- Aave's new liquidity program would allow lenders and borrowers to earn more rewards in addition to their standard interest yield.
- The goal of the new scheme is also to increase the decentralization of the protocol's governance.
- The added incentives could significantly drive up Aave's total value locked.
Decentralized finance protocol Aave has started its liquidity mining program after the Aave Improvement Proposal (AIP) 16 put forth by user Anjan Vinod has reached quorum.
Aave had a competitive disadvantage
Demand for DeFi’s concept of liquidity mining has been steadily growing, where lenders and borrowers are rewarded with the protocol’s native tokens.
To catch up with the rest of the decentralized finance market, Aave has launched its own yield farming program, allowing liquidity providers and borrowers to earn stAAVE rewards in USDC, DAI, USDT, GUSD, ETH and WBTC pools on top of its standard interest yield. Lenders and borrowers in the liquidity pools will split 2,200 stAAVE tokens per day from the 2.9 million AAVE ecosystem reserve, which accounts for roughly $1 million.
Prior to the launch, Aave had never implemented a liquidity mining program despite the meteoric growth in the popularity of yield farming. The lending platform has consistently ranked high among the largest DeFi protocols. The current top lending protocol – Compound – has over $8.91 billion in total value locked, while Aave sits right behind with $7.15 billion in TVL.
According to Aave co-founder Stani Kulechov, the added incentives could boost the protocol’s TVL significantly. He added:
The proposal allocates most of the rewards on stablecoins, meaning that we will see a substantial increase in TVL.
The AIP 16 proposal put forward by Anjan Vinod, an investment analyst at Parafi Capital, mentioned that the program's goal is to “drive lending and borrowing activity across markets” and distribute governance tokens to more users, increasing the decentralization of the protocol’s governance.
Initially, the Aave community only received roughly 60% support from its community for the proposal when first published on governance forums. However, seeing the success of other liquidity mining schemes, the community changed their views and provided the protocol with an opportunity to experiment in the new initiative.
According to Vinod, the program could be used as a beta to investigate further how liquidity mining rewards could benefit the Aave ecosystem. Aave is expected to end its program in July this year but is open to continuing some form of liquidity mining in the future.