The purpose of this RFF is to gather more detailed feedback, specifically from the larger NAY voters, to help improve the proposal put forth in Temp Check #2. Your time is appreciated.
Existing Feedback
Summarized from forum and snapshot
Concerns
Desire for more concrete alignment and commitment to liquidity bootstrapping in numbers.
Uncertainty in benefit to Aave DAO
Positives
Mode has over 500m in TVL and is heavily denominated in lending markets. Adding Aave as a familiar and trusted protocol shows promise in attracting significant liquidity from existing TVL.
Plan for Temp Check #2
Align on a quantifiable number for liquidity commitment with Aave, Mode and interested LPs.
Include more details about Mode Points multipliers which would be applied to Aave markets once deployed.
Target specifically productive assets for Aave on Mode like Ether.fi’s weETH (over $26m currently on chain) which has seen significant demand on Ethereum mainnet for Aave.
Proactive efforts to include aAssets in attractive markets to spur demand (i.e. Balancer pools with Beefy, Splice (Pendle Fork))
here is my rationale behind my vote which was NAY.
I posted a small rationale directly in the voting on snapshot which was “No benefit to the DAO. Expecting only costs, no real commitment to liquidity bootstrapping in numbers. Resources can be used better.”
Basically in the past it was crucial for Aave to be deployed on as many as possible chains to grow and generate revenue. But also in the past there were not hundreds of L1/2s which are now fighting for liquidity and creating liquidity fragmentation. Although Aave v4 is planning on solving this with CCLL, it will take some time.
Right now we are at a point in the DAO where it is crucial to decide where we do not want to deploy Aave. Why is that?
It’s because of costs and R/R and userbase. In the past there have been Aave deployments like Fantom that only resulted in a net loss for the DAO because people were rather looking at different Aave forks like Geist Finance (may they rest in peace) because of extensive LM and token dilution.
This means when looking at new deployments like on MODE, it is important to keep in mind that we have to generate a net profit for the DAO its SP and to attract new user.
So what I think is needed for new deployments is commitment like, providing liquidity to bootstrap Aave, maybe offer LM events, provide marketing towards that deployment and the benefits for user.
My main concern still is, what will happen after the MODE airdrop campaign is over, after all point events will end (Kelp, Mode, Turtle, Eigenlayer, etc.). Will TVL drop 50% or even more?
Because in my opinion most new Chains (mostly L2) are only attracting user because of incentives like these and afterwards they will leave for the next. How are you going to grow without incentives?
Mode Network is primarily dominated by incentive farmers. On lending platforms, most users are farming points, as seen by the utilization rates of the top two protocols compared to the Aave v3 benchmark, which we consider to reflect normal market dynamics.
The majority of TVL on these platforms is from farmers who deposit ETH to earn points. An example of this is Layerbank’s ezETH market, where users can earn 2x Ionic points, Turtle Ionic Points, 2x Mode Points, Turtle Mode points, 2x Renzo Points, Turtle Renzo Points, and Eigen Layer points. This results in $65 million of ezETH deposited as collateral, with only $30k being borrowed.
This raises the following concerns:
Given that the majority of volume is farming incentives, what is the future of the Mode network post-incentives?
How is Aave expected to compete for TVL since it will have fewer incentives than other platforms (both LayerBank and Ionic have native token points as incentives for suppliers)?
As revenue only comes from borrowers through the Reserve Factor (RF), will this deployment be profitable for Aave?
We can dive deeper into potential revenue using LayerBank and Ionic Protocol. The total revenue of both projects is around $1 million per year ($150k from LayerBank and $915k from Ionic Protocol).
The majority of this revenue comes from ETH and ETH-staked derivatives due to their high Reserve Factor (calculations are computed using RFs from Aave v3 Ethereum).
Revenue Calculations for LayerBank:
Revenue Calculations for Ionic Protocol:
Based on the above, there is potential for Aave to make revenue from LRTs However, will Aave be able to capture this value and earn revenue? Based on the previous proposal, which doesn’t outline clear incentives from MODE, we assume that most farmers will continue earning yield on LayerBank and IONIC as they are stacking points.
For us to vote Yes for a Mode deployment, the new proposal would need to outline clear incentives that would convince us otherwise.
Thank you for taking the time to share your thoughts EzR3aL.
I very much appreciate your outlook with concern of fragmented liquidity, competing native forks (Fantom case study), and assurances a new deployment would be a net positive for Aave stakeholders.
Regarding your main concern about the likely outcome after the Mode airdrop campaign is over (although we plan to continue incentives programs for an extended time), as well as the conclusion of points campaigns of many involved protocols. After these bootstrapping phases conclude / slow down, we predict two things will happen:
There will be a large deleveraging event, as loopers (on all ecosystems) will unwind positions that were open to farm points.
Newly levered positions will seek less emission-based yield opportunities. Mode is actively building out these opportunities.
The core culture of the Mode team and ecosystem partners is building a robust real-yield DeFi ecosystem that will thrive in a post-points era. Our high-level road map includes*:
*Integrating Aave aAssets and GHO will be explored throughout the eco
Establishing the DeFi baseplate for capital to park and earn conservative yield. This includes:
Lending markets that participants trust (i.e. Aave)
Curated bond-curve DEXes for different exposure preferences of LPs while facilitating low intra-eco slippage
80-20, index pools, etc.
Incentivized CL and full range pools
Stableswaps
Connect the baseplate to the yield layer
Transforming non-yield bearing assets to yield-bearing synthetics on the Mode bridge
Facilitating intra-ecosystem yield opportunities with strategic assets and markets
Supporting CDP protocols that can intake yield bearing assets and mint native stables
Supporting and growing yield markets (PT-YT)
Integrating innovative yield generating protocols that utilize volatility harvesting (arbitrage fee-capture) and managed v3 vaults that optimize idle liquidity
Grow and incubate the yield layer, while attracting BTC liquidity
Include strategic assets into perps counterparty LP to drive additional yield and demand for those assets (incl. BTC synthetics)
Facilitate intents-based markets to drive additional yield, both onchain and via RWA routes
Bring additional yield-bearing assets from other chains to pair with existing eco
Develop and expand our existing relationships with BTC-fi protocols and chains, providing attractive opportunities for newly-minted BTC synthetics seeking efficient DeFi-powered yield (vs. trad. staking).
Introduce existing and novel governance mechanisms to help command yield strategy and sourcing
As we all know, all of the above is easier “said than done”. However, I personally believe in our convictions and resources, respect the perspectives and pasts that enable us to build with a vision, and ultimately like our odds of success of creating an environment conducive to sticky TVL and confident stakeholders. It would be a privilege to have Aave onboard for our journey.
To address your recommendation of commitments to liquidity bootstrapping, liquidity mining events and marketing:
In addition to the Plan for Temp Check #2 in the OP post, Mode would like to also include:
Paying the $15,000, plus gas reimbursements for Catapulta, the Development Service Provider for new Aave v3 instances on new chains.
$100m committed to seed strategic, supported assets within 30 days of deployment by working with network LPs.
Earmarking an expected 1m per year in points incentives (based on current rates to incumbent lending markets) over 3 years.
We believe this is a reasonable amount to make Aave markets attractive while being conservative enough as to not attract mercenary farmers.
Thank you 0xkeyrock.eth for taking the time to put together a concise analysis on current utilization rates and revenue breakdown of Mode’s lending markets. This data is very insightful.
As to your concern about the vision for Mode post-network incentives, there is a brief outline in the conversation above with EzR3aL which gives a more idealized view of the roadmap.
To address your concern of how Aave will compete for TVL with incumbents, we strongly believe Mode can attract fresh capital from existing LRT communities. Additionally, given Mode’s particular ever-growing relationship with BTC EVM L2s, BTC synthetic LPs have voiced their openness to explore other lending markets (i.e. Aave).
We see there is demand for both newer nimble markets, as well as more familiar markets with more robust governance processes and security track records.
Notably, Mode plans to include in Temp Check #2 an earmark of an expected1m per year in points incentives (based on current rates to incumbent lending markets) over 3 years.
Hi Deez, now we are talking. I like that there are now commitments being made towards the market. I would also like to see @ACI and @TokenLogic to comment on this one, as everyone has their knowledge and experiences.
To address concerns of a new deployment on Mode with a heavy lending supply seeing adequate utilization, Mode will prioritize the listing and availability of Aave lending markets on Borrow Aggregators to facilitate cross-chain lending and borrowing. Mode has an advantage of being EVM compatible with cross-chain infrastructure, living alongside household names such as Optimism and Base on the Superchain. Mode’s positioning as the DeFi hub of the Superchain, combined with the earmarked incentives listed above, should help facilitate industry market rate utilization.
