spending AAVE”, it’s important to note that this proposal exists within the context of an upcoming AIP that aims to reduce the emission rate of the safety module: (Snapshot). This proposal was crafted to “make room” for strategic investment and Aave expenditures, particularly to jumpstart GHO and strengthen the GHO peg.

With that said, we’ve observed numerous proposals supporting GHO, and significant treasury funds have already been allocated for this objective.

Ensuring the long-term sustainability of the protocol and the capability to cover service provider expenses is of utmost importance to us. Unless this initial batch of proposals yields positive outcomes, the ACI will be reluctant to support further treasury spending on other protocol governance tokens.

If governance is inclined towards this proposal, please view the ACI as an available resource for AIP development and deployment within the Skyward program’s context.

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Gm all ! As I couldn’t reply on the initial post which was closed by ACI very fast after the vote ended, I’ll answer here:

Besides adding buraucracy/governance filters with high holdings/delegation needed to post & multiple steps to pass a vote (2 forum posts + 2 snapshot + 1 on-chain AIP for most decisions), this framework might also be incomplete & misleading as explained below, creating situations like this one where the snapshot vote shows “quorum reached” when it could not be.

Moreover, yes ACI is the author, but it didn’t stop you from bypassing the framework in situations less complex than this one such as Direct to ARFC posts when estimated necessary.

According to the voting guidelines established:

The framework is ambiguous & incomplete in this case as it doesn’t include situations with several YAE options (or even other voting types involving several options), which can be restrictive for DAO decisions in some cases.

It does mention that the quorum should reach 320K YAE VOTE(S), meaning that:

  • Snapshot parameters on the Aave space are incorrect & misleading for the governance participants because the quorum is calculated with the total votes cumulated there (all options included).

  • If this was to remain unchanged, all proposals should include a reminder of the quorum needed for each option to be valid. (I know snapshot settings are not very flexible, but this shouldn’t prevent transparency in the proposal)

  • Since it’s not specified in the framework, it’s safe to assume that 320K total votes can be reached with several YAE options (It was the case in the proposal with 311K YAE on Option 3 + 63K votes on Option 1 for a total of 374K / 376K of YAEs votes).

I also requested the ACI assistance at the ARFC forum stage but the demand was ignored, only comment before the vote was “we’ll vote NAY” without arguing or suggesting an alternative.

This type of personal attack & insinuations were not needed.

For context, I contributed there for 3 & 6 months respectively & I decided to leave both places because of the working conditions which were not including the freedom to share my thoughts & didn’t fit my transparency criterias.

Imo that’s the most important when working in a decentralized ecosystem, so I avoid people trying to censor my thoughts before it’s even on the forum. (The fact that it happened a few times was actually one of the reasons why I left TL btw)

Anyway, I’m confident about my skills and the value I bring to the Aave DAO. Plus, it’s easy to see who knows their topic when looking at treasury management posts/comments, so this attempt to discredit me is sad but not a big deal.

Moreover, I did:

  • Wrote in the TC that the ARFC would be posted by TokenLogic (but Matthew refused, so I posted it myself, as the OTC deal was time sensitive).
  • Tagged both ACI & TL in the ARFC post to collaborate on their expertise domains.
  • Replied to every comment with arguments & data/calculations
  • Coordinated discussions with Aura stakeholders to validate the deal terms
  • Revised & included a 3rd option aligned with Karpatkey’s comments

But the ACI:

  • Ignored the Skyward assistance request
  • Didn’t voted despite being a paid delegate
  • Removed my ENS from snapshot space authors during the vote without notice
  • Ignored Options 1 & 2 & redirected the repost to Karpatkey
  • Closed the discussion by closing the topic before I could reply

I know anyone who reads the initial post & comments will agree that if someone lacked of team collaboration here, it wasn’t me.

Anyway, the revote imposed can be argued for the reasons described above, as the proposal can already be considered valid for the AIP stage.

However if the community prefers to revote, there are a few points to reconsider in Karpatkey’s post:

  • As mentioned by @0xlide, a revote must include all options in the initial post, which explains pros & cons of each possibility, as it’s a complex topic.

  • This post is about the revised option 3, but it’s missing the rewards utilization for long term accumulation part (AURA earned locked for vlAURA & replaced with USDC or AAVE from the treasury to bribe with BAL)

  • Re voting is also a good opportunity to look deeper into the technical implementation & faisability of this option (where the auraBAL should be staked, how to optimize the rewards & bribes management etc), which would then not require another proposal.

  • Once technicals are defined, “Specification” & “Next Steps” sections can be added to this post to be valid according to the governance framework.

  • Confirm that the deal terms & TWAP calculations period are still aligned with the Aura DAO stakeholders agreements (if not done already).

Thanks @Karpatkey for proactively reposting. I would have been glad to co-author this proposal as this post contains the revised option 3 proposed together, but I don’t mind you posting it as long as it’s complete & helps move forward with the liquidity strategies.

It’s worth reminding that Option 1 does not require any extra investment, as it’s only optimizing existing holdings while preserving the DAO runaway.

Also, the AURA acquisition proposed in all options are smaller than the $2M CRV, and most of AAVE & GHO liquidity is on Balancer, so it’s more efficient for the DAO.

What alternative do you have in mind to optimize the Balancer liquidity strategies if none of the options is approved after the potential revote ?

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proposal escalated to the snapshot stage, voting starts tomorrow.

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My take on this:

  • There is an important lack of a holistic strategy regarding incentives. On the one hand, the liquidity committee targets the incentivization of “concentrated” liquidity pools, which from my perspective clearly seems like the first step. On the other hand, with this proposal, the DAO is getting a sizeable AURA exposure both from the market and OTC without full certainty on when is the right moment to really use it.
    This happened in the past with the veBAL acquisition and is happening now again.
  • Especially against selling AAVE for AURA without precisely understanding the timeline on where the AURA will effectively be optimal on 1) improving the GHO peg and 2) growing GHO without hurting point 1.

Incentive strategies are becoming chaotic, AGAINST.

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Imho the release of GHO overall wasn’t well planned nor prepared. A stablecoin was released without any usage, thats why people are simply selling it for DAI and get APR from Spark.
I hope that with the liquidity committee something will change, but i was also expecting more from Aave companies, even if GHO is decentralized. If you want your product to succeed you need to do something. I don’t see @AaveLabs being active in this forum, than they did years ago.
Now its up to other people to make GHO a success, which is a dangerous approach.

Overall i think the AURA strategy can help the peg, but like you said, when and how efficient is still not known.

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100% with you @EzR3aL the timing of the launch and they way it was handled it showed that there was not any strategy behind it. We would like to know and understand the GHO plan (if there is any) from @AaveLabs

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@eboado Thanks for your comments!

There is an important lack of a holistic strategy regarding incentives. On the one hand, the liquidity committee targets the incentivization of “concentrated” liquidity pools, which from my perspective clearly seems like the first step. On the other hand, with this proposal, the DAO is getting a sizeable AURA exposure both from the market and OTC without full certainty on when is the right moment to really use it.

The proposed GHO Liquidity Strategy—which the GHO Liquidity Committee will act upon—clearly promotes a diversified liquidity approach. Regardless of any additional initiatives to acquire incentive power in other AMMs—which we are definitely keen to explore—this proposal addresses Balancer specifically.

We’d also like to point out that the strategic value of Balancer goes beyond GHO. The current incentive design for the Safety Module partially relies on the 80/20 AAVE/ETH Balancer Pool, and its diversification plan will probably include other BPTs, which will effectively reduce AAVE emissions by introducing additional BAL/AURA rewards.

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Hello @Karpatkey, thanks for the response.

I have no problem with the DAO investing in the solidity and sustainability of GHO, but my point is not that. The precedent of veBAL is there: the DAO took a position on assets like BAL, which for organizational, technical, and/or any misc consideration, it was not possible to exercise on day 1 after the acquisition (not yet).

In my opinion, the DAO should not be speculating and taking unhedged positions on assets left and right, should simply acquire them with an exact strategy + timeline in mind. E.g. if not possible to execute the strategy immediately after the trade, the acquisition should not be done, or done on different terms (conditional OTC price based on market deviation, whatever).

Again, I have no problem with the incentivization of GHO liquidity, using Balancer or even AURA, but as I see it at the moment:

  • The DAO spends 600k USDC buying AURA
  • The DAO spends 200k of AAVE value to buy AURA.
  • The DAO gets a position of 800k value in AURA, a pretty illiquid asset.

It is probably not a good idea to start incentivizing the growth of an “imbalanced” Balancer pool like GHO’s immediately until the peg gets better via the liquidity committee.

And the issue with this type of proposal is that let’s assume the objective is to pass the ARFC phase, and only do the acquisition whenever it really makes sense to apply the incentivization strategy. At that point, the price will probably be different.

Are we gonna be in a situation of setting an OTC price today and executing the trade in 1 month? Let’s step up the game and figure out a better solution.

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@eboado Spot on comments, please find our answers below.

We totally agree with you on this note. Though we weren’t involved in this process and can only comment from information we gathered in the forum, the inability to execute the veBAL strategy on time seems to derive from the classic overfitting problem: early automation of an unknown and fairly volatile process.

We hope that the GHO Liquidity Committee—which we firmly believe should extend its mandate beyond GHO e.g. AAVE—will bring a swifter approach to this activity.

The strategy is already outlined in this proposal. As for the timeline, the GHO Liquidity Committee should be standing by to strategically deploy those assets within the Balancer ecosystem as soon as they get acquired.

We agree, but we anticipate that closing the spread between GHO’s Borrow Rate and EDSR & Maker/Spark Borrow Rates along with the additional demand generated by the incentivised Balancer pools will be suffice to reestablish GHO’s parity with USD.

It’s also relevant to notice that these initiatives carry a significant bureaucratic process, and if ratified by Aave DAO, we’d still need to go through Aura DAO community approval. For the sake of efficiency, it’s important to execute in parallel streams to be ready to deploy when the right time comes.

We reckon the inefficiency of D2D deals and would try to execute as quickly as possible. Ultimately, we believe that any price volatility throughout the process would be negligible compared to the long-term benefit of such an investment.

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as @Karpatkey notes, acquiring an asset and deploying it might come in two different times, with a plan for the latter being detailed later, especially knowing how the process of acquiring these assets might take a lot of time due to the bureaucracy of DAOs and in general slow processes.
To put it in another way: buying a shovel because you know that pretty soon you gonna need to dig a hole, is something that has a rationality behind.

Jokes aside: there is a plan laied out already to buy Aura, which is a fantastic asset in term of yield that can help for sure AAVE accomplish his goals. Feels like pursuing it is the best course of action.

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I support the essence of this proposal. Acquiring AURA now, while refining its deployment, ensures Aave remains agile in my opinion.

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This ARFC has passed. Thank you to everyone who participated in the discussion, voted and helped with the process.

ACI is preparing the payload for the AIP phase, and the temp check for the swap has been posted on the Aura forum.

Upon both DAOs’ approval, the expected ETA for the execution is on the 24th.

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Still no answer from @AaveLabs…

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The vote on Aura to swap $200,000 worth of AURA for AAVE has passed unanimously: [AIP-51] Secure AAVE DAO auraBAL mint and AURA accumulation through Swap.

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This proposal has been queued for voting as an AIP. Voting begins tomorrow, October 24th.

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