Proposal: Introduce Liquidity Incentives for Aave v2

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!

8 Likes

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.

7 Likes

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.

5 Likes

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.

10 Likes

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.

3 Likes

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 !!

4 Likes

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.

4 Likes

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!

7 Likes

If this ends up being implemented, any plans to include the Curve.fi aave pool contributors in the incentives?

Not sure how possible it is to do this, but as someone holding stablecoin aTokens in a Curve pool, I would love to be able to get incentives for my aTokens there and not need to withdraw them from Curve.

This might also help avoid noise in the metrics of “new users”, as someone withdrawing their existing position from curve would look like a new user. (Although in order to see that type of migration you would have to provide a competitive rate vs curve, they are already handing out 10+% APY worth of CRV on an aToken position.)

On a more personal note, I will say that I am against this initiative, one of my reasons for buying AAVE over COMP was the lack of LM rewards, proving that the platform can stand on its own. There are already ways (like Curve) to LM aTokens, let other dapps provide the incentive for the holding of aTokens.

I liked the way the polygon market was handled, with the rewards provided by MATIC and not AAVE. That seems to be the way.

3 Likes

Does this proposal also apply to Aave v2 on Polygon?

Do we know if this proposal passed? And if so what time does the new staking incentives start? I would like to participate if it is available.

It just passed, it starts at 4:53pm UTC tommorow.

1 Like

With claim fees in $50 to $100 range, stAAVE may be effectively locked for a while for users with say less than $20k in assets. I think autodropping those every month or quarter would be a good thing for a large number of users.

1 Like

I like the idea of incentivizing the protocol use and wider adoption of aave token, but I don’t see how this proposal benefits current utility of aave token and current aave holders.

In fact it looks like it even disincentivizes holding aave token.

Currently, aave token holders can not lend their tokens and earn intereset. Instead, they have to stake the token in safety module with a much greater risk of 30% chance of loss and a 10 day cooldown period. This extra risk should come with an extra reward/ privilege , but it does not. Even recently, by introducing the polygon market and rewards for depositing aave, it further disincentivized staking aave since depositing aave on polygon gives much better yields and has far less risk then staking.

That being said, as far as I can see, this proposal would yield non aave holders stkaave tokens which would further disincentivize aave staking because this would naturally lead to a decrease in staking APY day by day.

Compared to aave holders, non aave holders and users of the protocol would get even more yield, since stakaave yields more aave tokens.

Also, if taking into consideration that the users acquiring the liquidity incentive could instantly sell the incentive, that would further decrease the value of the token.

Except the governance voting utility aave token has I see it underprivileged in the aave protocol. This proposal would decrease its privilege even further.

2 Likes

Proposal is already live.

Autodropping unfortunately increases the gas usage across the whole protocol, which would further complicate the already difficult situation with the ethereum fees.

Surely it would be cheaper to autosend to all in one big transaction than to require each individual user to do so.
I think most of aaVE users are with less than $20k and so this incentive makes no sense for majority, only to large users or pools. Having amount of stAAVE that you cannot do anything with is bad for users and for platform as a whole.

1 Like

I think the stkAave part should be skipped and the users participating in the liquidity mining should just get Aave instead.
I don’t see the 10 day cooldown as an obstacle for someone to not sell the token (if that was the main reason for the implementation). It just floods the safety module with small amounts of rewards which would not be put there if the LM didn’t yield stkAave. Do the tokens actually get automatically put in the safety module before the users click on claim?

1 Like