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Introducing xAAVE: Mandated Governance

Even in a dynamic and diverse space like DeFi, few projects ship like Aave. In less than a year on mainnet, Aave has become foundational infrastructure, advancing an ambitious model for on-chain money markets.

And this innovation is just the beginning. Before long, Aave will have deep roots across the spectrum of capital markets, touching large cap crypto assets, NFT lending, and real world collateral.

Aavegotchi

You’d be hard-pressed to identify another project with such a robust footprint.

But with so many lines of innovation, the protocol needed an insurance policy — a backstop to protect depositors in the event of a shortfall or exploit. With that in mind, the team introduced the Aave Safety Module. AAVE holders stake their tokens to earn rewards in exchange for acting as a last line of defense for the protocol.

Aave Staking is simple enough. You lock up your AAVE. You received Staked AAVE. Maybe you vote on an AIP. You progressively earn AAVE rewards and claim them into your wallet when ready. With the rewards claimed, you can re-stake your AAVE rewards, trade them for another asset or leave them idle in your wallet.

This is all well and good, and for some investors, manual staking will always be preferable. But for many AAVE holders, we think there may be an alternative option: a cheaper, more convenient, more efficient and more powerful asset that generates the same basic returns of AAVE staking, paves the way for incremental returns and preserves the holder’s voice in governance.

Source: @ΔLΞXΔNDΞR

Why xAAVE?

  • Lower gas costs
  • Compounding returns
  • No mental overhead
  • Liquid collateral
  • Tax Efficiency
  • Representation in governance

Lower gas costs: xAAVE investors pay gas costs 1) when they mint on xToken or buy on a DEX and 2) when they burn xAAVE or sell. That’s it. No gas fees for staking, claiming, cooling down (more on this later), re-staking, voting, or anything else.

Compounding returns: The xAAVE contract automatically re-stakes claimed AAVE rewards on behalf of the pool, allowing for maximum compounded returns. This comes at no extra gas expense to holders.

No mental overhead: Many AAVE holders are long-term minded. There’s really no reason for them to periodically and methodically claim and re-stake. xAAVE is set-and-forget. The burden on holders is non-existent.

Liquid collateral: While AAVE stakers are issued Staked AAVE when they lock their tokens in the staking contract, those tokens are just representations of their staked position and are not yield-generating on their own. In contrast, xAAVE is a liquid, fee-earning asset that can be transferred from wallet to wallet, added to liquidity pools or deposited as collateral for loans. (xToken Lending coming soon…)

Tax efficiency: In many countries, the action of claiming your rewards qualifies as a taxable event. Additionally, this claim is often registered at the full tax rate, not the lower capital gains rate. To add insult to injury, many investors will have to send a laundry list of micro-transactions to their CPAs — one for each claim. xAAVE fixes this. There are only two transactions: in and out. And your rewards compound tax-free until you’re ready to sell. (Please consult with your tax advisor before making any decisions on this basis.)

Representation in Governance: One potential criticism of pooled staking is that it strips holders’ voting rights. In some ways, this is true. The way we see it however, pooled staking is actually an opportunity to increase participation in governance. With the help of a new model — Mandated Governance — we hope to empower more AAVE investors to express a governance position.

Mandated Governance

xKNC has two instances. xKNCa always votes to increase the share of fees allocated to KNC stakers. And xKNCb always votes to increase the share of fees allocated to Kyber reserve managers (liquidity providers). This model makes sense for Kyber, as allocation of fees is the key governance question facing the community.

However, this approach is limiting for projects without repeated, routine governance proposals. For xAAVE, we needed something a little more extensible. As such, we’re excited to introduce a new delegated governance model — Mandated Governance — that we hope will extend to future xTokens, as well as the larger DeFi community.

We’re live with xAAVEa:Buchanan and xAAVEb:Samuelson, both named after Nobel Prize-winning economists with outsized contributions to the discipline.

Buchanan is known for his work in Public Choice Theory, a body of work that emphasizes the use of economic incentives to drive political behavior. He’s been associated with the Austrian School, while pursuing a deeper exploration of ethics and social philosophy.

Samuelson, on the other hand, is known for defining the Samuelson Condition, a framework for efficiently allocating funding to public goods. While staunchly pro-growth, Samuelson has been identified as a Neo-Keynesian or Keynesian-adjacent and as someone who appreciated the role of public policy in market-based economies.

Put simply, Buchanan will be representing a center-right view point, and Samuelson will be representing the center-left.

< James Buchanan, Paul Samuelson >

Let us be clear. Twentieth century American economics and politics do not map perfectly to crypto-economic theory. And people’s off-chain politics do not necessarily dictate their on-chain governance positions. Mandated Governance is simply a way for xAAVE investors to express a governance position and be represented without needing to vote directly every time an AIP is proposed.

In many cases, the funds will vote in tandem. Many AIPs will be uncontroversial and passage will clearly be in the best interests of the protocol. In some other cases, we anticipate real, contentious debate in Aave governance. This is where Mandated Governance will shine.

How will decisions be made?

As a hypothetical example, there may come a time when an Aave community member proposes an increase in the supply of AAVE from its current 16 million. If there’s a well-considered blueprint and strategy for using new tokens to incentivize growth in the network, xAAVEb — drawing inspiration from Samuelson’s work — may be inclined to favor it. On the flip side, the likelihood of xAAVEa approving such a proposal is remote, with Buchanan’s hawkishness weighing down the scales.

Over time, each fund’s positioning will become clearer as more precedent is established. And, as we extend this same model to future xTokens, we’ll have a growing body of cross-ecosystem deliberation to apply to each governance decision.

We’re counting on active discussions in Discord from our community to help guide decision-making early on while we develop a more formalized framework to guide our voting. This is an experiment. We need your help to make it work. Join us at xToken Market.

xAAVE Balancer Pool

One extremely necessary but potentially vexing feature of Aave staking is that, to remove your funds, you need to first invoke a cooldown and then wait for a period of time (currently 10 days) before you’re able to unstake. For stakers to truly act as a backstop, a cooldown period is necessary. Otherwise, stakers would flee at the first sign of trouble.

But, from an investor experience perspective, this is sub-optimal. DeFi moves fast. People want access to their capital now. Part of the value proposition of xAAVE is that investors get instant liquidity. The contract holds a target 5% of capital unstaked and available for redemptions. However, if some market turbulence causes a rush to the exits and that 5% of exit liquidity is exhausted, it’s crucial that there be secondary liquidity available for investors to enter and exit positions.

That’s why we’re excited to introduce our xAAVE Balancer pools. Both xAAVEa and xAAVEb can now be traded on their respective 50/25/25 xAAVE/ETH/AAVE Balancer pools. We envision these Balancer pools eventually becoming the primary medium of exchange for xAAVE and we hope you’ll consider staking your liquidity.

Other Details

  • xAAVE has been audited by CertiK. No significant issues found.
  • Both xAAVE instances are deployed behind a custom 2-of-3 multisig proxy. xToken holds one key and two Aave stakeholders hold the others. xToken is the only key that can propose an upgrade but no change can be confirmed without approval from one of the external signers.

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michael j. cohen

michael j. cohen

founder at xToken — michael @ xtoken.market

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