Initial discussion: AAVE reserve emission for safety and ecosystem incentives

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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@Sunshine it’s an interesting takeaway. Indeed unlocking liquidity during market changes is more common. However, the ratio of the staking pool indeed is to secure the deposits of the protocol. Using staked LEND as a collateral would be somewhat counter intuitive to some extend even with the low LTV ratios. One thing to consider is that market movements might encourage token holders to re-allocate from staking to using AAVE as collateral in the protocol, that kind of movement would increase the stake rewards as there is less overall stake, hence in some what markets fixes this issue.

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I’m not going to get too bogged down the technicals here though I will add that I favour the .25 distribution model.
But how GOOD is this? Real governance and control full in the hands of the holders and a team delivering all they promised.
As for my vote, for what it’s worth, I’ll be voting for it :muscle:

Yes fully agree, in both cases market will find its equilibrium.

Even though I understand it is counter intuitive. It seems AAVE utility is a function of (LTV,SI) with either (50%,0) or (0,N) but there might be a universe in between which might optimise capital efficiency and share the risks between more AAVE holders.
N depends on the amount staked.

And while writing this message I realised actually we can virtually create our own AAVE utility function at the portfolio level as user.
If I have let’s say 100 AAVE and decide to stake 40% and to keep as collat 60%. I am building a sort of AAVE utility function (30%, 40% x N). It might be slightly different as a global one, but virtually close enough.

Then, in order to maximise the staked amount at any time (security) it could be in the UI/UX, similar to the stable/variable borrow rate button, could we have a stake / un-stake to make it smooth with some percentage amounts nicely displayed** instead of a vault on an other web interface as traditional DeFi.

**Why you may ask, because if there is a FYI token offering 1000% APY, I’d love to quickly jump on the tractor and come back to secure/stake as soon as the deal is done. (Two options: vesting few days stake to avoid this type of behaviour or making it cheap(optimise tx fee) and simple to avoid friction and to ensure maximum stake at all time).

Back on the original question and based on Stani’s answer:

Current simplified model 685 AAVE/day for SR.
100% 13M staked – 1,9% APY – 400M USD insurance
75% 9.5M staked – 2.6% APY – 300M USD insurance
50% 6.5M staked – 3,8% APY – 200M USD insurance
25% 3.5M staked – 7,1% APY – 100M USD insurance
10% 1,3M staked – 19% APY – 40M USD insurance
5% 650K staked – 38% APY – 20M USD insurance

Very cavalier statement but I believe in a crypto bull market 38% APY are easily achievable (even with 50% capital available), so staking might be less important than LTV. However, in a bear market this could attract capital the same way as staking rewards worked in 2018/2019.

After further thinking, I then believe more weight should be placed on the SI side than the LP one for the current distribution and really like the quarterly approach.

My two cents :slight_smile:

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But when more Aave Tokens are staked, the incentive goes down quite a lot. If the tokens are locked for a certain period of time, this may also lead to a incentive problem, cause the token is just too volative at the moment. This may not change in the near future. As the actual daily token price seem to fluctuare more than the proposed staked yearly incentive, it may come to a bit of a conflict here.
What about burning? If it would be possible to add a burning mechanism into the new tokenomics, it may lead to a little compensation for the new minted aave tokens which get probably added. Then it could inflate in phase 1 as incentive, and deflate in phase 2 as value generator.

I cant do the math for this, but it may be a compromise?

Update: It could also be thought about locking in a certain APY for for early stakers, cause beeing early and taking probably more risk should be rewarded.

When staking early at 20% (APY locked for a certain period of time) it could incentivise other stakers to be part of the game as early as possible. This would help to grow quicker…

Just a thought

On the first point, that rewarding borrowers results in fake/wash volume and crowds out real users, rewarding depositors can have the same end result. Imagine that the reward for depositing is very high, e.g. 100% APY. Then users will deposit, borrow max, convert and re-deposit, borrow max, etc. to maximize their deposits.

ALTERNATIVE
What we can incentivize is deposits above the LTV required for all borrowing. So if a user deposits and does not borrow against the collateral, that would be eligible for a full reward. If a user borrows the maximum, that would receive no reward.

The reward could be proportional to the utilization % of what was deposited.

In that way, only people who increase the usefulness of Aave to others will receive the rewards.

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the split might be 90% for depositors and 10% to borrowers effectively removing the option of wash trading

@Emilio mentioned reducing “opportunistic mining”. That would not necessarily be reduced by only rewarding lenders since they could deposit, borrow, re-deposit, etc. to boost their lending. Rewarding unburdened collateral completely avoids this

@monet-supply says that rewarding borrowers results in fake/wash volume. Please check the post to see how that can still happen when you reward lenders but we can avoid it by only rewarding unburdened capital

@depressedape mentions that attracting liquidity will help borrowers with lower rates. Incentives could drive borrowing rates higher if users deposit --> borrow --> re-deposit --> borrow more --> etc. to maximize their lending and get the maximum rewards. We can avoid that by only rewarding unburdened capital

@stani says that we should avoid “wash-borrowing”. Incentivizing supply side can still encourage wash borrowing as given in examples above but we can avoid that by only rewarding lending above the required LTV ratio

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Thanks @Dydymoon for the schedule. Looking at the numbers, here are some comparisons and projections:

Balancer is giving away 145000 BAL per week = $1.8M
Compound is giving away 20160
COMP per week = $2.7M
Aave is proposing 2753 AAVE per week = $714K

Balancer’s best reward rate is approx. 33% (not including pools that stake BAL which are 1.5x)
Compound’s return with lending --> borrowing --> re-lending --> borrowing more, etc. up to 70% with 75% max returns 32%

Both returns are similar so we might expect a similar return for Aave. That would mean rewards of $771K per week at 33% APY on about $121M. Aave has $511M locked according to DeFi Pulse ($623M posted on Aave.com main market) so $120M would not be a big increase when split between the two reward types. Based on those numbers, I would favor a bigger liquidity reward, e.g. $1.5M per week for liquidity = 5822 per day.

A way to stretch the liquidity booster is to only incentivize unburdened lending so people don’t “wash borrow” to max their lending and their rewards.

One thing I think we should all agree on is to compete for locking up Aave collateral. Right now, that is the largest collateral pool, and even with 0% APY, there is no competition. If someone like Compound supported Aave then we should compete directly for that deposit and be sure to win. With default COMP rewards, they would likely beat Aave rewards as currently anticipated

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There has been a lot of proposition, and i tried to account everything ( even the assurance fund mentioned on the new subject and the governance fees that i proposed early, in order to have a fluid governance ( not like YFI at first when no one was voting).

So, if we take a look at the numbers and increase emission from 21% ( first proposal) to 33% first year, it could look like the spreadshit added, where Q1 is x2 of Q2,3,4 to get a growing interest of aave safety module from the start.

However, i have a few questions, maybe @Emilio or @MarcZeller can answer :

  1. I agree to @Lance about the fact that Bal or Comp liquidity mining is a lot more than what aave propose ( 1M of aave, so 33% emission represent at the current price is 41M so 788k per week) and it’s true that people might prefer COMP or BAL for farming, and on one side this is what we want i guess to prevent dump on the price, but could this really turn into a loss of capital deposited on aave ?

  2. Even if we stay with those numbers and spread emission on 3 or 4 years ( i think more might be too much),how will stakers and Lp be rewarded once there is no more AAVE into the 3M reserve ? Do you think the protocol fees will eventually cover and replace staking rewards through time ?

  3. What do you think about covering the governance fees and add a part of the rewards to an assurance fund (which could bring a lot of institutional as mentioned of the new subject ) ?

Looking forward to get your point, and please correct me if a misunderstood something :)

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@Morris_Hanson the incentives to stake at the beginning will be high most likely as the staking liquidity gets boostrapped. Eventually I think it will find it’s risk/reward optimal point. I’'m not a big fan on token burning as it’s simply reduces supply, would rather direct such funds into a reserve and compensate stakers for providing safety, LPs to provide liquidity and builders to build new functionality. It’s more concrete feedback loop. Locking APY is interesting idea.

@Lance your idea for rewarding above LTV is actually fascinating. It incentivises borrowers to have a healthy Health Factor and thus is de-risking the protocol, which is a really good behaviour. On the higher LP rewards, I do thing that higher rewards brings more liquidity, however it might bring more fast food LPs who come to farm and sell for quick yields. Providing safety will probably incentivise more cautious LPs that are looking for less risk and long-term supply, that is something that we don’t see in the TVL statistics but is valuable as liquidity comes in different shapes and forms.

I agree that AAVE could have some interesting incentive model as a collateral (that does not overlap with the staking incentives).

@Dydymoon the challenge with the assurance fund is that it locks capital that would not be in efficient usage. The idea of staking and minting is that the token holders are bearing the risk of the protocol, or in other words are bearing the risk for the fact that the protocol functions and good products and services are build. It’s more capital efficient to risk transfer to AAVE holders and allow them to take additional risk via staking compared to locking value into insurance with stablecoins.

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Hey @stani, i agree that it could be better to redirect all minted funds but even if this is all allocated to staker and LP, i’m afraid that the risk/rewards ratio will be a bit too low to compensate a potential loss of capital if there is an issue with the protocol but as long as there is liquidity mining this should work.

But when all the minted AAVE will be distributed, what’s the plan to keep stakers and LP engaged into the protocol and keep security ? Do you think the protocol fees will be enough to remplace the safety mining ROI ?