The governance submission aims to implement a fee switch and a buyback program to increase the utility of staked AAVE.
Borrowing on Aave has reached a more than two-year high of $8.5 billion, an increase of 150% since the beginning of the year.
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Posted July 25, 2024 at 4:26 pm EST.
The price of AAVE, the governance token for the largest lending protocol in the decentralized finance ecosystem, spiked on Thursday with the proposal of anew governance proposal aimed at changing the cryptocurrency’s tokenomics, as well as the protocol setting a two-year high in borrowing.
According to data from CoinGecko, AAVE was trading at $85.89 around the time Marc Zeller, the founder of the Aave Chan Initiative (ACI), a leading service provider for AAVE’s DAO, submitted a governance proposal to update its tokenomics. AAVE has since increased to as high as $95.75, before settling at $91.95 at the time of writing, a 7% jump.
The governance submission proposes to create a clear roadmap for implementing a fee switch for staked AAVE and having a way for the token “to collect rewards generated from the protocol revenue,” Zeller wrote in the proposal.
If the proposal passes, staked AAVE will still be compensated in AAVE tokens, but a new “Buy & Distribute” program, funded by the protocol’s new excess revenue, will be introduced. The program would obtain AAVE assets on secondary markets, and then distribute those assets to the protocol’s ecosystem reserve.
The new system is expected to introduce “a constant demand side for the AAVE assets on the secondary markets,” according to the proposal.
Read More: Aave DAO Delegate Takes Aim at MakerDAO Over Spark Profit Sharing Deal
“The tokenomics update makes the fundamental case for AAVE even stronger,” wrote Walter Teng, an investor on the liquid team at Coinfund, a crypto investment firm, in a Telegram message to Unchained. Teng said the token “was already trading at 20x P/E, which is cheap even for web2 high growth businesses, but having revenues accrue to stakers ties in value accrual even more.”
According to Teng, unlike Lido and Ripple, AAVE has not been mentioned in any Well’s Notices, which are formal letters from the SEC that the agency may be bringing enforcement action. As a result, Teng doesn’t see AAVE encountering regulatory trouble anytime soon.
Once the governance proposal receives community feedback, the submission will move to a snapshot vote, an offchain mechanism to gauge sentiment on the potential changes.
The proposal builds on a related governance proposal, submitted by development firm BGD Labs on Wednesday, that is intended to improve the shortcomings of Aave’s current safety module, the lending protocol’s way of addressing the potential “bad debt” in different liquidity pools.
Read More: Aave Labs Unveils V4 Upgrade Proposal, Introducing a Unified Liquidity Layer and ‘Fuzzy’ Rates
“Bad debt” is defined as a liquidity pool having more liabilities than available collateral. If passed, this separate proposal will replace the current structure with “Umbrella,” a newer version that allows other assets to be staked and slashed in the event of bad debt. “Slashing” refers to the forfeiture of staked tokens.
Record High in Borrows
AAVE’s price spike and new governance proposal come one day after the lending protocol reached a more than two-year high in borrows.
Data from blockchain analytics firm Artemis shows crypto users have borrowed $8.5 billion in assets using the lending protocol, a 150% increase from $3.4 billion at the start of the year.
The most borrowed assets as of presstime were ETH ($2.8 billion), USDT ($1.4 billion), USDC ($1.3 billion), and WBTC ($305.4 million), according to Aave’s dashboard for its Ethereum V3 markets. By borrowing, users are able to obtain liquidity and working capital without selling their assets. Per Aave’s documents, “users are mainly borrowing for unexpected expenses, leveraging their holdings or for new investment opportunities.”
With higher levels of borrowing, Aave as a protocol generates more revenue, because users who borrow assets have to pay back the amount borrowed plus interest.
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