Aave V2 - Liquidity Mining Update (90 days at 30% reduced rate)

Simple Summary

This ARC presents the community with the opportunity to continue offering stkAAVE incentives on Aave V2 Ethereum market for an additional 90 days from when AIP-47 finishes at a further 30% reduced rate.

Liquidity mining incentives were introduced to Aave V2 on the 26th April 2021 via AIP-16, renewed by AIP-32 and then incentives were reduced by 30% with the implementation of AIP-47 which expires on the 20th February 2022. A summary is shown below.

• AIP-16: 2,200 stkAAVE per day from 26th Apr 2021 on Aave V2 Ethereum market
• AIP-32: 2,200 stkAAVE per day from 24th Aug 2021 on Aave V2 Ethereum market
• AIP-47: 1,540 stkAAVE per day from 22nd Nov 2021 on Aave V2 Ethereum market
• AIP-59: 1,078 stkAAVE per day from ~21st Feb 2022 on Aave V2 Ethereum market

Continuing on from AIP-47, incentives on low vol assets are to be split 1:2 in favour of borrowers over lenders. High vol assets will only receive lending incentives and this is skewed to favour more recently listed assets and communities that have a strategic relationship with Aave, like Balancer and Chainlink.

Motivation

This proposal continues on from AIP-47 with a further 30% tapering of incentives which was directionally communicated in the prior ARC and shall last for another proposed 90 day period. We will continue with the same rationale for how incentives are distributed across the Aave V2 Ethereum market.

Even though TVL has reduced with market conditions, the incentive APR will fall due to the change in the $AAVE price.

The below section outlines the proposed liquidity mining incentives to be applied from ~21.02.2021 up to and including ~20.05.2022.

Key details:

• 30% reduction in incentives to 1,078 stkAAVE per day on Aave V2 Ethereum market
• Distribution of stkAAVE is pro rata based upon deposit dollar value
• A 35 AAVE bounty will be paid to the proposers to refund gas

The table below shows the intend stkAAVE distribution across the Aave V2 Ethereum market asset listings. In estimating the Borrowing vAPR, a 75% utilisation of the deposited assets was assumed. This was based on the current DAI utilisation.

Note: TVL per token is as per the 3rd February 2022.

Mathematics: % of value deposited x multiplier then scaled to provide LM Allocation that totals 100%. Link here.

Rationale

The previous LM campaign indicated the ongoing tapering on the Aave V2 Ethereum market that is presented within this proposal. The net incentive spend over the next 90 day period is reduced down from 1,540 to 1,078 stkAAVE per day.

Discussion

The previous LM proposal provides a lot of the context and rationale to how the stkAAVE incentives are distributed across the various assets on both markets. Link here. Something of interest on the Aave V2 Ethereum market, large holders currently can turn a 336 bps and 344 bps profit based on the existing emission schedule across the DAI and USDC pools by recursive borrowing. (Lending vAPY, - borrowing vAPR, + Borrowing Incentives vAPR, + Lending vAPY)

With the newly proposed emission schedule this 336 bps return minus gas becomes a 289 bps and 292 bps profit before gas. Time in the pool is also a huge factor, and those already invested in this type of strategy may continue to do so. However, it would be a lot less appealing to deploy this strategy now. Tapering the incentives reduces the profitability of recursive borrowing but not sufficiently so to support unwinding the positions. The opportunity cost becomes more something to consider.

Economics

• Aave V2 Ethereum markets daily Reserve Revenue is averaging around $44.5K per day during late January 2022. Daily aToken interest is around $1.9K per day.
• Liquidity Mining is estimated to cost $161,700 per day assuming 1,078 stkAAVE at $150 per token. Down from $231,000 per day assuming 1,540 stkAAVE at $150 per token. Note, previous LM was budgeted using a stkAAVE price of $320.
• Ecosystem Reserve is worth around $296.89M with an AAVE price of $150.
• 90 days at 1,078 stkAAVE at $150 per token is $14.55M or around 4.92% of the Ecosystem Reserve.
• The Net spend is $115K per day after taking into consideration the daily Reserve Revenue and daily liquidity mining expenses. This does not take into consideration the 550 AAVE/day Safety Module incentives
• Daily Reserve Revenue has reduced significantly during January and the chart below shows the image of the recent market conditions. Not the economics above only takes into consideration Aave V1 and V2 market revenue.

Further details on the daily Reserve Revenue and Economic Reserve valuation can be found on the Aave Treasury Dashboard created by the Llama Community. Please note, each query will need to be run separately.

Copyright

Copyright and related rights waived via CC0.