aip: TBA title: Aave V2 - Liquidity Mining Program (90 days at 30% reduced rate) status: Proposal author: @MatthewGraham created: 2021-10 25

Simple Summary

Liquidity mining incentives were introduced to Aave V2on the 26th April 2021 via AIP-16 6 and then voted to continue on the 24th August 2021 via AIP-32 2 for an additional 90 days. AIP-32 incentives are due to expire 22nd November 2021.

This ARC presents the community with the opportunity to continue offering stkAAVE incentives for an additional 90 days from when AIP-32 2 finishes, up to including the 20th February 2021. The incentives will be distributed at a 30% reduced rate, commencing the tapering of incentives on the Aave V2 market.

Stable coin / low vol assets receive lending and borrowing incentives, split 1:2, in favour of borrowers over lenders. Aave V2’s revenue is derived from interest paid by borrowers and borrowing demand drives lending yield through higher liquidity utilisation. High vol assets receive lending incentives, skewed towards assets more recently listed and communities that have static relationships with Aave, like Balancer and Chainlink.

Abstract

The intent is to recognise liquidity mining incentives played a large role in helping grow Aave V2 TVL, whilst being conscious that competitors continue to offer incentives APRs marginally exceeding what Aave is currently offering.

When incentives were reduced aggressively on the Polygon market, the daily revenue reduced significantly. There is a risk that by tapering liquidity mining incentives on Aave V2 too aggressively could trigger the same outcome as what was experienced on the Polygon market.

• AIP-16 6: 2,200 stkAAVE per day from 26th April 2021
• AIP-32 2: 2,200 stkAAVE per day 2 from 24th August 2021
• AIP-XY: 1,540 stkAAVE per day from 22nd November 2021

Based on the learnings from the Polygon market and reviewing the governance forum, this proposal reduces Liquidity Mining rewards by 30% over the next 90 days. For the following 90 days during 2022, the logic would be to continue further reducing incentives pending how the market reacts to the implementation of this proposal.

It is to the benefit of the protocol to incentivise borrows more than depositors. Conceptually, incentivizing borrows already increases deposit rates, so passive depositors still benefit significantly.

To encourage the depositing of high volatility assets, this proposal suggests incentivising the lending of newly listed assets and continuing to offer incentives on those that are strategically important for the Aave community. Offering incentives on newly listed assets is expected to kickstart the supply of liquidity.

Motivation

As a community member, liquidity mining has been great for bringing more users as stakeholders for the Aave Protocol and distributing the governance power to a wider more decentralised group of holders. Distributing stkAAVE means users also backstoppers of the protocol and automatically have skin in the game.

I would say that most liquidity that a liquidity protocol such as the Aave Protocol needs is stablecoins - incentivised as diversely as possible and also encouraging stablecoins that are aiming towards decentralization such as RAI, FEI and FRAX.

I would like to present to the community an opportunity to continue distributing stkAAVE at the same rate per day across the Aave V2 market with the intention of achieving the following:

• Grow Total Value Locked (TVL)
• Increase liquidity
• Attractive (low) borrow rates
• Increase the protocol income via growing the Reserve Factor
• Redistribute governance power towards users of the platform

As the value deposited within the Aave V2 market has grown from ~$5B to ~$21B and the $AAVE price has underperformed this growth, the incentive APR is lower now relative to the start of the prior incentive period.

On the 17th June 2021, the incentives on Polygon were reduced by 5x and revenue fell from $55.77K per day to $32.27K per day. This highlights the risk of reducing incentives to hastily. It is worth noting Compound is providing liquidity mining rewards similar to the existing 2,200 stkAAVE distribution level in terms of APR across key stable coin (low vol asset) markets.

For further details on the proposed liquidity mining incentives, please visit:

https://governance.aave.com/t/arc-aave-v2-liquidity-mining-program-90-days-at-30-reduced-rate/5946