Is the AIP-16 Catalyst for the Next Major Rally in DeFi? | Deep Dive

Review Date: May 06, 2021

WHAT IS AIP-16?

Aave is a prominent money market protocol in the DeFi ecosystem that allows anyone to deposit crypto assets into their protocol and earn a yield by allowing other users to borrow those assets and repay back their debt with interest. DeFi protocols as well as layer-1 blockchain protocols have improvement proposals such as EIP for the Ethereum protocol in which the team or community can submit a proposal that outlines a modification to the current protocol.

AIP-16 is a liquidity mining scheme aimed to increase the amount of lending and borrowing activity on the Aave V2 protocol. The main aim is to reward users of the protocol with AAVE and to migrate liquidity from V1 to V2 which currently has around 40% of the total value locked (TVL) of the Aave protocol. Around 2,200 stkAave will be distributed daily across a range of markets which will be valued on the market’s liquidity, utilization rate, and maturity.

On-chain Data Flows

The smart money has definitely noticed the opportunity to earn additional yield based on Aave’s liquidity mining scheme. We have seen large inflows into the Aave V2 protocol which can be shown by the diagram below:

There have been significant inflows to the USDC, USDT, ETH, and WBTC money markets with an aggregated inflow of $1.1B on the 27th of April 2021 and $606m on the 28th of April 2021 resulting in an $11.06B TVL for Aave.

SIGNIFICANCE IN DEFI

In the DeFi summer of 2020, the rally was initially kicked off by a liquidity mining scheme launched on Compound which increased base rates not just in money market protocols but in yield aggregator protocols that deploy assets between money markets to earn the largest yield for depositors.

Therefore, it’s reasonable to extrapolate that the Aave liquidity mining scheme will have the same effect and have a spillover in yields for protocols such as Yearn Finance and Alpha Finance.

Additionally, the demand size of the money markets is also being incentivized meaning greater market utilization. The more of the assets being borrowed from the protocol the more opportunity there is for capital to be deployed in other DeFi protocols or to simply use those assets to gain exposure to another asset via decentralized exchanges.

SUMMARY

Just as Compound launched a liquidity mining scheme before the infamous DeFi summer rally of 2020, Aave with the AIP-16 proposal has launched the same program which looks to be a catalyst to kick off another major leg up in DeFi. The increased base rate in money markets and its spillover effect into yield aggregators will attract more capital into DeFi increasing TVL and revenue across the board which will result in the price appreciation of each protocol’s native governance token.

REFERENCES

[1]: Nansen AI – Aave V2 daily deposits & withdrawals.

DISCLAIMER

Token Metrics Media LLC is a regular publication of information, analysis and commentary focused especially on blockchain technology and business, cryptocurrency, blockchain-based tokens, market trends, and trading strategies.

Token Metrics Media LLC does not provide individually tailored investment advice and does not take a subscriber’s or anyone’s personal circumstances into consideration when discussing investments; nor is Token Metrics Media LLC registered as an investment adviser or broker-dealer in any jurisdiction.

Information contained herein is not an offer or solicitation to buy, hold or sell any security. The Token Metrics team have advised and invested in many blockchain companies. A complete list of their advisory roles and current holdings can be viewed here: https://tokenmetrics.com/disclosures/