Aave

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.

Decentralizing Aave

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.

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” . 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.