Aave announces new token: Next Ethereum DeFi token to skyrocket?

  • The Aave loan protocol will start its transition process to a decentralized governance model with the introduction of the AAVE token.
  • LEND will migrate to AAVE with the approval of the Genesis governance model. 100 LEND will be equal to 1 AAVE.

The Ethereum-based Aave protocol will initiate the process of transition to a decentralised governance model. Via the “Aavenomics” proposal, the team behind the protocol announced the introduction of a new token, AAVE, which will replace LEND. The process of replacing the token will begin with a vote on the genesis governance model. According to data from DeFi Pulse, the AAVE credit protocol accounts for $400 million of ETH in Total Value Locked (TVL).

The Aavenomics proposal contemplates a series of changes and additions with the objective of “sharing a vision of alignment among the various shareholders” and improving the functionality of the protocol. The new governance model will have the AAVE token as a basic security element. In that sense, Aave will migrate the 1.3 billion LEND token to 13 million AAVE tokens. Thus, the tokens will have an equivalency of 100 LEND for 1 AAVE.

While these 13 million AAVE will be claimable by LEND holders at the aforementioned rate, 3 more millions AAVE will be allocated to the Aave Ecosystem Reserve – a bootstrapping fund for protocol incentives governed by AAVE token holders.

Migration will begin with a vote using LEND in a Genesis governance poll. The poll will serve as a mechanism to deploy the smart contract responsible for converting LEND to AAVE. Once completed, the AAVE holders will determine how funds in the Aave Ecosystem Reserve will be used. Below you can see a summary of how the Aave protocol will operate and what role the AAVE token and its holders will have.

As can be seen in the image above Aave will launch a security (SM) module so that the AAVE token can be delegated as “last resort” collateral. Stakeholders will earn AAVE as a security incentive along with a percentage of the protocol fees. In addition, staking in Aave will allow for the delegation of AAVE and the AAVE/ETH pair.

The AAVE/ETH pair will also be used as a liquidity incentive for the market through a pool from the provider Balancer. Therefore, holders will also earn rewards on Balancer and rewards for trading fees. In order to trade the AAVE token it is necessary to wait for a “cool-down” period. Rewards on the new token will be distributed “while the AAVE is removed or transferred from the security module”.

Another important change in the protocol is the introduction of the Aave Improvement Proposals (AIP). This will allow holders to vote for protocol changes to be ratified on-chain. In that regard, the Aave team stated the following:

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.

Will AAVE be the new star of the Ethereum DeFi?

The decentralized governance model seems to be a new trend in the Ethereum DeFi sector. Other protocols such as Compound, Synthetix and yearn.finance have launched governance tokens to enable their users to participate more. The token of the latter protocol, YFI, recorded a daily gain of 2000% on the day of its launch and 11,000% within the first week. The new AAVE token could follow a similar path, if investors find the incentives offered by the Aave protocol attractive.

Last updated on July 30, 2020