Introduction
Aave, the leading lending platform, is entering a new chapter in its journey fueled by the introduction of the GHO stablecoin, growing interest in liquid staking derivatives, enhancements of the safety module, and the implementation of delegate incentives. Aave Governance, the community stewarding the protocol, is actively laying the groundwork for these innovations and more within the Aave ecosystem.
In this piece, we showcase the latest accomplishments of Aave's thriving community of contributors and service providers. Our goal is to provide a condensed summary of all the exciting things happening within Aave Governance, as well as its promising prospects for the future.
GHO Genesis Parameters
At Aave DAO, talk of its native stablecoin GHO has been all the raave (heh) recently. In anticipation of its launch, governance has successfully passed a number of key proposals. These proposals aim to set the Genesis Parameters for GHO and encompass key aspects such as the onboarding of GHO Facilitators, the initial liquidity strategy for GHO, and the possible allocation of GHO revenue towards safety incentives.
A proposal (status: passed) was put forward by Aave Companies, which introduced the GHO genesis parameters. These parameters included the following initial values: a 1.5% borrow rate for GHO, along with a 30% discount rate for AAVE stakers, a bucket capacity of $100M, and a discount limit of 25% of total GHO bucket size. In order to manage the supply of GHO and ensure price stability, the minting caps for DAO-approved Facilitators can be adjusted based on demand. AAVE stakers can mint GHO at a discounted rate. Additionally, the proposal introduces a dedicated Stability Module designed to provide liquidity support.
Aave DAO also introduced a new governance procedure (status: passed) for the onboarding of GHO Facilitators, an entity or protocol who can trustlessly mint and burn GHO. To apply, interested parties can submit their application on the Aave Forum. Subsequently, a discussion period will take place, followed by an off-chain vote on Snapshot. If the vote passes, the address and its initial cap will be added as a facilitator in an on-chain vote that targets the Aave DAO Short Executor. The proposal includes sample applications for facilitators like Aave V3 and Flash Minter, providing a comprehensive overview for the entire procedure. The main objective of this proposal is to establish clear guidelines for onboarding of facilitators, as well as modifying their permissions and handling their offboarding process.
Recently, there have been discussions about launching liquidity pools on Balancer for GHO as part of an initial liquidity strategy. TokenLogic authored a proposal (status: passed) outlining an initial liquidity plan for the upcoming launch of GHO. The proposed approach suggests a central liquidity pool that combines GHO/bb-a-USD, LST/GHO (80/20), and GHO/LUSD pairs. The primary objective is to facilitate large trade sizes while minimizing price impact, thereby generating sufficient liquidity to maintain the $1 peg of GHO. Additionally, the plan explores the integration of GHO liquidity tokens into the Aave Safety Module (SM) and highlights the potential contributions from various communities and protocols in supporting secondary liquidity pools. The main liquidity pools are built to leverage Balancer to increase BAL incentives and trading fee income. To maintain liquidity and diversify SM assets, the inclusion of GHO in the Aave SM is considered. Overall, the proposal provides a thorough liquidity plan for GHO, covering primary and secondary pools as well as factors to be considered for ongoing liquidity and future growth.
Finally, there are ongoing discussions to allocate GHO revenue as safety incentives. According to the proposal (status: deliberation on the forum) by the Aave Chan Initiative, a portion of GHO Revenue would be dedicated to Safety Incentives to improve sustainability while allowing stakers to earn AAVE and GHO tokens. This tactical change would help lower reliance on the AAVE Ecosystem Reserve.
Source: Marc Zeller (Aave Chan Initiative) Aave Forum
With adjustments made to the distribution % in response to market conditions, the plan focuses on ensuring the protocol's long-term viability and advancement. Further information regarding the technical aspects of the implementation, including the allocation of GHO funds to a splitter contract under oversight, will be provided at a later stage. Next steps include, waiting for the outcome of the GHO deployment vote, gathering community feedback, and potentially moving forward with the Snapshot and ARFC stages for further deliberation and execution.
LST Demand
The Aave protocol has witnessed a significant surge in demand for Liquid Staking Derivative Tokens (LSTs), particularly from the supply side. The prevailing market sentiment suggests people are looking to earn a yield on their LSTs and potentially leverage them to borrow other assets. In response to this activity, Aave Governance has mobilized to quickly increase LST supply caps.
To reduce operational and voting overhead associated with increasing supply caps frequently, BGD posted a proposal (status: passed) to grant Aave Risk stewards the power to increase supply and borrow caps of assets .This step has made it easier to increase the supply and borrow caps of fully utilized assets in a timely manner, this way Aave can meet the demand for these assets safely.
Aave Risk Stewards, as their name suggests, are risk service providers entrusted by Aave Governance with administrative permissions to manage supply, borrow caps, and overall risk parameters for assets.
Using wstETH as an example, the demand for this asset has surged across multiple markets, including Aave V3 Ethereum, Arbitrum, Optimism, and Polygon. At time of writing, the supply cap for wstETH stands at 66.82% on Ethereum, 100% on Arbitrium, 79.71% on Optimism, and 100% on Polygon.
Source: Aave V3 Polygon wstETH Dashboard
Safety Module Updates
Aave service provider Llama proposed a series of proposals aimed at upgrading the Safety Module to be more resilient, thereby strengthening the Aave Protocol. The Aave Protocol is currently at a point where after building a resilient DeFi protocol, the Aave DAO now has the task of maintaining and improving what has been built. As the DeFi ecosystem evolves, so do its risks and attack vectors. The proposed upgrades are a necessary addition to the Aave Protocol’s Safety Module, as one of Aave’s protective mechanisms. It is important for the safety module to be iterated upon at least annually in our opinion, considering that a year is a long time in the DeFi ecosystem.
As a reminder, the Aave Safety Module is the primary mechanism for securing the Aave Protocol by incentivizing AAVE token holders to lock their tokens into a smart contract. In the case of a Shortfall Event, part of the locked AAVE is auctioned off and sold against the assets needed to mitigate potential deficits.
In general, a shortfall event denotes a circumstance when there is a deficiency in the value of the collateral, and selling locked AAVE tokens through an auction is one option to acquire money to address the shortfall and guarantee the stability of the lending platform.
Below we briefly summarize each of the six proposals, saving you the trouble of digging through the forums.
Part I - Migrate AAVE/wETH Balancer v1 Pool to Balancer v2
This proposal (status: passed) explores adding the BPT into the Safety Module (SM) and recommends building a new AAVE liquidity pool on Balancer v2. The goal of this proposal is to increase capital efficiency, lower risk, and give depositors a return on their money. The proposal offers four composition alternatives for the pool, including various AAVE to wETH or wstETH ratios.
The authors of this proposal maintained a preference for Option 2, which swaps out wETH for wstETH due to its enhanced capital efficiency and possible BAL reward upside. The community ended up supporting Option 2 in the Snapshot vote. Technical requirements and migration process are also described, emphasizing collaboration with Balancer and other communities.
Part II - Asset Diversity, SM Categories & Slashing Updates
This proposal (status: passed) enhances the SM through asset diversification, risk management, and growth synergies. Three asset categories—Single Asset, Volatile Asset Liquidity Positions, and Stable Asset Liquidity Positions—are proposed to be added to the list of assets that can be accepted by the SM. The proposal analyzes the slashing parameters, underscores the dangers, and outlines the suggested assets for each category. It also outlines the pros and cons for each and offers technical guidelines for putting the enhancements into action, including guidelines for building additional pools in accordance with the outcomes of community voting.
Part III - Enable gauges on BPT in Safety Module (smBPT)
This proposal (status: passed) suggests allowing deposits in the SM to get yield from other protocols and introduces the idea of "smBPT gauges." Users would be able to use these gauges to stake their LP tokens in the SM and earn incentives from Balancer and Aura Finance. The proposal explains the rationale behind this strategy, including how to maximize rewards by using incentives and voting power. Also included in the proposal are the technical requirements and potential hazards that could arise from implementation. In general, the objective is to increase the capital efficiency of the SM, offer participants sustainable rewards, and reduce risks.
Part IV - Incentives Management Upgrade
This proposal (status: deliberation on the forum) introduces a novel method of allocating incentives within the Aave DAO in order to cut costs across the board and boost profitability. All incentives are currently being used to mine liquidity from the Ecosystem Reserve, which costs the DAO a lot of money. The proposed method calls for maximizing strategic voting power, lowering costs, and allocating the majority of the AAVE money as vote incentives for smBPT gauges. The strategy calls for strengthening backstop value, lowering AAVE spend, raising depositor yield, as well as boosting profitability and long-term financial viability. The plan also allows for the possibility of enhancing treasury strategies, boosting strategic voting power, and extending safety module coverage.
Additionally, the proposal suggests launching a Warden Quest on Paladin Protocol for obtaining votes and talks about the distribution upgrade for single assets, volatile and stable BPTs, and single asset BPTs. The plan places a strong emphasis on the management and optimization of vote incentives to achieve goals and align economic interests. The proposal also lays out the technical implementations involved in setting up weekly prize distribution, designing the voting structure, and putting in place various procedures for managing strategic voting power and vote incentives.
Part V - veToken Holding Management Framework
In order to manage the Aave DAO's holdings of strategic assets, this proposal (status: deliberation on the forum) suggests creating a voting committee and implementing a framework to help manage the DAOs strategic assets. A collector contract whitelisted multisig would be deployed by the committee, which the community would elect.
The duties of the committee include locking and unlocking veToken positions, voting on gauges, claiming protocol fees and rewards, updating veBoost, optimizing strategies, claiming incentives, compounding assets, and transferring yields to the collector contract. Aave hopes to maximize the management of its strategic assets through the use of this framework, increasing governance effectiveness, and boosting profitability.
Part VI - Future Considerations
This proposal (status: deliberation on the forum) focuses on broader future considerations and strategies Aave DAO might look to adopt in the near future. Specifically, the proposal suggests the gradual migration to a new safety module design, sustainable incentives budgets, protocol-owned liquidity strategy, and a framework for adding additional assets to the safety module.
The proposal also highlights a technical implementation plan that calls for the migration of Balancer V1 pools to Balancer V2, the addition of new assets and the reduction of parameters, the introduction of smBPT gauges and the Aura strategy, the distribution of weekly rewards, the election of a committee to oversee incentives and voting power, the creation of quests, and the discussion of progressive incentives migration & other issues.
Delegate Incentives
In addition to product development and core protocol maintenance, there has been a significant push from the community to implement delegate incentives (finally). These incentives aim to reward governance contributors who consistently bring value to Aave Governance. To justify the proposed financial incentives, the ecosystem has worked to formalize and define the roles and responsibilities of a delegate.
Flipside introduced a proposal for the creation of a Delegate Code of Conduct (status: passed) which defines the values and expected conduct for an Aave Recognized Delegate. By ratifying these values through a proposal, the Aave DAO has gained the authority to establish a consensus on the conduct they expect from their delegates.
Furthermore, a Framework for Recognized Delegates (status: passed) proposal was introduced and passed by governance as a guideline for prospective Aave Delegates. This official framework defines the duties and responsibilities of Aave delegates and will serve as the foundation for potential future compensation frameworks.
Several experimental community campaigns and programs are currently underway to bootstrap delegate incentives. Notably, the Butter and Orbit campaigns are making strides in this regard. The Butter Delegate Campaign took the first step by offering financial incentives to an Aave Delegate. After a fiercely contested election, TokenLogic became the first recipient of $15,000 grant to offer delegate services to the Aave DAO for three months. In the lead-up to the election, several delegate platforms were motivated to develop their own delegate initiative, outlining their plan for contributing to the Aave DAO.
Recently, the Aave Chan Initiative launched Orbit, a Delegate Platform Funding Initiative aimed at supporting three active Aave Recognized Delegates for their valuable contributions to Aave Governance. Included in the list of recognized delegates was StableLab (Us), Flipside (Did not wish to participate), and the London Business School Blockchain Society.
Aave Chan Initiative 'Orbit' Pilot Program
In response to the rising cost of on-chain governance due to high gas prices, the Aave Chan Initiative proposed a mechanism to reimburse (status: passed) gas fees for Recognized Delegates who vote on Aave on-chain proposals. This initiative was warmly welcomed by delegates who consistently voiced their concerns about the rising costs of participating in on-chain governance.
Conclusion
The Aave Ecosystem has solidified itself as an important pillar for the wider DeFi ecosystem. As the DAO enters into a new chapter of product launches and product development, it becomes increasingly important to pay close attention to Aave proposals and forum chatter.
Aave Governance has consistently shown its dedication to supporting the protocol by leading initiatives that generate value for the Aave ecosystem. Notable initiatives include the launch of the GHO stablecoin, catering to the demand for LSTs, enhancing the Safety Module, and implementing delegate incentives. These developments aim to bolster price stability, meet demand securely, enhance security measures, and reward governance contributors. Aave remains fully committed to evolving and upholding its status as one of DeFi’s most resilient protocols. At StableLab, we're active delegates and ecosystem participant within the Aave ecosystem, and are super excited to see these exciting changes and what's next for the lending platform as it enters a new chapter with the launch of GHO and beyond.
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