Compiled written by Karen, Foresight News
A piece of news about Aave may start a fee switch mechanism and buy back tokens caused the price of AAVE to climb from $85 to above $100. At the same time, Marc Zeller, founder of the Aave-Chan Initiative, released the TEMP CHECK proposal for Update AAVEnomics yesterday, proposing to launch a purchase and distribution plan to purchase AAVE assets in the secondary market from protocol revenues, and enrich the ecosystem reserves to reward major users of the ecosystem. At the same time, the Atokens security module will be activated through a new security module, and the GHO lending rate discount will be cancelled and the Anti-GHO generation and destruction mechanism will be introduced to enhance the consistency of interests between AAVE pledgers and GHO borrowers. In addition, the new proposal also recommends upgrading the current AAVE security module to a new pledge module.
What improvements and updates does Aave’s new security module bring?
Before understanding Aave’s potential fee switch mechanism, it is necessary to review Aave’s original security module and understand the new version of Aave’s security module “Umbrella” proposed by Aave contributor Bgd Labs.
In fact, Aave launched a security module as early as 2020, allowing AAVE and AAVE/WETH Balancer LP holders to pledge their tokens and receive rewards to enhance the resilience and security of the protocol. When the protocol encounters a shortfall event caused by a smart contract vulnerability, liquidation risk, or oracle failure, some of the locked tokens may be used for auction to compensate for potential losses and build an additional protection barrier for the protocol.
Currently, Aaves security module mainly runs on the Ethereum mainnet. As of the time of writing, it has accumulated about $480 million in assets, supports the staking of AAVE, GHO or ABPT V2 (Balancer AAVE + wstETH liquidity pool tokens), and releases about 820 AAVE tokens per day. According to official regulations, in the event of capital loss, the system can use up to 30% of locked assets for compensation. If this amount is not enough to cover all debts, the Recovery Issuance mechanism will be triggered, that is, the temporary issuance of AAVE tokens for auction.
However, Bgd Labs pointed out that there is room for optimization in the existing security module, such as inefficient bad debt processing, low capital efficiency, lack of transparency and flexibility in the slashing mechanism, and pledge and slashing are completely based on Ethereum. To this end, the new security module Umbrella came into being, and made the following improvements to the above problems:
1. Add new pledge assets stk aTokens: Cancel the ability of stkAAVE and stkABPT to be used as direct debt repayment (coverage) assets because they lack relevance to assets that may generate bad debts on the Aave pool, and instead use aTokens that are more relevant to potential bad debt assets in the Aave pool as collateral.
bgdlabs believes that aToken is the best pledged and slashable asset. When aToken is slashed, it does not need to be sold to make up for the deficit. It only needs to be destroyed, that is, the aToken pledged in Umbrella is destroyed, and the number of destroyed aTokens is the number of bad debts. In this way, the balance between the supply of aTokens and the amount that can be withdrawn can be maintained.
2. Comprehensive coverage at the network and pool levels: Umbrella is set up for each pool of Aave on each network to ensure comprehensive security.
3. Automated rapid reduction mechanism: Reduce reliance on manual governance proposals and achieve instant automatic compensation when bad debts are generated.
4. New incentive system: Introducing multiple rewards and more complex algorithms. For example, stk aUSDT can simultaneously obtain AAVE rewards from the ecosystem reserve and USDT rewards from the protocol income, thereby increasing the enthusiasm of participants.
In addition, stkGHO will still be retained in Umbrella, but the types and rules of pledged assets will be more flexible to adapt to future changes in community needs.
How will the Umbrella security module start updating?
The TEMP CHECK proposal states that as an initial step, it is recommended to separate the repayment scope of the StkGHO and StkAAVE security modules, which aims to clearly distinguish the protection responsibilities of the two, especially to improve the efficiency of the StkGHO security module to more effectively safeguard the stability of the GHO stablecoin. Specifically, the updated StkGHO security module will focus on resisting risks related to GHO debt and will only be used to clear GHOs excess debt.
Ethereum StkGHO will be the first security module to adopt the Umbrella standard. If a shortfall occurs, GHO can be destroyed in the security module to clear excess debt without slippage and without affecting the GHO anchoring situation.
The proposal also plans a gradual transformation of the StkGHO security module reward mechanism, aiming to gradually direct resources to potential Umbrella StkGHO security modules to meet the needs of future development.
How will the new AAVENomics work?
In the TEMP CHECK proposal, the biggest change of the new AAVENomics is to upgrade the current AAVE security module to a new staking module instead of a part of Umbrella. The protocol revenue will be used to purchase AAVE assets from the secondary market and allocate them to the ecosystem reserve. This measure not only introduces a constant demand side for AAVE assets in the secondary market, but also enhances the long-term sustainable development capabilities of the protocol. Specific measures include:
1. It is recommended that the AAVE security module not be included in the Umbrella update . StkAAVE will evolve into a staking role, acting as a liquidity receiver and a way to collect rewards generated by protocol revenue and other protocol benefits;
Second, StkBPT is excluded from the Umbrella security module, and the Aave Liquidity Committee (ALC) is appointed to manage AAVE secondary liquidity. At the same time, a purchase and distribution plan funded by the protocols excess revenue is introduced to improve budget efficiency and promote sustainable subsidies and refined management of liquidity.
3. Cancellation of GHO lending rate discount and introduction of Anti-GHO token: Anti-GHO is a non-transferable ERC-20 token. Users accumulate Anti-GHO linearly, and the generation of Anti-GHO is proportional to the interest accumulated by all GHO borrowers. StkAAVE holders can destroy Anti-GHO to mint GHO to repay their own GHO debts or receive StkGHO, thereby enhancing the consistency of interests between AAVE pledgers and GHO borrowers, and introducing revenue sharing of part of the Aave protocol revenue to some AAVE pledgers.
4. Activate Umbrella Atokens Security Module. Most of the debt of the Aave protocol is wETH and stablecoins. Aave is collecting feedback on launching the Umbrella Atoken Security Module with awETH and aUSDC. It is recommended that the aTokens Security Module be rewarded mainly with their respective aTokens, funded by their respective assets and the Reserve Factor of the relevant assets. The details and budget of these Umbrella Atokes Security Modules will be discussed in the ARFC stage.
5. Launch the Buy and Distribute plan. With the introduction of the efficient Umbrella security module, the protocol revenue surplus is expected to increase. Aave purchases AAVE assets in the secondary market from the protocol revenue and enriches the ecosystem reserves to reward ecosystem users.
summary
The token design of many projects is often limited to governance functions and lacks other utility or application value. Aaves move is like a stone thrown into the market, causing ripples. Can this inspire other projects to re-examine the economic model of their tokens and push their tokens from a single governance function to a role that carries income distribution or other actual utility value?
However, the reality is that most projects face the dilemma of lack of additional distributable income. However, when leading DeFi protocols such as Aave activate the fee switch mechanism, the demonstration effect it produces cannot be underestimated. This action is not only an exploration of the existing economic model, but also sends a strong signal to the entire market - the value of tokens should not be limited to governance rights, but should be more closely linked to project revenue and user interests. This will prompt market participants to re-evaluate the potential value of tokens and stimulate in-depth thinking on the innovation of token economic models.
refer to:
https://governance.aave.com/t/temp-check-aavenomics-update/18379
https://governance.aave.com/t/bgd-aave-safety-module-umbrella/18366
https://docs.aave.com/aavenomics/safety-module#shortfall-events
