Hey everybody, i’m usually a lurker here on the forum but i believe this topic is really important so i decided to jump in.
although i’m not against liquidity mining, these numbers look more like an attempt to pump the tvl/bring fake borrowing volume rather than cultivating actual organic growth.
First of all i would remove from the list TUSD, GUSD, SUSD, BUSD, WBTC and ETH. ETH/WBTC borrowing is a limited usecase and incentivizing it would only bring fake outstanding debt,
which might be good to bring more fees but not now with a migration in process.
GUSD, SUSD, BUSD and TUSD have limited use in defi (even though sUSD is mostly used on synthetix), their total supply is rater low and it would essentially waste the emission to reward relatively unproductive assets.
I think the protocol would be better off rewarding only DAI/USDT/USDC for the first quarter, for the following reasons:
there is currently 370M of outstanding debt on Aave V1 on DAI, USDC and USDT. Borrowers on V1 are reluctant to migrate because liquidity on V2 is taken very quicky, borrow rates are high and the migration is damn expensive (i’m a borrower on V1 myself and i need to spend 700$ to migrate, with the current V2 borrowing rates it’s just not worth it). At the same time V1 borrowers are experiencing high gas costs and cannot leverage the new V2 features, which bring bad user experience.
the remaining outstanding debt is mostly ETH, WBTC and SNX. V2 can easily cover the needs for these borrowers to migrate, since there is plenty of ETH/WBTC liquidity and rates are even better in V2 right now.
Since as you are saying in the proposal Aave can’t compete with compound/other protocols in terms of liquidity mining APY, the Liquidity mining program needs to be as targeted as possible
to facilitate real growth of the ecosystem and onboard everyone on the latest iteration of the protocol.
For that reason if we bump the emission a little bit to 650 AAVE/day splitted across 3 currencies (DAI, USDC, USDT) instead 9 and with a ratio of 80% LPs/20% borrowing, there would be the following situation:
Let’s imagine a price of 400$/AAVE, which is a fair bit below the current market price but it’s closer to the average of the last two weeks;
Let’s consider DAI:
With your proposal, LPs would get 30.5 AAVE/day. At 400$/AAVE, that’s 4.453M year. Considering the current V2 reserve size of 74M, that’s 6% APY. Compound DAI APY is 5.9% APY. I fail to see how this emission will attract any meaningful additional liquidity, especially considering there is the need of 63M more DAI just to cover the debt on v1 for the migration. The eventual leverage doesn’t help either, because people leveraging will just drive the supply/borrowing APY up, which might attract more liquidity yes, but at the same time will keep the borrowing rates high, disincentivizing organic borrowers (ie borrowers that borrow on Aave to use the funds elsewhere). This is exactly what’s happening on Compound: People might think that for real borrowers it’s always better to borrow on Compound because you get paid for it, but that’s actually false: right now for example there is a 6% subsidy in COMP, but the borrowing rate is 13%: Borrowers that don’t leverage pay 7%, and that’s MORE than Aave V2 WITHOUT borrowing incentives. This is the result of the crazy leveraging happening in their protocol. Moreover, entities that can’t leverage (think for example of liquidity coming from curve pools) would have little to no reason to move to V2.
With my proposal, DAI LPs would get 31.6M$ in AAVE a year. With the 74M currently in V2, that’s nearly 50% APY. If we imagine that the APY settles around the one of compound, thats 10 times more liquidity than what’s available in V2 right now. Aave V2 would have the cheapest DAI lending rates on the market by far, which would drive up organic growth. At the same time, borrowers will get 43 AAVE/day, which is 6.3M/year, so on 120M outstanding debt for example the reward APY from borrowing would still be 5%, lower than compound but coupled with the high stablecoin liquidity, it means that organic borrowers actually earn from borrowing (as i mentioned before, the same can’t be said for compound unless you leverage: an “organic” borrower on compound right now still has to pay around 7% a year, that is the difference between the subsidized 6% and the borrowing APY of 13%)
Same reasoning can be of course applied to USDC and USDT. These three currently drive the growth of the defi space, so that’s what needs to be incentivized the most, i have no doubt about it.
That would be, of course, for the first quarter - if it does not work, can be changed and/or other assets can be added.
So that’s it - you have my opinion, the community can do whatever they want with it. I really hope we take the path of incentivizing organic growth rather than bringing useless farming volume - i really want to migrate to v2 :)