[ARFC] "Merit is Forever" Reward System Program Extension

[MarcZeller]

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Title: [ARFC] “Merit is Forever” Reward System Program Extension
Date: 2024-04-11
Author: Marc Zeller - Aave-Chan Initiative

Summary:

Following the success of Merit’s first two rounds, this ARFC proposes the long-term adoption of the Merit reward system for the DAO and allocating a 5m$/quarter budget for the next 12 months.

Motivation:

Merit was designed to address two main objectives:

1. Counteract the negative impact of Morpho optimizer on Aave DAO revenue by attracting Ethereum back from Morpho. Merit Round 1 resulted in approximately 165k ETH leaving Morpho and growing Aave’s market share. The Morpho product is now imbalanced (limited to a 52k ETH capacity), ensuring it will not offer additional yield on top of Aave, thus achieving its primary goal.

2. Support the GHO stablecoin peg, fostering supply growth and revenue expansion while maintaining a stablecoin base for the safety module:

   • StkGho supply increased by 45%.
   • GHO supply grew by 40%.
   • The GHO borrow rate was increased to 13.8%.
   • GHO peg remained within target rate 97% of the time.
   • GHO protocol revenue grew significantly, reaching approximately 6.5m$/year.

Merit Round 2 involved 1367 eligible users, with Staker & Strakoor being the largest booster (over 100 users), indicating a strong user trust in the Aave protocol and willingness to participate in the Safety module for yield and discounted GHO borrowings.

Building on these positive outcomes from the first two Merit rounds, the ACI proposes extending the funding of Merit for an additional four periods (three merit rounds per period). This proposal would approve Merit’s continuation for the next 12 months.

Operational aspects:

We propose Aave Finance incorporates Merit funding within their Treasury Management AIPs if this proposal is approved by a DAO snapshot vote. Our successful collaboration with Angle Protocol and their Merkl product will continue, with the ACI producing user-friendly applications for Merit beneficiaries and providing relevant data to the DAO.

At present, we do not propose making any changes to boosters or diluters within Merit; however, ad-hoc ARFC snapshot votes can be used by the DAO to modify these aspects of Merit at any time.

Budget considerations:

The Aave DAO currently enjoys an excess annual net profit of 80m$. The ACI considers allocating 20m$/year to Merit a worthwhile investment, as it supports Aave protocol market shares and boosts DAO revenue. The expected returns, particularly with GHO, are anticipated to be noteworthy.

Should the DAO decide to discontinue Merit due to unsatisfactory returns or lower profits stemming from market conditions in the future, an ad-hoc ARFC vote can terminate Merit funding and limit budget exposure.

Learnings from the previous rounds:

1. The wETH “spray & pray” approach has been underwhelming for most users due to the large scale of Ethereum borrowing on Aave (2B$). Despite this, wETH Merit was a resounding success in achieving its goals through the behavior of a subset of “whales” who recognize the value of Merit based on their substantial positions.

To address this, this proposal grants flexibility to Aave Finance and the ACI to allocate a part of the wETH Merit budget towards targeting influential users.

2. The Ethereum-centric nature of the GHO Merit program generated some minor backlash due to high Ethereum network transaction fees. With the introduction of cross-chain GHO, we have an opportunity to deploy a “cross-chain” merit system in collaboration with L2 safety modules and L2 StkGHO.

To achieve this goal, this ARFC grants flexibility to Aave Finance and the ACI to allocate a portion of Merit budget to L2 markets following the deployment of cross-chain GHO.

3. Some “sleepy” liquidity will likely never claim merit airdrops. To increase program efficiency and resource allocation optimization, this proposal greenlights redistributing unclaimed funds to subsequent merit rounds if a user hasn’t claimed during six merit rounds.
   As an example, unclaimed funds from Round 1 can be allocated to boost the Round 7 budget.

Specification:

If this proposal is approved by a snapshot YAE vote, Aave finance will incorporate Merit budget within their monthly Treasury Management AIPs. Funds management will continue to be handled by the Merit Safe wallet, and Angle’s Merkl contracts will still handle distribution.

Disclaimer:

This proposal is made independently by the ACI.

Copyright:

Copyright and related rights waived via CC0

[x2daniel]

Thank you all for your work and the sustainable growth you target

[EzR3aL]

The first round of Merit did definitely have positive effects on the protocol and its inflows/borrowings. Additionally GHO was able to capture more market cap and since has been holding its peg in a great area.
As defilama and TokenLogic | GHO Analytics data are showing, the DAO is profitable and making enough money to start a 12 month Merit campaign, even after paying for every service provider.

I still want to see the relevant treasury manager of the DAO to calculate things to be sure we always have a buffer, but nevertheless I am supportive of Merit and excited to see how Aave is going to capture more market share and rewarding its user.

[A_J]

Very much in favour of this proposal. I do however suggest options of 3 differnt amounts for reqard allocation; $20m, $15m qnd $12m. I belive this approach is more democratic unless reasoning for $20m can be substantiated.

[midapple]

While the results from the initial rounds of Merit appear promising, the (effectively) permanent allocation of such substantial resources warrants a deeper evaluation to ensure alignment with Aave’s long-term objectives. To this end, I suggest the following steps to ensure that we are making the most informed decisions possible on this program:

1. Establishment of a Merit Review Committee: This committee would be tasked with overseeing the implementation and effectiveness of the Merit system. It would provide quarterly reports to the DAO on program performance against predefined metrics, offering transparency and ongoing accountability.
2. Development of Specific KPIs: Before committing to a long-term expenditure, we should define clear, quantifiable KPIs that the Merit system must meet to justify continued funding. These KPIs should focus on key areas such as market share growth, protocol revenue enhancement. The Merit Review Committee could assist in defining these KPIs and in the regular assessment of their achievement. In the current state of merit
3. Phased Funding Approach: Rather than allocating the full budget upfront, I propose a phased funding approach where budget releases are contingent on the successful achievement of the aforementioned KPIs each quarter. This approach would mitigate financial risk while ensuring the program’s goals are being met effectively. I see no reason to commit to the full year of funding right now.
4. Extended Discussion Period: Given the complexity and potential impact of this proposal, an extended discussion period is necessary. This would allow all DAO members adequate time to review the proposal details, contribute to the KPI development, and voice any concerns or suggestions they might have.
5. Ad-Hoc Reviews and Adjustments: While the proposal mentions the possibility of ad-hoc ARFC votes to modify aspects of the Merit system, I recommend formalizing this process. Regularly scheduled review points could be instituted, allowing for adjustments based on performance data and external market conditions.

Ultimately, Merit is probably to stay. That is well and fine, despite very well articulated reasons against it that have never been addressed:

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

I’m two roles: 1) AAVE User 2) AAVE Holder I don’t like this system for either of my two roles, that I participate in. As an AAVE holder, I hope to accumulate value from the protocol revenues, this doesn’t help me do that, it simply re-directs the value (and always has some percentage of corruption in doing so) to whatever protocol politicians decide. As a user, I have to pay attention to weekly incentive changes to see if I can get more incentives somewhere. I don’t want to do this. We’re t…

Let’s actually put the structure around it so that it is run properly. I am not all that opinionated on the form in which this takes, but I am sure the majority of Aave holders would agree that something that will end up being the largest item on Aave’s balance sheet should undergo commensurate diligence.

[0xlide]

@MarcZeller

With the introduction of cross-chain GHO, we have an opportunity to deploy a “cross-chain” merit system in collaboration with L2 safety modules and L2 StkGHO.

Hi @MarcZeller
Is it possible to provide a more detailed explanation about this? (how to select the chain and determine the amount of incentives?)

[Kene_StableLab]

Merit has been a valuable incentive program in the battle to ensure Aave’s continued dominance, therefore we would be in support of extending the Merit program.

@MarcZeller

Learnings from the previous rounds

We are glad to see that we are actively looking to iterate on the Merit Incentive program to optimise for returns.

@MarcZeller

With the introduction of cross-chain GHO, we have an opportunity to deploy a “cross-chain” merit system in collaboration with L2 safety modules and L2 StkGHO.

It is essential for us to take this proposed cross-chain approach to incentivisation. However, we must be diligent in selecting which L2s should receive Merit funds in order to ensure that these incentives attract the most value for Aave.

[Terminal]

Looking forward the L2 implementation. May I suggest supply rewards for the AAVE token?
Congrats for the success of the first rounds.

[ACI]

The current proposal has been escalated to ARFC Snapshot.

Vote will start tomorrow, we encourage everyone to participate.

[sid_areta]

Extending Merit given the success of the first round makes sense generally.

However, we are aligned with the feedback from @midapple. Having a Merit Review Committee, developing specific KPIs, having a phased funding approach, a formalised process for how adjustments can be made, and an extended discussion period for a proposal that asks for $20M from the DAO seems very logical. While we are in favour of Merit and the success it has brought to the DAO, some more checks and balances in a decentralised governance system are absolutely necessary. Simply allocating a one-off budget of $20M without consideration for any other funding options or a phased approach is not recommended for a DAO which requires checks and balances to be fair, neutral, and hear all voices. We also think there needs to be a defined process and structure for the L2s that are chosen for expansion of Merit. All of these are details that, for a $20M program, should be defined up-front.

[Zeebradoom]

“To address this, this proposal grants flexibility to Aave Finance and the ACI to allocate a part of the wETH Merit budget towards targeting influential users.”

What does this look like? What are the parameters to be optimized? How will the “correctness” of decisions be determined?

[ACI]

After Snapshot monitoring, the current ARFC Snapshot has recently ended, reaching both Quorum and YAE as winning option with 550k votes.

Next step will be to include into next monthly Treasury Management AIP the Merit budget. As said in the ARFC Funds management will continue to be handled by the Merit Safe wallet , and Angle’s Merkl contracts will still handle distribution