Can we introduce some incentives/utility for holding AAVE token?

Governance
21

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.

2 Likes
22

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.

1 Like
23

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.

24

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.

2 Likes
25

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.

4 Likes
26

@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.

2 Likes
27

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.

5 Likes
28

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? :thinking:

29

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.

2 Likes
30

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.

31

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:

  1. The value staked/collected via Reserve Factor could be utilized better (or even distributed/shared partially with the stakers)
  2. 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.

5 Likes
32

I agree with your point it’s will be a great way to attract more holders, which means more talents and ideas participate in AVVE will reach new heights

33

I think this needs to be examined. As suggested, perhaps deposit interest rate boost or borrow interest rate reduction for AAVE token holders (in addition to governance abilities, maybe others as well) would provide good incentive.

34

According to the suggestion from China, I have held AAVE tokens for more than 4 years.
Let everyone involved in the AAVE project want to hold more or less AAVE tokens, which can be set as a goal for the development of AAVE tokens. AAVE tokens need to introduce the actual value of the project itself, not just governance, similar to CRV and BNB, so as to make the tokens have sustainable and growing value. Several points can be considered:

  1. For depositors, holding AAVE tokens can increase the deposit interest rate. For borrowers, holding AAVE tokens can reduce the loan interest rate. It can be divided into several steps, similar to that the larger the BNB holding, the lower the transaction fee. Please ask the official personnel for calculation.
  2. Liquidity mining will become a long-term activity, just as it shows that the world bank will provide various gifts to depositors in order to absorb deposits. Whether holding a certain amount of AAVE can improve the income of liquidity mining (refer to CRV).
  3. The income from pledging the security module provided by AAVE is only about 6.5%, but the loss may reach 30%. The security module is a very important link in AAVE trust. It is suggested to increase the income of this piece.
  4. Destroying tokens is a simple, feasible and easy to understand scheme recognized by most people (except official personnel), which BNB has done well. It is suggested that AAVE can continue to destroy tokens. BNB can still keep rising under the background of the vigorous development of decentralized exchanges, indicating that its token incentive scheme is feasible.
  5. Whether AAVE holders can directly share part of the money earned by the project, even if 1% of the project income is used to distribute AAVE holders, is also an encouraging thing and of great significance.
1 Like
35

“Since we decided a few weeks ago to adopt the leaf as money, we have, of course, all become immensely rich. But we have also, run into a small inflation problem on account of the high level of leaf availability, which means that, I gather, the current going rate has something like three forests buying one peanut. So in order to solve this problem and effectively revalue the leaf, we are about to embark on a massive defoliation campaign, and, burn down all the forests.” ― Douglas Adams, [The Ultimate Hitchhiker’s Guide to the Galaxy]

In case it isn’t clear I don’t think burning down the revenue is a good long-term plan

2 Likes
36

Almost everyone here seem to like the CRV tokenomics (i do as well, just to be clear). But to keep the discussion going i want to play the devil’s advocate and emphasize what I think are some weak points on which its potentially possible to improve:

  1. the inability to unlock the tokens for such a long time (4 years) reduces the incentives for participants to vote for the long term health of the protocol. The bribing system incentivizes to vote for short term gains. Imho there should be the ability to exit at any time, with a penalty (that can eventually be burned or redistributed to other stakers). This would ensure that participants can ragequit/exit at any time, which should help aligning incentives for the long term health of the protocol and the governance.

  2. Single sided stacking becomes problematic and can slow down growth and participation when the staked percentage of the total supply becomes too high. The asset becomes too illiquid and volatility increases (one single whale exiting could massively crash the price if the orderbooks are too thin). This could be improved by introducing a locking mechanism where not only the native token but also LP shares can be staked, similar to the current implementation of stkAAVE/stkBPT.

  3. There is currently no way of boosting rewards on networks that are not ethereum. Staking should be available on all the networks where the protocol is available. This would work well in Aave’s case as the community has signaled multiple times the demand to stake on different networks.

3 Likes
37

On point 1, I believe completely the opposite: if you lock the tokens up for a long time, you have a very strong incentive to make sure that they still have value at the end of the lock-up period. If you can rage quit, even with a 10% penalty or have a short-term lockup, you can buy a bunch of tokens, do self-serving governance that harms the protocol and benefits you, and sell out.

So what about something similar to what Maple Finance have implemented? There you can stake MPL/USDC BPT token to take the first-loss piece on loans issued, similar to the safety module. In exchange, you get a combination of a portion of inflation (similar to what AAVE does already), plus a proportion of loan revenue.

The loan revenue piece would give two incentives:
(1) if the safety module gets too small or too big, then the APR would encourage/discourage people to enter in a natural way
(2) it incentivizes valuing both the growth of the protocol as well as safety of the protocol and forces you to trade off the two directly

I suppose because of gas fees, it would be natural to have AAVE convert all the loan revenue share that could go to the safety module into a single currency periodically at the protocol level so participants don’t get too many different tokens to claim.

1 Like
38

Yearn proposal on new tokenomics:

I think we can do something similar

1 Like
39

Just saw this as well. YFI also doing buyback. Please take a look guys. I welcome your thoughts. YFI is a known innovator and one of the most respectable brand in the DEFI space.

The discussion on this topic has been fantastic, I will spend the weekend going over the comments everyone summitted. Thank you AAVE tribe!

@curmudgeon @Emilio @JeremyKeating @DTBAEE @pakim249 @kartojal @eboado @taodai @neptune @JackCode

2 Likes
40

Well, I still think this has nothing to do with sustainable, long-term growth but what the hell, right? It’s not like I could do anything else on a Saturday night as Covid restrictions strike again…

Step 1 - seems to be the buyback. Nothing really innovative about that. Companies have been doing this for years, as a way of rewarding shareholders and increasing their own and their shareholders tax advantages. Only in this case, the bought back YFI is circled back to xYFI stakers. I guess it’s a little bit better, than - for example - the liquidity incentives in AAVE, as, like in a recent analysis for Compound, these tokens tend to get dumped pretty quickly, because people might not be too invested in AAVE (or COMP). But if you’re already a YFI holder and staker, there might be more holding going on.
Either way, I do not think this would increase the incentive to hold AAVE, because AAVE already has this mechanism - the Safety Module - albeit with risk involved.

Step 2 and Step 3 together - a derivative of CRV tokenomics and already mentioned. I’m not a big fan, but there seems to be some support for this. I’m hesitant to build an extra barrier when it comes to decision making, as it’s already pretty hard to get participation going.

Step 4 - Do I understand that right as being a payment for services? The tweet says:

6/ Step 4: Useful work
veYFI holders earn additional rewards by doing useful work. This is is pending the final form of the vaults v3 design. Things that it could be (but not limited to) includes configuring vault parameters, setting fees, providing insurance.

So designing strategies, I guess is what this means. And providing insurance? So this speaks to maybe more protocol layer services? I don’t quite understand what they mean by this.
The proposal itself binds this to veYFI holders. So this is additionally gated. Not sure what this could evolve into.

tl;dr: All in all, it’s basically a treasury redistribution and Curve tokenomics. Nothing out of the ordinary and definitely no big innovation (in my humble opinion).

Let’s also recognize who pays for it: the existing token holders. They own the treasury, which is being redistributed to mostly long term holders (current and future).

Also, if we’re talking about stuff to adopt from Yearn, how about we’re opening a Hentai category in this forum?
(Disclaimer: Yes, that is a thing in Yearns Discord. No, this is a joke, I don’t really want it. If you’re unfamiliar with Hentai - DO NOT google it)

1 Like