Proposal to stop the LEND burning and start building an AAVE governance treasury

Aave V1 included the possibility to burn LEND tokens by collecting flashloan premiums and borrowing fees. Up until now, 2.3M LEND have been burned, which will not be converted to AAVE.
As a result of the migration, the LEND liquidity has shrunk considerably, which makes it very hard to buy LEND on dexes for the burning.

The LEND burner currently holds around 50K of funds, distributed across all the different Aave V1 reserves (mostly stablecoins). The burner contract is here https://etherscan.io/address/0xe3d9988f676457123c5fd01297605efdd0cba1ae

My proposal is the following:

  1. Stop the LEND burning by deploying a new version of the migrator. The migrator would instead:
  • Convert all the non stablecoins to stablecoin (EG DAI)
  • Move the funds to the AAVE reserve contract (0x25f2226b597e8f9514b3f68f00f494cf4f286491), the AAVE contract that currently holds the AAVE incentives.

Optional:

Deposit the AAVE treasury in the protocol itself and hold the treasury in the form of aTokens. With that, the following is achieved:

  1. More yield is generated from the interest paid by borrowers
  2. The aTokens interest can be used for different pourposes through the interest redirection
  3. With V2 and credit delegation, the governance will be able to borrow from the protol against the treasury, which brings some interesting use cases like
    • Providing grants to the community without depleting the governance treasury
    • Allowing borrowing to yield strategies that might use the borrowed assets to yield farm
19 Likes

What? Stop the LEND burning?

In the original tokenomics, LEND must be bought from the market to burn. Over time this reduces token supply, hence increasing the Token value.

Now LEND is AAVE. So why now buy AAVE from the market to burn them.

The whole tokenomics was dependent on the token supply deflation.

Now - 1 we increased the token supply around 25% (Printing money out of thin air on the expense or other holders ).

2- And you are proposing removing the most valuable tokenomics gem, burning the token.

I hold AAVE and strictly oppose any option against the initial tokenomics of “Buring the token”.

Don’t Turn Aave into Governance token, The token should directly incentivize from the protocol fee.

I think it’s important when evaluating token economics to think about long term sustainability of a decentralized protocol. In this perspective, a compounding treasury that accrues value over time and can be redistributed, in the future, to token holders is much more appealing to my eye than a simple token burn.

The proposal here is to start building the treasury (first step for subsequent value redistribution) from the currently accrued V1 fees, that can’t be burned for LEND anymore without a significant loss in slippage.

For reference, multiple reads on why token burning is obsolete and how a more efficient treasury can be built out of the value captured by the protocol, to bring more value to token holders:

https://docs.aave.com/aavenomics/ explains the long term vision for AAVE and the Aave protocol

Explain the drawbacks of token burning and how treasuries can be reused in a more effective way

7 Likes

My first response here is I don’t think token burning is obsolete at all. We can see EIP 1559 moving towards token burning. Filecoin has adopted it and there are researchers who think there may well be multiple protocols (both PoS and PoW) may adopt some variant of what EIP 1559 is doing in the future.

Quite frankly, to claim token burning is obsolete is a misreading of the entire space (respectfully IMO).

@Emilio I will go through your links on the weekend as I do want to understand your arguments at a deeper level and see whether you have superior points. I will say I am somewhat uncomfortable with the ease with which this idea is being circulated here currently.

I believe token burning is an important tool within tokenomics and will continue to be in the future (again consider EIP 1559). Considering AAVE has just increased token supply considerably and is now asking Stakers to take on considerable risk just to win that inflationary subsidy, I am NOT satisfied with the idea of easily ditching the existing function of token burn to give Treasury even more funds.

2 Likes

Burning has been around for many years in different token economies, and it didn’t really bring any tangible benefit - for sure didn’t emerge as a top notch value redistribution mechanism. Which means that, in my - and other researchers - opinion, it is possible to do better. Of course for other use cases it might work well. Ethereum has no governance, and given the network structure and the way it works, burning looks like the obvious way to go. Certainly some form of value accrual (in the case of ETH, burning) is better than no value accrual mechanism at all as the current network configuration.
With a tangible treasury under management (besides the control of the protocol itself) many possibilities unlock for AAVE that are beyond a slow decrease of the total supply. Including, for example, direct value redistribution to the token holders.

4 Likes

Definitely in favor of opening this topic. Burn are too short sighted and not efficient. And as mentioned, if a migration happen every N years with newly minted token, it kills any burned effect and only a wrong narrative stays.

On the fees or any revenues from the treasury, I would consider multiple aspects:

Why not splitting like XX% back to AAVE stakers as a claim. (a la SNX)
Having an other XX% on an aDAI fund to protect from hacks (an other security layer on top of the security mech to avoid taking loved AAVE from AAVE fam stakers).
Having an other XX% to pay for insurance on a mutual (Financed by all defi protocol to cover in case of non-systemic hack). (What an other layer of protection???)
Having XX% for a sort of venture branch, investing in early projects benefiting to AAVE ecosystem or AAVE ethos. ( And if those generate revenues, those would be added to this whole loop.)
Having an other XX% to invest in Governance Tokens to be able to cast vote and have an AAVE voice in other protocols. (And if those generate revenues, those would be added to this whole loop.)

Of course amounts are too small for now to be relevant but should increase in the future, otherwise additional means for capturing value should be considered :)

7 Likes

Absolutely - all of these are possibilities to be considered. My proposal goes mostly towards start building the treasury, then there are tons of opportunities that open up

3 Likes

I definitely agree that burning tokens does not make sense in most of economical designs. You are in theory paying to burn money without getting any utility in return whereas taking the amount of capital and re-investing or recapitalising would mean that you would be able to use that capital to a) yield more capital and redistribute to various stakeholders as @Sunshine pointed out or you could actually use that capital by incentivising stakeholders for various actions such as building more infrastructure and functionality to expand the protocol.

Practically using funds to increase demand for the protocol, any demand for the protocol will increase the TVL and that increases the Safety Module coverage, which means that the incentives of SM would be priced higher to cover increasing demand, these increased pricing on incentives could actually mean that there could be more demand for AAVE to cover the demand. It’s a positive value loop.

Interesting compromise can also be the option where the funds are converted to aTokens and deposited to Aave Protocol to increase liquidity and kept there for fixed time-lock, which could be long enough, for example x % of the funds could be unlocked after 12-36 months and used to incentivise stakeholders or fund development teams.

I believe that in the future efficient management of Aave Reserve will be the key part of having self-sustainable protocol.

11 Likes

I definitely agree with what’s said here, thank you for bringing it up.

The possibilities for the treasury are really exciting. For instance, as @Emilio pointed out, if the treasury holds aTokens (like aDAI instead of just DAI), we can actually vote to redirect a portion of that interest to new projects, core AAVE devs/team members, and more, sort of like a “salary.”

Furthermore, as more ways for the treasury to accrue value are built (redirecting a portion of interest/greater origination fees/etc), we can, and I believe should, pay out SM stakers in the corresponding aToken, aDAI in this example.

This is a neat model because by default, rewarding stakers with aTokens doesn’t actually remove any liquidity from the protocol, and the individual stakers would accrue interest as well. It would be up to the staker to redeem their aTokens manually.

Another option is to redirect a portion of the treasury’s interest to a “distributor” contract that distributes that given interest to stakers instead of directly distributing the earned aTokens. Thus, as the treasury grows, so too do the stakers’ incentives. I’m not too familiar on the feasibility of a system like this, but I’m sure it’s possible.

Honestly I’m just having a brain dump here… I tend to get ahead of myself. I love where this is going and 100% support the proposal.

6 Likes

Hey guys !

This is a really cool proposition, can’t wait to vote yes for this :D

As mentioned above, there is so much that can be done with a tresaury.
One part of the proposition we made with @EmmanuelD also cover this topic :

The idea of the treasury is to get a DAO growing fund in addition to the ecosystem reserve. The first fees generated will start generate interests with a farming strategy allowing the DAO to compound interests earned in order to fill the treasury faster.

  • Incentivize Devs building up on top of Aave
  • Incentivize Non Devs community members
  • Additional Safety in case of short fall event
  • Additional Incentive for stakers
  • Create a DAO farming fund with credit delegation

As the funds will rise every time with compounding, the interest could be used like this:

  • some interests used to buy AAVE and send it to stakers, creating a bullish pressure on the price
  • some interests compounded to always raise treasury
    *some interests for stakers so they could receive stablecoins or even atokens for exemple, which would increase HF’s stakers.

Regarding the burn, i also think it’s not the most efficient solution, as we are able to use value in $AAVE as a collateral, in a farming strategy or else, and i would be glad that remaining $Lend be used to start a DAO fund that would increase over time.

6 Likes

I definitely agree with this proposal.
A treasury is way better and way stronger for the aave environment. The possibilities are huge, even though I don’t know everything we could do. But using the funds for liquidity e.g. for new token that have been listed would be great. To incentive borrower and also lender to get into this asset. Also using this for Liquidity in New markets like Set market could be possible. So yes definitely behind this proposal. Burning is way to short term and only for people looking for a price spike. This model is outdated and now worthy at all. If you don’t believe me check CHSB and BEST token burnings. Look how much was burned and what it did to the price.

3 Likes

Agree with this proposal. Burning doesn’t make sense now as AAVE is a capital asset which its value should ultimately determined by the value of Aave protocol and the future earnings accrue to token holders that participate in staking and governance.

Messari’s research on rethinking capital allocation is a very good read on this.

5 Likes

Was just going to say this. Here’s the piece where they explain their capital allocation framework (paywalled).

And here’s their proposal to restructure how the treasury is managed in YFI, which comes off their research on capital allocation.

1 Like

@Sunshine Sunshine,

I appreciate the thoughtfulness of your post.

I do like the SNX parallel that could easily be adopted as part of future governance. Obviously this couldn’t be done in exactly the same manner but it makes for interesting discussion. I also appreciate the interest in incentivizing other synergistic opportunities for the protocol as the crypto space matures.

I would love to see the aTokens focused in trustless stablecoins to help bootstrap these decentralized stablecoins as they develop and compete with CBDC and more trusted stable coins.

And here’s their proposal to restructure how the treasury is managed in YFI, which comes off their research on capital allocation.

Very interesting,

A treasury is way better and way stronger for the aave environment. The possibilities are huge, even though I don’t know everything we could do.

@EzR3aL i’m agree too, being ready for these possibilities i think it’s a good start point

In favor. Buyback-and-burn misses an opportunity to grow the ecosystem and has a weak effect on valuation given the market nascency and volatility.

This change should be accompanied by some thinking around how to maintain high-quality and safe capital allocation by the community over the long term.

Looks like the community is largely in favor of the idea.

I created a draft AIP (AIP-2) can be read here

The idea is to keep to implementation as simple as possible. So the assets collected will simply be deposited in the protocol to obtain aTokens, and afterwards moved to the AAVE reserve contract.

I think there is time for subsequent AIPs to evaluate what’s the best reinvestment strategy for the treasury for the sake of the AAVE ecosystem.

11 Likes

The idea is to keep to implementation as simple as possible.

Thinking the same way, keep it simple

2 Likes

This makes perfect sense to me.

Growing a community-governed treasury makes 100x more sense than burning a legacy token which will likely not be migrated if it hasn’t been migrated already.

Fully in favor of this proposal.

2 Likes