Aave to launch liquidity mining, expected to distribute a total of one million US dollars worth of mining rewards daily

Decentralized lending platform Aave has been operating without liquidity mining all along. However, according to a governance proposal released by the Aave community on April 23, the situation seems to be changing.

Aave to Launch Liquidity Mining

Aave Improvement Proposal (AIP) number 16, devised by Anjan Vinod from Parafi Capital, an Aave investor, aims to boost lending activities across markets and increase the decentralization of protocol governance by distributing governance tokens to more users.

AIP 16 was launched on April 23 for voting, which concluded today with a total of 739,414 votes, meeting the required participation threshold. Starting tomorrow, liquidity providers and borrowers in Aave's USDC, DAI, USDT, GUSD, ETH, and WBTC pools will be able to share 2,200 tokens daily from the current ecosystem reserve of 2.9 million AAVE (valued at nearly $1 billion). The first mining phase will continue until July 15, 2021, when the community will vote again to discuss and decide whether to continue, end, or adjust the mining program.

However, it is important to note that the protocol distributes stkAAVE, not AAVE, to users daily. stkAAVE must undergo a ten-day activation waiting period before it can be unstaked and redeemed for AAVE. If not redeemed within two days after the ten-day cooling-off period, users must reactivate the cooldown and wait another ten days.

Why Launch Liquidity Mining?

Although Aave has not previously initiated a liquidity mining program like many of its competitors, this has placed it at a disadvantage compared to counterparts in the decentralized lending space. Compound has the largest amount of funds in a similar protocol, with a Total Value Locked (TVL) on its platform exceeding $15.4 billion, while Aave's TVL across Polygon (Layer2), v1, v2, and AMM LP token markets is approximately $6.8 billion.

The proposal notes that Compound's USDC lending yield is 3.31%, with a 2% yield on COMP governance tokens, totaling 5.51%. At the same time, Aave's pure interest yield can reach 5.51%, and with additional mining rewards, it is expected to further enhance Aave's platform competitiveness and adoption rates. Aave founder Stani Kulechov mentioned in an interview that he anticipates the added incentive mechanism will significantly boost the protocol's TVL.

"The proposal allocates most rewards to stablecoin pools, meaning we will see a significant growth in TVL."

Furthermore, Stani Kulechov pointed out that when the idea of liquidity mining was first proposed, it only garnered 60% community support. However, the proposal ultimately passed with a substantial margin of "739,414.164:1,883.977". Kulechov believes this shift is likely due to the community observing the success of liquidity mining programs on various platforms.

"The Aave community previously lacked consensus on this issue mainly because the Aave protocol had been successful without liquidity mining operations. However, as many platforms have proven the effectiveness of liquidity mining for the network, this provided Aave with an opportunity to experiment."