Liquidity rewards for smart contract insurance providers

In the discussion thread here, we are discussion allocations for AAVE emission

  • 685 AAVE/day allocated for the Ecosystem Incentives (“Liquidity mining”) 250K AAVE allocated for the first year

Proposal tldr: Provide 2% of yearly liquidity mining rewards for stakers participating in providing liquidity for Nexus Mutual smart contract insurance (to learn more about Nexus Mutual).

Why? At the moment, there is about over $17.8M USD worth of smart contract insurance cover being taken out on Nexus Mutual, and 7.8% of that has been taking out by Aave. The hypothesis here is that there is a large untapped audience of potential Aave users (mostly whales) who would be willing to use Aave - but ONLY if there was insurance for their staked funds.

Currently Aave’s safety module covers economic risk but not smart contract security risk.


Source: NexusTracker.io

-> Aave funds are insured -> safety and protection -> more willingness to risk funds in DeFi/Aave

It could be potentially a really positively self-reinforcing cycle.

What happens when you provide greater incentives for $NXM holders to stake on $NXM?

  • More stakers will opt to on NXM
  • More individuals will want to become $NXM stakers to earn $AAVE alongside $NXM rewards
  • More capacity for smart contract security for Aave users

How much to dedicate to rewarding $NXM stakers?

Rewarding liquidity providers is mostly sound but there should be experiments in other ways of driving both supply and demand side liquidity for Aave. Incentivising insurance is another way.

1 Aave = (100 $LEND) = roughly $36.3036 USD worth at the moment
2% of 250k yearly liquidity incentives Aave = 5k $AAVE
5k AAVE = $181,518 USD worth of Aave

There are currently $2,095,636 worth of NXM staked securing $1.4M worth of Aave.

A 2% inflation would roughly represent an extra 10% APR on top of the current NXM rewards.

I believe that all this needs to do is incentivoze merely $2M more in $NXM staked into the platform to provide $2M+ worth of liquidity back into the platform (about 10x returns in incentive:reward ratio)

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It’s worth an experiment? Try it out for say 3 months @ 2% of rewards?

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Point about more whales = more money and whales need risk avoidance is legit, but I do think it’s very important to see what value this would really add that the safety module doesn’t already provide

Would the safety module really be able to cover the TVL? If there was a platform SC exploit then the value of AAVE would plummet. The proposal is very interesting. If NXM had direct integration with aave adoption would be very high. KYC would be an issue though …

@DrAdz786
Well KYC isn’t an issue, because the team itself can buy insurance for all whales. Other protocols do that already

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I think this is a great idea and worth experimenting with for the first quarter of the v2 protocol

I think it could be really interesting to add a wNXM aave liquidity pool. It would allow NXM holders to borrow against their positions, but more importantly it would also allow Nexus Mutual members to borrow NXM for risk assessment.

This feels like a no brainer to support.

“Less rewards” is a spectrum. If a more secure platform brings in larger players (“whales”) then the overall pool of rewards goes up dramatically. Focus right now should be on sustainability and scale.

Regardless of whether the 2% makes a meaningful impact in the event of a crisis, at the very least it will contribute to the branding of Aave as an above board project.

This is a terrific idea! One of the biggest hurdles DeFi faces is lack of insurance, so every action that improves that is positive both for Aave and DeFi.

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Love this idea. Definitely worth a 3 month trial!

I suppose this incentive would help decrease the cost for end users? Right now it is 1.3% APY to buy coverage, which is more than most of the current supply rates.

I would love to see a native integration for insurance inside AAVE.

Borrowers can currently borrow either with variable or fixed rates.
I could see a world where there is an option for deposits to either be insured (lower or negative yield if deposit as collateral) or un-insured. In this world:

  • AAVE purchases coverage and sets a smart contract pool as recipient
  • If there is a bug, this SC receives DAI
  • Anyone that had opt-in and paid for insurance before payment in DAI could claim automatically from that pool. This could be extremely fluid, like a block-by-block coverage / pay as you go.

@nxm_chad thanks for opening the thread, the community appreciates that kind of gesture. It’s amazing to see good utilization of nexus for Aave deposits and it’s a great way to transfer risk. The planned Aavenomics will also take into consideration smart contract risk or any risk the Aave Governance seems important to be included for the long-term safety of the protocol. However, I think it’s important to diversify the risk always and allow users to be able to take nexus cover, that will help to decrease the overall risk within the protocol. Currently, nexus does not scale to the above billion factor but would be beneficial to depositors who need that extra cover.

I think adding wNXM/NXM might be something that the Aave community would appreciate.

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