[ARFC] Merit - A New Aave-Alignment User Reward System

Governance
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Proposal parameters updated following part of Feedback
Proposal updated to enforce [ARFC-ADDENDUM]
Proposal updated to reflect “Merit is Forever” Budget
Proposal updated to be more clear and gather evolution of Merit - 2024-08-08

Title: [ARFC] Merit - A New Aave-Alignment User Reward System
Date: 2024-02-16
Author: Marc Zeller - Aave-Chan Initiative

Summary

“Merit” is a merkle-tree-based periodic airdrop system, designed to reward Aave-aligned user behaviors and enhance protocol competitiveness.

Motivation

Addressing the competitive DeFi landscape, “Merit” seeks to elevate Aave’s appeal and efficiency through a rewarding mechanism that prioritises DAO-beneficial actions, distinguishing Aave from competitors employing artificial incentive methods.

Specification

The “Merit” system employs a booster-based model to reward specific user actions with points, dictating the weekly StkAAVE and GHO distribution. The system incorporates merit boosters and diluters to adjust user rewards based on their alignment with Aave’s objectives.

Rewarded Actions

Actions that align with Aave’s strategic objectives will be rewarded:

  • Hold stkGHO
  • Borrow USDC on Base

Merit boosters

Merit boosters enhance these rewards for specific behaviors:

Behavior Multiplier description
Second-degree user of aligned protocol Booster for users coming from aligned protocols that favour Aave over other protocols.
Migrator Incentive for moving positions to Aave from others protocols, currently Spark and Morpho
Aavenger Usage of AAVE as collateral
Holdooor Booster for ≥100-day AAVE holders in the past year
Stakoor Booster for ≥100-day stkAAVE holders in the past year
Staker Bonus for staking AAVE, StkBPT, StkGHO
Active in Governance Rewards for voting or delegating to an Aave DAO recognised delegate platform
ETH Maxi Supply WETH on Ethereum, Lido, Arbitrum and Base instances
User of Non-Aligned Protocol Severe dilution

There were also some previously rewarded behaviours which are not rewarded in current Merit rounds, these are shown below for reference.

Behavior Multiplier description
Cooldown dilution Dilution for leaving Safety Module
OG DAO Participant Booster for early DAO voters or delegates
MakerDAO fren Usage of sDAI as collateral
Diversity Supporter Rewards for using a variety of LSTs

And furthermore, a summary of all past rounds and rewarded behaviours can be found here.

Merit Diluters

Merit Diluters will dilute part or all rewards for certain behaviours:

Behavior Effect
User of Non-Aligned Protocol Severe dilution (up to -100%)

We propose to launch Merit with a single protocol with non-aligned status: all Morpho products.

Budget and Scope

  • Monthly Budget: Defined by Aave Finance service providers, all data will be published publicly after the Merit program ends.
  • Total Budget: Initially this was for $5M for the first 90 days covering rounds 1-3; then 20M$ for the following 365 days to make a total budget of $25M over 395 days.
  • Scope: Aave V3 Ethereum, Arbitrum, Base.

Synergies

Discussions continue with protocols interested in aligning with Aave in order to participate in the Merit Program.

Resources

You can access to all resources and proposals done on Merit since it’s start.

Proposal Forum Snapshot Description
Initial Merit proposal [ARFC] Merit - A New Aave-Alignment User Reward System Snapshot Initial creation of Merit Program
Addendum 1 [ARFC] Merit - A New Aave-Alignment User Reward System - #40 by MarcZeller Snapshot Introduce “Hold StkGHO” Reward Action
Addendum 2 [ARFC] Merit - A New Aave-Alignment User Reward System - #70 by MarcZeller Snapshot Update Merit for Round 4
Addendum 3 [ARFC] Merit - A New Aave-Alignment User Reward System - #79 by ACI Snapshot Update Boosters for Merit Round 6
Addendum 4 [ARFC] Merit - A New Aave-Alignment User Reward System - #84 by MarcZeller Snapshot Update Boosters for Merit Round 7
Addendum 5 [ARFC] Merit - A New Aave-Alignment User Reward System - #88 by MarcZeller Snapshot Update GHO Dynamics and StkGHO Fast Exit Mechanism
Superfest [ARFC] Merit Base Incentives and Superfest Matching Snapshot Merit Base Incentives and Superfest Matching

Disclosure

ACI independently proposes “Merit,” without external compensation.

Copyright

Copyright and related rights waived under Creative Commons Zero (CC0)

10 Likes
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A few questions:
Is there any data to back the decision to choose these specific merit boosting and diluting behaviors?
And also for the migration bonus multiplier?
Is there greater detail on how the funds will be distributed?
Is there a reason to choose a budget of 2.1M$ in wETH and 2.9M$ in GHO?
Significant GHO distribution may cause the price of GHO to fall even further.
What is the predicted financial gain for this proposal and how sticky will these new users be?

Some risks I envision:
The detailed criteria for earning boosts or risking dilutions might encourage manipulative behaviors, such as creating sybil accounts or engaging in minimal qualifying actions just to earn rewards, which do not genuinely contribute to the protocol’s health or goals. If the community perceives the initiative as overly complex, unfair, or ineffective, it could harm Aave’s reputation and erode trust among its users and stakeholders.

Perhaps, a more gradual, stepwise approach could be beneficial. Would love to hear others’ opinions on such an expensive market manipulation program on Aave V3 Eth.

2 Likes
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There’s no benefit in the Merit system for Sybil behavior.

As boosters are weighted on points accrued on the position itself.

Every merit action increases protocol revenue in the largest money makers (wETH borrow & GHO). Some merit boosters increase governance participation & favor long term holders & stakers.

Merit budget is based on protocol net profits once every service provider compensation is accounted for + buffer room for bounties/unexpected spend, it can be sustainable.

GHO borrows are especially profitable for protocol, with only 35M GHO borrow currently, GHO revenue is ~5% of overall DAO revenue. we expect Merit to help GHO grow and increase protocol revenue overall.

we think it’s precisely the wrong path to take. we’re in a highly competitive vertical with new actors having “zero revenue, print shitcoin-powered APY” policies. We also are in markets conditions favorable to grow GHO to a critical mass that will ensure it’s adoption, stability & appeal.

with the ACI we believe the Aave DAO should strike hard.

6 Likes
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If Aave wants to start incentivizing zero/negative sum behaviour like this I’m going to recommend that the current 1m / year DAI funding for the Aave V3 code be pulled.

Morpho is a completely new protocol and incentivizing against user choice is pretty rediculous. Users should be free to choose what they prefer.

4 Likes
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Morpho optimizers are a leech on top of the Aave protocol that provides zero benefits and steals potential revenue at the scale of millions per year for negligible yield improvement of users, subsidized by the fact they take zero revenue for doing this.

Merit helps to put an end to this. With the ACI, we are completely clear about our position on optimizers; every morpho optimizer user hurts by proxy the Aave protocol revenue. Therefore, they get a non-aligned status and are zeroed out of the merit system.

Spark & Morpho Blue are just Aave competitors; it’s a normal incentive campaign to apply a boost to users willing to discover the alternatives. Under the Merit system users using Aave & alternatives are not zero’ed out. they will receive merit rewards based on the aave side of their activity.

The whole merit system is an additional rewards system on top of Aave protocol regular yield.
Aave is and will stay a permissionless, neutral & decentralized protocol.
The Aave DAO is free to distribute additional rewards on top as they see fit.

Well, if Phoenix Labs wants to be seen as an entity with no weight of its word, that seems an interesting pathway.

A young company doesn’t have a lot of shots to build a reputation.
The current deal is mutually beneficial, and despite what some may believe, at the ACI, we still strongly believe there are a lot of potential future synergies between the Aave & Spark/MakerDAO ecosystems.

3 Likes
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I agree, but if it’s being used to fund incentives against innovation, you’ve lost my support.

2 Likes
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But where are incentives that fund against innovation? It’s simply one protocol competing against another. In the end no one gets hurt. Everyone is getting the same yield or if they align, even more. I would call it competition rather than being against innovation. Merit cannot stop innovation.

8 Likes
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It’s this piece. I have no problem with a rewards program, but penalizing users for using other protocols is new and a bad precedent.

Screenshot 2024-02-17 at 7.31.17 AM

2 Likes
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i didnt think i would see the day Maker guys would attempt to give moral lessons but here we are. This is an incentives system on top of the Aave protocol, which remains permissionless and nothing will change for Morpho users, if they still find beneficial to keep their liquidity within Morpho they are welcomed to do so. Moreover, it literally has nothing to do with OSS development which the Aave DAO has done and will continue to do (and you should know very well as you are by far the one who benefited the most from it until now). This threat of withdrawing from an agreement that

  1. you proposed
  2. you decided your own terms and changed the terms multiple times
  3. was literally paying zero on purpose before the DAO noticed despite you praising “funding OSS” on twitter

sounds more like a weak attempt to avoid paying money you never wanted to pay in the first place, conveniently forgetting not only the technology stack we gave you, but also the hundreds of millions of incentives DAI and Maker received over the years from the Aave DAO.
On my side, the will to collaborate with the Maker guys is long gone, and as a protocol dev i have no intention to provide any support given their hostile behavior towards the DAO.
As far as i am concerned you can do whatever you want with your two millions, at least you can stop acting like you have the higher moral ground here.

6 Likes
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Not going to delete this, but I retract what I said here in the heat of the moment.

I still object to the language in this proposal, but AaveDAO is ofc free to do as it will. I hope to find future areas to collaborate.

2 Likes
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Hello,

Feels like a good idea to experiment even though 5M$ is quite an investment … how can we ensure a fair user distribution for these rewards ? Any rough idea of which wallets would be the top beneficiaries and up to which reward amount ?

Then few questions :

1- Rewarded Actions include Deposit of LSTs, Borrow wETH. Shall the reward system apply to indirect usage through protocols who built AAVE ecosystem solutions such as instadapp (incl. lite), defisaver (incl. ethsaver), contango, cian (incl. vaults) … ?

2- Isn’t it contradictory to reward “Deposit sDAI, Borrow GHO” while incentivizing Spark users exiting ?

3- What about rewarding also non-ETH based LST loops such as stMATIC/MATIC, MATICx/MATIC, sAVAX/AVAX … ?

Thanks

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We’re in favor of reward & migration boosters applied to second-degree users of these protocols.

It’s not, sDAI is the tokenized representation of the makerDAO DSR a concept that was here years before the creation of Spark (pre-4626 version of sDAI is CHAI)

Merit first period focus on Eth L1.

4 Likes
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While it’s understandable that Aave would like to reduce the loss of revenue from optimizers, I feel like allocating $5 million to redirect economic activity towards Aave (within a short period of time, by the way) is a band-aid on a wooden leg, as most users will switch protocols as soon as the yields are no longer sufficiently attractive.

This $5 million could be better invested in building a native optimizer for Aave. This would allow Aave to offer a product that is both competitive and attractive for all users.

Maybe this point of view is too naive, maybe this is already under development or maybe this can’t be technically feasible. In any case, I would like to have your opinion about it

7 Likes
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While not everything has been laid out yet due to lack of maturity, Merit is seen by the ACI as the first step of the Aave DAO redistributing its net profits long term and not as a single isolated event.

there’s an upgrade to the safety module that is currently being worked on that is also a prime candidate to receive protocol profits.

The truth about optimizers is they’re neither innovative nor real optimization.

They just sacrifice all revenue (zero reserveFactor or fee) and subsidy by distributing a shitcoin (a16z funded so expect UNI-like tokenomics) for no economic value add creation, just destruction. it’s not economically sustainable for any actor involved.

Under Merit this Non-sense is revealed, as optimizers factually are now underperforming just using Aave.

We expect this fact to be unclear until the first period Merit airdrop then extremely well understood immediately after.

This was allowed to grow because actors on DAO payroll but actually working against it, like Gauntlet, refused to increase the wETH optimal ratio % and wanted recently to increase wETH RF to make Aave even less competitive, Fortunately, DAO governance allowed protocol increased efficiency, that makes these optimizers benefits at best negligible.

Aave invented Ethlend, which is the design behind the optimizers, so some service providers are fully capable of building an optimizer, but it’s a net negative, so we don’t think this should be a point of focus.

for the Blue protocol, it’s more a MakerDAO & Compound V3 competitor than an Aave one, they participate in ecosystem diversity and while I wouldn’t call that innovation (maybe innovation by abstraction at best) there’s no particular reason for the DAO for any hostility,

Merit migratoors boosters are simply an incentives program. Like a mobile carrier giving you a good deal if you switch to them instead of current one.

regarding rewarded actions;

It all boils down to “Borrow wETH” and “Borrow GHO.” Maybe it would remove proposal complexity to bring the nature of collaterals into the “booster/diluter” layers.

to put it simply, we have a GHO budget & a wETH budget, and two actions towards allocating these budgets. the boosters diluters are defined by collateral nature & added bonus user behaviour.

4 Likes
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agree 100%. it is bad practice to pull all your eggs in 1 basket.

what @MarcZeller is proposing with 100% dilution for using non-aligned protocols is ridiculous. don’t think that will sit well.

penalizing users who choose to apply standard risk mgt is bad.

rather just incentivize ppl to use the protocol.

what @MarcZeller is proposing is a centralization of power.

1 Like
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What are you even saying? this proposal is defending a sustainable business model, period. Kudos @ACI and @MarcZeller

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what i am saying is i am against 100% dilution for using non-aligned protocols.

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If you are happy with Morpho or Spark, then you will be rewarded on their protocols. There is no need to reward predatory systems.

2 Likes
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does this 5m incentive over 90 days actually make a difference or is it a drop in the bucket and waste of money? - what is the expected gain? feels like a bit like a forced initiative due to the new points meta that just got traction. not a fan of profit distributions, personally prefer reinvestment for sustainable growth.

1 Like
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Morpho optimizer brings 0 security diversification as the assets and positions are (for the most part) still within aave, so you actually add a (significant) smart contract risk on top what you already have. Standalone products (like morpho blue, compound or spark) are obviously not part of the program and anyone is free to use them and still receive merit incentives. I mean i dont even know why it would be controversial to not reward a direct competitor but here we are

7 Likes