Interpretation of Aave's new economic model: repurchase dividends, security module upgrades

Aave is one of several projects that the author has been paying close attention to for a long time. Yesterday, its governance team ACI released a draft of Aave’s new economic model in the community forum, and carried out expected upgrades in many aspects such as the value capture of Aave tokens and the security model of the protocol. published. The author's article focuses on this latest proposal with great influence, and mainly answers the following four questions:

1. What are the main contents of the proposal

2. The potential impact of each main content

3. The timetable and trigger for the implementation of the proposal Conditions

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

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

1. AAVEnomics Proposal The core content of

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. The release time was 15 hours ago. The initiator of the proposal is ACI. ACI can be understood as the official team of Aave Governance representative, ACI is also the mastermind and main coordinator of community governance. Its important proposals are generally fully communicated with other governance representatives and professional service providers 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. Introducing Aave’s current good operating status and abundant financial reserves

The project is in a continuous leading position in the lending field, with income levels far exceeding project expenses, and Most of the reserve funds are ETH and stablecoins, so there is an opportunity to update the economic model and start the protocol income distribution.

2. Bad debt processing mechanism update: The original "security module" is gradually withdrawing from the stage, and the new security system Umbrella (umbrella) is online

• Aave currently provides a reserve for possible bad debts in the agreement. This mechanism is called " Security Module", this part of the reserve currently consists of three parts:
  • Pledged Aave, currently worth 275 million U.S. dollars
  • Pledged Aave native stablecoin GHO, currently worth 60 million U.S. dollars
  • Pledged Aave-ETH LP, and at the same time It is also one of the main sources of liquidity on the Aave chain, currently worth 124 million US dollars
• The newly launched "umbrella" security system will replace the original security module. Specifically:
  • The system's bad debt reserve will be replaced by the new The aToken module is responsible. The funds of this module come from users who make voluntary deposits. After depositing, users will not only receive interest income from the original deposits, but also receive additional security subsidies. The subsidies come from Aave’s protocol income

3 . The new role of Aave tokens and opens up protocol profit distribution

• The Aave pledge module still exists, but the pledged Aave no longer serves as a risk reserve, but has two functions:
  • You can obtain what the protocol needs to maintain operations The method of profit surplus distribution in addition to the funds is that Aave's financial team regularly repurchases Aave in the secondary market through community governance proposals and distributes it to pledgers
  • Staking Aave can obtain "Anti-GHO", "Anti-GHO" "It can be used to offset your GHO stablecoin debt, or it can be directly deposited into the GHO pledge module, so Aave can also obtain the profits generated by GHO

4. Changes in the GHO pledge module

The original GHO pledge module requires The bad debts of the entire Aave protocol system are guaranteed, but after the change, only the bad debts of the GHO part are guaranteed.

5. The liquidity of other

• 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 the protocol’s initial token Lend to Aave will Termination, tokens that are not redeemed on time will be transferred to the treasury

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

II. The impact of the content of this proposal

There are two main impacts:

• Aave token ownership A relatively clear value capture has been achieved, and the selling pressure has been further reduced, which is further linked to the good development of the agreement.
  • The value capture comes from: the income repurchase of the interest spread part of the agreement + the feedback of GHO interest income.
  • The reduction of selling pressure comes from: The deactivation of the pledge module 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 make Aave more scarce
• The introduction of the umbrella security module makes the structure of the protocol more flexible, the protocol incentives are further optimized, the upper limit of security governance of the protocol is further raised, and higher governance requirements are also put forward
  • The original Aave security module relies entirely on Aave uses emissions to incentivize and has little flexibility. The umbrella security module is similar to Eigenlayer’s AVS model. It is a modular module that can customize incentives based on asset class, time, and capacity
  • This also means that Aave’s risk team In addition to risk indicators such as asset size, interest rate curve, LTV, etc., there is 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 be implemented step by step The method is divided into three stages (three governance proposals) based on different prerequisites to implement the above content.

Phase 1: Pledge mechanism and GHO mechanism changes

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

Prerequisites: Achieved

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

Phase 2: Aave Token Function updates, new economic models are gradually coming online

• End staking Aave to get GHO interest discount function
• Anti-GHO function is online, staking Aave can get Anti-GHO
• Close Lend exchange for Aave

Prerequisites:

• GHO The scale has reached 175 million (currently around 100 million)
• GHO's secondary liquidity can reach "10 million transaction size has an impact on the price of less than 1%". The current transaction size that affects the GHO price by 1% is about 2.1 million

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

• Turn off the traditional security module
• Activate the aToken mode of the umbrella security module. Users can provide guarantee for the system with their own deposits and will receive additional rewards
• Aave Finance The service provider starts Aave's repurchase through governance and distributes it to Aave pledgers, and gradually realizes automation

Prerequisite:

• The average net asset value of the Aave revenue pool in the past 30 days is enough to cover the existing service provider's income for 2 years Expenses

* The total assets in the Aave treasury excluding Aave tokens are currently about 67 million US dollars (61% are stable coins, 25% are Ethereum, 3% are BTC), and Aave’s full-year expenses for 24 years It is about US$35 million (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 US$70 million. Considering that Aave’s weekly income this year is basically US$1-2 million , the two are already quite close and will reach that level in about a month.

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

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

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

*Budget by Aave Finance Service providers are defined, allocated and adjusted quarterly.

In general, phase one has the conditions to go online, phase two is expected to take several months (specifically depends on the liquidity budget and investment of GHO by the Liquidity Committee), and the time for phase three to go online is not very good. The forecast is affected by factors such as specific budget plans, market environment and income, but considering Aave's current strong income level, it is not difficult to meet the standard.

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

In the long term, this proposal clearly links the development of the Aave protocol to the Aave tokens for the first time, and the lower limit of the Aave tokens has a repurchase At the end of the day, holders will have cash flow income, which will benefit 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, so the value capture of Aave tokens is a gradual and long-term one. the process of.

However, if the proposal goes smoothly, 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 investors may not only come from the currency circle, but also include Web3 newcomers from the traditional financial field.

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