I think Aave’s tokenomics is not perfect, there are obvious problems and we can’t deny it.
If we don’t like burning tokens in this early stage, I understand it, then we need to create utility for the token as Emilio said.
CRV has performed very well, but even MKR is doing way better than AAVE, it is still holding may low and forming a bottom because they have token burning, while Im not bullish on sushi because redistributing revenue with xsushi does not stop selling pressure and there is a lot of liquidity mining.
Price pumping is the best marketing tool, we have seen it with a lot of projects, but i’m here for the long run too, Ive filled my bags in may and during this last dump, I just don’t want to see it go down only in a bull market while fundamentals are good
To be honest, my belief is that burning money is a waste and a relic of the past, and only works in very specific scenarios (for example, it works very well with ETH).
For the vast majority of the token and protocol designs, it’s much better to retain protocol generated value and reinvest it to compound growth faster. This ensures more value accrual in the long term for the ecosystem and increased runaway for the project.
The Aave governance holds now around 40M of various assets. Lets say we dump them all to stablecoins, buy back AAVE and burn them. WHat have we achieved? A slight reduction in the total supply, no meaningful impact on the price, and we burned the runaway of the protocol for the years to come. Let’s say the treasury get reinvested, so that instead of yielding the circa 4% it yields right now, it would yield 10%. Now the treasury generate 4M a year that can be used to push the protocol forward, while the treasury remains intact (and keeps growing through reserve factor). See the difference? We need to think long term. Only that way we win.
I disagree, all tokens that are deflationary and useful have performed better than AAVE, see ETH, BNB, LUNA, MAKER and it’s a direct way for holders to receive value generated from the protocol.
I’ve never said dumping the treasury to buy back back and burn AAVE, it’s a bad idea and is not healthy, I suggested to do it using a bit of the new revenue.
But the problem here is that nobody sees value in governance tokens with no utility and inflationary supply,
people will just continue to dump for ETH, why would anybody hold governance tokens if there is ETH?
One solution is burning and the other is doing something like Curve did, we can boost yields with Staked AAVE.
Ex. 40000$ in staked aave → your yields are increased let’s say 10% of normal rate on 40000$ usdc.
There are a lot of defi projects that use AAVE and if they want more APY they will have to buy AAVE.
what is the timeframe we are measuring here? because if you shift the timeframe to 6 months or one year ago, then AAVE did better than most of these. My point being that 6 months or one year are way of a too short time frame to judge the effect of burning on the token price and on the project long term sustainability.
On why hold gov tokens instead of ETH - well ETH is an amazing asset, but it doesnt give control over the Aave protocol. That’s what the AAVE token is for.
With that said, i 100% agree on the last part of the comment. We need to steer the demand from other actors in the defi space to be part of the Aave protocol on the AAVE token. That would bring way more value.
Hello,
I’m not a big fan of asset valuation discussions in the governance forum outside of Risk and AIP category but as this thread gain traction I’ll slide in with a few things
-
Don’t compare oranges with apples.
AAVE is not a layer 1 native asset, It can’t be compared to ETH, BNB or others assets for reasons already well explained in this thread -
"The Buy-Back and Burn" model is terrible for long term growth
This model was already implemented, it was the tokenomics of LEND the ancestor of AAVE, during the previous cycle downtrend this model did little to none to prevent market dynamic. Also it’s a terrible model for a protocol that wants to achieve self-sustainability as @Emilio said earlier here. putting money into the fire pit is less efficient to grow and build things then reinvesting the money and spending the interest generated by the capital
- VeCRV model
makes sense in the context of an LM program, instead of doing a quarterly AIP for LM budget, Locked-up AAVE gains governance weighted power to influence the distribution of Liquidity Mining and bonding programs. This model is interesting and worth exploring.
But there are challenges with this model as current implementation in Curve doesn’t mitigate “parasitic” layers on top of it that can influence and create cartels controlling LM and bonding programs (Curve, Lobis, [REDACTED], Yearn)
- Aave V3 is embracing the multiverse
This fact can offer opportunities to generate new use cases for the Native Asset of Aave, What if the governance deploys an Avalanche subnet, a rollup, or a parachain using aUSDC as the native asset for gas? Validators would need to stake AAVE to process transactions and earn fees from the network transactions? This cycle seems to give a premium to L1 assets, it doesn’t seem impossible to consider an “AAVE chain” linked to all networks with portals. This chain would make sense to have cheap and fast usage of Aave and if the main DeFi protocols deploy also there and allow use-cases it might gain traction.
What if Bridges and protocols using the portals would be required to own amounts of StkAAVE to have fees reduction and/or credit lines?
Anyway, let’s focus on long-term building and added-value creation instead of daily charts and short-term plans.
All this is a marathon.
“Investment is a game of wealth transfer from the inpatients’ actors to the ones with patience”
Your points are very well thought of, and I have to agree with all of them. Except for maybe this one. The safety module staking is a service token holders provide/contribute to the protocol, and they do so with considerable amount of risks (of being slashed). So the reward is actually to compensate for the risks of providing the service, not risk-free incentives to hold the tokens.
We don’t necessarily have to consider token burning, but I do want to consider adding more utility for the token, perhaps something like preferred deposit rate/reduced interest rate when holding X amount of tokens. Anything that give AAVE token holders incentives to hold onto the token. I mentioned above, this is not an AAVE issue, this is an issue for all DeFi governance tokens, which have been on a downtrend since May 2021, but AAVE can be the first protocol that actually engineer a solution out of this.
You obviously have great knowledge of this space, any reasonable solution you can think of that can be beneficial for AAVE protocol and AAVE token, that can be put into an AIP? Any ideas are welcomed. Thanks
interesting proposals, the burning is something interesting for the community.
You are for the wrong reason here. You want this token just to “pamp like others”. But this is not what it is about at Aave and the Aave token. The real value should come from the protocol and its user not from some ponzinomics like, fake pumping mechanism. So yeah i agree with @neptune
Not at all. Burning is such an oldschool thing that is so irrelevant for the aave token. The previous token, Lend had it and it was such a waste of a feature. It didn’t have any impact at all on the price.
Seek for longterm growth, not shortterm.
Think about Aave v3 and the portal. What if bridges like Hop would build on top of this portal to bridge the assets, keep the assets as aToken, then deposit them into Aave generting yield and accruing fees and if they lock up a specific amount of aave token, their yield is even higher. Would be a benefit for everyone because the bridges would generate yield every second and security would be there, but also they could make those token, that are listed in aave for free to bridge. Endless possibilites. But burning token… man doesn’t make sense at all, if Aave is not going to be an L1/2 solution in the future.
There is no reward without risk. That is true for TradFi, CeFi and DeFi. It might actually be true for live in general - but that not important.
Any liquidity mining incentive, any DeFi yield comes with a risk. Protocols that tell you that there is no risk in their staking, in their liquidity pool, in their locking mechanism is either deceiving you or blatantly ignorant.
- Liquidity Mining in Pools usually comes with the risk of impermanent loss, which can be significant.
- “Staking” mechanisms à la PancakeSwap come with the risk of heavy dilution.
- Locking mechanisms come with the risk of the inability to sell in case of a market downturn.
Of course staking AAVE comes with a risk. Looking at the history of the protocol, that risk is relatively small. And the rewards are more than fair.
Much like rewards don’t come without risk, value doesn’t come from nothing. Who is going to pay for these reduced/increased rates? Someone has to.
In case of a boosted yield, it’s either the borrowers (which could be a problem, as the rates need to stay competitive), or the generated revenue (like mentioned, this eats into the tactic of diversifying the treasury) or it comes from the treasury (a finite resource).
Well, as I think I made clear, I don’t see an immediate need for it and would rather the token naturally grows in value through a strengthened ecosystem. But when it comes to ideas and implementations:
This is something that I’m keen on. Pushing other protocols who want their asset to be listed into locking AAVE into the protocol (if I understand correctly, this is basically a mini, isolated safety module just for one token, hopefully with a slashing mechanism?) is a good idea.
Calling it ponzinomics, so ETH and MKR have ponzinomics too?
There are better solutions like giving utility to the token but calling burning ponzinomics is too much and it will not pump in short term just for burning, it takes way more time.
I’m in line with previous opinions that think that from a high-level perspective, buyback and burn sounds like a waste of resources.
Obviously, there are some game-theoretical aspects that in some cases help with price appreciation of the asset, but in my opinion, the Aave community should not be designing systems based on I what I think it is pretty weak dynamics.
Any healthy protocol treasury should be composed of multiple assets, of course with a main and big role of the native governance asset, in this case AAVE. So selling those assets to try to inflate AAVE price, first I think it goes against the ethos of AAVE as a governance token, second, leaves the protocol with no room to manoeuvre operationally (lot of cases, services’ provider could be forced to sell AAVE governance power), and third, probably is it useless.
I’m in favour of changes on the tokenomics which “organically” makes sense: Aave at the moment is a liquidity protocol, so the extra utilities of the token should improve the model of the ecosystem in one way or another, same as the Safety Module at the moment, de-risking the system.
Also, let’s put things in perspective. The Aave ecosystem is around 2 years old, and it has:
- A really active community, as we can see (I think everybody will agree) almost everywhere in the blockchain space.
- Quite healthy governance system, as we can see for example on the Snapshot space so linked to this forum.
- Multiple teams working or trying to on the all different parts of the protocol.
- A liquidity protocol of $+25b size, a Safety Module of close to $600m size.
- Multiple developments month-by-month, by hundreds of integrators providing access to the protocol and on the “core” aspects too.
So yes, we can/will improve things, but we are not doing bad.
@neptune yes you got that correctly - that would be the idea.
Another utility from which i’m getting better and better vibes the more i think about it is a booster a la CRV - the more you stake into the safety module, the higher boost you achieve on the LM rewards. This makes a lot of sense for people that is invested in AAVE and wants to achieve better yields or have higher subsidy on borrow rates.
I’m in favor of locking AAVE a la veCRV. It can provide more utility to the AAVE token and now is the best moment to think about the possible use cases to implement it at Aave V3. The AAVE could be locked directly at the Safety Module, but with larger lock duration.
Some of the utilities mentioned:
- Listing new assets in a faster way than governance (but still governance could keep listing assets)
- Improve risk parameters like LTV of an asset (but with a maximum in mind to keep the protocol safe)
- Boost liquidity incentives
- Whitelist asset to be able to use at portals/bridge, lower bridge fees.
- Credit lines where the credit score could be boost by locking AAVE
- Apply a Aave deployment to be covered by the Safety Module
- Collect fees from the different Aave pools treasuries overt time.
In this way, apart for listing new assets, the veCRV system could boost the incentives of depositing AAVE into Safety Module and improving the security of the system. The incentives to lock AAVE could also be provided by using the protocol treasury fees, for example a part of the rewards could be USDC or any stablecoins (like Curve does with 3pool fees), instead of AAVE to prevent adding more sell pressure to the token.
I’m wondering if things are going to change in the bear market. People probably will start withdrawing AAVE from SM and exchanging for stablecoins so as not to melt the capital they managed to get during the bull market, and I have concerns about how much AAVE will be left in SM then. In my opinion, the amount of funds may decrease significantly during long bear market. What do you think? 
I think it’s best if the focus of the governance token was not on generating the highest market cap possible in the short term. Burning tokens can be a consideration as a way to generate value for token holders with excess treasury supply, but I doubt the treasury supply will be considered excessive for a very long time. That capital should be kept and used as needed for the crazy road that defi has ahead of it.
Ultimately, I believe that the value of the AAVE token will make itself clear in time and there’s no need for extra incentives. Adding incentives will imo twist the AAVE token into something it shouldn’t be. The holders of AAVE tokens decide the future of the protocol that many other protocols use as a base. If that is overvalued, so be it. But I don’t think it is. I’m happy to hold AAVE tokens because it truly does decide the outcome of the protocol on chain, unlike many other protocols with pretend governance.
The goal of the Aave Tokenomics, through its incentives and policies, is to create a Shelling Point where the protocol’s growth, sustainability and safety take priority over individual stakeholder objectives.
I think it will be best for AAVE to reduce some gas fees so the users can get more benefits from it and many new users will join it too.
Thank you everyone for contributing to the discussion on the topic here. As usual I try to leave the space as much to the rest of the community and comment when I feel there is necessary need from my personal capacity as a community member.
There is always a clear sentiment on upside market to have inflation and downside market to have deflation. I believe there is quite a lot of tries on the burn/deflation models on protocol level (not referring to network level) where removing value is less impactful than distributing value across the community. Furthermore, web3 protocols are already adopting models where they capture value into their protocol governance to make it in use across web3 as protocol controlled value, resulting into increasing income for the DAO and governance power across DeFi protocols.
In terms of tokeneconomics, the current feedback loop is to backstop the protocol on the risk-based decisions that the community participates in return for yield from the Safety Module. The model by itself is interesting but could have its 2.0 improvement where:
- The value staked/collected via Reserve Factor could be utilized better (or even distributed/shared partially with the stakers)
- The Safety Module should be increased to cover new opportunities that the Aave Protocol V3 provides which is a) isolated asset listing and b) permissioned aToken minting
Regarding a) we could imagine potential utility of using AAVE to empower permissionless asset minting (up to the point of staked value and debt cap set by the governance) meaning that new projects would have more liquid opportunity to get their asset listed into Aave Protocol against the staked Aave towards that particular asset. This would naturally provide more yield to the stakers, as with higher Reserve Factor, which goes directly to the stakers.
Regarding b) there are over 20 entities that are facilitating themselves as bridges who could use the permissioned aToken minting and to cover that risk - staking could be expanded in the similar model as in a).
These above examples would be interesting expansions of the Safety Module / backstopping narrative and feels the most organic updates for the tokeneconomics.
Then another interesting topic for utility is to use AAVE to expand the idea of being able to manage in a governance minimized fashion of which pools should yield more of the liquidity mining as pointed out by @Emilio. This also solved the issue of how liquidity mining should be distributed on a quarterly basis and leaves actually more room for the community to decide on it as on-going basis.
Last point is that governance is expensive in L1 and would be interesting if the tokeneconomics could empower active governance. We could brainstorm on this particular feedback loop as well.