Initial discussion: AAVE reserve emission for safety and ecosystem incentives

Hi @stani, thanks for considering rewarding above LTV, there would be no incentive then to max lending/borrowing for rewards which mostly drives coin rates up (like in Compound). One other thought was to multiply the reward by the utilization rate. The idea would be to incentivize depositing the coins that are actually in demand. This does NOT work without the LTV rule as Compound found out with BAT. People starting borrowing BAT, depositing the BAT, borrowing stablecoins, depositing those stablecoins, borrowing more BAT, etc., all to gain the maximum reward. But with the LTV rule, it would work perfectly since none of that cycling behavior at max LTV would be rewarded.

On the higher LP rewards and “fast food LP’s who come to farm and sell for quick yields”, I did for example jump on the YFI farming. After the rewards ended, many withdrew their money and Curve, yearn, and Aave had massive withdrawals of capital. So I hope you will read my earlier post on a rewards system like Ampleforth Geyser. They have a retroactive multiplier which maxes at 3x after 60 days. Ampleforth has been having negative rebases (where you lose coins) for the last week and their Geyser deposits were steady near $26M during that time when everyone was losing money on AMPL. The reason is that all the stakers wants the 3x max retroactive multiplier for their rewards. The idea I was suggesting was to extend that out to 3x at 1 year and after that, have the retroactive multiplier continue to increase with the inflation rate. That way, the long term Aave holders would want to keep backing the Safety pool (and/or liquidity pool) even when Aave’s token was under pressure or when there was an incrementally better yield somewhere else. It really rewards long term investors which is good for Aave. I’m very interested to hear your thoughts on that.

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As a short follow-up, Curve just released its rewards system and you can choose a 2.5x multiplier with a 4-year staking commitment. That is the longest-term incentive I’ve seen in DeFi but a 4-year lockup is a hard decision to make with all that is going in the space.

The idea I suggested above is a much easier choice (1-choice). You can get out at any time but there is always more upside even after 4 years with staying staked.

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You are telling 3 million is proportion of 13 million but right now its 300 million with 1.3 billion supply. Not to forget everyone’s balance will be reduced by 1/100. So 3 Million is a huge amount to mint almost 25% of total supply. This tokenomics proposal is a reason to mint more coin and a red flag for AAVE. On other hand projects like polkadot is multiplying their supply by 100 times. Why AAVE??

SHAHIDALI810, Please reread the proposal. No one’s balance will be reduced. Lets say you have 1000 banknotes of 1 dollar each. You have 1000 dollars then. I say to you - give me all your one dollar banknotes in exchange for one 1000 USD banknote. After the swap you still have 1000 USD but only one banknote. No loss on your end or mine.

As for the minting, the tokens will not be released right away but incrementally over time.
The other point is that we have to reward those who provide security to the protocol in the staking module. The best way to do it is via Aave token inflation. Keep in mind that per year, based on the proposals so far, the inflation is very low - between 4 and 5%.
Even the US dollar has a similar inflation and now it is probably more.

The third point is that by current proposals ALL Aave holders benefit either by staking directly or by the fact that the Aave platform because way more valuable due to increased liquidity/features/safety, and consequently the Aave tokens will be more valuable.

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This is no point of reducing balance it is a bluf to inject 300 million new tokens in circulation otherwise it wud be highly noticeable. U have to agree to this. Secondly AAVE team have not been able to answer why reduce 1.6 billion to 16 million where as other projects are doing the opposite. Which helps in adopting and liquidity. You trying to explain me new proposal which I have already read and aware how those new tokens will be injected. The fact is team is not loyal since it was never mentioned in whitepaper hence you are indirectly cheating on ICO purchasers unless you compensate them with 25% more token. Stop fooling investors around. This will start the down fall of AAVE.

It has been made clear that the rewards are not to be distributed wholly and at once.
Re-branding and legal compliance - these are (I believe) the main reasons behind the swap from Lend to Aave tokens. The Aave token has different functionality and scope compared to Lend. The swap ratio differentiates the new Aave tokens further from Lend in the new version of the protocol, which is to be way more decentralized. It is also easier for exchanges like Coinbase/Kraken to list Aave rather then Lend based on their listing framework. Thus, the new Aave tokens characteristics actually would serve in the end to INCREASE liquidity, contrary to your point above.
In the end you will be able to express opinion with your vote. For me and so many others, the proposed changes cement Aave’s path to become the dominant money-market protocol in DeFi.

Still does not explain why 16 million and not 1.6 billion. Same question AAVE team has been dogging like u did. Neither reduce number help or support and listening in exchange see stellar and ripple. And yes I will vote against that proposal and so will most of the people.

@SHAHIDALI810
Hello,
I think like @depressedape said, you shouldn’t sum up the token lend -> aave swap to a change of name and supply.
The tokens have different specificities and are necessary for the new missions that the protocol requires in its V2.

  1. the name change is a good thing as it will clarify things for a lot of people and even just from a marketing point of view it is good.
  2. The change of supply, i.e. the division by 100 of the number of tokens will lead to a scarcity of supply and therefore less liquidity on the markets, which will have the effect of increasing the unit price of the token. We all love it when our dear Lend goes up in value, we'll burn even more when the aave goes to the moon.

Another thing that has not been said. The lend is, we can say, a rather old token. By that I mean that we can imagine, as in the case of the btc, that a significant part (20-30% in my opinion) of the supply has been lost over time. The supply of aave after the swap (swat which will be limited in time I am sure) will therefore be lower than that of lend. The gradual addition of aave will therefore only bring the supply of aave closer to the initial one of lend.
So I don’t see any problems in validating this token switch if the contributions in terms of technology and value for the protocol are as substantial as they seem.

So thank you lend and welcome aave !!

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Name change is a marketing thing. But changing token supply to show as if its being reduced but in reality they are increasing the supply by 25%. Thats a huge increase. And your taking about scarcity and you forgot that your balance will be reduced by 100. If you dint know then your in wrong playground and if you know that then your just stupid to accept scarcity thing and you have know idea of tokenomics. And your point of tokens being lost like bitcoin, hah wake up from your world of imagination. For your information there is no guarantee that market will accept this 1/100 stunt and token might still trade at same price in that case you lose 99% of your value. But in case of polkadot market had to accept and price was forced to adjust.

Ok you are too aggressive for me!
It seems that you do not understand that the division by 100 of the supply and therefore that of your bag will be followed by an increase by a factor of 100 in the price of aave compared to lend.
As a stacker, I would be very happy to perceive for the most part the newly created token supply and that as time seems to emerge.
Otherwise, I cannot advise you too much to cash in your capital gain and to speculate elsewhere.
In all cases, you will vote what you see fit, it is the principle of governance that is proposed.
In the meantime, I still advise you to buy a calculator. It can still be used.

Best Regards,

Division by 100 in supply is guaranteed but your second part that price will be followed by multiplication is not guaranteed. And its only expected to rise if people are willing to buy at higher price. And as far and mathematics is considered you seem to be professor at department of Maths at MIT, Who teaches 13=16 using your special self invented calculator. :joy:

DYOR buddy
It seems you don’t read the aavenomics as good as you pretend. Althought what is proposed here concerning the new supply of 3 millions aave.
But you are right lend and aave are not stablecoins.
So the price continues to fluctuate after the swap.
My opinion is to upward but you seem thinking it will not.
Future is not written yet. We will see.
If @stani or @MarcZeller would explain it quickly may be you will feel a little less anxious.

@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.

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@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.

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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

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