Aave, the open-source and non-custodial protocol for earning interest on deposits and borrowing assets, has put forward an innovative update to its economic framework. The proposal, spearheaded by Aave Chan Initiative (ACI) founder Marc Zeller on March 4, marks a momentous step in Aave’s progression. With a focus on revenue distribution, staking incentives, and liquidity management, Zeller believes it to be the most significant proposal in the history of the protocol.
In the face of varying market conditions, Aave has steadily broadened its market influence over the past two years, establishing a solid financial groundwork. This financial stability, underpinned by the DeFi protocol’s liquid reserves increasing by 115% to reach a substantial $115 million, allows Aave to pursue its tokenomics upgrade while remaining competitive.
At the heart of the proposal lies the formation of the Aave Finance Committee (AFC). This governance-backed body will be responsible for treasury fund management and liquidity strategy, overseeing financial allocations within Aave’s ecosystem to ensure sustainable revenue distribution. The initiative brings together key stakeholders, including Chaos Labs, TokenLogic, Llamarisk, and ACI.
The AFC will be in charge of a six-month AAVE buyback program designed to enhance token value and ecosystem sustainability. This buyback strategy will allocate $1 million per week, with potential to expand based on Aave’s financial health, pending further governance approval. The AFC is equipped to execute purchases directly or through market makers to acquire AAVE from secondary markets, with these tokens then distributed to the ecosystem reserve.
Aave’s proposal also presents a solution to its significant liquidity costs, which currently total $27 million annually. The plan is to consolidate staking and liquidity management under a new system called Umbrella. This mechanism aims to offer unrivaled protection against bad debt, an area often avoided by competitors. This safeguarding measure is expected to fortify Aave’s position, particularly in the eyes of institutional participants cautious of on-chain risks.
The proposal also seeks to conclude the transition from LEND, Aave’s original governance token, to AAVE before the 2020 upgrade. The plan involves freezing the LEND migration contract to reclaim 320,000 AAVE tokens valued at approximately $65 million. After this, the DeFi protocol’s governance could decide how to allocate these recovered funds.
Lastly, Aave proposes to introduce Anti-GHO, a new rewards mechanism aimed at enhancing incentives for GHO stablecoin holders. This feature would replace the current discount model with a non-transferable ERC20 token, linking the issuance of Anti-GHO directly to revenue generated from GHO.
This comprehensive proposal underscores Aave’s commitment to developing its economic framework, aiming for sustainable growth while remaining attuned to the needs of its users and the wider market.
