Redefining DeFi Economics: Aave Musings On Fee Allocation

An idea is being discussed at Aave, the decentralized lending platform, to turn on a “fee switch” that would distribute fees to token holders. Aave Chan Initiative founder Marc Zeller shared this on X.

Zeller asked, “Should we activate the ‘fee switch’ next week?” He noted Aave’s DAO currently earns around $60 million yearly – enough for five years of operating costs.

Aave is a crypto lending platform running on multiple blockchains. It lets borrowers take loans in one cryptocurrency while depositing a different one as collateral. The Aave token holders together form AaveDAO, which governs the platform.

In a previous post on a social media platform, an individual named Zeller suggested the potential introduction of fees for participants who stake their tokens in the Aave protocol. Specifically, on Mar 16, Zeller stated, “A forthcoming update to the safety module will propose distributing collected fees to those staking their tokens.”

The term “fee switch” generally refers to a mechanism or capability within a system or platform that allows for the enabling or disabling of specific fees or charges. For decentralized finance (DeFi) protocols like Aave, a fee switch could potentially enable the distribution of fees collected from various transactions or activities to holders of the protocol’s tokens or participants who actively contribute to its operations.

Adjustable Aave Fees Enhance Governance

The platform’s governance will adjust fees using the fee switch. This lets them control policies based on needs and goals. The Aave DAO okayed changes to GHO staking fees recently. This maintains their stablecoin’s peg. If Aave DAO activates fees, they’ll copy Frax Finance. Frax recently approved bringing back their fee switch.

But on Apr 5, AaveDAO talked about Dai (DAI) collateral limits. Advisors from Chaos Labs wanted a 12% Dai loan-to-value (LTV) drop. Marc Zeller proposed cutting it by 75% instead. The advisors pushed their idea for managing risk.

Before this event, Ave unveiled a fresh plan to establish DAI’s loan-to-value ratio (LTV) at 0% across all Ave deployments. The proposal also recommended discontinuing sDAI incentives from the Merit program, starting with Merit Round 2 and subsequent rounds. This move aimed to counteract MakerDAO’s rapid D3M plan, which involved raising the DAI credit line to approximately 600M DAI within a month.

Concurrently, the decentralized exchange Uniswap is nearing the final stages of preparation for its fee switch proposal. Following a successful temperature check, this proposal is anticipated to be introduced in mid-April.

The author’s views are for reference only and shall not constitute any investment advice. Please ensure you fully understand and assess the products and associated risks before purchasing.