Introduction
In Q3 2023, the Aave DAO relentlessly pushed forward in build mode. The DAO drove initiatives aimed at GHO stability and adoption, explored how to leverage its strategic assets, dipped its toes into RWAs, and implemented delegate incentives. As noted in our previous State of Aave Governance report, the growth and stability of the Aave Protocol, like many other protocols, is top of mind for the dozens of governance participants within this healthy and brewing community.
Below, we highlight the flurry of activity from this past quarter at Aave DAO, from the storylines and latest developments to the changes that are transforming this bustling DeFi community.
The GHO Journey
In our previous report, we noted the ongoing battle to repeg GHO. Since its launch on July 16, 2023, the GHO stablecoin has struggled below peg forcing the Aave DAO to focus on initiatives to remedy this. In Q3, this activity ramped up.
Despite some initial challenges, stability for the GHO stablecoin seems on the horizon. The following proposals are examples of the hard work implemented to establish GHO amongst the elite crop of stablecoins.
Temporarily Pausing GHO Integration in Aave
To ensure the safety of the GHO integration, the Aave DAO voted to pause its integration due to a technical issue identified in the GHOVariableDebtToken function.
Following the detection of this issue, the Aave Guardian promptly suspended the GHO reserve as a precautionary measure against potential misuse or abuse. Aave Companies, BGD Labs, and Certora, some of the most prominent players in the DeFi space, collaborated on governance recommendations for a technical update of the GHO VariableDebtToken during this suspension. Importantly, no user funds were lost during this entire process.
In this case, the issue was caused by a scenario in which a user may pay off their debt in full but still have a VariableDebt token amount left over, which prevented their borrow state from updating properly. The GHOVariableDebtToken accounting's inaccurate precision was the source of this problem. An upgrade was necessary to rectify this and prevent occurrences of borrowings that exceed the permitted collateral-to-loan value (LTV) ratio.
The problem was successfully addressed through AIP 308, resulting in the unfreezing of the GHO reserve. The borrowed ceiling for GHO has been raised to $35 million, and the GHOVariableDebtToken has been improved. Additionally, the power to freeze the GHO reserve in the future has been granted to the Aave Guardian. Users were not negatively impacted by this occurrence, and as a thank you, the community member who reported the problem is eligible for a bounty reward.
Status: Approved
[ARFC] Increase GHO Borrow Rate
With the DAO primarily focused on restoring the peg, DAO Service Providers such as the Aave Chan Initiative (ACI) have suggested taking the approach of raising the borrowing rate to incentivize GHO Borrowers to repay their loans. In the previous quarter, the ACI proposed and passed an increase in the borrowing rate from 1.5% to 2.5% on September 2nd, 2023.
Building on this, the ACI has now suggested an additional increase in the borrowing rate. Consequently, there is a proposal to raise GHO's borrowing rate from 2.5% to 3%. This adjustment aims to rectify the peg deviation, ensuring the stability and credibility of GHO within the industry. Despite its rapid growth, with a circulating supply of 22 million in a short period, GHO's peg deviation has affected its market growth and confidence, primarily due to its low borrow rate compared to stablecoin alternatives.
To address this, the proposal recommends a modest increase in the GHO borrow rate to 3%. This adjustment is seen as a temporary solution, to cement the GHO peg, especially in light of the potential integration with sDAI, which could create selling pressure on GHO considering the current borrow rate.
In a more recent development, there is now a proposal to further increase the borrowing rate from 3.00% to 4.72%. While the rationale behind the interest rate hike is generally understood by the Aave Community, there are concerns among some community members that this approach may negatively impact early GHO adopters.
We believe that increasing the borrowing rate is a crucial step in motivating existing GHO minters to repurchase GHO tokens from the market to settle their debts, ultimately bringing GHO closer to its $1 peg. Although these rate increases may pose short-term challenges, the adjustments made will ensure the long-term sustainability of this stablecoin.
Status: Approved
[TEMP CHECK] Treasury Management - Create and Fund GHO Liquidity Committee
Aave DAO’s various service providers have taken distinct approaches to boosting demand for the GHO stablecoin. In this case, TokenLogic proposed the establishment of a liquidity committee responsible for devising and implementing strategies to drive liquidity towards GHO while leveraging the strategic assets of Aave DAO.
This proposal by TokenLogic offers the Aave DAO an opportunity to create and finance the GHO Liquidity Committee for a three-month trial period. The rationale behind this suggestion stems from the expectation that, in the upcoming weeks, the voting base will show less interest in GHO liquidity pools.
This change can be attributed to the fact that users who vote for GHO pools are not actively participating in the bribery market, resulting in missed opportunities. Furthermore, with all BPT locked, the Aave DAO's gauge vote for veBAL is merely 1.8% of veBAL. Therefore, the DAO needs to explore alternative means to sustain GHO liquidity and maintain desirable APR as the liquidity pools expand, especially since external teams are reducing their support.
The liquidity strategy outlined in this proposal focuses on strengthening the GHO peg by establishing a combination of narrow and wide concentrated liquidity pools. Over time, liquidity will be reallocated from larger to smaller pools, necessitating proactive management. Additionally, if necessary, the DAO may co-incentivize a GHOFRAXBP pool by the Frax team and a GHO/crvUSD pool on Curve Finance.
To address this pressing matter, a Liquidity Committee with a dedicated team will be formed. Comprised of seven signers, the committee will conduct transactions using a 4 of 7 SAFE. TokenLogic will oversee coordination, communicate with protocol teams, and provide analytics. Each signer will offer insightful critique, refine the plan, and authenticate the transactions. The initial three-month budget for the committee includes 406,000 GHO for liquidity incentives and 5 ETH for gas. Any unused funds will be carried over or returned to the subsequent committee.
This plan recognizes the urgent need to maintain GHO liquidity while exploring long-term alternatives. By focusing on the establishment of a Liquidity Committee and allocating funds accordingly, it aims to successfully manage liquidity and strengthen the GHO peg.
Status: Approved
[ARFC] Treasury Management - GHO Liquidity Strategy Update
To systematically boost liquidity for GHO, an updated strategy for capturing liquidity was put forward. Developed by the liquidity committee, this strategy is the first of many initiatives to drive demand for GHO by focusing on reinforcing the GHO peg and diversifying liquidity across multiple exchanges.
This plan addresses these concerns through the establishment of structured liquidity pools. The proposed approach includes the creation of concentrated liquidity pools on platforms like Balancer/Aura, Bunni-powered Uniswap, and Maverick. These pools aim to offer GHO varied and effective liquidity support. Furthermore, the integration of GHO with the strategic assets of the Aave Safety Module (SM) is also suggested. Liquidity in these pools will be actively managed and encouraged by the Liquidity Committee.
The proposal outlines performance metrics, such as total value locked (TVL) in GHO pools, swap size with defined price impact, and enhancement of the GHO peg. It also provides a comprehensive budget breakdown for Liquidity Committee activities, encompassing governance involvement and various liquidity incentive programs.
Status: Approved
Activating V3 Governance
V3 Governance represents a significant leap forward in Aave DAO’s governance infrastructure, paving the way for efficient decision-making as the DAO continues to scale.
An important turning point in the Aave ecosystem will be reached with the activation of Aave Governance v3. The platform's governance and operations are impacted by several crucial components of this intricate transfer from Aave Governance v2.
BGD. Aave Governance v3 - Activation plan
To facilitate a seamless transition and maintain improved speed and performance, Aave Governance v2 proposes two key changes. These proposals will concurrently disable the previous system and activate Aave Governance v3. The entire migration process is expected to last approximately 21 days.
Additionally, there will be upgrades to voting tokens, such as stkAAVE, aAAVE, and AAVE. Notably, the governance structure will no longer rely on Snapshots, signaling a paradigm shift. The voting networks will comprise Avalanche C-Chain, Ethereum, and Polygon PoS, empowering users to participate in the governance process across these networks.
Aave Governance v3 prioritizes voting accessibility as a crucial feature. Users can cast their votes using a Foundry script, the user interface, or block explorers. This flexibility ensures that individuals with varying preferences and technical proficiency levels can actively engage in the governance process.
To deter spam proposals, a cancellation fee has been implemented. Users will be required to pay this fee when submitting proposals, which will contribute towards covering the expenses of the Aave Robot. If the proposal concludes in a manner other than cancellation, the cost may be reimbursed.
Furthermore, the introduction of AI (Aave Delivery Infrastructure) plays a pivotal role in facilitating governance control and cross-chain communication. This infrastructure will support all Aave systems and address technical issues, ensuring a cohesive governance framework across multiple networks.
The technical implementation of v3 has been spearheaded by the BGD Labs team. As Aave governance participants, we wholeheartedly welcome these updates, as they enhance efficiency, reduce costs, and simplify participation in governance. As the Aave DAO continues to grow in terms of Total Value Locked (TVL), new products, and user base, governance activity is expected to naturally increase to meet the rising demand. This update reinforces Aave Governance's position at the forefront of innovation.
More recently, an issue was identified during the initial proposal’s implementation of voting assets, leading to its cancellation, for now. Recognizing the isolated nature of this issue and its relation to voting, the proposal authors have suggested a partial migration to an interim v2.5 version. This approach will streamline the final transition to v3 while allowing the release of a.DI (Aave Delivery Network) and all non-voting mechanisms of Governance v3 to proceed.
All in all, Aave Governance v3 represents a comprehensive update that strengthens the governance process, introduces new functionality, and elevates the overall effectiveness and adaptability of Aave's decentralized governance. This migration exemplifies Aave's commitment to providing its user base and token holders with a flawless experience.
Status: Approved
Strategic Assets
Across DeFi, projects rarely grow in isolation. A quick survey of the landscape reveals that many protocols derive or develop their value through collaborations, partnerships, and integrations with other projects. Just consider the relationship between Curve and Convex Finance, or Balancer and Aura Finance. DAOs have come to understand that the most effective strategies for exponential growth and value creation involve leveraging the technology and resources of other DAOs.
DAOs often leverage partnerships with other DAOs to create value for their respective ecosystems, and the Aave DAO is no exception. Aave DAO possesses a diverse range of strategic assets such as BAL, AURA, and CRV. Below we highlight a recent proposal concerning these assets.
Update the StrategicAssetManager Contract
With this update, Aave can actively participate in Balancer and Aura governance, maximizing its voting strength. The integration of vlAURA support enables Aave to lock and control vlAURA tokens, allowing the Aave DAO to maintain a strong position in governance choices and exert more influence. The StrategicAssetManager contract provides a range of functions, benefiting both veBAL and vlAURA holders.
For veBAL holders, the contract enables the distribution and sale of veBAL boost, participation in Balancer gauge votes, token locking and unlocking, and collection of protocol fees and rewards. Likewise, vlAURA-related features include token locking, reward claims, voting authority delegation, relocking, and emergency withdrawal. These features empower Aave's governance to actively participate in governance voting and decision-making.
The inclusion of vlAURA support is a significant aspect of this proposal. This change, driven by community feedback and the evolving dynamics of the Aura governance ecosystem, strategically positions Aave in the DeFi space.
In addition, this contract introduces the concept of the GHO Liquidity Committee multisig being designated as a guardian. This designation grants the multisig authority to communicate with the StrategicAssetManager (SAM) contract. It is essential in enabling the Liquidity Committee to actively manage Aave's strategic assets, enhancing the DAO's ability to respond to ever-changing market conditions. Efficient asset and voting power utilization is ensured by fostering cooperation and coordination within the Aave ecosystem.
Updating the StrategicAssetManager contract is vital for the Aave DAO to comprehensively manage its strategic assets. This update empowers the Aave DAO to actively participate in Balancer and Aura Governance, effectively leveraging these assets to drive liquidity to GHO and achieve its goals.
Real World Assets
As the Aave DAO treasury continues to grow, the DAO finds itself driven to explore innovative strategies for diversifying its sources of yield. In the ever-evolving landscape of decentralized finance (DeFi), a DAO must pursue avenues that can enhance its financial sustainability and bolster the growth of its treasury.
Currently, the Aave DAO is considering venturing into Real World Assets (RWA), which presents a compelling opportunity for the Aave DAO. This exploration offers a dual advantage: it can not only contribute to the generation of yield that fortifies the Aave Treasury but also elevate the utility and significance of the GHO token.
Engaging with Real World Assets demonstrates the DAO's progressive approach to financial diversification, securing the sustainability of the Aave ecosystem while harnessing the transformative power of Real World Assets.
[ARFC] Aave Treasury RWA Allocation
This proposal outlines the integration of Centrifuge as a service provider for Aave DAO. Its objective is to establish a legal framework that facilitates investments in Real World Assets (RWA). The proposal further aims to create specific management and governance procedures for RWAs, along with allocating $1 million from Aave’s treasury stablecoin holdings into a liquid US Treasury Bill (T-Bill) fund on Centrifuge.
This integration is the first step towards Aave's long-term objective of providing GHO with Real World Assets as a proof of concept investment. The opportunity to earn a yield on idle stablecoins held by Aave Treasury, which currently amounts to approximately 17% of its assets (around $13 million), has sparked this suggestion.
With just a $5 million investment in low-risk, high-yield US Treasuries, the Aave DAO has the potential to generate recurring annual revenue of up to $250,000. Additionally, the Aave community stands to gain valuable knowledge about the RWA sector, fostering familiarity and competency for further exploration. The plan lays forth a methodical strategy to accomplish these objectives.
Initially, Centrifuge will create a legal framework for the Aave DAO, to make the framework advantageous to the DAO. The legal structure is to be established in the Cayman Islands and will include procedures tailored to the DAO's interactions with the foundation firm. This framework aims to work seamlessly with DAO governance while providing legal protection for its investments. The engagement of legal counsel is intended to safeguard Aave's interests through an impartial third party.
Once the legislative framework is in place, the proposal outlines the first pilot investment in the Anemoy Liquid Treasury Fund. In this transaction, $1 million in USDC will be transferred from the DAO's treasury to the Anemoy pool. Centrifuge and Aave will collaborate closely throughout this initial investment to test the associated procedures. The proposal places significant emphasis on the cautious deployment of RWAs and grants the community discretion over future investments. It suggests maintaining fixed caps on RWA allocations in relation to the entire Aave balance sheet until the community feels more comfortable with such investments.
The plan concludes by outlining the expected returns, liquidity, and potential asset classes for the upcoming investments, including liquid, preservation, and acceleration assets. Overall, this plan represented a strategic move towards Aave's exploration of RWA investments, the creation of new revenue streams, and the development of sector knowledge.
Source: https://governance.aave.com/t/arfc-aave-treasury-rwa-allocation/14790
Status: Approved
Delegate Compensation
Delegate compensation remains a hot topic within the Aave DAO. Given the level of expertise, context, and time required for governance delegates, the DAO is actively working towards incentivizing and fostering high-quality contributions.
Previously, the Aave DAO neglected conversations around delegate compensation, but as the community has matured and developed, there has been a need to mitigate the risk of delegates colluding with third parties. To address this risk while retaining talented individuals and professional delegate teams, the Aave DAO introduced the "Orbit" program, initiated by Marc Zeller of the Aave Chan Initiative. Through Orbit, a select few Aave Delegates were funded for a quarter, resulting in a successful trial run of the delegate funding program.
[ARFC] Expansion of “Orbit” - A DAO Funded Delegate Platform Initiative
As a follow-up to the Orbit trial run funded by the ACI, the [ARFC] Expansion of “Orbit” - A DAO Funded Delegate Platform Initiative was an attempt to switch the "Orbit" delegate platform initiative's funding source from the Aave-Chan Initiative (ACI) to the Aave DAO directly. The main goal is to guarantee the program's independence and sustainability so that active delegates in the Aave community can continue to receive support.
This shift is driven by the accomplishments of the Orbit initiative's pilot program, which was first supported by ACI and demonstrated incredible effectiveness in its first quarter. Given the positive effects shown, there is a strong case for the program's expansion and generalization. This change guarantees the project's sustainability and unity within the larger objectives of the Aave community.
The plan outlines how funds will be raised, with payments made in GHO stablecoin. The monthly budget for the Orbit initiative remains at $5,000, following a quarterly schedule and eligibility requirements. The criteria for the upcoming quarters will align with the ones described in the [ARFC] Quarterly Gas Rebate Distribution - August 2023, while additional measures such as voting power and delegation diversity will be introduced to safeguard program integrity.
To finance the Orbit project, stablecoins from the Aave DAO treasury will be utilized to purchase GHO on secondary markets, thereby enhancing the GHO peg. The proposal includes a list of eligible and recipient delegates for the next quarter, along with a detailed breakdown of each delegate's assigned budget. Pending approval from the Aave DAO governance, this plan will be executed by combining stablecoin holdings to purchase GHO and generating a fresh supply of 15,000 GHO. The allocated amount will then be distributed over three months to qualifying delegates' addresses. Through this strategic approach, the success and sustainability of the Orbit initiative are ensured, fostering active involvement and engagement within the Aave community.
Status: Approved
Looking Ahead
In Q3 2023, Aave DAO showcased continuous innovation and expansion. With the onboarding of new assets and the growth of supply and borrowing caps, the Aave Protocol, driven by the dedicated contributors of the Aave DAO, stands strong as one of the potent and resilient decentralized communities.
As active delegates and contributors at Aave DAO, we have a great front-row seat to witness the current and future ideas being incubated by the Aave DAO. Looking ahead, we foresee efforts to re-stabilize the GHO stablecoin as a catalyst for solidifying Aave's position as the dominant lending protocol in an increasingly crowded DeFi space.
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