Aave to Initiate Liquidity Mining Program, Overtake Compound?

Deepshikha  |  Apr 26, 2021

The Monday announcement made for the liquidity mining program enables Aave to be on the rim of being one of the dominant decentralized finance (DeFi) lending protocols. 

Earlier today, the Aave Improvement Proposal (AIP) 16 reached quorum. Reaching 16 quorum implies that 4/26 liquidity providers and borrowers in Aave’s namely, USDC, DAI, USDT, GUSD, ETH, and WBTC pools will earn stAAVE rewards in addition to their standard interest yield.

The Aave Improvement Proposal (AIP)

According to AIP 16, lenders and borrowers in these pools will split 2,200 stAAVE tokens per day. The tokens will be split from the protocol’s current 2.9 million AAVE Ecosystem Reserve, that currently worth nearly $1 billion.

An investor Parafi Capital’s Anjan Vinod penned the proposal mentioning the goal of the program is 

“Drive lending and borrowing activity across markets, as well as increase the decentralization of the protocol’s governance by distributing governance tokens to more users.”
“The proposal allocates most of the rewards on stablecoins meaning that we will see a substantial increase in TVL,” he added.

As per the governance, the proposal notifies the major disadvantage it historically holds is the lack of a liquidity mining program. For example, at the time of writing the money market Compound offers a 3.31% yield on stablecoin USDC, along with 2% in COMP governance tokens for a total of 5.51% yield. Aave’s market, meanwhile, also currently offers an identical 5.51% in pure interest yield.

Aave co-founder Stani Kulechov mentioned that he expects that "the added incentives will bolster the protocol’s TVL significantly.” He believes that,
“Aave community has for and against views on the topic previously, mainly because Aave Protocol has been successful in organic growth. However, since now liquidity mining network effects are proven to work, it allows experimenting in Aave and that might be grounds for the swing.”

AAVE to Introduce Liquidity Mining

The developer Emilio Frangella In a recent Tweet indicated the offers yield to borrowers via the new program. Furthermore, according to Aave investor Vinod, 

“The current program is slated to end 07/15/2021, the door is open to some form of liquidity mining continuing for the protocol for the foreseeable future.“ “This program is being proposed as a beta to further investigate how the inclusion of liquidity mining rewards will benefit the Aave ecosystem,” he added. 

Calculating the 2,200/day rate of distribution, the program would deplete only 5% of the Ecosystem Reserve tokens per year. 

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