The decentralized lending platform Aave has historically operated without a liquidity mining program. However, a recent governance proposal indicates a significant shift in strategy.
Proposal AIP 16, drafted by Anjan Vinod from Parafi Capital, an investor in Aave, aims to boost cross-market lending activity. It also seeks to distribute governance tokens more broadly to enhance the decentralization of protocol governance.
Voting for AIP 16 concluded successfully, surpassing the required quorum with 739,414 votes in favor. Starting immediately, liquidity providers and borrowers in Aave’s USDC, DAI, USDT, GUSD, ETH, and WBTC pools will be eligible to receive daily rewards.
These rewards will be drawn from the protocol’s current ecosystem reserve of 2.9 million AAVE tokens, valued at nearly one billion dollars. Each day, 2,200 AAVE tokens—worth approximately one million USD—will be distributed among eligible users. This initial mining phase is set to continue until July 15, 2021, after which the community will vote again to decide whether to continue, conclude, or adjust the program.
It’s important to note that users will receive stkAAVE, not AAVE tokens directly. To convert stkAAVE to AAVE, users must initiate a cooldown period of ten days. After this period, they have a two-day window to claim their AAVE. Missing this window requires reactivating the cooldown and waiting another ten days.
Why Launch Liquidity Mining Now?
Aave has stood out in the decentralized finance (DeFi) space by not initially adopting liquidity mining, a model used by many competitors. This difference may have put Aave at a disadvantage in terms of total value locked (TVL) compared to other platforms.
For instance, Compound, another major lending protocol, currently leads with over $15.4 billion in TVL. Aave, across its various markets including Polygon, v1, v2, and AMM LP token markets, has a combined TVL of approximately $6.8 billion.
The proposal highlights that Compound’s USDC lending yield is 3.31%, with an additional 2% yield in COMP tokens, bringing the total to around 5.51%. In comparison, Aave already offers pure interest yields of up to 5.51%. Adding liquidity mining rewards could make Aave even more competitive and attractive to users.
Aave founder Stani Kulechov has expressed optimism about the new incentive mechanism. He expects it to significantly increase the protocol’s TVL, especially since the majority of rewards are allocated to stablecoin pools.
Kulechov also noted that while an earlier proposal for liquidity mining received only 60% support from the community, this latest proposal passed with an overwhelming majority. He attributes this change to the community observing the success of liquidity mining programs on other platforms.
Impact on Users and the DeFi Ecosystem
The introduction of liquidity mining is likely to attract new users and increase capital inflows into Aave. Existing users will benefit from additional yield opportunities, especially in major asset pools.
Stablecoin providers, in particular, may see noticeably higher returns, making Aave a more compelling option for conservative yield seekers. The broader distribution of governance tokens could also lead to more decentralized and community-led decision-making.
For the DeFi sector as a whole, Aave’s move signals continued innovation and competition among lending protocols. It may encourage other platforms to revisit their incentive structures to remain competitive.
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Frequently Asked Questions
What is liquidity mining?
Liquidity mining is a process where users provide liquidity to a DeFi protocol in exchange for rewards. These rewards often include governance tokens, giving users a stake in the platform’s future decisions.
How can I participate in Aave’s liquidity mining?
To participate, you need to supply or borrow assets in one of the eligible pools on Aave, such as USDC, DAI, USDT, GUSD, ETH, or WBTC. You will then earn stkAAVE rewards based on your activity.
What is the difference between AAVE and stkAAVE?
stkAAVE is a staked version of AAVE. It must go through a cooldown period before it can be converted back into AAVE. This mechanism encourages long-term participation and reduces selling pressure.
How long will the liquidity mining program last?
The first phase ends on July 15, 2021. The Aave community will then vote on whether to extend, modify, or end the program.
Will this affect the price of AAVE?
While it’s difficult to predict price movements, increased demand for AAVE tokens due to mining rewards and staking could positively influence the token’s value.
Can I use other DeFi platforms while participating in Aave mining?
Yes, you can interact with other protocols, but be mindful of transaction costs and potential risks associated with using multiple platforms simultaneously.