DeFi Lender Aave Weighs Changing Tokenomics to "Fee Switch on Steroids"

Community members of Aave, the largest lending platform in decentralized finance by total-value locked, made a proposal to change the protocol token’s economic model, aka “Aavenomics.”

Aave founder Stani Kulechov said on X the proposed tokenomics are “fee switch on steroids.” Aave Chan founder Marc Zeller called it “the most important proposal in our history. ” Aave Chan is a delegate platform aimed at governance participation and creating Aave Improvement Proposals (AIP) for the Aave DAO.

The AAVE token is up 13.4% on the day in the wake of the proposal.

Umbrella Safety System

One aspect of the March 4 proposal to the Aave decentralized autonomous organization (DAO) is the creation of a new Aave Finance Committee and the implementation of Umbrella, a safety system that will double as a rewards distribution tool.

Aave stakers will no longer be slashed, meaning they won’t lose their deposited AAVE tokens to cover any losses or deficits on the platform.

In addition, Aave will repurchase $26 million in AAVE tokens over six months. After that, there will be a quarterly buyback budget that aims to match and potentially exceed all other protocol expenses.

Aave is the second-largest DeFi protocol by total value locked (TVL), with $17.7 billion TVL and a market capitalization of $2.8 billion, according to DeFiLlama. It has almost $530 million staked.

That also makes it the largest DeFi lending protocol by a wide margin. JustLend is No. 2, with a TVL of $3.5 billion.

Aave’s GHO stablecoin has a market cap of $208 million, which compares with USDT’s $142 billion in market cap and USDC’s $56 billion in market cap.

Strong Finances

In a blog post, Zeller said that the Aave protocol’s revenue stream remains strong despite adverse market conditions, with the cash portion of the Aave DAO treasury at $115 million.

This will improve with the implementation of Chainlink’s Smart Value recapture (SVR) system, which lets projects recapture non-toxic maximal extractable value (MEV), allowing “DeFi lending protocols to recapture oracle-related MEV from liquidations,” Chainlink said. The most common of these is backrunning during the liquidation process when competing for the right to liquidate an at-risk position and earn liquidation bonus rewards.

Shield and Reward

Umbrella is primarily a safety system, enabling the development of aTokens which can be staked on the protocol and will be slashed in the event of bad debt.

It will replace the Aave safety module and is expected to secure liquidity for the platform while making “potential bank run events less harmful,” Zeller wrote. It will also “protect users from bad debt up to billions [of dollars].”

Umbrella is also a rewards platform, as Aave will distribute part of its excess revenue to aToken holders.

Umbrella will build upon Merit, the protocol’s existing rewards program, which has distributed $12 million per year of protocol revenue to GHO stablecoin stakers. Rewards will be paid in wETH, USDC and USDT, as well as AAVE.

Another addition on the rewards front is the anti-GHO, a non-transferrable ERC20 token that can be used either to pay down borrowed debt by burning it at a one-to-one ratio or converted to StkGHO, which is eligible for Merit and other rewards. It will be convertible to GHO stablecoins after a cooldown period.

The anti-GHO token proposal calls for providing rewards of 50% of the yield earned on GHO, which would put it at $6 million for the first year. The proposal calls for it to be distributed at 80% for StkAAVE holders and 20% for liquidity providers with staked Balancer Pool Tokens (StkBPT).

Umbrella would be activated on ETH, AVAX, Sonic, ARB, Gnosis, and Base. It will accept wETH, USDC, USDT and GHO via StkGHO.

The End of LEND

In addition, after almost five years, the swap period of the discontinued LEND tokens into AAVE will end, with 320,000 unclaimed AAVE worth about $65 million transferred to the DAO treasury.

“Given that the community has had multiple years of notice, we consider it fair to close down the migration process,” the proposal said. “These long-dormant funds (approximately $65M at current AAVE price) will then be available to the DAO to be mobilized for growth, safety, or burn proposals by governance.”