Introduction

Aave is a decentralized non-custodial liquidity protocol where users can participate as depositors or borrowers. Depositors provide liquidity to the market to earn a passive income, while borrowers are able to borrow in an overcollateralized (perpetually) or undercollateralized (one-block liquidity) fashion.

This Portal links to the key resources on Aave to understand the fundamentals of the Protocol. Please join the discussion on Aave community Discord server; our team and members of the community look forward to helping you build on top of Aave.

Why Aave?

Aave Protocol has been audited and secured. The protocol is completely open source, which allows anyone to interact with a user interface client, API or directly with the smart contracts on the Ethereum network. Being open source means that you are able to build any third-party service or application to interact with the protocol and enrich your product.

How do I interact with Aave protocol?

In order to interact with Aave protocol, you simply deposit your preferred asset and amount. After depositing, you will earn passive income based on the market borrowing demand. Additionally, depositing assets allows you to borrow by using your deposited assets as a collateral. Any interest you earn by depositing funds helps offset the interest rate you accumulate by borrowing.

What is the cost of interacting with Aave protocol?

Interacting with the protocol requires transactions and so transaction fees for Ethereum Blockchain usage, which depend on the network status and transaction complexity.

Where are my deposited funds stored?

Your funds are allocated in a smart contract. The code of the smart contract is public, open source, formally verified and audited by third party auditors. You can withdraw your funds from the pool on-demand or export a tokenized (aTokens) version of your lender position. aTokens can be moved and traded as any other cryptographic asset on Ethereum.

Aave (AAVE) token

AAVE is used as the centre of gravity of Aave Protocol governance. AAVE is used to vote and decide on the outcome of Aave Improvement Proposals (AIPs). Apart from this, AAVE can be staked within the protocol Safety Module to provide security/insurance to the protocol/depositors. Stakers earn staking rewards and fees from the protocol. Documentation on tokenomics and governance is available in the flash paper and with further detail in the full documentation. Feel free to join the discussion in the governance forum.

The Aavenomics introduce a formalized path to the decentralization and autonomy of the Aave Protocol. Covering governance mechanisms and financial incentives, it aims to share a vision of alignment between various stakeholders within the Aave ecosystem, protocol functionality and the AAVE token as a core securing element of the Aave Protocol.

Governance mechanisms in decentralized protocols stem from the interplay of community participation, incentives, self-regulation and policy management, all adjusted to live through and alongside the market. They are political, financial and social institutions which can only be altered by market forces.

One key design goal of decentralized governance protocols should be to balance Shleifer and Vishny’s emphasis on behavioral incentives with Tirole’s focus on stakeholders' welfare, while prioritizing more recent focus on governance minimization and automation.

Goal

The goal of the Aave Tokenomics, through its incentives and policies, is to create a Shelling Point where the protocol’s growth, sustainability and safety take priority over individual stakeholder objectives.

Conflict dynamics amongst open or closed governance can produce unfocused goals and lead to suboptimal decisions . Multilevel governance is more efficient as market participants must operate under the realm of agreed risk standards and higher-level policies.

AAVE token holders bear the risk of the protocol. Stakeholders contribute in more tangible ways to the protocol, usually in the form of technical integration (DeFi Front End, integrations etc.) or financial participation (Liquidity Provider). Both have some expectations for the protocol behaviour, safety and functionality.

The Aave Protocol codifies trust between stakeholders (AAVE token holders, Vote delegates, Market Manager, Liquidity Providers and integrators). Moreover, although this implementation of multilevel governance cannot practically solve voter apathy, our liquidity-based governance creates economic incentives that keep the voting pool active and renewed as new Aave participants become potential voters.

The incentives design resulting from multilevel governance encourages participants to become risk aware as they are economically co-dependent on each other and the protocol while allowing more flexibility between market operators.

Within a decentralized ecosystem, governance is what Reinhard describes as “a catch-all concept for various forms of steering.” Still he recognizes that governance “pay[s] tribute to the complexities of steering in poly-centred, globalised societies.” Taken from this perspective, governance is a term often associated with opacity. The vote and the result of a vote are only a small part of governance processes and ongoing power diffused through participants.

While the Ethereum blockchain is an on-chain system operating in full transaction transparency, it abides by an off-chain process that is broadcasted on-chain. The result is a system where power “constitutes agents rather than being deployed by them”. Therefore, every agent is an intrinsic part of the governance model.

In contrast, the organizational design and power distribution of the Safety Module follows Clarissa Hayward’s vision of power as a set of boundaries and rules of organization within a particular system. “Power’s mechanisms are best conceived, not as instruments powerful agents use to prevent the powerless from acting freely, but rather as social boundaries that, together, define fields of action for all actors. Power defines fields of possibility. It facilitates and constrains social action. (...) Freedom enables actors to participate effectively in shaping the boundaries that define for them the field of what is possible”.

In the protocol, the Aave Token governance defines the rules for market participants, aiming to improve the challenging condition of the governance framework by enhancing “people’s relative capacities to know and shape these boundaries” [10]. This will also be carried by more informal supports such as open Community and Governance meetings, the Aave Improvement Proposal process, and forums that incentivize communication between stakeholders.

This Aavenomics proposal is designed as a catalyst for the growth and long-term governance of the Aave Protocol. The goal is to create a future-proof framework which relies on systemic incentives and multilevel governance to create an efficient equilibrium that stimulates long-term growth and optimization of the protocol.

Protocol Governance

Aave Governance consists of the proposition and decision-making process for the different risk parameter changes, improvements and incentives that constitute the policies, and upgrades to governance itself. All future decisions governing the protocol will be enacted through this procedure.

The AAVE token empowers holders to collectively act as governors of the protocol by enabling them with the capability to vote and propose.

Market Specific Governance

As described in the Policies section, the Policies of the Aave ecosystem affect all markets, therefore, control over them resides in the AAVE token. These market-wide parameters are just constraints; they define the ranges for which specific configurations of markets can be defined. The importance of providing constraints to the market parameters by using protocol policies materializes in the protection guaranteed by the Safety Module. This results in markets that adhere to the Policies automatic protection from Shortfall Events.

Market specific parameters defined in the Protocol Policies can be adjusted to the use case of the market and/or interests of the parties involved in it (market creators, liquidity providers, borrowers, liquidators etc.).

The different components of the protocol include capabilities to quantify the involvement of the different participants within a market, with metrics like the interest earned over time by liquidity providers for an asset, the interest repaid by a borrower or the amounts liquidated, amongst others.