Lending giant Aave organizes to launch liquidity mining program

With the liquidity mining program scheduled to launch on Monday, Aave may be on the verge of becoming the dominant decentralized funding (DeFi) lending arrangement.

Earlier today, Aave Improvement Proposal (AIP) 16 reached a quorum, meaning that as of Monday, April 26, liquidity providers and borrowers of USDC, DAI, USDT, GUSD, ETH and WBTC will not only receive their stAAVE rewards off standard interest rate.

Providers and borrowers of these funds will allocate 2,200 stAAVE tokens daily among the agreed 2.9 million AAVE ecosystem pools, which are currently valued at nearly $1 billion.

The proposal states that the goal of the plan is to promote lending and marketplace lending activities by distributing governance tokens to more users and increasing decentralization of protocol governance.

This move is new for Aave. While there is no liquidity extraction program like many competitors, the lending platform has always been at the forefront of DeFi deals.

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Compound is currently the leading lending protocol, with a total blockchain value (TVL) in the market exceeding $15.4 billion, and Aave has $6.8 billion in its Polygon, Ethereum v1, Ethereum v2 and AMM LP token marketplaces.

Stani Kulechov expects the additional incentives to greatly strengthen the deal's LTV. The proposal allocates most of the rewards to stable coins, which means we will see a substantial increase in TVL.

Historically, the lack of liquidity in the mining program puts Aave at a competitive disadvantage.

The money market composite can provide a 3.31% return on USDC stable coins and a 2% return on COMP governance tokens, for a total return of 5.51%. At the same time, the Aave market currently offers the same pure interest rate of 5.51%.

The new plan will increase the rate of return by several orders of magnitude and provide a substantial return to the borrower, which, calculated at the current interest rate, will far exceed the annual interest rate on the loan owed by the borrower.

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Although the current program is scheduled to end on 07/15/2021, there is some agreement to continue the door to certain types of liquidity mining in the near future.

The program is proposed as a Beta version to further investigate how the use of liquidity mining rewards will benefit the Aave ecosystem, and with a daily distribution rate of 2200, the program will only consume 5% of the ecosystem's reserve tokens per year.

When first proposed in governance forums, liquid mining has received only 60% support from the community.

The shift is due in part to the fact that the community has seen how other liquid mine programs have performed successfully.