[TEMP CHECK] Merit - A New Aave-Alignment User Reward System

Governance
1

Title: [TEMP CHECK] Merit - A New Aave-Alignment User Reward System

Author: Marc Zeller - Aave-Chan Initiative

Date: 2024-01-30

Summary

Introducing “Merit,” an Aave-alignment user reward system, designed as a merkle-tree-based periodic airdrop to incentivize Aave-aligned behaviors and enhance the competitiveness of the Aave protocol.

Motivation

In an increasingly competitive DeFi landscape, Aave seeks to innovate its protocol efficiency and appeal. “Merit” aims to distinguish Aave with a rewarding system that emphasizes actions beneficial to the DAO, countering competitors’ use of points or non-transferable tokens. while increasing DAO revenue and wanted behaviour.

Specification

“Merit” is a booster-based reward system with specific actions that earn points over time. These points determine the weekly distribution of StkAAVE and GHO rewards. The precise calculations are kept private to prevent gaming of the system. Merit does not provide any benefits to Sybil’s actions.

Rewarded Actions

Actions that align with Aave’s strategic objectives will be rewarded:

Action
Deposit LST, Borrow wETH
Deposit LSTs, Borrow wETH using emode
Deposit sDAI, Borrow GHO
Deposit USDC/USDT, Borrow GHO
Deposit AAVE, Borrow GHO

Merit boosters

Merit boosters enhance these rewards for specific behaviors:

Behavior Multiplier description
Staker Bonus for staking AAVE, StkBPT, StkGHO
Active in Governance Rewards for voting or delegating to an Aave DAO recognized delegate platform
First-degree User Bonus for direct Aave protocol users
Second-degree user of aligned protocol booster for users coming from aligned protocols that favor Aave over other protocols.
Migrator Incentive for moving positions to Aave from others protocols
Diversity Supporter Rewards for using minority LSTs
OG DAO Participant Booster for early DAO voters or delegates
Holdooor Booster for ≥100-day AAVE holders in the past year
Stakoor Booster for ≥100-day StkAAVE holders in the past year

Merit Diluters

Merit Diluters will dilute part or all rewards for certain behaviors:

Behavior Penalty Description/Effect
User of Non-Aligned Protocol Severe dilution (up to -100%)
Dumpoor Sold threshold amount of the previous week’s airdrop dilution
Freerider Has not voted or delegated to a recognized Aave DAO delegate Platform Light dilution

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  • User A: This user regularly engages in actions rewarded by “Merit.” As a direct participant in the Aave protocol, User A can expect to receive slightly higher rewards compared to users with indirect involvement.
  • User B: This user is highly active within the Aave ecosystem. By staking in the Safety Module and actively participating in governance (voting or delegating), User B is eligible for enhanced rewards through the “Merit” system.
  • User C: This user operates through non-aligned protocols, As a result, User C will not receive any periodic rewards from the “Merit” system.

Budget, Duration Scope

  • Weekly Budget: Defined by Aave Finance service providers at ARFC stage.
  • Duration: Initial 90-day period.
  • Scope: Aave V3 Ethereum

Non-aligned protocol list:

We propose to launch Merit with a single protocol with non-aligned status: Morpho Aave Optimizers V2 & V3

Migration bonus multipliers list:

We propose to apply the “migrator” Boosters to users of the following protocols:

  • Morpho V2
  • Morpho V3
  • Morpho Blue
  • Spark

Start of the snapshot to calculate Merit rewards:

Timestamp equivalent block of the publication of this TEMP CHECK with retroactive rewards at the time of implementation of this proposal in case of a successful AIP vote.

Next Steps

  1. Refine the proposal details based on community feedback to achieve consensus.
  2. Conduct a TEMP CHECK snapshot vote.
  3. If successful, escalate to the ARFC stage, followed by an ARFC snapshot vote.
  4. Upon successful ARFC outcome, prepare and submit an AIP for implementation.

Disclosure

The Aave Chan Initiative independently proposes “Merit,” without external compensation.

Copyright

Copyright and related rights waived under Creative Commons Zero (CC0).

15 Likes
2

Supporting “Merit” and the idea behind it.
Aave user have always been strong and aligned with the protocol and maybe even the DAO (by delegating or voting). Through Merit these user will be rewarded in a fair way.

The Bonus multiplier are very generous chosen, making sure every user will be able to get a piece of that cake.

On the other hand malus multiplier are targeting non-aligned user and typical airdrop/yield farmer, which are basically never a net positive for any protocol.

Will user also be eligible if they switched their loan through other dapps like Defisaver from e.g. Spark to Aave V3 Ethereum?

Thanks for Merit, to stay competitive but also fair its important to launch programs like this.

8 Likes
3

I hope everywhere StkAAVE is mentioned this also includes StkABPT. Also should not penalize StkABPT under “Freerider” since we have not ability to vote or delegate.

2 Likes
4

Looks great, well balanced as aave holders like!

1 Like
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Thanks for the initiative as always mate. I have borrowed GHO on Aave and have deposited USDC/T on Morpho to farm their tokens. Do I have to migrate back the Morpho funds on Aave v3? Thx

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Policies that have always been positive should be dominated by rewards and should not have penalties. For example, there should be no penalties for entrusting voting rights. Some people who do not understand the operation may even lose their wallets. Don’t expect most people to do operations that are not easy to perform.

2 Likes
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Hello @GregDh84, as a user on a non-aligned protocol, your merit reward would be zeroed out by having a -100% negative multiplier.

@DTBAEE Merit does not “punish” anyone, Aave is DeFi, aave stays and will remain a permisionless protocol offering the same APY to every single user.

Merit is a reward layer system on top of Aave. Aave users under Merit, have either the same or a better outcome.

@daren_eth StkBPT holders have the highest yield of the safety module already + they will get the “Holdoor” bonus multiplier

2 Likes
8

We do not support this proposal at it’s current form.

Implementing penalties for DeFi users that use multiple platforms of the ecosystem is embracing a maximalist behaviour rather than embracing the common goal we all share in this digital asset space around it’s adoption.

There are many use cases and reason on why someone would be using both Aave and the “Non-aligned Protocol”.
We’re all in for the continued success of Aave and for it to maintain it’s market share - but we will not support penalising users in a permissionless environment.

1 Like
9

The same answer as previously: there’s no punishment, only the absence of rewards for specific actions.

To be more clear, we changed the proposal wording to remove the term “penalty” and use the more fitting terms “Boosters” & “Diluters”

5 Likes
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While we support the motivation behind “Merit”, we recommend excluding the Designers of the Reward System from “Merit” and removing the following two Rewarded Actions.

  • Excluding the Designers of the Reward System from “Merit”:
    Only the designers of the reward system have access to the specific formulas. As a result, their receipt of rewards carries a high potential for compromising the trustworthy neutrality of this initiative. Therefore, we recommend excluding the designers of the reward system from eligibility for “Merit.”

  • Removing the following two Rewarded Actions:
    Promoting the issuance of GHO collateralized by USDC/USDT is not recommended as it may undermine the censorship resistance of GHO’s collateral assets. Also, promoting the issuance of GHO collateralized by AAVE is not recommended as it may compromise the safety of GHO’s collateral assets.

1 Like
11

Could you explain what you mean by designer?

Also looking at TokenLogic | GHO Analytics you can see that the top borrower haven’t used AAVE as a major asset to borrow GHO. I don’t see any risk associated with that right now. It could be in the future if the major part of GHO would be backed by AAVE and then it suddenly drops extremely in price, but still, there are other assets backing it, thus i cannot see any scenario being a risk.

3 Likes
12

Although it can be a slippery slope, giving a bit of airdrop / staking rewards to those active in governance would be great. It is something that we can see on Cosmos governance (particularly Cosmos, Osmosis) and it works very well there.

Another potential good idea in the sense of increasing governance is to add the HAL widget in AAVE Snapshot page. Works very well and helps me keep almost 100% active voting track record on the DAOs I really care about.

image

1 Like
13

Although the motivation behind this proposal is to reward Aave-aligned users, this can easily become a slippery slope for users who use multiple protocols, and that might not be a great approach for how we choose to reward our user base.

1 Like
14

I support this proposal. It aims to equitably reward Aave-aligned users, acknowledging their loyalty and active engagement with the protocol. The “Merit” system values beneficial behaviors for the ecosystem by granting generous multiplier bonuses, while avoiding passive rewards for less aligned actions or those with potential for misuse.

On the other hand, the exclusion of system designers from the “Merit” reward system ensures the impartiality of the initiative, and the removal of certain rewarded actions aligns with a prudent approach to underlying asset management. This proposal therefore embodies principles of balanced governance and a competitive yet fair protocol.

4 Likes
15

Good initiative. Good Comments.

Summarizing:

Dont use penalties or punishment terminology. “Diluters” is better yes. OR “Dampener” etc. But even better to just only have “Boosts” instead - unless something something is clearly bad i.e. user is doign something risky to the protocol

Privacy of points formula - This means we need to figure out how to keep it private. I dont think we need to explicitly stop certain people from receiving the rewards - it would be impossible anyways. Imho if we want to stop this, we would need to do something like “After X amount of time we will reveal what the specific calculations were” - this means it would be possible for someone to sleuth and find out addresses to abused their position. This scare should itself stop it from being abused :slight_smile:

Some other personal additions:

  • Maybe a bit too many things at once? Should be way more simpler as a program to start out, then make it more complex over time. Otherwise users will be confused.
  • Aave NEEDS this. All these delegates saying this is “maximalist” behavior. Yeah no shit. Otherwise the incentive system in crypto means new protocols with non-diluted tokens will always eat away at established projects. Stop letting this be the status quo. Not seing this is perfect but its better.
1 Like
19

It would be great to give a boost to some of the Aave V2 Pioneers as well: https://poap.gallery/event/566

1 Like
20

Providing incentives solely for the issuance of $GHO backed by specific assets has a high potential to create a misconception that Aave DAO strongly endorses those assets as collateral for $GHO. Additionally, even if the collateral ratios of USDT/USDC/AAVE are currently not problematic for $GHO, the act of increasing those collateral ratios does not seem to be a favorable course of action.

The term “designer” here refers to individuals who are knowledgeable about the precise calculation formula for rewards within “Merit.”

21

This initiative is focused on these assets not because they should endorse that GHO is only backed by these, but because these also generate a substantial amount of fees and revenue for both, user and treasury. In the end GHO is still and will be backed by every asset deposited into the protocol.
But we have to start somewhere and looking at it strategically it makes most sense to start with these.

And thanks for clarifing the term designer.

2 Likes
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Following governance discussion, this proposal has been escalated to TEMP CHECK Snapshot.

Voting starts tomorrow. We encourage everyone to participate.

23

Posting the rationale for our YES vote here which we have also posted on our delegate platform:

This is a very interesting and relatively complex proposal. We have both points in favour and points against, and some further considerations for the ARFC stage:

Pros

  • Rewarding Aave users for actions that are beneficial for the protocol via the Boosters makes sense and uses the full functionality of the open blockchain ecosystem.
  • This system gamifies Aave even more and would bring about more usage and fees to the ecosystem in protocol-aligned manners.
  • While we are conflicted about the Diluters, this makes sense since it allows Aave to turn non-aligned users to more aligned users, which is better for the protocol and builds up a loyal user base, which is very beneficial in the long run

Cons

  • There is a chance that the non-aligned protocols may also apply a similar system and this would lead to a ‘war’ between the protocols, which may end up hurting Aave users and not allow them to maximise their capital efficiency.
  • The points formula is private which is not ideal - having one party, even if it is a ‘trusted’ one, knowing the formula leads to a centralisation vector even though this is somewhat mitigated since the ‘designer’ is not part of the reward system.

Further Considerations for ARFC Stage

  • It may be better to start with only a subset of these actions as @Jommi has suggested since it would be good to test this proposal out first and then expand it.

All in all, this is a very worthy experiment and we are in favour of it.

2 Likes