Aave is one of several projects that I have been paying close attention to for a long time. Yesterday, its governance team ACI released a draft of Aave’s new economic model on the community forum, and made expected upgrades in many aspects such as the value capture of Aave tokens and the security model of the protocol. release.

Regarding Aave, the author’s recent article provides a relatively complete analysis of its current situation, competitiveness, and valuation:“Altcoins continue to fall, it’s time to refocus on Defi”

This article focuses on this latest proposal with huge impact and mainly answers the following four questions:

1. What are the main contents of the proposal?

2. Potential impact of each main content

3. Timetable and triggering conditions for the implementation of the proposal

4. How the proposal might affect the price of Aave tokens in the medium to long term

Original text of the proposal: https://governance.aave.com/t/temp-check-aavenomics-update/18379

1. Core content of the AAVEnomics proposal

The full name of the proposal is [TEMP CHECK] AAVEnomics update. It is in the early stage of the community proposal, that is, the “temperature check” stage. It was released 15 hours ago. The proposal initiator is ACI. ACI can be understood as the governance representative of the Aave official team, and ACI is also the governance representative of the Aave official team. The masterminds and main coordinators of community governance generally communicate fully with other governance representatives and professional service providers for their important proposals before they are released, so the probability of passing them is very high.

[TEMP CHECK] The main contents of AAVEnomics update are as follows:

1. Introduced Aave’s current good operating status and abundant financial reserves.

The project continues to be a leader in the field of lending, with income levels far exceeding project expenses, and reserve funds mostly consisting of ETH and stablecoins. Therefore, it has the opportunity to update the economic model and start protocol income distribution.

2. Bad debt processing mechanism update: the original “security module” gradually withdraws from the stage, and the new security system Umbrella (umbrella) is launched

• Aave currently provides a reserve for possible bad debts in the protocol. This mechanism is called the “security module”. This reserve currently consists of three parts:
  • The pledged Aave is currently worth US$275 million
  • The pledged Aave native stablecoin GHO is currently worth US$60 million.
  • The pledged Aave-ETH LP is also one of the main sources of liquidity on the Aave chain and is currently worth US$124 million.
• The newly launched “umbrella” security system will replace the original security module, specifically:
  • The system’s bad debt reserve will be responsible for the new aToken module. The funds for this module come from users who voluntarily deposit. After depositing, users will not only receive the original deposit interest income, but also receive additional security subsidies. The subsidies come from Aave. Agreement income

3. The new role of Aave tokens and the opening of protocol profit distribution

• The Aave pledge module still exists, but the pledged Aave no longer serves as a risk reserve, but has two functions:
  • The protocol’s profit surplus distribution in addition to the funds required for operation can be obtained by Aave’s financial team regularly repurchasing Aave in the secondary market and distributing the profits to the pledgers through community governance proposals.
  • Staking Aave can get “Anti-GHO”, which can be used to offset your GHO stablecoin debt, or can be directly deposited into the GHO pledge module, so Aave can also get the profits generated by GHO.

4. Changes to GHO pledge module

The original GHO pledge module needs to guarantee the bad debts of the entire Aave protocol system, but after the change, it only guarantees the bad debts of the GHO part.

5. Others

• The liquidity of Aave tokens no longer relies on the Aave-ETH incentives in the staking module, but is handed over to the ALC (Aave Liquidity Committee)
• The exchange of Lend, the initial token of the agreement, to Aave will be terminated, and tokens that are not exchanged on time will be transferred to the national treasury.

Aave’s new economic model relationship diagram can be seen:

2. Impact of the content of the proposal

There are two main impacts:

• Aave tokens have relatively clear value capture, and the selling pressure has been further reduced, which is further linked to the good development of the protocol.
  • Value capture comes from: repurchase of income from the interest spread part of the agreement + feedback from GHO interest income
  • The reduction in selling pressure comes from: the deactivation of the pledge module, which also means that Aave will use the stablecoins and ETH generated by the protocol as expenditure tokens to replace the output of Aave tokens. This will directly reduce the selling pressure on Aave and will also Make Aave more scarce
• The introduction of the umbrella security module makes the structure of the protocol more flexible, further optimizes the protocol incentives, further increases the upper limit of the protocol’s security governance, and also puts forward higher governance requirements.
  • The original Aave security module is solely motivated by Aave emissions and has little flexibility. The umbrella security module is similar to Eigenlayer’s AVS mode. It is a modular module that can be customized for incentives based on asset class, time, and capacity.
  • This also means that in addition to risk indicators such as asset size, interest rate curve, LTV, etc., Aave’s risk team has one more indicator that needs to be evaluated and formulated.

3. Timetable and prerequisites for the implementation of the plan

ACI stated that the implementation of the plan will take a step-by-step approach and be divided into three stages (three governance proposals) based on different prerequisites to implement the above content.

Phase 1: Changes to the pledge mechanism and GHO mechanism

• GHO pledge is only responsible for the bad debt guarantee of GHO debt part.
• Aave and Aave – The ETH staking module was changed to a “legacy security module” that will continue to function as a guarantee before being replaced, and the cool-down period for Aave staking is set to 0

Prerequisite: achieved

Execution time: After this proposal obtains sufficient community opinions and BGD Labs, Aave’s main community developer, approves the Umbrella upgrade

Phase 2: Aave token function update, new economic model gradually launched

• End staking Aave to get GHO interest discount function
• Anti-GHO function is online, you can get Anti-GHO by staking Aave
• Close Lend and redeem Aave

Prerequisites:

• The scale of GHO reaches 175 million (currently around 100 million)
• GHO’s secondary liquidity can reach “a transaction size of 10 million that affects the price less than 1%.” The current transaction size that affects the price of GHO by 1% is about 2.1 million

Phase 3: Aave fee switch is activated and buyback is enabled

• Turn off traditional security modules
• By activating the aToken mode of the umbrella security module, users can guarantee the system with their own deposits and will receive additional rewards.
• The Aave financial service provider starts Aave’s repurchase through governance and distributes it to Aave pledgers, and gradually realizes automation.

Prerequisites:

• The average NAV of the Aave revenue pool over the past 30 days is sufficient to cover 2 years of existing service provider expenses

  *Currently, the total assets in the Aave treasury excluding Aave tokens are approximately US$67 million (61% are stablecoins, 25% are Ethereum, and 3% are BTC), while Aave’s annual expenditure in 24 years is approximately US$35 million. Around (data given by the person in charge of ACI), if the expenditure level in 25 years is similar, the expenditure in two years will be 70 million US dollars. Considering that Aave’s weekly income this year is basically 1-2 million US dollars, the two are already equivalent. Close enough to reach that level in about a month.

Aave’s treasury fund structure, source: https://aave.tokenlogic.xyz/treasury

Aave’s protocol revenue, source: https://aave.tokenlogic.xyz/revenue

• The Aave protocol’s annualized revenue over the past 90 days has reached 150% of all protocol spending year-to-date (sic), including AAVE’s buyback budget and spending on the Umbrella Security Module

*The budget is defined, allocated and adjusted quarterly by the Aave Finance service provider.

In general, phase one has already met the conditions for launch, and phase two is expected to take several months (specifically, it depends on the liquidity budget and investment of GHO by the Liquidity Committee). The launch time of phase three is not easy to predict, and is affected by The specific budget plan, market environment, income and other factors will affect the impact, but considering the current strong income level of Aave, it is not difficult to meet the standard.

4. How will this proposal affect the price of Aave tokens in the medium and long term?

In the long run, this proposal clearly links the development of the Aave protocol to the Aave token for the first time. The lower limit of the Aave token has a repurchase support, and the holder has cash flow income, which is good for the price of Aave. .

However, considering that the implementation of the proposal takes time and is carried out in batches. In addition, the proposal has just been published for less than a day and the specific terms still need to be discussed and modified. Therefore, the value capture of Aave tokens is a gradual and long-term process. .

However, if the proposal is successfully implemented, Aave, as one of the largest Defi projects currently, its standardized, transparent and regulated governance, and rewards for token supporters may further allow it to gain the favor of investors with value investment preferences. These investments Participants may not only come from the currency circle, but also include Web3 newcomers who come from the traditional financial field.

Disclaimer：

1. This article is reprinted from [Mintventures]. All copyrights belong to the original author [Alex Xu]. If there are objections to this reprint, please contact the Gate Learn team, and they will handle it promptly.
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