Aave's Merit - A New Reward System

Moyi Dang
Last Updated:
March 23, 2024
Published:
March 23, 2024


Table of Contents

Aave introduces Merit user reward system

Aave, a leading decentralized finance (DeFi) lending protocol, has introduced an innovative user reward system called "Merit" to enhance engagement and distinguish itself amid increasing competition. The program utilizes a booster model that enhances rewards for preferred activities while diluting rewards for non-aligned behaviors. Following a successful community vote, it will move to official implementation and remain open to iteration based on user feedback. While it sparks some concerns about complexity and manipulation, its launch has initiated discussions about this novel approach to cultivating loyal, aligned communities in DeFi.

Overview of the Merit Program

Merit is a user reward program originally proposed by Aave's member Marc Zeller on February 16th, the governance submission of which explains that certain 'Aave-aligned' user behaviors would be rewarded in intervals, starting with 90 days. 

The intervals are proposed to be done with merkle trees. One of the main reasons for the proposal is Aave users' growing hunger to outcompete similar DeFi protocols when there are many of a similar size to Aave's.

Marc Zeller’s originally proposed outline of reward distribution model

Aave's GHO stablecoin, alongside other different tokens flowing through Aave like StkAAVE, wETH, StkGHO, sDAI, StkBPT, and of course AAVE, will be tracked for user transactions that would then be evaluated based on their "Aave-Alignment". 

Every week, StkAAVE and GHO will be distributed to users, and the number of tokens sent will be determined by merit boosters and diluters. Aave's new periodic airdrop is to start with $5 million, where $2.1 million is in wETH and $2.9 million is in GHO, initially for 90 days. 

In a TEMP CHECK original governance post shared on January 30th, Zeller describes his main idea of dilution and token distribution.

Here, User A is a direct participant in the protocol following the Merit booster suggestions that receives rewards slightly higher than those indirectly involved. User B is a very active participant who stakes and votes and delegates (“enhanced rewards”). User C is an indirect participant operating through other “non-aligned” protocols who doesn’t receive periodic rewards

Background on Aave

Aave is a leading decentralized finance (DeFi) lending protocol, known for enabling users to lend and borrow cryptocurrencies. Its innovative approach and incentive campaigns have attracted a large user base. Aave's user-centric design with features like flash loans distinguishes it in the sector. For example, following the Aave V2 launch in 2021, AAVE incentives led to a substantial rise in Total Value Locked (TVL)from $3.5 billion to $12 billion within two months, demonstrating the power of well-designed incentives.

Aave has been especially active as a decentralized collective recently, which was induced by new launches like its USD-pegged, collateral-backed GHO, the purpose of which is to facilitate governance, borrowing, and similar DeFi operations on Aave while being censorship-resistant and multi-collateral. 

Following its launch, GHO achieved parity with USD after trading below $1 after 6 months. With new products like GHO, Aave has also been growing through its V3 of the network that took a while to roll out and transition to. 

The flow of GHO from its initial introduction

Key Features of Merit

Aave's "Merit" is a novel booster-based rewards system designed to incentivize behaviors that align with the protocol's strategic goals. Users earn points for actions like borrowing wrapped Ether (wETH) or the GHO stablecoin, which directly engage with and promote Aave. Merit boosters enhance rewards for governance participation, staking Aave tokens, migrating from other protocols, and using minority liquid staking tokens. Meanwhile, merit diluters reduce rewards for non-aligned behaviors harmful to Aave. This carefully budgeted system, currently limited to Aave V3 on Ethereum, encourages greater protocol utilization, revenue, security, and sustainability. With community feedback in mind, "Merit" consolidates Aave's competitive position in DeFi through a dynamic incentive structure favoring committed, long-term users. By penalizing unsupportive actions, boosting aligned behavior, and placing governance at its core, the program fosters an active community unified behind Aave's strategic vision. As the landscape evolves, "Merit" demonstrates Aave’s user-centric innovation.

Rewarding and Penalizing Behaviors

Aave's "Merit" system introduces a novel approach to incentivize aligned user behaviors and enhance the protocol's competitiveness. Through periodic airdrops, it rewards actions that contribute to Aave's revenue streams and strategic goals, like borrowing wETH and GHO. Merit boosters act as multipliers for particularly beneficial behaviors, encouraging migration from other protocols or support for minority LSTs. Long-term stkAAVE holders also receive boosters. Conversely, merit diluters penalize non-aligned behaviors by severely reducing rewards. For example, using Morpho optimizers faces a -100% diluter. While ambitious, concerns exist around potential manipulation and unfair complexity. Aave has clarified no benefit from Sybil attacks and that boosters favor long-term, engaged users and governance participants. The system ultimately aims to calibrate incentives and disincentives to foster an ecosystem of users who actively contribute to Aave's health and sustainability amidst a competitive landscape. Its success rests on striking the right balance between aligning community behaviors and maintaining reputation.

Budget and Distribution

The budget is split between $2.1 million in wETH and $2.9 million in GHO to incentivize borrowing of both assets, which is profitable for Aave. The larger GHO portion specifically aims to promote Aave's stablecoin and boost competitiveness. The distribution occurs bi-weekly to provide steady rewards for contributions like diversified staking strategies and direct protocol usage. These behaviors align with Aave's long-term growth plans. The bi-weekly amounts will be published transparently after the program ends, reflecting Aave's ethos. Currently, Merit is limited to Aave V3 on Ethereum, allowing for focused impact and outcomes measurement. But the program can scale across versions and blockchains in the future if the community chooses. Overall, Merit represents Aave's commitment not only to reward users but also to strategically strengthen its protocol in the DeFi landscape. With a clear budget and distribution schedule centered on community alignment, Aave is poised for sustainable expansion while fostering loyal user engagement as well.

Community Feedback and Governance

Merit was welcomed by members of the Aave DAO as an interesting take on airdrops and approved. Although a MakerDAO engineer commented, recommending that the 1 million DAI per year funding towards Aave's V3 be pulled because of zero/negative-sum behavior.

hexonaut critiquing Merit

The program went live this week on Thursday, with 280 wETH to be airdropped to borrowers of this token. DAOTimes says Merit has already attracted around 200,000 ETH to Aave from other protocols. 

While merit boosters are considered as to-be-rewarded actions, actions not aligned or those that go completely against Aave's objectives are to be penalized with severe, up to -100% dilution. 

Marc Zeller made it clear in the governance forum that these types of behaviors often come from Morpho optimizers, which steal revenue and provide no value to the ecosystem –- to which Morpho Labs' CEO replied, denying the allegation and saying that Aave DAO is likely to lose revenue by not using Morpho's products. With this, there is an ongoing debate between Aave members that go against Morpho and Spark products and members that go against the severe dilution and for the inclusion of Morpho services. 

Controversies and Concerns

Critics argue the detailed criteria for earning rewards or facing dilutions could encourage manipulative actions and centralization of power, contrary to decentralized finance principles. There are also concerns about the potential impact on GHO's price due to substantial reward distributions, with calls for more analysis of predicted gains versus risks. One of the most contentious aspects is penalizing users for engaging with competing protocols like Morpho, labeled as "ridiculous" by critics who contend it punishes reasonable risk management through diversification. Proponents defend Merit as promoting a sustainable business model by withholding rewards, not punishments, from non-contributors. Broader worries touch on stifling innovation and user choice in DeFi. As discussions continue, refining details and addressing controversies around price effects, usage restrictions, and implications for the open ecosystem will be crucial. Consensus requires balancing incentives and open competition. Ultimately "Merit" aims to encourage protocol-aligned behaviors without compromising decentralization, but risks remain around manipulation, centralization, and innovation.

Expected Outcomes and Goals

Aave's new "Merit" rewards program aims to boost user retention and engagement by incentivizing behaviors that align with the protocol's growth objectives. The goal is to increase activity amongst existing users and attract new participants, consequently expanding Aave's market share in DeFi lending. Specific rewarded actions like borrowing select assets, governance participation, and holding affiliated tokens are designed to directly contribute to user base growth and protocol revenues. Moreover, by redistributing a portion of net profits back to engaged community members, Aave seeks to build long-term loyalty and position itself as an equitable ecosystem aligned with user success. However, realizing these goals requires balancing competitive incentives with community trust. Concerns around manipulation risks and penalizing use of third-party services will need to be navigated thoughtfully. Overall though, if effective at driving retention and strategic behaviors, the "Merit" program can play a key role in cementing Aave as a top DeFi protocol with an expanding and invested user base contributing to sustainable protocol growth.

Conclusion

Aave's innovative Merit program demonstrates the protocol's commitment to fostering a more engaged and aligned user base through incentive structures. By rewarding behaviors that support Aave's growth, such as borrowing preferred assets, governance participation, and loyalty, the initiative aims to shape user actions in a way that benefits the protocol. While debates within the community highlight the need to strike a balance between incentives and penalties, the initial success of moving funds from competitors suggests receptiveness to the idea. As Aave navigates the crowded DeFi landscape, the Merit program is a bold experiment in cultivating protocol loyalty and contribution over the long term. With the potential to reshape engagement, Merit represents an exciting milestone for Aave. However, its success relies on active participation from the community. As such, it’s an opportune time for both new and existing users to make their voices heard in governance discussions and help guide the protocol’s future direction. By continuing to build a robust and aligned ecosystem, Aave can leverage initiatives like Merit to sustain its competitive edge.

Additional Resources

The Aave Governance Forum contains detailed discussions on the "Merit" program, including the initial ARFC Merit proposal and community feedback in the TEMP CHECK thread. To participate in "Merit," understand the rewarded actions and how merit boosters and diluters work via the Merit Approvals page on Aave's website. Stay updated through Aave's official blog and press releases. Follow real-time updates on Twitter from summarized thread accounts like x23.ai.

How to Participate in the Merit Program

The "Merit" program rewards Aave users who contribute to the protocol's growth and sustainability. To participate, first understand the merkle-tree-based system that allocates points and rewards for specific behaviors. Then, engage in strategic activities like borrowing wETH and GHO or holding stkGHO to start accumulating points. Maximize rewards by utilizing "Merit" boosters - multipliers for behaviors like using AAVE as collateral, staking AAVE, participating in governance, or migrating from other protocols. However, beware of diluters that severely reduce rewards from non-aligned actions. Stay updated on "Merit" changes through Aave's governance forum and votes. As a participant, you'll help shape the program's future direction to serve community interests. After accumulating enough points and boosters from aligned behaviors, you'll be eligible to claim bi-weekly rewards like StkAAVE and GHO. In summary, "Merit" incentivizes contributions to Aave's growth, sustainability, and efficiency by rewarding users for strategic activities. Align behaviors with Aave's goals to earn points, leverage boosters, avoid diluters, stay informed through governance, and claim your hard-earned rewards.