AAVE Token Review: Aavenomics
In this post, I will discuss the details of Aavenomics. This is a continuation from my previous post on the AAVE protocol.
Disclaimer: The information provided here is accurate at the point of writing. It is strictly my personal opinion and should not be regarded as investment advice. Please do your own due diligence. I currently have a long position on AAVE.
Some background info, the native token of AAVE was originally LEND. However, the issue with LEND was that it lacked use case and there was nothing much you can do with it other than LP-ing it for some random yield farming opportunities. Holders mostly collateralize them on AAVE protocol to borrow other tokens.
Today, majority of LEND have migrated to the new native token, AAVE which will be the first step towards further decentralization of AAVE protocol.
What is Aavenomics?
Aavenomics is the token economics (or tokenomics for short) of the redesigned native token $AAVE. It elaborates on the details of token functions and how it synergizes with the protocol. The team also shared their visions for the protocol and plans to further growth, sustainability and safety.
Having good tokenomics is key when it comes to crypto investing as it defines the "quality" of the token. What is this "quality" then? It basically means having good fundamentals or perhaps I should say "pumpamentals" that entices buyers to ship this token.
I will discuss more on tokenomics in my later post, now back to the topic.
Changes from AAVE v1 to v2
Besides the obvious name change, LEND tokens can migrate to AAVE (transform into governance token) at a 100:1 ratio. On top of that, AAVE team "printed" additional 3mil tokens for the treasury, bringing total token supply to 16mil.
Although issuing more tokens dilute its value, market seemed unfazed by it and casually rocket to 6X at the point of writing.
Witness the power of apes xD
So like all governance tokens, token holders would be able to put forth or vote on various improvement proposals on numerous areas of the protocol. This is in line with the team's plan to further decentralize AAVE.
AAVE tokens can be staked in the newly implemented Safety Module smart contract and be rewarded with AAVE tokens. Stakers will receive stkAAVE tokens as a form of IOUs which can also be used for governance. APY was recently bumped up to 550 AAVE/day which is approximately 6% in the latest AIP.
Read here for staking details.
New governance framework
The part where folks who enjoy exercising their rights would dig. Protocol governance grants AAVE token holders (or AAVEngers) the freedom to make changes in key areas (or policies) of the protocol.
Personally, it's not really my kinda stuff. Maybe because I'm deeply ingrained in the Asian culture where exercising freedom is bullshit. I mean it's not like we don't have freedom to do anything we want BUT bad actions often lead to bad consequences.
Try practicing your freedom of speech, maybe tell your parents to **** off and see whether you're able to get away with it. I'm pretty sure someone will get served some ass-whooping haha.
Coming back to the topic, the entire architecture is fairly straightforward.
How does it work?
Before enacting any changes, ideas need to be shared on the governance forum as an ARC (AAVE Request for Comment) so governance participants can voice their opinions, discuss or maybe even suggest alternatives. Once the community is happy, anyone with sufficient proposition power can submit an AIP (AAVE Improvement Proposal) which token holders can vote for or against.
AIP can either be improvements on Protocol Policy (changes on the AAVE protocol) or Market Policy (changes on the parameters of listed tokens).
What you need to submit AIP
Proposers would need minimally 0.5% (80k) of the total AAVE token supply (16 mil) which is worth roughly USD $20 mil at the point of writing. I doubt anyone of that financial status would enjoy spending their time putting out AIPs haha.
Hence, delegation was introduced which allows token holders to entrust their rights to someone (probably with certain reputation in the crypto community) in hopes that he/she would act in their best interest.
What is governance without voting?
As for voting, all AAVE and stkAAVE token holders are eligible to vote at the rate of 1 AAVE/stkAAVE token = 1 vote. Once an AIP is passed, everyone will have 3 days to vote. By the end of day 3, there are a few conditions to fulfil before executing the AIP:
Quorum, 2%: At least 2% of total token supply (320k out of 16mil) is needed to pass. Else, it defeats the purpose of having governance when a single vote can pass any AIPs.
Vote differential, 0.5%: If voting result comes really close, the difference has to be 0.5% to be considered having a single clear outcome. For example: 49.75% YAE, 50.25% NAY = result NAY.
Though, there are folks in the crypto community who live by governance, claiming that it allows controlling the flow of money. However, if we look back on past AIPs, the number of votes had consistently exceeded the threshold by a small margin. Evidently, majority of token holders are not interested in governance. This is not something that only AAVE faces but other token governance as well.
I'm not sure why there is a lack of interest, perhaps the lack of rewards to compensate for high gas fees is deterring holders from voting.
For details, see the post by Marc Zeller here and AAVE docs here.
Safety Module (SM)
The most important section for stakers.
SM is a safety mechanism of AAVE that insures against the loss of capital incurred from shortfall events from smart contracts, liquidation and oracle failure (read here for more details). To put it simply, 30% of the staked AAVE will be auctioned away to compensate for the losses when shit happens to the protocol. Should the 30% be insufficient, more AAVE will be "brrr-ed" to make up causing further value dilution.
Hopefully now you know that staking APY doesn't come free.
Personally, SM is a crucial component and a really smart approach to decentralize AAVE. It works similarly as danger signs that tell us of danger ahead, we would naturally be cautious when moving forward for our own safety.
So when risks are transferred to token holders, it somewhat ensures that we feel responsible for the protocol and we would take good care of this golden goose. Should we let anything bad happen, we are the ones on the losing end. After all, "with great powers comes great responsibility".
Token holders can practically list any tokens = more fees collected = more incentives distributed to stakers
Becomes capital intensive for other projects to accumulate sufficient AAVE to list their tokens as price goes up over time
Decentralized: Protocol is owned by AAVE community hence it cannot (perhaps difficult) to be shut down or acquired by any government/institutional entities.
Indirectly having exposure to coins that you don't like via staking
Runs the possibility that AAVE community goes full retard and harms the protocol
Scam coins can get listed on AAVE
Overall, AAVE has been a great buy especially after it recently 8X at ATH compared to when I first bought it. In just recent months, the team has shipped out so much new stuff (credit delegation, new token listings etc.) and collaborated with other protocols to create more value in the crypto space. Hence, without a doubt, AAVE has a great team that continues to deliver new innovation which is key to further protocol growth (probably already working on AAVE v3).
Will continue to long AAVE.
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