Market Thoughts: Just How Good is Aave Staking?
For Aave, it’s early yet but due to the timing of their governance token’s launch, they have a unique opportunity to do things in a better way.
This weekend, I migrated my meager supply of $LEND to $AAVE via the Aave market’s migration portal. After doing so, I decided to stake it as well and gleaned a few insights on how $AAVE’s currently working as an incentive in its earliest stages.
First, like most leading governance tokens, it doesn’t seem to be a major incentive for anyone but whales, at least not at this time. In case you didn’t already know, 100 LEND gets you 1 AAVE, which when staked, earns you roughly 1% AAVE(1% of an AAVE token) per month.
If you 10x or even 20x that, then you can see where the real returns lie.
Through only giving attractive returns to those who really buy-in, I see the Aave team’s goal as being to incentivize “skin in the game”- based governance. If you’re not familiar with that term here, then head to my post on Numerai’s Erasure Bay and read up on it!
Essentially, what this sort of leadership theory assumes is that the more of your money (or crypto) you risk to attain a leadership position, the more likely you are to act in an honest fashion, especially when voting on issues that affect a protocol or network’s future.
Perhaps the earliest example of this in the crypto space is proof-of-stake-based governance, which predated the current DeFi movement. As you may already know, in a proof-of-stake blockchain network, to vote on updates or really any sort of issue related to the network’s future, you have to leave a certain number of coins in a wallet that can speak to the network’s blockchain or remain “staked” on the network.
Through doing so, you’re supposed to be promising that you will act honestly as an effective blockchain politician who acts as one member of a group that governs a single network. In reality, only a small number of networks actually appear to punish those who act unfairly by, for example, burning(eliminating) some or all of their stake.
The wide majority don’t have proper negative incentives or recourse like this in place. For that reason, I’m interested to see what Aave and the other leading DeFi protocols(networks) choose to do down the road to mitigate the risk of selfish governors(stakers).
For now, however, Aave has a unique opportunity to do decentralized governance in a better way since it’s the latest and the last of the market leaders to introduce its native governance token(crypto token that functions as a vote and incentive for honest behavior). Whether they will capitalize on that opportunity through keeping a good balance of recourse and staking incentives remains to be seen.
Thank you for reading yet another installment of my thoughts on the current state of the crypto markets. If this discussion or any of my other posts interest you, please reach out here or on Twitter and keep in mind that I aim to cover as much as possible and I’m always open to suggestions! In a future post, I aim to dig into Aave’s governance docs to illuminate some of the topics I’ve introduced here, i.e., recourse and staking incentives. Until then, if you’d like to do more research yourself, head here!
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Disclaimer: None of this is meant to be financial advice. I’ve researched and worked in crypto since 2016 and I aim to merely educate people on the upsides and downsides of all sorts of projects and the market itself. Additionally, I’m a student just as all of us are. Therefore, my thoughts on projects evolve naturally over time as I learn more about them. Last but not least, none of these posts represent the thoughts of NBX unless otherwise stated and this includes all posts that preceded this one.
