Aave launching a Liquidity Mining Program for its v2 protocol. This proposal was proposed by its users. It will pay governance tokens as a reward exceeding 20% to users who borrow stablecoins.
Before that, In the Summer of 2020, Compound brought an old concept, liquidity mining to DeFi. Its willingness to reward lenders and borrowers in its COMP governance tokens helped make it the biggest lender in all of Ethereum.
Earlier today, Aave Improvement Proposal (AIP) 16 reached quorum, meaning starting today, 4/26, liquidity providers and borrowers in AAVE’s USDC, DAI, USDT, GUSD, ETH, and wBTC pools will earn stkAAVE rewards in addition to their standard interest yield. Staked Aave is equivalent in value to AAVE. To convert it to the AAVE governance token, they must wait 10 days after receiving it.
An update of the yield and collateral swap will enable users to “Trade their deposited assets, across all currencies supported in the AAVE protocol even when they are being used as collateral,” Aave stated. The company believes that this option will help customers avoid liquidations.
The AIP would distribute 2,200 staked AAVE per day from the 2.9 million AAVE ecosystem reserve. Around 1M$ in reward distributed daily to lenders and borrowers.
According to Aave co-founder Stani Kulechov, the added incentives could boost the protocol’s TVL significantly. He added: “The proposal allocates most of the rewards on stablecoins, meaning that we will see a substantial increase in TVL.”
A recent Tweet from Aave Developer Emilio Frangella indicates that the new program will bolster yields by order of Magnitude.
The proposal written by Anjan Vinod notes that the goal of the program is to “drive lending and borrowing activity across market”. And increasing decentralization of governance by distributing governance tokens to more users.
Also Read: Aave’s Decentralized Lens Protocol Goes Live on Polygon
Distribution strategy rewards market based on borrow demand. Markets with higher dollar value borrowed receive a higher share of the daily stkAAVE rewards. It proposes to allocate a 50/50 ratio of stkAAVE between lenders and borrowers across a stablecoin market. In wBTC and ETH markets, the ratio between lenders and borrowers will be 95/5 to discourage riskier borrowing activity.
They proposed 7/15/21 as the target end date for this liquidity mining program. A mid-July end date gives the community 3 months to review the LM program. According to Vinod, “This program is structured as a beta, with opportunity to track protocol activity and refine the distribution in the future”. At a 2,200 day rate of distribution, the program will deplete 5% of the Ecosystem Reserve token per year. The proposal in governance forum, poll closed with 62% participant supportive of introducing rewards.
