Initial discussion: AAVE reserve emission for safety and ecosystem incentives

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.

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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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I personally like this proposal. If the move is to a quarterly reviewed emission, it makes sense to bootstrap with a higher emission and adjust afterwards.

Maybe 6% is a bit high as bonus to compound the incentive. II think 3-4% would do the trick already. 3% in one shot is super high returns

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I’m preparing a google sheet that can be accessible by everybody where it will be possible to try different emission schemes. Will share once ready

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Without going into too complicated calculations, I find that securing the protocol for depositors is the real added value for the protocol of this new Aave token.
So I think only stackers should receive a reward.
This will avoid what we saw on the Comp.
The protocol regarding lending and borrowing correspond to the real use of the procole as well as the credit-delegation for the moment.
I am not for locking LPs over time or at least for a short time (max 1 month), and I am for keeping farmers away from any short-term speculation.
Under these conditions, a quarterly allocation is a good thing only for holders with a stronger incentive in the first year in order to guarantee a rise in the deposit of funds guaranteed by the holders.
This certainty of having great security on deposits will make it possible to reach a new fringe of depositors and achieve the goal of being able to give everyone the opportunity to borrow in a decentralized manner (exchanges, companies, individuals) and to insure depositors to be able to be sure to review their funds in case of problems.
Confidence in the protocol must be at the center of our concerns.

I understand what you meant now and I can only agree with you :beers:

If AAVE goes into the direction of proof of liquidity I would like to understand if this is a riskier solution than conventional staking or not in case the safety mechanism has to be activated.

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@depressedape democratizing the lending via reduction of transaction costs are vital especially as Aave is getting popular in new markets and new user-bases. One idea could be that part of the fees collected is used for subsidising smaller transactions. Pros is that it allows wider usage demographic and adoption (user retention as well as smaller depositors keep their funds in the protocol for longer period to yield compared larger depositors who can move funds fairly easily with less transaction costs). Cons is that it brings burden for larger depositors but would be spread to wider amount of capital hence might not factually effect that much negatively on their yields. This might be one decentralized approach. Open to other ideas if someone has in mind.

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@ecent I like the SNX idea of locking however I think the most efficient solution is to be able to re-use that value for the benefit of the network. For example locking for the purpose of velocity does not serve the protocol itself, being able to use the locked value for securing the network might be a way to using those locked rewards to create more positive value loop.

Just to add I think the idea is more of not to “lock” but to ensure that the incentives are aligned towards network value creation so eventually the LPs and stakers can choose themselves. In a healthy system, de-risking by selling would not entail to competitive LP portfolio management and by itself would incentivise LPs to stake and allows room for them to manage their own models and risks.

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Lots of great responses to this so far!

I like the idea of setting the rate for quarters at a time vs annually as James had mentioned as well, definitely seems annually would be an over commitment.

I’m also against having to leave anything “locked” for upwards of a year. As Marc mentioned, a short timeframe would seem more acceptable to me (days/week) but I think it’s important to find incentive for these LPs to where they would benefit more from not selling even with no timelock. Some have mentioned possibly rewarding them more the longer they keep it in the system, but I’m curious to see more thoughts around any incentives that might dissuade LPs from using their earnings as cashflow. I think it’s very important this area is explored IMO.

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A quick question here might be a bit off-topic, but will liquidity staked in the SM could be collateralised?

Reasoning:
As almost 40% of LEND tokens are on AAVE at almost 0% I would assume (might be wrong here), holders are long and use the tokens as collat (or to increase their “health factor”).

In a bull market, it might be even less interesting to pour/block liquidity in a SM while it could be leveraged. (Depending on risks profiles)

By having LEND/ETH locked in the SM with a lower LTV this could increase the incentive to stake and secure the system against “shortfall events” with a higher amount locked (even though some collat might have debt issued against).

To me, this would then impact the ratio strategy for SI/LM allocation.

(If staked AAVE/ETH can be collat you can increase LM allocation %, If not I would then prefer to have more incentives for SI side as you carry the risk burden while blocking liquidity.)

It would be good if the majority agreed that a stronger incentive to keep Aave rewards in the Aave ecosystem was needed. In particular, I believe that many Balancer users dump their rewards every week depressing the Balancer market cap. We don’t want a rewards system to put downward pressure on the Aave market cap (speaking as an investor in Aave and a user depositing LEND into Aave for collateral).

LOOK AT AMPLEFORTH GEYSER
Consider Ampleforth Geyser with their increasing bonus based on lock-up time. Ampleforth rewards increase from 1x on day 1, to 2x on day 30, to 3x after day 60 (retroactive). So many people are waiting for at least 60 days before they withdraw anything. In line with Stan’s desire for a positive incentive, you can withdraw at any time but you benefit more by staking longer. To secure a financial system, I feel that 60 days is too short.

IDEA FOR AAVE
Rewards increase retroactively with time as with Ampleforth. But unlike Ampleforth, there is NO TIME CAP. Instead, the retroactive rewards curve grows continuously over a period of one year after which it starts growing at the Aave inflation rate. E,g, if day 1 is 1x, then day 45 might be 1.5x, day 90 = 2x, day 180 = 2.5x, day 365/year 1 = 3x, year 2 = 3x * (1 + inflation rate).

The curve is retroactive but since you cap out at the inflation rate, that puts a ceiling on the percent of Aave’s market cap required to support the reward. Note that if the multiplier grew slower than the inflation rate, your rewards would be losing equity given a fixed market cap.

THE BEST TIME TO CASH OUT IS NEVER
This curve incentivizes someone to keep accumulating rewards indefinitely. Cashing out tomorrow will always have a higher reward multiplier than cashing out today.

The more back-loaded the curve is, the more it will screen out short-term investors giving the majority of the rewards to the long-term Aave supporters. Front loading will attract more investors so you need to find a balance.

NOTE
If this idea sounded interesting, one suggestion is to only vote for only a limited part of the curve (e.g. first year which allows you to budget properly) and see how it is working out before voting to continue the curve. That way if it doesn’t work out, you don’t have a lifetime commitment to honor :)

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