Initial discussion: AAVE reserve emission for safety and ecosystem incentives

@Dydymoon there is two options after the minted tokens end, either focus on distributing fees or fees and introducing an inflation schedule, however I think that will be for years to come since the current Aave Reserve should be sufficient for LPs over time and currently I think the consensus is that the initial distribution would apply for first quarter and then new allocation could be scheduled.

@Lance yes I think if the rule is only based on utilization rate, it would be gamed quite harshly and would max the utlization to the extent that it would be hard to exit the deposit position, creating some liquidity risk. I like as well the retroactive multiplier as it allows stakers and LPs to build their liquidity and retain their position that they achieved over time. It would be good to check the technicalities on the implementation but seems to be as you said, the AMPL model with extended period that increases over time.

Whats interesting is that it ties up the staked AAVE and also the rewards AAVE for a time period, so it brings more safety and also utility for governing the protocol.

I agree with @depressedape and @EmmanuelD that there should be incentives for LPs and stakers for providing safety for LPs, DeFi is about incentives in general. It’s more of a question on

  1. the healthy balance between stakers and LPs
  2. ensuring that there is incentive for LPs to stake their earned AAVE
  3. ensure that LPs are interested in long-term sustainability for the protocol (that would be inline with the governance since short-term LPs would merely want faster gains)
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Hello Dydymoon, I would like to say that if LP suffers of a loss, the stakers of Aave would cover it, so no risks for them
Haave a great day

Hello @L0GYKAL, i think there will not be much impermanent loss considering 80/20 ratio + $BAL+$AAVE+ Bonus for compound rewards.

What i was saying is that :

  1. I’m afraid the APY of the AAVE LP and stakers will be too low for two reasons :
  • If there is a protocole issue, safety module could not be enough, and risk-reward ratio is low too considering growing TLV in AAVE.

  • If you compare future AAVE Apy to all those Degen Food Farm Defi project, this will be a lot less, and on one side it’s good to keep farmers away, but on the other side it could create a lack of liquidity on the protocole, so less funds into the safety module.

But let’s say this is enough and Stakers and LP receive their AAVE for a few years, (time to distribute 3M reserve) then,

  1. I was wondering how keep stakers and LP after the end of the 3M minted AAVE, if there is no rewards anymore. I know there will be protocol fees but can this really be enough ?

Moreover, if the governance decides to allocate a bonus for compounding aave rewards, this would mean few or no selling for the time of ditribution, but then, how to prevent massive price dump when incentive and bonus are off ? Which will turn into a lot of value out of the safety module at the same time.

Looking forward to get your ideas on this :)

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AAVE went to $1.5 billion in value locked completely organically, with no incentive, which is truly impressive.

We need to think carefully what behaviour needs to be incentivised to grow the network further.

Most users in this space today are fairly aware of the risks, and as AAVE is further battle-tested, they feel more comfortable using AAVE. The next wave of users will likely be fairly unaware of these risks. If something ever goes wrong, these users will leave AAVE forever with a sour taste. I think that the Safety Incentives is a smart thing to incentivise with new AAVE tokens which I fully support.

Thinking more long-term, I think AAVE needs to incentivise new actors to work/integrate with AAVE. I want to see real world assets as collateral, with projects like Centrifuge for example, and it sounds like this is a direction that AAVE is taking from recent tweets. These assets can be harder to manage for a permissionless protocol like AAVE, but there are work-arounds (like Tinlake). This will not happen over-night, but I feel this is worth spending reserve tokens on.

The current DeFi users are already here. There are $15bn of stablecoins. We need to incentivise the next $50 billion of value, which happens by incentivising other platforms to integrate in AAVE! That for me is worth inflating the supply, as it would bring more value to token holders than the cost of inflation.

4 Likes

@Dydymoon there is the protocol Recovery Issuance (RI) that would set in place in case the slashed AAVE does not cover the Shortfall event (and the build-in backstop module to place buy order for slashed or minted AAVE). That should decrease the stakers risk position to some extent.

In terms of short-term LPs, I think liquidity comes in different shapes and forms, feasible aim is to capture long-term liquidity providers, whose incentives are aligned for the health of the protocol and thus bridging their LP rewards into the Safety Module. This bridging would be rewarded, which allows nice compounded earnings for rewards. I think also time-basing the rewards system in Safety Module would be neat.

There are two ways to recapitalize the Reserve for rewards, either the protocol fees or activating issuance that is not too high but compensates the LPs and stakers after the Aave Reserve is utilized. I think the AAVE safety module could be also utilized to things being build on top of the Aave Ecosystem, thus allowing projects to boos-trap liquidity and utilization in exchange of protocol fees for safety.

@Julien I agree, the cool part is that as real world assets such as ReaT issues could be used as a collateral and the Aave Governance can actually vote on which real world assets could be added as a collateral into the protocol.

2 Likes

There are two ways to recapitalize the Reserve for rewards, either the protocol fees or activating issuance that is not too high but compensates the LPs and stakers after the Aave Reserve is utilized. I think the AAVE safety module could be also utilized to things being build on top of the Aave Ecosystem, thus allowing projects to boos-trap liquidity and utilization in exchange of protocol fees for safety.

I think this is a great point. One thing to account for is that LPs and stakers have different models for discounting their cash flows. LPs have variable cash flows — fees that depend on events — whereas stakers are receiving more steady, continuous income. As such, the discounted cash flows that LPs attribute need a correction for volatility whereas staking pools can discount directly based on inflation. As such, the safety module should ensure that if there is a price crash after a shortfall event (SE), e.g. AAVE/ETH falls 90%, then LPs are over-incentivized relative to stakers.

One of the things that Gauntlet will provide is some numerical evidence for how much is necessary to incentivize LPs vs. stakers post price shocks (even when there aren’t fees). It is likely that there will be some stable regions and unstable region in the space of inflation curves and compensation, but numerical plots like the one below (which is for a staking derivative that is similar to what Aave is doing with an insurance fund) will help improve confidence in recovery during such an event. Note that in the plot, the correct analogue of slashing probability for Aavenomics is the probability of an SE.

image

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Hello all,

Here is my attempt to consolidate the discussion. As Liquidity Incentive will start after the Staking and with the launch of v2, this proposal focuses solely on the Safety Incentives (Staking reward).

  1. The AAVE emission for safety incentives will be set for the first quarter, and re-evaluated each quarter

  2. An initial AAVE emission of 400 AAVE/day for the first weeks until the slash is activated should be enough to incentivize migration and plain Aave staking in order to bootstrap the initial liquidity and gauge stakeholders interest in staking.

These steps describe how the deployment and activation of the different parts of the Safety module will move forward:

  1. Deployment and activation of the Aave Staking in the Safety Module (Without slashing)

  2. Balancer Pool Staking and start of the Aave/ETH incentives

  3. Activation of the safety module functionality which includes slashing and protocol coverage against shortfall

Each of those steps represents different risk level and should be incentivized accordingly when the times comes, for now we need to vote on the incentives to migrate & stake Aave for the step one.

Next steps would be to vote on the reward for Aave/ETH balancer staking and the level of reward once the slash starts.

The offchain signaling tool developed by Balancer is being adapted to let the community signal their approval of this proposal offchain. If the signal is positive, an AIP will be created to implement the proposal and move forward with the on-chain vote, token migration and activation of the step 1 of the safety module.

TL:DR

Off chain signalling then vote on the token migration and initial incentive to stake Aave, before adding Balancer stake incentive + Protocol coverage

6 Likes

I think at this point we all await to vote on the migration and sequential deployment of the staking mechanism. What is needed is the clear avenue/platform where users can signal the intent, which I believe to be overwhelmingly positive. I personally agree with the proposed AAVE emission to bootstrap some liquidity into the safety module. As for the slashing stage, a proposal with several options would be the most simple for stakeholders to vote on - with options varying from Higher rewards for stakers/Lower for LPs to Higher for LPs/ Lower for stakers. Ultimately the initial options must rely on the team’s judgement given the inputs so far and various economic factors that I assume you model internally. Looking forward to the migration and the deployment of the Safety Module and V2 as a whole, whether at once or incrementally.

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@depressedape on the polling, the Aave team can set it up in the next days for getting the sentiment before creating the AIP1.

Having options later on the slashing part in the polling would serve well the community sentiment.

On the team’s judgement, I think the community does not need to rely too much on the team, rather the team can poll a sentiment that the community endorses the most. I would imagine others will model as well the incentives in the future when Slashing and Balancer AMM is activated.

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How I can vote ??? I spend couple hours and not found

The vote was concluded on Wednesday. Today in less than 12 hours the migration to AAVE will be activated.

How I can vote now ??

they just answered your question above, I think you had 5 days to vote. and now you are too late. that’s no problem follow Aave’s telegram group. for fast info about AIP.

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I’m found the anons yesterday morning and spend all day how voting but well I hope we in touch

I 100% agree with these factors for determining how to structure the incentives. I recently joined the forum this week and have been trying to absorb the previous discussions. I was planning to write a proposal to begin/consolidate the conversation about shared revenue with Aave stakers in one place but did not want to create a repeat thread. Have there been discussions yet for how we strike that balance other than this thread?

685 per day staking reward is rather low, if 40% of staking rate (about 5.2m of 13m total AAVE), the APY would be 4.81%, for 20% of staking rate, less than 10% APY. Comparing with aother governamnce coin in the DeFi space, such as Kyber, Band, Syntherix, Chainlink (https://www.stakingrewards.com/defi), this is at the lower end. I suggest 1000 per day for staker and 1000 per day for LP, this will translate into about 7% with 40% of stake rate and 14% for 20% stake rate. Appeciate we are in this for long term, but 6 years (3M at 16.6% per year) is awlfully long time in a fast moving DeFi space. AAVE needs to scale quickly within a year or two before competitiors catching up, its incentive program needs to gear up for rapid scaling.

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Hey Jeffrey, for now incentives are only 400 per day because slashing is not activated, once we’ll protect the protocol, there will be more Aave available for staking and LP.

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Thanks for this info. Is there a timeline somewhere on when slashing would become activated?

As a staker, I think this is a great idea. I was also hoping that some of the risk of up to 30% from slashing could somehow be mitigated.