Extending Aave TRIBE Incentives for FEI Borrowing

Aave is one of the most dominant lending/borrowing markets in DeFi, and having FEI as a prominent borrowable and collateral asset helps further fortify our position in the space. Success of the initial deployment of FEI was partly driven by a 4M TRIBE incentivization of borrowing over the past 5 months on Aave. These borrowing incentives will expire on March 23, 2022.

In addition to increased visibility and other benefits to the FEI ecosystem, the Tribe DAO generated 1.63M FEI in fees from the initial 50M FEI deployment on Aave, which has been reduced to 15M FEI during the recent contraction policy execution.

As we carefully explore a path to a more expansionary mode, this post invites a community discussion to consider the addition of 3M TRIBE and the extension of incentives for another 6 months from 23 March 2022, ensuring ongoing lending and borrowing activities on Aave.
There are many advantages to a strong presence on Aave, both as a borrowable and collateral asset, and we should continue to explore and optimize our approach to grow this and other stronger partnerships.

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Tribe incentives on other lending platforms like Aave and Compound should be dynamic distribution only when a certain threshold FEI is not borrowed.

I fully agree that FEI’s position and visibility on AAVE is very important for the growth of the protocol. As I have mentioned in the FEI deployments thread, I am against extending TRIBE incentives for borrowing on AAVE, or any other platform. I will restate those arguments here, and explore other possible alternatives for encouraging FEI usage on AAVE.

TRIBE rewards for borrowing inflate the borrowing rate on that platform and disproportionately attracts arbitrage borrowers. As mentioned by SebVentures here, there is empirical evidence that AAVE borrowing is heavily redeployed into other TRIBE yield programs, rather than any organic usages.

In the same thread , I have argued in depth why it is more preferable to subsidize borrowers by lowering the interest rate, instead of giving out TRIBE rewards outright. I’d like to raise some of them here again: foster organic usage growth by non-arbitrageurs; equalizing FEI borrowing rates across different platforms, eventually allowing the rollout of an unified policy rate across the entire platform; amongst other reasons to not reinstate TRIBE rewards for borrowing.

Given that adding borrowing incentives would inevitably raise the borrowing rate to a very inflated rate that is close to the rewards payout (~20% p.a.), and is additionally inflationary for TRIBE holders. Although AAVE borrowings have generated a hefty profit for the PCV, one could argue that it is enriching AAVE and the PCV at the expense of existing TRIBE holders.

Instead of directly incentivizing borrowers with TRIBE, it would be better to oversupply FEI and simply accept lower PCV returns on those deployed funds instead of issuing more TRIBE rewards. By pinning the borrowing rate at a more competitive rate (cf. DAI/USDC), carry traders will ensure that FEI utilization remain high. (this is proven by the experience of the FeiRari pool)

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In agreement with Cozeno - especially optimizing for real borrowers

When it comes to optimizing borrowing and developing organic growth, our emphasis is always on Fuse. However, if we can generate meaningful returns and continue to expand our strategic partnership with Aave users and the Aave community, we should continue with 25% reduced rewards (from 4M to 3M) for another 6 months, then re-evaluate.

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I strongly agree that the strategic partnership with AAVE should continue to prosper. Though I digress that this program is generating any meaningful returns for the protocol overall.

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As mentioned already, TRIBE rewards issued thus are inflationary, and averages ~9% APR over the last month. The protocol revenue generated from this segment does not exceed 6% APR over the last month. I do not have the data for 2021 at hand, though it was comparable to the figures displayed above for early 2022. This yield is dilutive to TRIBE holders, and can be characterized as cannibalistic for the protocol overall.

It is not clear whether these incentives have raised the profile of FEI overall, seeing that it encourage arbitrage borrowing instead of organic borrowing for legitimate uses by retail users. Borrowing FEI at these rates only make sense to users who are large enough to promptly sell the rewarded TRIBEs without letting gas fees make any meaning dent to their profits, and this deters small, retail users from borrowing.

The high headline rate also casts an unfavorable light on FEI at platforms such as “defirate.com” and makes FEI look like an outlier stablecoin with very high financing costs (seeing that Rari rates are not widely referenced) to users unaware of the nuances of this incentives program.

I invite the community to explore other forms of strategic partnership with AAVE such as creating a fix interest rate borrowing bracket for FEI which has been highly popular with other stablecoins on AAVE.

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The TRIBE rewards are a sunk cost and the TRIBE emission schedule cannot be changed, so no matter what, a certain amount of TRIBE will be emitted every month from liquidity mining emissions. The real question is what behavior does that TRIBE incentivize and how does the protocol benefit over the long term from the emissions?

It is beneficial to use the TRIBE incentives on large platforms like AAVE to increase awareness and generate demand for FEI borrowing. Additionally, this program creates PCV as the interest from lending the FEI goes to the protocol which is extremely positive.

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Elliot, I dont think TRIBE rewards need to be seen as a true sunk cost… I understand what you’re saying (emission schedule is emission schedule) but I think I’d rather they go to single staking TRIBE holders than mercenary borrowers where there isn’t any organic usage or adoption. Basically, given we (the protocol) is spending them, direct them instead to Fuse Tribe staking and reward those who’re staking instead then as they are a more valuable stakeholder for the health of the protocol

Also I agree w/ Cozeno. The way to think about Aave and deployment is if it’s net + seen from the eyes of the Dao (and if it isn’t, make it that way). If we’re paying more than taking in, it’s a net negative… but we need to be on Aave (compound) and others so the best solution is tweak/iterate what we have and look to increase organic adoption. No point continuing to spend $1 to take back in 80c.

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I didn’t check the TRIBE emission smart contract, but I assume that it can be diverted anywhere. For instance a burner or the 0x00 address.

I’m in line with @cozeno that issuing 9% of TRIBE to get 6% of PCV is waste. If you want to increase the equity of the protocol, then why not just sell TRIBE tokens? I don’t believe there is a behavioral impact that justifies paying a 50% premium.

What is needed is organic demand. I fail to see who would borrow, it’s a pure liquidity mining play that I assume is recursive.

The main borrower is using recursive farming and selling TRIBE it seems.

If the goal is to provide an interest rate on FEI (which is a great idea), I think it would be better to do it internally (i.e. provide USDC deposit rate on Aave +2% by stacking FEI). And then provide a good borrow rate on Aave (i.e. a low one) so people borrow in FEI instead of USDC. Both parts require a very good peg so people start to consider FEI as just a better version of USDC.

One good counter-example of that is Notional farming. They subsidize good interest rates on their bonds (~7%) which leads Yearn to integrate it in yvUSDC. It doesn’t help with organic demand at all, but helped to have a protocol integration.

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All - thank you for the great insights into this discussion. We need to continue to tune our Aave incentive structure to get more desirable activity for FEI lending and borrowing. We need to ensure a more competitive borrowing rate, and we need to make supplying FEI on Aave just as desirable. Llama recently released this: Dune Analytics which shows Aave is the number one FEI lending market. While current setup is imperfect, we should continue to support it in the near term, and extend borrowable FEI to Compound (FIP-85 covers that).

I would like to move this to a last call, and recommend we start another discussion thread focused on lending markets optimizations.

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I’d rather keep these tokens to incentivize other behaviors, incentives on the borrow side create high interest rates, which make borrowing FEI undesirable unless TRIBE rewards are dumped to cover for the loan interests. I’m sure there are better ways to do this, if the goal is to invite more people to buy FEI (to deposit on Aave and earn the high interest rate paid by borrowers), why not incentivize directly some user FEI deposits instead ?

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Im lightly in favor of the incentives but will not fight super hard for them. many of the arguments in this thread against the incentives are valid, but the counterarguments are not very well represented so I’ll post some here

it’s not as simple as “low borrow rates = good”. whats good for lenders is bad for borrowers and vice versa. both are important to the ecosystem. high rates are an incentive for people to acquire and lend fei. fei acquisition increases the size of PCV. low borrow rates mean that FEI will be borrowed and likely redeemed against PCV. so if the borrow rate is lower than the PCV’s yield rate, then that slows PCV growth (second order effects nonwithstanding). I think it would be much more problematic if aave was the only game in town, and fei could only be borrowed with high interest rates. but there are plenty of lending markets with low rates so that is less of a concern

I also dont agree that spending X% to earn Y% when X<Y is necessarily a waste. by that logic the entire TRIBE incentives program is a waste (maybe it is :wink: )

an internal program incentivizing the holding of FEI is interesting. would not achieve the same visibility of being highest earning stable on aave though. fuse does already go in this direction and upcoming fuse integrations will probably offer something with a similar flavor as well

finally, the native stkAAVE incentives offered to fei last round were about 1% of the total stkAAVE incentives because FEI is about 1% of the volume right now. FEI will likely be offered a lower amount in the future if there is an extended period of unincentivized lending/borrowing, especially when most other tokens on aave are being incentivized

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