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:
- 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.
- 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.
- We’d weight the liquidity incentive emissions per eligible pool roughly in-line with current pool size (see table below).
- 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!