[1IP 27] Allocate 1M USDC stables in treasury to lending pool on AAVE V3

Author: @DAOplomats.eth (@Baer, @jengajojo)

Simple-summary

This proposal suggests allocating 1M USDC of the current USDC balance into AAVE V3 to generate passive yield.

Motivation

~95% of the current 1inch DAO treasury is in USDC, earning exactly 0% interest or fees. The only source of income is the 1inch DEX. At the same time, there is ~15.5M USDC which could potentially generate income for the DAO with relatively low risk. The current average variable yield in AAVE markets is between 1-2%

Specification

What is lending and borrowing?

https://www.youtube.com/watch?v=aTp9er6S73M

AAVE V3

Aave is a decentralised non-custodial liquidity protocol where users can participate as depositors or borrowers. Depositors provide liquidity to the market to earn a passive income, while borrowers can borrow in an overcollateralized (perpetually) or undercollateralized (one-block liquidity) fashion.

Expected Yield

The current average variable yield in both markets is between 1-2%, which means that the DAO can potentially earn between ~ 6000 & ~12000 USDC per month.

Update (13.05.23) :Current yield in Aave is more than 3%

Why AAVE?

The AAVE team has been building since 2017 and the contracts have hosted one of the highest TVLs in DeFi at the moment. This makes depositing in AAVE V3 relatively less risky than any other lending/borrowing protocol.

Considerations

There are several ways to earn a yield on idel treasury assets such as:

Yield Farming on yield aggregators such as Yearn.Finance

In this approach, tokens are deposited into contracts which run the best risk-adjusted farming strategies to earn native tokens, which are swapped back to the original token. This strategy's upside is that yield is farmed automatically and is independent of market activity; however, this comes with slightly higher smart contract risks than the other two options. Another con here is that the Yearn.finance team is completely anonymous, which can be considered a con in some cases

Being a liquidity provider on DEXes

As highlighted in the Stablenode proposal, being a liquidity provider for the native token has several advantages and disadvantages. Since this strategy is already being proposed in another RFC we won’t dive into the details here. The only con we see here is that to provide a significant proportion of the treasury to LPing would mean taking on losses in the form of slippage on top of the risks mentioned in the proposal.

Depositing into a Lending pool

Based on the analysis provided in this proposal, we suggest that depositing in lending pools is the best risk-adjusted strategy for a large treasury allocation. In the current approach, there is no need to do any other complicated swap resulting in slippage or engaging in unnecessary smart contract risks.

Risks and Disclaimers:

AAVE Audit report

• https://consensys.net/diligence/audits/2020/09/aave-protocol-v2
• https://docs.aave.com/developers/deployed-contracts/security-and-audits

DAOplomats will monitor the position and provide an update to the DAO regularly