Aave and "Aavenomics": Token Buybacks, Safety Nets, and Revenue Redistribution

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Key Takeaways:

Aave has kickstarted a massive overhaul of its tokenomics design, internally termed “Aavenomics” to increase the incentive for users to stake Aave tokens and improve the protocol’s stability.
The proposal includes a $1 million per week AAVE buyback program as well as a new safety module dubbed “Umbrella,” designed to protect against large debts.
It will launch a new token to redistribute revenue from GHO stablecoin to AAVE stakers, dubbed “Anti-GHO.”

A yet-to-be approved draft proposal, which would overhaul the funds coming in and out of DeFi lending protocol Aave, is currently under consideration. Labeled “Aavenomics,” the proposed overhaul focuses on creating a better deal for AAVE token holders, augmenting the protocol’s financial footing, and optimizing its liquidity handling. The proposal, put forth on March 4th by founder Marc Zeller of the Aave Chan Initiative (ACI), is now pending community ratification.

Zeller considers this proposal “the most important” in Aave’s history, with its approval leading to major ramifications for Aave tokenomics.

Table of Contents

Introducing New Revenue Redistribution Model Rewards AAVE stakers

The core component of “Aavenomics” implements a new stage of the revenue redistribution model to ensure better reward for AAVE stakers. The current GHO staker program “Merit” will remain enabled.

Anti-GHO Token: A major innovation is the introduction of the “Anti-GHO” non-transferable ERC-20 token earned from AAVE and StkBPT staking. This token is used to pay off GHO debt on the Aave protocol or can be redeemed for StkGHO, which is eligible for the “Merit” program and other incentives. Background: The Anti-GHO Mechanism is intended to be what replaces the current GHO discount system, enabling revenue sharing to a greater base of AAVE stakers.

Anti-GHO Financing: Leave more than half (50%) of GHO revenue to create and distribute Anti-GHO with 80% of Anti-GHO rewards to StkAAVE holders and 20% to StkBPT holders. Given that GHO is currently a $12 million/year protocol revenue generating asset, this makes up roughly $6mm worth of Anti-GHO being distributed to Aave stakers.

Umbrella Safety System: Securing Aave from Monopoly Market Dynamics

One important innovation proposed by “Aavenomics” is “Umbrella”, a new safety module that aims to shield Aave users from the effects of bad debt.

Aavenomics visualisation

Bank Run Protection: “Umbrella” ensures protection “up to billions”, creating a commitment of liquidity that is locked in the protocol until “cooldown maturity”. Zeller thinks that will make bank runs “less harmful” and the platform is also able to find new products and income streams.
Focus on Strategic Assets: The “Umbrella” insurance will apply to important assets such as wETH, USDC, USDT, and GHO, in addition to native assets across various chains and reward users with wETH, USDC, USDT, and AAVE. Such a system would also motivate users to stake those assets, naturally making the Aave protocol more secure and stable.
Network deployment: The Umbrella feature will first be turned on key networks including Ethereum Mainnet, Avalanche, Arbitrum, and Gnosis.

The “Umbrella” model increases user protection as well as security, liquidity and the ability to create new financial products for Aave.

Token Buyback Program – AAVE Value Enhancement

The ACI has also set forward a plan for token buyback and redistribution. This proposal would assign the Aave Finance Committee (AFC) the role of buying AAVE tokens on the secondary market and transferring them into the ecosystem reserve.

$1M Weekly Buyback: In the beginning, the AFC will be required to buy back $1M USD worth of AAVE on a weekly basis for the first six months. This program would be funded from the treasury holdings of Aave, the size of the buybacks could be tailored to the overall financial health of the protocol.
Reducing Liquidity Costs: Aave aims to reduce secondary liquidity incentives, which currently exceed $27 million per year. The roadmap also includes a more efficient mechanism attaching staking with active management, before transitioning to purchasing AAVE on-market instead of distributing it.

“While staying extremely conservative with Aave treasury funds, the ACI considers this proposal can mandate the AFC to start an AAVE buyback and distribute program immediately at the pace of $1M/week for the first 6 months of the mandate,” Zeller said.

Closing the LEND Chapter

The proposal also corrects a bit of Aave’s history by formally deprecating the LEND-to-AAVE migration contract. LEND is Aave’s original governance token before the platform’s upgrade to AAVE in 2020.

Reclaiming Unclaimed Tokens: This will reclaim approximately 320,000 unclaimed AAVE tokens (~$65 million) and redirect them to the ecosystem reserve. This action, years in the making, will allow the community to concentrate its efforts exclusively on AAVE.

Aave: The Dominator of DeFi Lending

The move towards “Aavenomics” coincides with Aave’s establishment as the largest DeFi lending protocol. According to DefiLlama, DeFi lending protocols hold $39.5 billion in TVL, up from just $10.6 billion at the end of 2022. Aave has the highest TVL of $17.5 billion across 14 blockchains.

TVL on DeFi lending protocols. Source: DefiLlama

Healthy Revenue: Even amid the highs and lows of the overall market, Aave has seen healthy revenue generation. The protocol recently accumulated $8.3 million in fees over a seven-day period, with net deposits hitting $33.4 billion on Jan. 25 — exceeding 2021 levels.

The Aave model also holds significant sway, with other projects, like Kamino Finance, even implementing their own Aave models on Solana.

Whereas many projects are growing in popularity in DeFi, Aave’s size and revenue allows the protocol to take an authoritative position in the space.

The AFC: A New Era in Treasury Management

.In order to manage Aave’s treasury properly and drive forward this ambitious set of changes, we put forward the need for an Aave Finance Committee (AFC) to be created.

Key Responsibilities: The AFC would be responsible for overseeing Aave’s collector contract holdings vs overall liquidity target ratios and budget for both safety and growth initiatives, The committee will be tasked to oversee the AAVE buyback program and coordinate capital allocation across various networks.
Experienced Representation: With the AFC being composed of representatives from critical Aave DAO services such as Chaos Labs, Tokenlogic, Llamarisk, and ACI. It would work on 3/4 signature basis, making it evenly balanced between risk management, growth strategy and treasury expertise.

What’s Next? Community Feedback and Governance Approval

The Aavenomics proposal is now open for community discussion and feedback. The ACI will strive to achieve agreement on the proposal before proceeding to an off-chain Snapshot vote. If passed by the community, the proposal will then enter into the formal on-chain governance proposal (AIP) process before being executed.