[ARFC] Treasury Management - Amend Safety Module AAVE Emissions

Governance
1

Title: [ARFC] Treasury Management - Amend Safety Module AAVE Emissions
Author: @MarcZeller - Aave Chan Initiative & @TokenLogic
Date: 2023-09-24

Summary

This publication proposes reducing AAVE (Safety Incentives) distributions to the Safety Module (SM) by 30% and introducing a 90-day SM emission cycle.

Motivation

The SM serves as the Aave Protocol’s self-protection smart contract. The Aave Protocol distributes 1,100 AAVE daily, split evenly across AAVE and B-80AAVE-20wETH deposits.

Future proposals shall discuss the composition and aim to improve the overall capital efficiency of the SM. However, this publication intends to reduce AAVE emissions in the immediate future, saving the DAO valuable AAVE emissions while the broader SM upgrade is being advanced. It is widely accepted within the community that Aave DAO is overpaying for AAVE and B-80BAL-20wETH deposits.

This publication proposes reducing AAVE emissions by ~30%. The revised AAVE emission is to be reduced from 1,100 AAVE/day to 770 AAVE/day. This represents a 330 AAVE/day reduction. The APR for stkAAVE holders is expected to reduce from 6.87% to 4.81%. Similarly, for the B-80BAL-20wETH deposits, yield is expected to fall from 14.35% to 10.05%.

Please note that the 80AAVE/20wETH Balancer v1 pool is to be migrated to Balancer v2 in the future. This will present the community with an opportunity to further revise the AAVE emissions. It may also occur at a time when the DAO has vlAURA and/or veBAL at its disposal.

For context, the Llama Part IV SM Upgrade suggests reducing the AAVE emission to stkAAVE holders by 75%. This is because slashing for stkAAVE is to be reduced, additional assets are to be added to the SM, and the emissions are to be redirected to those newly added assets. Since this proposal was published, stkAAVE has also gained the utility of discounted GHO borrowing rates.

Similarly, Xenophon Labs recommended doubling the slashing percentage from 30% to 60% on the stkAAVE pool and lowering emissions by 80 AAVE/day, from 550 to 470. While this publication does not propose amending the slashing rate, the reduction in AAVE emissions is about double.

Specification

The implementation for this proposal will be prepared by ACI. The table below shows the current and proposed daily AAVE Emissions.

Collateral Current Emissions Proposed Emissions
AAVE 550 385
B-80AAVE-20wETH 550 385

Transition to a 90-day period SM Emission schedule.

A comparison between Xenophon Labs’ proposal and this proposal for stkAAVE holders is shown below:

TVL Slashing Rate Protection AAVE/day AAVE Price Annual Spend Annual Cost per $ of Coverage Deposit Yield
$175.0M 30% 52.5M 550 $60.00 $12.045M $0.23 6.88%
$175.0M 60% 105.0M 470 $60.00 $10.293M $0.10 5.88%
$175.0M 30% 52.5M 385 $60.00 $8.431M $0.16 4.82%

Next Steps

  1. Gather community feedback on this ARFC.
  2. If community consensus is reached, escalate this proposal to the Snapshot ARFC stage.
  3. If the snapshot outcome is YAE, escalate the proposal to AIP stage.

Disclosure

Neither ACI nor TokenLogic are compensated for the creation of this proposal by Aave Protocol.

Copyright

Copyright and related rights waived via CC0.

10 Likes
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Thanks for this proposal @MarcZeller & @TokenLogic. We’re in agreement that the DAO has been overpaying.

This is a great first step to reduce the emissions.

Slashing rate of 60% is quite aggressive so in our opinion 30% is the optimal for now.

5 Likes
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Supporting this proposal. The 60% slashing proposed by Xenophon labs was too aggressive imho.
This is a good start to lower costs of the DAO and start seeking other ways to give staker sustainable yield and cover for Aave markets.

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We support the reduction in SM emissions and look forward to seeing its effects on SM depositors.

Thanks

5

Getting there…this is a good step.

Thanks Marc and ACI.

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Gm ! Despite contributing to TokenLogic, and working on the SM proposal update, I didn’t co authored this post so sharing some thoughts:

Agree that the DAO is overpaying and introducing emissions cycles is smart, however since it’s not necessary for an immediate reduction, it’s probably safer to implement it once the SM strategy goes live so it’s not a blocker to increase emissions back if the SM is ready before the estimated timeline.

About the duration, 3 months seems fine, otherwise it could be increased to 4 months (relative to some strategic assets lock period).

About the amount, can you confirm that the overall budget can be increased back when new assets are added in the SM ?

If yes, agree that reducing the emissions on single assets and current BPT rewards to temporarily reduce the overall budget makes sense.

Not exactly, the proposed reduction for StkAAVE rewards is from 550 to 200 AAVE / day, so 63%.

The SM upgrade is not proposing to reduce the slashing on single assets at the moment, but instead to keep the parameter unchanged for now (30%) and add another asset.

It also proposes to increase the slashing up to 45% for volatile LPs and 60% for stable LPs, which means that 80-AAVE-20wstETH once migrated would be 45% slashing.

I’d support reducing the slashing on StkAAVE over time but might be better to implement this once its representing a much lower proportion of the overall cover.

Assuming the emissions cycles can be added later, and if emissions can be easily changed back when the SM strategy upgrade is ready for implementation, then emissions for StkAAVE could be decreased even more (up to 200 / day), saving 350 AAVE/day.
(2,5% APR if no TVL reduction, 3,6% APR with 70% of the current TVL, which means 16/80M$ of cover would be withdrawn)

The reduction on StkABPT can make sense too as it’s where the SM cover is more expensive because of the TVL spread, but it could also be proposed after the migration, as the DAO voting power should then be ready to use by the committee to vote on the gauge + the slashing would be increased to 45%. This can be a first step of the SM upgrade to test the strategy (before adding GHO pools once the peg is improved).

However, if the cycle periods are implemented now, or if the budget can’t be increased back with new assets, it’s best to update the reduction to 100 AAVE / day because the rewards spending estimated for max TVL (including GHO pools) on the new strategy is ~ 1000 AAVE/day atm, so it would not be a blocker in case the SM upgrade can be live earlier than expected.

2 Likes
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Thanks @MarcZeller

While I agree with reducing emissions, I wonder how the 30% reduction was calculated? Are there any projections on this move may affect the TVL in the safety module?

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This topic was automatically closed 30 days after the last reply. New replies are no longer allowed.

9

Hello,

Due to a misconfiguration of this proposal payload due to a wrong migration from Aave Gov V2 to Aave Gov V2.5 done by the ACI, this AIP that was voted Aave - AmendSafetyModuleAAVEEmissions will fail execution.

After careful review by @bgdlabs there is zero risk for the aave protocol and users,just an unfortunate waste of time & transaction fees.

The issue was identified, and a patched AIP will be created and submitted for a vote shortly.

3 Likes
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this proposal has been re-run via AIP-385

1 Like