Original article by Alex Xu, Research Partner at Mint Ventures
Aave is one of the projects that I have been following for a long time. Yesterday, its governance team ACI released a draft of Aave's new economic model in the community forum, announcing expected upgrades in many aspects such as the value capture of Aave tokens and the security model of the protocol.
Regarding Aave, the author has a relatively complete analysis of its current situation, competitiveness and valuation in a recent article: "Altcoins keep falling, it's time to pay attention to Defi again"
This article focuses on this latest proposal with great influence and mainly answers the following 4 questions:
1. What are the main contents of the proposal?
2. Potential impact of each major content
3. Timetable and triggering conditions for the implementation of the proposal
4. How this proposal may affect the price of Aave tokens in the medium to long term
Original proposal: https://governance.aave.com/t/temp-check-aavenomics-update/18379
1. The core content of the AAVEnomics proposal
The full name of this proposal is [TEMP CHECK] AAVEnomics update. It is in the early stage of community proposals, namely the "temperature check" stage. It was released 15 hours ago. The initiator of the proposal is ACI, who can be understood as the governance representative of the Aave official team. ACI is also the mastermind and main coordinator of community governance. Its important proposals are generally communicated with other governance representatives and professional service providers before release, so the probability of passing 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 lending space, with revenue levels far exceeding project expenses, and reserve funds mostly in ETH and stablecoins. Therefore, there is an opportunity to update the economic model and start protocol income distribution.
2. Update of bad debt handling mechanism: the original "security module" gradually withdrew from the stage, and the new security system Umbrella was launched
Aave currently provides a reserve for possible protocol bad debts. This mechanism is called a "safety module". This reserve currently consists of three parts:
Staked Aave, now worth $275 million
The staked Aave native stablecoin GHO is now worth $60 million
The pledged Aave-ETH LP is also one of the main sources of liquidity on the Aave chain, currently worth $124 million
The newly launched "Umbrella" safety system will replace the original safety module. Specifically:
The system's bad debt reserve will be managed by the new aToken module, which is funded by users who voluntarily deposit money. After depositing money, users will not only receive the original deposit interest income, but also receive additional security subsidies, which come from Aave's protocol income.
3. Aave token’s new role and the start of protocol profit distribution
The Aave staking module still exists, but the staked Aave no longer serves as a risk reserve, but has two functions:
You can obtain the profit surplus distribution of the protocol in addition to the funds required for operation. The way is that Aave's financial team will regularly repurchase Aave in the secondary market through community governance proposals and distribute it to pledgers.
Staking Aave can obtain "Anti-GHO". "Anti-GHO" can be used to offset your GHO stablecoin debt, or it can be directly deposited into the GHO staking module, so Aave can also obtain the profits generated by GHO.
4. Changes to the GHO staking module
The original GHO staking module needed to guarantee the bad debts of the entire Aave protocol system, but after the change, it only guaranteed the bad debts of the GHO part.
5. Others
The liquidity of Aave tokens no longer relies on the Aave-ETH incentive in the staking module, but is handed over to the ALC (Aave Liquidity Committee)
The exchange of the protocol's first-generation token Lend to Aave will be terminated, and the tokens not exchanged on time will be transferred to the treasury
Aave’s new economic model relationship diagram can be seen:
II. Impact of the proposal
There are two main impacts:
Aave tokens have a relatively clear value capture, and the selling pressure is further reduced, which is further linked to the good development of the protocol
Value capture comes from: Repurchase of the interest rate spread of the agreement + GHO interest income feedback
The reduction in selling pressure comes from: the deactivation of the staking module also means that Aave will use the stablecoins and ETH of the protocol income as expenditure tokens to replace the output of Aave tokens, which will directly reduce the selling pressure of Aave and 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 entirely motivated by Aave emissions, with little flexibility. The Umbrella Security Module is similar to Eigenlayer's AVS model. It is a modular module that can be customized by asset category, time, and capacity.
This also means that in addition to risk indicators such as asset size, interest rate curve, and LTV, Aave’s risk team has one more indicator that needs to be evaluated and formulated:
3. Timetable and prerequisites for implementation of the plan
ACI said that the implementation of the plan will be carried out in a step-by-step manner, and will be divided into three stages (three governance proposals) to implement the above content based on different prerequisites.
Phase 1: Staking mechanism and GHO mechanism changes
GHO pledge is only responsible for the bad debt guarantee of GHO debt
The Aave and Aave-ETH staking modules have been changed to the “legacy security module” and will continue to function as collateral until they are replaced. The cooldown period for Aave staking has been set to 0.
Prerequisites: Already met
Implementation time: After this proposal obtains sufficient community opinions and Aave’s main community developer BGD Labs 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 launched, staking Aave can get Anti-GHO
Close Lend Exchange Aave
Prerequisites:
GHO scale reaches 175 million (currently around 100 million)
The secondary liquidity of GHO can reach "a transaction size of 10 million has an impact on the price of less than 1%". Currently, the transaction size that affects the price of GHO by 1% is about 2.1 million.
Phase 3: Aave fee switch activated, buyback enabled
Disable the traditional security module
By activating the aToken model of the Umbrella Security Module, users can provide collateral for the system with their own deposits and will receive additional rewards
Aave’s financial service provider starts the repurchase of Aave through governance and distributes it to Aave stakers, and gradually realizes automation
Prerequisites:
The average NAV of the Aave income pool over the past 30 days is enough to cover 2 years of existing service provider expenses
*Currently, the total assets in Aave’s treasury excluding Aave tokens are approximately US$67 million (61% in stablecoins, 25% in Ethereum, and 3% in BTC), while Aave’s annual expenditure for 24 years is approximately US$35 million (data given by the head of ACI). If the expenditure level in 25 years is similar, the expenditure for two years will be US$70 million. Considering that Aave’s weekly revenue has been basically US$1-2 million since the beginning of this year, the two are already quite close, and this level can be reached in about a month.
Aave’s treasury composition, source: https://aave.tokenlogic.xyz/treasury
Aave’s protocol revenue, source: https://aave.tokenlogic.xyz/revenue
Aave protocol’s annualized revenue over the past 90 days is 150% of all protocol spending year-to-date (sic), including AAVE’s buyback budget and spending on the Umbrella Security Module
*Budgets are defined, allocated, and adjusted quarterly by Aave Finance service providers.
In general, Phase 1 has met the launch conditions, Phase 2 is expected to take several months (depending on the liquidity budget and investment of the Liquidity Committee for GHO), and the launch time of Phase 3 is less predictable, affected by factors such as the specific budget plan, market environment, and revenue. However, considering Aave's current strong revenue level, it is not difficult to meet the standards.
IV. 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 with the Aave token for the first time. The lower limit of the Aave token has a repurchase backstop, and holders have cash flow income, which is beneficial to the price of Aave.
However, considering that the implementation of this proposal will take time and will be carried out in batches, and that the proposal was just published less than a day ago and the specific terms still need to be discussed and revised, 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 at present, its standardized and transparent governance, and rewards for token supporters may allow it to further gain the favor of investors with a preference for value investing. These investors may not only come from the cryptocurrency circle, but also include Web3 newcomers from the traditional financial field.
