In the “DeFi summer” of 2020 Connection brought up the heat by pulling out an old concept, liquidity reduction. Its willingness to reward lenders and borrowers in its COMP governance tokens has helped make it that largest lenders in all ether.
Now, in an effort to keep up, decentralized finance (DeFi) competitor Spirit is testing its own liquidity mining program. Starting today, the platform will pay its users in Staked Aave (stkAAVE) when they lend or borrow Ethereum, Wrapped Bitcoin or Bitcoin stablecoins DAI, GUSD, USDC and USDT. And we’re not talking about pennies anymore.
Decentralized finance is the umbrella term for blockchain-based protocols that eliminate financial intermediaries and enable lending and borrowing without loan officers or credit checks.
Liquidity Depletion, also known as “yield farming‘ involves pooling your cryptocurrency into a fund so it can be loaned out to others – not much different than a savings account or certificate of deposit (although the latter pays more if it can’t be moved). In exchange for you providing liquidity to the exchange or protocol, it rewards you with a different type of token.
Aave users are already earning staking rewards for staking (i.e. locking) Aave’s native token, as well as interest on their deposits. This program allows them to earn additional rewards in stkAAVE. Staking Aave is equal to the value of AAVE, which is currently the case cheap almost $400, according to Nomics. To Convert send it to the AAVE governance token, they have to wait 10 days after receiving it.
In case you’ve ever wondered what’s coming out of DeFi governance, which places are the responsible user running the protocol was one of those things. Aave Improvement Proposal (AIP) 16, presented by venture capitalist and AAVE user Anjan Vinod, called for liquidity reduction as a way to attract capital and ensure borrowers get the credit they need. Additionally, he argued, it would push people to migrate to version 2 of Aave, which launched in December 2020. Much of the protocol’s capital is still tied up in v1, so the proposal is built on top of that because of the high gas fees on the Ethereum blockchain that hosts the protocol; Users did not have enough reasons to move the funds.
“By introducing liquidity mining rewards only on Aave v2, liquidity providers and borrowers will naturally migrate to the more optimized version,” Vinod wrote.
That’s because the rewards are supercharged on v2. Right now, AAVE v2 is promoting lenders with a floating rate of 18% on Tether stablecoin, while borrowers get up to 36%. In v1, these rates are 1% and 7%, respectively.
In essence, liquidity mining rewards are split equally between lenders and borrowers; for ETH and WBTC, the lenders take 95%. The platform distributes 2,200 stkAAVE (worth approximately $1 million) each day proportionally to the six liquidity markets based on their size. The program runs through July 15, at which point Aave users can vote to extend, discontinue, or change it.
Aave is playing catch-up. Uniswap experimented with liquidity mining in October and November last year. Compound, on the other hand, has been running its program since June. Compound had more than $5 billion in outstanding loans by the end of Q1 2021, according to a Messari report, compared to $1.5 billion to $2 billion for Aave.
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