Aave protocol is a blue-chip DeFi project and a huge brand in the new decentralized finance world. No doubt, the protocol will continue to become more valuable over time. However, has anyone noticed that AAVE token itself had not performed quite so well (along with the rest of DeFi governance tokens like COMP, MKR, UNI). It has underperformed against ETH since Feb 2021 and since May 2021 token price had been stuck in a downtrend.
I think a key reason is that AAVE tokens failed to capture the massive amounts of value of the protocol. Can we design some incentives/utility for the AAVE tokens besides governance? There needs to an incentive to hold the tokens.
For example, a fees-reduction program for the protocol. If you hold X number of AAVE, you will pay less gas fees per transaction or pay less interest to borrow. Another would be if you hold X number of AAVE, you get additional 0.5% interest in deposits, paid out in StkAave or Aave, similar to a liquidity mining program. Lastly, a token burning mechanism that burn the revenue generated from the protocol, effectively reducing the token supplies and make the remaining tokens more valuable over time.
The AAVE token keeps losing value is not just a financial issue, it is a governance issue. Token governance is work, in an ideal world, compensated for by the appreciation of governance token over time. If the token keeps losing value, there is going to be less interest in governance and therefore the protocol cannot keep improving and innovating.
DeFi is all about financial innovation. Let’s do what we do best and keep innovating. Please consider what I said above and let’s get a discussion going. Open for all sorts of suggestions.
Thank you Jack. It’s not just AAVE, all DeFi and governance tokens are facing the same problem. But we can be the first governance token that innovates us out of this problem. I am sure everyone noticed the discussion on this forum have gone way down since Feb-May 2021.
My take is that EIP1559 is such a marvel of financial engineering and game changer for ETH, most governance tokens with their regular tokenomics cannot even catch up. I think governance tokens MUST ADAPT, need some token burning mechanism in order to compete against ETH in valuation.
BNB is a good example, holding relatively well against ETH due to its token burning mechanism. Another example is CRV, which broke out of month-long downtrend and had recently gone deflationary in tokenomics.
I think burning right know is a good solution, I made some math and:
In September aave generated 6.1m in revenue let’s assume we use 25% of revenue($1528250) to buy tokens and burn, at an average price of 200$ we would burn 7641.25 aave every month, it’s 91695 (about 5.73% of total supply) every year!
We can even reduce the burn rate to 10% we would still have about 2.29% burn every year.
I remember you there is Aave on Avalanche too, but we don’t have data yet.
Tell me if my math is wrong or not
Let me try to unpack this and give my two cents about this, because apparently “DEVS, DO SOMETHING!!!11one” gets to be the new trend.
AAVE hasn’t performed very well, that is right. But apparently, so have all the DeFi tokens, as you say yourself. This could mean two things: (1) They’re undervalued, because people don’t see value in them, or (2) they were overvalued because of hype coming out of the DeFi summer 2020 and this overvaluation was too much, which triggered a reaction that pushed the value of them even lower than everything else during this years big market correction.
This doesn’t make much sense. You say yourself that AAVE protocol has massive value. In that case, you wouldn’t need to design an incentive/utility to begin with.
There is the Security Module. You can stake your tokens there and gain rewards (up to 15.1% at the moment). Any other utility that you’re calling for can not take that AAVE away from the Safety Module - it secures the protocol.
A fee reduction is counterproductive to the strategy that is deployed right now. Which is filling the reserve with different tokens/coins than AAVE through incentivising borrowing through actually emitting AAVE. I.e. diversification of the treasury.
Counter thesis: Through AAVE having a low price you actually incentivising people to make the protocol better, which they can more easily do, as the hurdle to gain governance rights is lower. Also, the motivation to participate is higher, because the motivation to bring the price back up is higher.
EIP-1559 is a marvel of financial engineering because, through growth in block space demand, it basically doesn’t take anything away from anybody. This could’ve gone a different way, potentially angering the miners for as little time they’ve left to mine.
But all the other burn mechanisms (Binance or the one suggested by @taodai) do take something away. In this it would take away 25%/10% earnings from the treasury.
All in all, I’m not a big fan of trying to artificially inflate the value of a token or a coin. Many projects in this space trying to do just that. This has nothing to do with sustainable growth.
All of this is also assuming that the markets would react in a logical way to any changes. If you look at Ethereum, for example, the objective price of an Ether would’ve actually shrunk, as there is still more Ether emitted with most blocks. But it didn’t, it rallied by 30%. So markets don’t react logically, don’t take everything into account and, especially in the crypto space, don’t really look at a project objectively - because a lot of it is speculation.
Your math is wrong. 91,695 AAVE is 0.6842711804858799% of circulating supply or 0.57309375% of total supply.
then what do you think is the solution? I still think we need to create incetives to hold the token, ETH, LUNA and BNB have pumped a lot by burning tokens. 10% away from treasury is not a huge impact.
If we do nothing the token will likely go down only vs ETH and BTC pairs while waiting for devs to ship some new products.
I think two of them are massively, astronomically overvalued. And that is what I think of most of the DeFi space. Other, on the other hand, are undervalued. That is just what happens in a normal market. That said, the bigger the crypto space grows, you will have less and less speculation - i.e. tokens and coins will have fairer and fairer valuations.
I know you can not, but if you look at protocols like you look at companies - most of them would be considered start ups. Most of them would be start ups of <5 years. And in a stock environment, 90% wouldn’t even have half the valuation they have now. And that is with the VC funding apparatus already tending to be very speculative.
That being said, that doesn’t mean that AAVE won’t have a bright future. But it might not be 10% up candles every day anymore.
It is a huge impact on the future and longevity of the protocol and can actually bite it in the ass later.
I know how frustrating it is to be negative with your portfolio. But if you’re not planning on holding for a long time, you should probably sell then.
i think a simple mechanism of value accrual wont do much for the holders. It must also be noted that although indirectly, the aave protocol already accrued and accrues every second value for the token holders.
All the assets held by the protocol treasury 0x464c...e18c - Zapper.fi, polygon 0x7734...39e9 - Zapper.fi and V1 Aave: Token Burner Address | 0xe3d9988f676457123c5fd01297605efdd0cba1ae (avalanche is missing; i cant find the address rn but it holds around 1.5M) are under direct control of the AAVE holders, and generate interest as we speak. These assets are already Protocol Controlled Value and the governance should start thinking about how to enhance this treasury to yield more.
MKR has token burning, SUSHI has payouts through xSUSHI, neither of them is doing well - it’s part of a more bearish trend against defi. With that said, what we can do is create utility for the token. If we look for a defi token that is performing better against all other defi tokens, then we need to look for CRV. CRV has many utilities:
Users can lock it up to have boosted yields up to 2.5x
Protocols and other projects can lock it up to direct the CRV liquidity mining for their own benefits.
This factually creates a competition between users and other defi teams to acquire and lock more CRV, which compensates the huge emission CRV has (the so called flywheel). Currently 80%+ of the circulating CRV supply is locked.
If we look at the Aave protocol, we can see that the same utilities can be created:
There is huge interest from networks (other L1s and rollups) to have the Aave protocol deployed.
There is huge interest from other projects to be listed on Aave
There is huge interest from users to get boosted yields and/or better borrow rates
We need to look in that direction. V3 already has some features that would facilitate implementing some of these utilities (isolation mode and listing admins for permissionless asset listing backed by AAVE locked for X years for example). This has to be the path we need to follow.
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.
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
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
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