[TEMP CHECK] Allocating part of GHO Revenue to Safety Incentives

[MarcZeller]

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title: [TEMP CHECK] Allocating part of GHO Revenue to Safety Incentives
author: Marc Zeller, Aave-Chan Initiative (ACI)
date: 2023-06-07

Abstract

This TEMP CHECK proposes the introduction of a dual reward system Safety Incentives, where a portion of GHO revenue is directed to the Aave Safety Incentives, enabling stakers (StkAAVE & StkBPT) to earn both AAVE and GHO tokens.

Motivation

The motivation behind this TEMP CHECK is to enhance the sustainability of the Aave protocol by reducing its reliance on the Ecosystem Reserve of AAVE tokens for Safety Incentives. We propose a strategic shift towards harnessing protocol economic activity to generate “real yield” through the introduction of GHO as an additional Safety Incentive.

By directing part of GHO revenue to the Safety Incentives, we aim to create a dual reward system, offering stakers both AAVE and GHO tokens. While the contribution of GHO to Safety Incentives may initially be a small fraction of the total incentives, it represents a significant step towards the protocol’s maturity and sustainability.

This proposal, suggests that the governance should adjust the distribution percentage quarterly, in response to market conditions.

As the Aave protocol already generates sustainable revenue that covers service provider costs, the introduction of GHO into the Safety Incentives mix is a viable and strategic move toward diversifying Safety Incentives and ensuring the long-term sustainability of the protocol.

Potential Implementation

While technicals details of the implementation will be discussed at a potential ARFC stage of this proposal, and current stage is meant to gauge community’s general interest, here’s a diagram of a possible implementation, redirecting GHO revenue from Collector contract (dao treasury) to a splitter contract controlled by governance.

Initial Parameters

We propose to set a potential “Gho Splitter” contract with

• 80% toward COLLECTOR contract (Aave DAO treasury)
• 20% toward REWARDS_VAULT (controlling safety incentives)

Next Steps

• Wait for GHO deployment AIP vote result (a NAY outcome will make the current TEMP CHECK irrelevant)
• Gather feedback from the community.
• If consensus is reached on this TEMP CHECK, the proposal will be escalated to the TEMP CHECK Snapshot stage.
• If the TEMP CHECK Snapshot is successful, the proposal will be escalated to the ARFC stage for service provider feedback and implementation discussions.

Disclaimer

The Aave Chan Initiative has not been compensated by any third party for publishing this TEMP CHECK.

Copyright

Copyright and related rights waived via CC0.

[EzR3aL]

Hello Marc thanks for the proposal.
Do you think it is good to directly start with rewards for staker from day 1? Even though the protocol is sustainable I am not sure if we should start with fee sharing directly.
Given the current market conditions it will probably be not a big amount but still I would probably prefer allocating all fees to the DAO. To bolster further GHO incentives in other protocol’s and just diversify the treasury.

Imho I would let GHO be live for a few months and see how it will evolve and then decide on how to share fees and so on.

Anyway thx for the proposal!

[MarcZeller]

Hello @EzR3aL, thank you for your reply.

@EzR3aL

Do you think it is good to directly start with rewards for staker from day 1

While it’s true that the GHO revenue will initially be modest, and the impact on the Safety Module participant rewards may be minimal, the purpose of implementing this proposal from “day one” goes beyond immediate financial impact.

This proposal is a clear signal of the Aave DAO’s commitment to sustainability and a gradual transition away from reliance on Ecosystem rewards. It’s about setting a direction for the future and demonstrating our dedication as a DAO to this path.

Even though this proposal represents just the first step in what could be a long journey, making this commitment from day one sends a powerful message about our intentions and our commitment to sustainability. In my opinion, the benefits of this clear signaling are significant and this aligns with the ACI platform & vision.

[0xlide]

This proposal is gooooooood👻

I recommend conducting a thorough analysis and making a judgment regarding the initial parameters. Additionally, it is advisable to lock the rewards until reaching the bucket capacity, as specified in the GenesisParameter, of 100M GHO.

According to the GHO Genesis Parameter Analysis by AaveCompaniese, in the first year in the 1.5% interest rate case, revenue estimates range from $2.5 million in the DAI growth scenario to $4.1 million in the FRAX growth scenario. Sending 20% to REWARDS_VAULT in the first year would generate incentives ranging from $500,000 to $820,000.

Safety Modulu Data(@Llamaxyz )： https://community.llama.xyz/aave/safety-module

Thank you for the excellent proposal.

[A_J]

Very much in favour of this implementation because this focuses on long term value creation and independence of Aave DAO with gradual transition from reliance on Ecosystem rewards.

My concern is in relation to the split % with a view to take a balanced yet long term approach. As the protocol grows in value with GHO, more focus on safety incentives is required to keep Safety Module reserves at healthy levels. I suggest to code 80/20 split from day 1, transitioning to 70/30 in 180 days and 60/40 in 365 days.

[WintermuteGovernance]

We are in favour of this proposal thanks @MarcZeller

We agree that reducing Aave’s reliance on native rewards to service the protocol is super important for its sustainability.

We support the 80/20 split and assuming Aave V3 Ethereum Pool Facilitator gets filled rather quickly (ignoring stkAAVE discounts) this is ~$300k GHO a year towards SM incentives which is a great start.

In the future, it would be interesting to explore different GHO splitter parameters including something dynamic like Lido’s Insurance <> Treasury split. For example, if Aave’s Treasury is above a certain threshold (determined by governance) the SM gets an increased % of GHO rewards to further reduce AAVE incentives.

[TokenLogic]

Hi @MarcZeller,

As this proposal is directionally aligned with an earlier forum post, link below, we are directionally supportive of this proposal.

[TEMP CHECK] Safety Module Upgrade Part IV - Incentives Management Upgrade

title: [TEMP CHECK] Safety Module Upgrade Part IV - Incentives Management Upgrade author: @Llamaxyz - @dydymoon & @TokenLogic created: 2023-04-13 Summary This publication focuses on how incentives are distributed to reduce the overall AAVE spend and enhance the profitability of the Aave DAO. Abstract The current SM incentives budget is 1100 AAVE/day. These rewards allow Aave to attract deposits, where up to 30% can be used to insure the protocol in case of shortfall event. At the moment,…

We are not sure if everyone has seen the SM upgrade posts, there are many. The SM proposals also suggest replacing a portion of the AAVE with GHO for single stake assets and then using GHO to attract veBAL and vlAURA vote support to boost the SM yield and reduce Aave DAO’s overall budget spend.

Our main consideration with distributing GHO via the SM, is the timing. There needs to be solid liquidity for GHO and ideally some utility beyond swapping for fiat on a CEX or to another stable coin on a DEX to then cash out via a CEX. It would be prudent to let the GHO peg settle, develop a track record and then be integrated into the SM emissions. It may be that the Aave Governance process duration is already sufficiently long in duration to enable this proposal to progress without delay.

We like how the GHO is funded from revenue, not debt. The splitter concept lends itself to scaling the SM insurance fund nicely. However, in time when BPTs are accepted in the SM and smBPTs gauges are in production, direct emissions are less capital efficient compared to alternative mechanisms. Distributing GHO to attract veBAL and vlAURA vote incentives, will lead to a higher ROI on SM deposits and it will be another way to distribute GHO into the broader ecosystem. For stkAAVE and other single asset deposits in the SM, there would be no change except perhaps considering the overall desired APR to prevent overpaying.

The summarise, we are directly supportive and highlight that there are additional iterations which would further enhance the capital efficiency of the SM that should be considered. Pivoting to the more efficient approach for attracting BPTs into the SM is something that can be actioned in time and would likely lag this proposal in terms of implementation schedule.

[0xlide]

My analysis last night concluded that only 0.12%~0.28% of the Stake Reward APR would be up, which is not only ineffective for the purpose, but would not promote GHO.

Evidence
Aave’s STAKING VALUE for the last 6 months: $290million ~ $410million(llama dashbord)
Projected 1st year earnings range for a 1.5% fixed rate: $2.5 million ~ $4.1million(GHO Genesis Parameter Analysis)
Safety incentive generated by GHO (20% toward REWARDS_VAULT): $500k ~ $820k
Safety incentives generated by GHO converted to Reward APR: 0.12% ~ 0.28% up

[Kene_StableLab]

This proposal is a step in the right direction towards sustainability and reducing reliance on the native AAVE token; as an initial TEMP CHECK, this proposal is a welcome development.
We look forward to seeing how these parameters shape up during the discourse in the ARFC stage.

[jengajojo]

Great initiative from a long term sustainability point of view, especially with filling SM with revenues @MarcZeller . I second @WintermuteGovernance on their suggestion for a dynamic splitter model but 80/20 is a good start for the initial config.

[MarcZeller]

we would like to thanks @TokenLogic for this reply.

I think the right approach would be to implement a modular splitter contract that can easily be controlled by governance to distribute part of GHO revenue as governance see fit in terms of strategy.

alongside this architecture upgrade it’s important to make reward_vault evolve to support more complex distribution.

if this proposal passes TEMP CHECK stage, we will craft the ARFC in this direction to focus less on specific parameters of distribution but more on modularity to leave the doors open for synergies with @TokenLogic treasury & revenue management strategies.

in terms of timeline, this proposal requires quite a bit of engineering and auditing, from primary estimation it would require 3-4 weeks of work after a potential TEMP CHECK snapshot greenlight to be “ARFC-Ready” then audit time to be “AIP-Ready” it’s very likely GHO will be released and will start to generate some revenue meanwhile, allowing the DAO to collect market data that will help taking decisions.

[MarcZeller]

proposal escalated to Snapshot stage.

The ACI has discussed with @bgdlabs and prepared the engineering resources to move further on this if governance approves this TEMP CHECK.

[RapidsCapital]

Hi may I ask why it would not promote GHO?

[MarcZeller]

Hello, the ACI is currently working on the code allowing this proposal to be implemented on a potential AIP stage, this code will be opensource and shared when ready in the context of a ARFC.