Initial discussion: AAVE reserve emission for safety and ecosystem incentives

This thread is to bootstrap the discussion about the initial distribution of the AAVE reserve for safety and ecosystem growth. As readers might already know, 3M AAVE will be allocated in the reserve, and these 3M will need to be properly distributed between the Safety Module (to safeguard the protocol against shortfall) and the protocol liquidity providers to incentivize growth.

The team proposal covers the first year of AAVE emission, and is defined as follows:

  1. 685 AAVE/day allocated for the Safety Incentives (aka staking rewards) - 250K AAVE allocated for the first year
  2. 685 AAVE/day allocated for the Ecosystem Incentives (“Liquidity mining”) 250K AAVE allocated for the first year
  3. 2.5K AAVE allocated as further incentive to move the AAVE accrued through ecosystem incentives in the safety module, instead of claiming them to the wallet. This will result in a 1% bonus for every user that automatically locks their AAVE accrued within the ecosystem incentives in the Safety Module.

this results on 16.6% of the 3M available in the reserve (0.5025 Million) allocated in the first year

The rationale of this proposal:

  1. Promote safety through the concept of safety mining. Users contributing to the SM cover the extremely important role of long term sustainability for the protocol, protecting against shortfall events. Therefore an extremely relevant aspect that needs to be properly incentivized
  2. Leverage ecosystem incentives to redistribute governance power and incentivize organic growth. The goal is to attract users that bring real volume and usage.
  3. Reduce the “opportunistic mining” of the ecosystem incentives, but actually stimulate the users involvment in safety and governance.

This discussion is a starting point for the upcoming AIP and governance vote, and it’s based on in-depth research of the dynamics of the yield farming and staking models. The goal is to have the community decide on this critical aspect of the AAVE emission scheme.

Related documents:

Aavenomics proposal
https://docs.aave.com/aavenomics
Aavenomics flashpaper

UPDATE 1

The community seems to favor a quarterly emission rather than a first year emission. The reevaluation of the emission each quarter allows to adapt to the fast pace of defi incentives.

The community seems to agree with an emission of 685 AAVE/day for the Ecosystem Incentives (for protocol growth)

The community seems in favor of raising the AAVE emission for the staking rewards (aka Safety Incentives). Considering that 685 AAVE/day equal to a yearly emission 250K AAVE, which is essentially slightly less than 2% APR with the Safety Module completely full ( the whole AAVE supply locked in it)
One idea could be to double this amount for the first 4 months, to incentivize early migration, staking and also locking of the initial ecosystem incentives. This would equal to an emission of 1370 AAVE/day, equivalent to a 4% APR with the stake full.

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A few lessons learned from Compound’s COMP distribution:

  • Rewarding borrowers results in fake/wash volume and crowds out real users
  • Having the rewards be immediately unlocked attracts short term farmers who are not aligned with project’s long term vision

I personally think rewards should only be for suppliers, and they should be subject to some sort of vesting.

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Some sort of escrow period could work well with both staking incentives and liquidity mining to ensure it isn’t just speculators coming in to earn some AAVE and dump it.

An escrow can align the incentives with more long-term oriented users while also putting much less downside pressure on AAVE’s price.

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If the protocol attracts a lot of liquidity, borrowers will benefit from low rates which reduces the need to incentivize borrowing per se. Liquidity can be leveraged in different ways by a diverse group of actors from retail borrowers to exchanges, institutions. I believe we should incentivize demand for borrowing by providing the best rates and user experience in the process. Another positive for borrowers and lenders alike is security which is provided by SM.

Thus, it makes sense to reward depositors, with rewards locked up for at least a month.

Regarding the stakers/insurers, the 2% inflation of the entire Aave supply in circulation is reasonable because they will benefit from Aave fees, Balancer distribution and Balancer fees alongside Aave rewards. I think the goal should be that the cumulative rewards for insurers reaches about 5% per year given the early stages of the project.

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Adding to my previous comment, I think it makes sense to reward stakers with more AAVE since they are bearing a much larger tail risk. They are effectively acting as a backstop in the case of a protocol deficit. A higher incentive relative to liquidity miners is warranted IMO.

Keep the same 500k annual token issuance, but skew the distribution a little more in favour of stakers.

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I agree with this. A distribution of 870 Aave/day for insurers vs 500 Aave/day for depositors could work too. It also matters what is the percentage from the origination fees that depositors and insurers respectively take .

:fire: _:fire: Thoughts/feedback on the above proposal:

First year AAVE emissions:

1 & 2: Setting a per day allocation of AAVE rewards makes sense – However setting 12 months for the AAVE/day rate might be a little over committed, perhaps setting this rate for quarters at a time makes more sense?

Just cautious of the effect the AAVE token price has on these allocations.

3: This system makes a lot of sense in terms of encouraging Ecosystem rewards to flow into the Safety Module – I wonder if these numbers could start higher (2%-5%?) then drop over time (to >1% - 1%) as the Safety Module gets more and more established?

16.6% of the total AAVE reserve allocated in the first year makes sense & is a reasonable allocation.

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I agree with James, it might be more flexible to go on a quaterly allocation.
Curious to know what others think about it ?

  • It gives more flexibility to adapt in ever changing environment, and its closer to the reality as even with a 1 year commit, governance would still have power to change allocation during the year. So quaterly seems more reasonnable.

3. If quaterly schedule is accepted, then it makes more sense to start with a higher number for the “Ecosystem reward to Safety Module” incentive, at least for the first 2 quarter to bootstrap the habits of depositing mined AAVE directly in the SM.

Higher reward for stakers :
It’s about maintaining the balance, the value proposition of the stake is already an incentive for LPs as their deposit would now be covered by design, however i’m not sure most LPs would recognise it as such in the beggining and having good bootstrapping liquidity for them is also important

Taker / Maker Split :
I completely agree, this is bad practice to encourage high leverage. However i think its still important to cover their cost in the bootstrapping phase so i would support a 90/10 split between depositors and borrowers

Vesting of reward : Interesting thought, but imo those who come to dump, will dump no matter the locking period. I think its more interesting to design incentives within the ecosystem to make sure its more attractive to reuse AAVE rather than selling it.
So, as a LP, I would mine AAVE, then be incentivized to deposit it in the SM and within the SM I would mine more AAVE with my AAVE (+ potentially Aave fees, BAL, Balancer pool trading fees) and the SM would have a cool down period to withdraw.

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I agree with @monet-supply that we should focus on supply side for providing markets and to avoid so called wash borrowing. Similarly as @ashwathbk mentioned as well, we should avoid the scenario where “fast food” farmers are farming for short-term gains by selling their crops for cashflow.

Governance tokens are not cashflow and incentives should be aligned to the direction that liquidity providers are incentivized to stake whatever they are earning back to the network to provide security. This actually provides also additional yield for the liquidity providers and they become network security participants. Participants who are participating in securing the network might have higher risk awareness and value protocol health more than liquidity providers that are looking for short term gains.

There are no shortage of liquidity providers in DeFi and dedication to provide long-term liquidity should be rewarded, without limiting composability. Rewarding long-term LPs would democratise also earnings since gas costs eats the yields of smaller LPs and smaller LPs might be less keen on optimizing their yields in DeFi, rather they want to park their funds to a safe harbour that yields better than their fiat equivalents.

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Hey Stani, is there a way in which the protocol can cover the gas costs incurred by the users in a sustainable way, at least in the next year? The L2 solutions are still somewhat early and do not posses a smooth UX yet. One way to democratize lending and borrowing further is to take out this nuisance/obstacle for users that want to deal with smaller amounts or just test the platform. Perhaps the gas cost (immediately realized expense) could be covered by increasing the origination fees (potentially to be recovered through whatever gains borrowers make on the side).

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Hasn’t the team at Synthetix put down the blueprint for avoiding cashflow driven market dumping? SNX rewards are locked for a year if Im not mistaken … seems reasonable.

From what I gather there is a mix of rewards … AAVE / ETH / Whatever … going to stakers. Lock up AAVE rewards to ensure long term commitment and let the rest be immediately accessible?

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@ecent cent I’m personally more leaning towards a time-weight based system rewarding more the long time stakers than a pure lock-up, my DeFi brain don’t like very much the idea of money being “locked” outside of small periods (days, a week) to act as a buffer.

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LOVE that! Nexo does something similar with their “dividends” although its unclear what their dividend schedule is or how they actually calculate / report profits but anyways … longer you hold Nexo with them, larger your share of the profit is. Natural incentive with the asset remaining liquid.

Your DeFi brain is a good brain.

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Hi Jordan, I have to disagree with you there. You cannot design a system with time-limited inflationary rewards for AAVE and expect the value of the token to remain stable once the reward period ends, people will logically cash out at that point and look for the next farm. The rewards only from staking AAVE cannot by definition be as high as when the rewards period is active.

It is in AAVE stakers’ interests to try and keep the token valuation as high as possible and incentivising short term farming schemes is not the way to achieve this.

I think SNX is the example to follow here; rewards from staking SNX are vested for a year, well after the reward periods end and the value of their token has continued to increase over time.

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Hello guys
685 AAVE/day allocated Sounds like a good amount as Incentives. Regarding the rewards i would think a lock up time (days/weeks/months) after which they can withdraw or deposit back with a prefixed reward lock up time (days/weeks/months the greater gets more reward).

This is a very good set of thoughts. I think we can agree that the emission can be defined for the first quarter and re evaluated after each quarter - the $YFI finite emission scheme with review by the governance is a good inspiration in this sense. I’m updating the initial post with this information.

@depressedape that is a very good point that is worth createing another thread. Gas consumption is only going to rise in the upcoming months. The argument is a bit complex though and out of the context of this topic, so please feel free to open another thread to bootstrap the discussion on gas fees subsidy.

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I think i was misunderstood because I agree with your point @Demosthenes :smiley:

My point was that instead of purely locking the token there might be more elegant ways to do it by having a positive feedback loop where :

You are a stablecoin LP and farmed AAVE, you can withdraw it and do what you want with it BUT if you actually keep it in the ecosystem and directly stake it in the SM, then you get a reward for that behaviour + you will start accruing further AAVE (+ fees etc) by staking the farmed AAVE, create interesting dynamics.

I’m not personally a huge fan of locking tokens for the point of locking them.

The SNX case is quite different because people are farming with SNX, and the COMP case is also different because you can’t do much except voting with your COMP.

2 Likes

It might be good to start with a distribution similar to Compound at first but disclose a road map that transitions into a more rational emission incentive. This could overcome the gas-fee friction(or make it worse? haha) with the intent to maximize publicity of $AAVE.

@Demosthenes Actually there is many feature where having “locked value” can be useful and used in a way that further add value to the protocol. It reminds me of very long discussions with AndreYFI, but again its good to have a choice and just design things in a way that the “wanted” choice makes more sense that the “unwanted” one.

Hey everyone,

Just to be sure i got all of this right, i made a quick board about the update of proposal 1, can you confirm ? (Sorry i coulndt find how to add a pdf or a spreadshit)

QUARTER 1 : NB token & % Supply
Staking :
Per day : 1370 -> 0,046%
Per Quarter : 125012,5 -> 4,167%
LP :
Per day : 1370 -> 0,046%
Per Quarter : 125012,5 -> 4,167%
Bonus incentive :
Per day : 13,698 -> 0,0005%
Per quarter : 1250 -> 0,0417%

QUARTER 2, 3 and 4
Staking :
Per day : 685 -> 0,023%
Per Quarter: 62506,25 -> 2,084%
LP :
Per day : 685 -> 0,023%
Per Quarter : 62506,25 -> 2,084%
Bonus :
Per day : 6,849 -> 0,0002%
Per Quarter : 625 -> 0,0208%

Total per Year 1 :
Staking : 312531,25 -> 10,42%
LP : 312531,25 -> 10,42%
Bonus : 3125 -> 0,104%
Total général : 628187,5 -> 20,940%

Then, if this is correct, i think the LP should get more than reward staking, because of the impermanent loss risk. I also think that the bonus should really be more than 0.1% emission in year one, in order to really incite farmers to compound interests by staking claimed rewards, or maybe even a possibility to redirect rewards it to avoid gas fee claim.

The 21% of supply emission for year one seems great, maybe we can push to 30% so 900K AAVE, that could be distributed like this :

  • 10% for rewards staking - 300K AAVE/Year
  • 14% for liquidity providers - 420K AAVE/Year
  • 6% bonus to incite compound interests180K/Year (Locking period needed)
    This way, those who choose staking only without claiming get a good 16%, and those who Lp, 20% + others farming tokens, which will boost liquidity in my opinion.
    Of course this would only be for Year one, and year two would be by divided by 2.5 or 3.

Looking forward to get others opinions on this :)

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