Proposal: Introduce Liquidity Incentives for Aave v2

I questioned this proposal on the face of the title however after reading through it I am fully supportive of it.

I believe the reward of stkAAVE as a crucial component to the success of this proposal aligning stakeholders over the long term success and growth of the project. The 1.25% supply sounds sensible given it’s in line with current staking rewards.

Alex B

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Good idea but needs to exclude WTBC / ETH
Only incentivize the USD deposits and weight by borrow demand.
Also wouldn’t incent borrows. Just incent USD lenders.

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I’m strongly against the proposal for a few reasons:

  1. It doesn’t make much sense to incentivise migration → this will set a bad precedent where every time a new version of the protocol comes up, LPs will expect some sort of incentive before they migrate. Rather, the new version should be “so good” such that liquidity providers will want to migrate to take advantage of the new protocol.

  2. stAAVE distribution does not really help incentivize long-term holding as 10 days is way too short and cannot possibly be considered long term in anyway. SNX escrow period is 1 year, and Sushi swap liquidity mining vested 2/3rds of the rewards after 3 months.

  3. Running liquidity mining programs after the protocol has been live and successful for such a long-time feels like a step backwards, especially if the plan is to incentivise the current existing pools which are working along just fine. There is a reason why uniswap themselves decided to stop their liquidity mining program, and yet their growth is coming along just fine.

I think it will make more sense for the protocol to focus on bridging to real-world assets, and perhaps giving out AAVE to incentivise people to build out peripheral protocols that connect AAVE to real-world assets.

As an aside, a more effective liquidity mining programme would to just incentivise the demand side (so we can give out half the amount of tokens). Incentivise demand will push up interest rates sky high, and supply will follow. This is way more effective than compounds liquidity mining programme. If we were to incentivise demand and supply, that would kind of be like an Curve giving out governance tokens to people who make swaps on the protocol.

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Thank you Anjan for putting the proposal forward; a few thoughts:

1.3% of annualized inflation seems generally reasonable to us as a CAC to incentivize longer-term LTV boost to Aave.

  • We generally feel that crypto lending (WBTC, ETH) and stablecoin borrowing (USD) are the most natural demand today (and likely in the future) and will occur naturally without any incentives (given a host of reasons – borrowing a non-appreciating asset to maximize returns via leverage and/or farming, delay selling for tax purposes, etc)

  • On the other hand, crypto borrowing is more opportunistic (mostly for farming) and stablecoin lending today is typically unnatural for crypto-natives. To wit, the latter would forgo potentially sizable crypto returns – and such a group may pertain mostly to (a) crypto credit funds and/or (b) non-crypto-natives looking for high-yield.

  • Therefore, we tend to believe that more aggressively incentivizing stablecoin lending would be the “most bang for the buck” to maximize LTV / CAC for Aave’s inflation:
    — lowest stablecoin borrow naturally attracts borrowers
    — similarly, lowest borrow naturally attrends crypto collateral lenders
    — with more crypto collateral lenders, crypto borrowing may come at lower rate which attracts demand upon opportunistic farming opportunities.
    — all such measures would ensure the TVL : borrowed ratio stays high and efficient.

  • Therefore, as an idea, we suggest Aave to consider for example directing most if not all of the 550 AAVE token towards stablecoin lending only across [USDC, USDT, DAI, GUSD], with opportunistic allocation too secondary stables such as [sUSD, TUSD, UST, etc]. The allocation should also be negotiated heavily with the stablecoin-issuer – with the anticipation of more aggressive assistance / integration / synergistic steps. For instance, a big allocation of AAVE to GUSD lender would almost certainly help adoption of GUSD – Aave should thereby ask for priviledged treatment across Gemini #DeFi business development efforts.

  • We generally support longer lock-up of rewards and thereby support a vesting similar to 1/2 10 day + 1/2 6 month. We also feel like an option of accelerated vest should be available for (a) paying a say 10% cost to vest-all, the 10% is burned, and/or (b) tailor vesting schedule to the amount of TVL / borrowing provided.

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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:

  1. 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.

  2. 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.

  3. 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;

image

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 :)

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@Anjan-ParaFi you explained very well the chosen emission scheme and the usage of stkAAVE (which i find fascinating) but there is no explanation on the distribution percentages or the asset choices, can you provide your rationale?

I voted NO on the current proposal, but i may change my vote if i’m convinced by your arguments or the proposal gets updated to be more targeted towards organic growth

1 Like

Not reallt relevant proposition as we don’t need incentive to grow the network the tech speaks by itself !
The incentive should only be regarding the safety module or nothing !!
You want tokenomics like curve ? It will just hurt the tokenomics without real affect the network effect wich is already there growing and recognize.
Good try by the way

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Defragmenting liquidity is the important part - a bit of carrot to drive v1 users to v2 sooner rather than later. Perhaps that’s what should be specifically subsidized, rather than a blanket incentive that will be mostly wasted on mercenary capital.

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I feel these mess with the market in unforseeable ways. Much better to use Aave to provide incentives to backstop the protocol imo. And use it to reward innovation and other protocols piping into Aave ecosystem.
Howw do you stop the problem where people stake and borrow recursively?

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I strongly disagree with this proposition.

1/ Liquidity mining is a degen easy solution
Liquidity mining is an emergency joker that we should keep, if needed, to make the protocol growth.

2/ Bring value to users, not cash
Rn, we should rather keep working on governance development, markets implementation and basically maintaining a high innovation rate, rather than falling in the simple “money distribution” solution, that will make us take the idleness path. Confort is a brake on progress.

3/ Leaders favor developers, not farmers
Strong leaders like Uniswap and UMA distribute their gov tokens for grant programs, not for farmers. I recommend to embrace this strategy.

4/ More efficient solutions to spend treasury

In a nutshell

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I’ll be voting against this in its current form.

Me too! i think its not the right way.

This is great! However, I’m not sure it’s really “worth” it, at least right now. Aave has a lot up its sleeve, and I firmly believe that the features being developed are going to prove to be more than enough incentive.

With that said, it’s true that having liquidity providers/borrowers earn rewards could both bootstrap migration (but this is going to be achieved regardless) as well as increase TVL and adoption, which is obviously a fantastic thing!

Truth be told, I’ve got to give liquidity mining more thought, but as I see it in its current state, the ecosystem reserve is an incredibly powerful tool that we’ve got to use wisely. I believe it should be used to support the safety module (until it becomes self-sustaining), as well as support community developers and contributors. This is the ethos of DeFi.

On the other hand, garnering increased adoption now could be a game-changer. These are the early days of DeFi, and we’ve got to be on top of our game.

Overall, the question is- does the short term benefit outweigh the potential use for that AAVE? Keep in mind that LPs and borrowers are important parts of the ecosystem, but devs and community members are the driving force.

I’ll be giving this more thought, but, one thing’s for sure- I’d like to see a grants program first!

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It’s a good proposal, however i don’t think liquidity mining is necessary right now, and as mentioned above by @TheoRochaix it’s a good joker that we should keep.

Moreover, farming AAVE could result in a bad price action with farmers taking profit (i think farmers can easily wait 10 days to claim their yield as AAVE is a solid token, so they would probably claim and sell) even they are paid in StkAAVE. If the price drops, the value of the safety module drops too and the protocol is less covered in case of a shortfall event.

Also, participants in the safety module are the most important and should probably earn more to cover the risk that this represent.

We also need to start working on grants, (i will try to make an ARC soon) there is so much to build and i think the main focus right now should be to get Aave available on L2 as soon as possible.
There is already 2B TVL on Venus (BSC lending protocol) because gas fees are just killing the user experience on Ethereum, and this will probably remain like this until L2 are available.

Finally, we have to remember that the ER is not forever, and once it’s gone, the protocol needs to generate enough fees to cover the end of the staking rewards, so we should be careful about how we use those AAVE.

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Hello and first of all, thanks for the carefully crafted contribution.

However, I do believe that any liquidity mining incentive on Aave is as best unnecessary. Here’s one thing to consider to assess the health of a money market: the balance between borrows and deposits.

On Compound since the launch of the mining, it skyrocketed in favor of borrows, because mining on borrows creates situations that favor deposit-borrow loops. Look at the metrics, it’s telling - despite a similar TVL Compound roughly has 4x the borrows of Aave’s (both versions).

Compould. TVL = 5.16B | Total Borrowed = 4.3B
Aave (V1+V2) TVL = 5.85B | Total Borrowed =~1 B

If you want more context into my thought process, feel free to check the resource I just shared today helping to assess the safety of money markets.

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Thank you to everyone who provided feedback - great points all around! To reiterate, this program is being proposed as somewhat of a “beta” to further investigate how the inclusion of liquidity mining rewards will benefit the Aave ecosystem. The poll closed with 62% of participants supportive of introducing rewards. To touch on a few points:

  • Are Aave liquidity rewards needed? While Aave has seen success without rewards so far, this program would attempt to supercharge its growth at a relatively low cost to the treasury and Aave holders. Instead of a binary yes/no approach to rewards - one framework to consider is what token % makes sense? (0%, 0.5%, 1%, 5% etc). The proposed annual distribution of 1.3% of the fully-diluted supply is significantly lower than other DeFi protocols. @RyanRam brought up valid points on maintaining an ecosystem fund - we believe a lower LM distribution saves plenty of AAVE for ecosystem efforts down the line. The proposed 550 AAVE/day would use less than 7% of the 3MM AAVE reserve annually. Our view is that LM rewards can be distributed alongside grants and ecosystem initiatives. The community can also vote to stop/decrease rewards if needed.

  • Migration: We don’t see migration as the primary reason for LM rewards. Any incentives to migrate are an add-on to the main focus - increasing liquidity and utilization in v2.

  • Distribution mechanism: @EzR3aL’s multiplier system is an interesting idea (parallels to Ampleforth’s Geyser program) - perhaps this incentive structure can be layered on down the line to keep the initial distribution fairly simple. We agree with the lock up comments from @davidkohcw and @mapleleafcap. The 10 day vest is likely too short - 1/2 after the 10 day vest and 1/2 in 6 months may be a good compromise.

  • Targeted pairs: @Defi_stalker and others mentioned a shorter list of target markets such as DAI, USDT, USDC, WBTC, and ETH. We believe this approach will boost rewards to the most productive markets and makes sense for the initial distribution. Over time, the community can always vote in new assets and stable coins.

Given the feedback, we will move a refined version of the LM proposal to the AIP Process. Again, this proposal attempts to trial LM rewards with a relatively low amount of AAVE.

Next Steps: When the AIP is live, we will need support from AAVE holders through delegation or a direct vote. We will post the AIP/vote details here.

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This is a fantastic idea and one that I’ve been thinking about quite a bit. I’m an AAVE token holder, all of my AAVE is in the safety module, and I have my spare cash in USDC earning interest on AAVE. In other words, I’m a huge AAVE fan, investor, and user. I promote Aave to all my friends.

My only concern is how little Aave impacts people outside of crypto. Of course this is true for almost all of crypto now, it’s too circular. How do we change that? Because when the next bear market comes, it will be hugely beneficial to have links to more traditional borrowing/lending markets through partners. For example, people in developing countries who need small loans to start a business. Car loans. That is where AAVE needs to help with incentives, in my opinion, in order to build out partner networks in local communities that can help facilitate this.

I see liquidity incentives as another way for the relatively rich to increase their stake in AAVE. They are the ones that will benefit the most from this, not the little guy. I don’t see how a 10-day cooling off period does much to incentivize long term thinking, either. It’s just 10 days, not 10 months! I want to move more people to v2, but think there are better ways to accomplish this.

Let’s find ways to incentivize behaviors we want to support and encourage as part of the Aave community. Transferring more Aave to the relatively rich is not the way to align benefits with community goals. I’m against this proposal.

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Good morning all,
I am clearly against this proposal.
In my opinion, this is a proposal aimed only at making short-term profit and again for whales who can never get enough of gorging on money.
Why be against? Well, I’ll put aside false claims such as facilitating the v1-v2 migration or advertising the protocol. Sounds silly to me.
On the other hand, I will be in front of the fact that this will have a downward pressure on the price of aave (even with the cooldown of 10 days). This also has the effect of increasing the token release by 50%, thus diluting the total supply. And the worst effect is that with a proposal like this, we will therefore have a decrease in the guarantee provided by the stackers at the same time as a significant increase in stable deposits and therefore less guaranteed funds in the end.
It is one more risk that is certain.
Finally, there are much more urgent proposals to be resolved and the short-term interests of some must not exceed the medium-term interests of a whole community that believes in this beautiful project that is Aave.
I will vote NAY !!

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Chiming in from the perspective of someone integrating into the protocol. I do think the liquidity mining helps grow the total pie and can bring meaningful amounts of new capital.

There is currently a few community members working on an integration between PoolTogether and Aave so Aave powered prize pools can launch. PoolTogether currently supplies ~$130 million of supply side capital to Compound Finance. Having a high effective APR means Aave should see similar if not greater amounts.

Additionally, it doesn’t direct result in selling pressure. PoolTogether basis on yield farming rewards directly to the prize winners so it’s up to them whether to sell or hold those.

tl;dr I think this can be positive sum and grow the total pie for Aave.

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Thank you @Anjan-ParaFi and ParaFi for starting the liquidity mining conversation with your thoughtful proposal. We wanted to respond with some thoughts on liquidity mining in general and, specifically, on the proposed plan.

TL;DR — We should absolutely try out liquidity mining since it’s a potentially powerful growth lever for Aave. But we should do it as an experiment to better understand the pros/cons.

About us: Standard Crypto

Standard Crypto is a venture capital firm based in San Francisco focused on (surprise, surprise) crypto. We aim to be long-term partners to the entrepreneurs and communities we support. Our mindset is to maximize the potential/value of a crypto-network on a 10+ year time horizon. We hold a significant number of AAVE tokens. We believe that Aave has the opportunity to affect structural change in global financial markets. And we are delighted to support the team and community in pursuit of that goal over the next decade and beyond.

"If by whiskey liquidity mining…"

If when you say ‘liquidity mining’ you mean the powerful force to coordinate capital and labor in pursuit of improving Aave long-term — then we are certainly for it. But, if when you say ‘liquidity mining’ you mean the opportunism inspiring, product-market-fit obscuring, token price destroying, community fracturing scourge on DeFi — then we are certainly against it.

All that is to say, liquidity mining has pros and cons. It can inspire explosive growth but it can be value-destructive if poorly executed. Aave has accomplished all it has so far without any direct financial incentives for usage, so we should be careful not to lose or hinder the unique product-market-fit that we currently have.

The imperative to experiment

We think it’s a good idea for Aave to experiment with liquidity mining. The only way to learn how appropriate liquidity mining is for Aave is to give it a shot and see what happens. We’re better served by having an open mind to any/all growth levers at our disposal. But we should maintain a high bar for deeming an experiment a success and doubling down.

An ask to the community: set goals

We’ve observed in our experience that the best growth experiments have clear objectives. Setting goals and being honest about whether or not they were achieved is the most effective way to learn and make progress.

The initial proposal suggested 4 positive outcomes of a liquidity mining campaign. We think each of those outcomes could have a target metric or set of metrics. Initially, the goal would be to move those metrics in the desired direction. But over time we can get better at predicting how much we’ll move the metrics and ultimately gauge the ROI of various growth levers.

For example:

  • Grow lending and borrowing activity in targeted markets — how much additional liquidity do we gain normalized per AAVE issued?
  • Further decentralize/expand the AAVE token holder base — how many new users did we add? does the AAVE gini coefficient increase or decrease?
  • Incentivize v1 to v2 migration — how much v1 liquidity migrated to v2?
  • Increase long-term pools of capital via stkAAVE distribution — how much have we grown the amount of long-term staked AAVE?

Ideally, we’d study the above on a cohort basis comparing the behavior of incentivized users to our previous baseline or to user behavior in non-incentivized pools.

Specific feedback on the proposal

We thought the initial proposal was well reasoned and a great start. We are generally supportive but would offer a few points of feedback:

  1. We suggest a cap (or “budget”) of 50K AAVE (0.3125% of the FD token supply). At an emission rate of 550 AAVE/day, the experiment would conclude after roughly 1 quarter. Since we can always do more later, we should start small. We also think it is healthy to have the liquidity mining program conclude as a default.
  2. We’d slightly reduce the number of incentivized pools to the following six: DAI, USDC, USDT, GUSD, WBTC, ETH. With those six pools we can gauge the differential response to liquidity mining for large pools, small pools, and across a variety of asset types.
  3. We’d weight the liquidity incentive emissions per eligible pool roughly in-line with current pool size (see table below).
  4. Lengthen illiquidity period for incentives to something on the order of months, rather than days. Similar to capping the scale of the experiment, we can always shorten the illiquidity duration later if needed. But why not aim to select for the most aspirational user behavior?

The following table is our suggestion for structuring the incentives, in line with (2) and (3) above.

Pool Emission ratio
DAI 13.40%
USDC 41.56%
USDT 25.87%
GUSD 0.73%
WBTC 8.25%
ETH 10.19%

Once again, thank you to Anjan and the Aave community for a thoughtful discussion. We are excited to engage!

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