With a liquidity mining program launching on Monday, Aave could be on the cusp of becoming the dominant decentralized funding protocol (DeFi).
Earlier today, Aave Improvement Proposal (AIP) 16 reached quorum, meaning that from Monday 26 4/26 liquidity providers and borrowers in Aave’s USDC, DAI, USDT, GUSD, ETH and WBTC pools will earn stAAVE rewards in addition to their standard. interest income.
Per AIP 16, providers and borrowers in these pools will split 2,200 stAAVE tokens per day from the protocol’s current 2.9 million AAVE ecosystem reserve, currently worth nearly $ 1 billion.
The proposal, written by Anjan Vinod of Aave investor Parafi Capital, notes that the goal of the program is to “boost lending and lending activities in all markets” and to increase the decentralization of the protocol through governance tokens, among other things. users.
The move is something new for Aave. The lending platform is consistently ranked among the largest DeFi protocols, despite not having a liquidity mining program like many of its competitors. According to their respective apps, Compound is currently the main lending protocol with over $ 15.4 billion in total value locked down (TVL) in their markets, while Aave counts $ 6.8 billion for their Polygon, Ethereum v1, Ethereum v2 and AMM LP token markets.
Aave co-founder Stani Kulechov told Cointelegraph that he expects the added incentives will significantly bolster the protocol’s TVL.
“The proposal allocates the most rewards to stablecoins, which means we will see a significant increase in TVL,” he said.
As noted in the governance proposal, the lack of a liquidity mining program has historically put Aave at a somewhat competitive disadvantage. For example, at the time of writing, the Compound money market offers 3.31% returns on stablecoin USDC, along with 2% in COMP governance tokens for a total return of 5.51%. Meanwhile, Aave’s market is also currently offering an identical 5.51% of pure interest yield.
A recent Tweet from Aave developer Emilio Frangella indicates that the new program will bolster yields by orders of magnitude, and in particular provide yields to borrowers – yield that, at current rates, amply exceeds the APR borrowers owing their loans would exceed.
Here is the estimate, if the market conditions remain the same pic.twitter.com/3cLisnArPy
– Emilio Frangella (@ The3D_) April 24, 2021
While the current program is expected to end on 07/15/2021, the door is open to some form of liquidity mining that will continue for the protocol for the foreseeable future. Per Vinod, “this program is presented as a beta to further explore how the uptake of liquidity mining rewards will benefit the Aave ecosystem,” and at a distribution rate of 2,200 per day, the program would deplete only 5% of the ecosystem reserve. tokens per year.
When liquidity mining was first proposed in board forums, it received only 60% support from the community. Kulechov believes the turnaround is due in part to the community’s seeing other liquidity mining programs with success.
“The Aave community has previously taken for and against views on the topic, especially as Aave Protocol has been successful in organic growth. However, since the effects of the liquidity mining network have now been proven to work, it offers the opportunity to experiment with it in Aave and that could be a reason for the turnaround. “