Why does Agaave need a token in the first place?
Firstly, Aave designed their protocol to include governance for making decisions on listing tokens, adjusting liquidation threshold, setting collateral rates, etc. Although not required we would want a good reason to remove this feature from the protocol.
Secondly, there are situations where the protocol may fail, If there is a significant crash to one of the token prices, there is a possibility the loans will become undercollateralized.
Aave uses the AAVE token for both use-cases. AAVE is staked giving the staker the ability to participate in governance decisions as well as receiving staking reward (the fees generated by the protocol).
If there is a shortfall event, the stake is sold to cover the shortfall effectively slashing the stakes. This is the reason stakers should govern and decide on risk parameters. Stakers benefit from rewards but they also take on the risk of the parameter they set themselves. Aave publishes a very detailed outline of this risk assessment methodology
Why not just use HNY, what is the purpose of the second token?
We could simply replace AAVE with HNY. However, this would expose all HNY holders - even HNY holders who do not stake. While only staked HNY holders will be slashed, the protocol will dump as much HNY as needed to cover the shortfall. A second token compartmentalizes this risk.
Why not use another token like xDAI or WETH for shortfall insurance?
This is effectively the same thing. Our treasury only holds HNY, so we would have to sell HNY before a shortfall has even taken place. Another token planned in advance would allow us to sell HNY in planned increments but this would still put undesired sell pressure on the price of honey. The responsibility should be to those that actively govern the protocol, not all HNY holders.
Are there other benefits to using a second token?
As the 1hive community grows I expect 1hive to be more and more risk-averse. Shortfall events should be very rare and we don’t HAVE to insure against them. However, it will be harder to attract larger amounts of capital without a shortfall insurance mechanism but the protocol will work.
The real benefit of having a protocol-specific token comes from the flexibility it gives us in engineering incentives. Discussions of a radical or aggressively high cost marketing deployment strategy appears to be undesired by holders of HNY. However, with a second token we would have the flexibility of distributing the new protocol-specific token to the 1hive community and attract a bunch of other communities to xDAI/Agaave/HoneySwap ecosystem.
We can do this by including a very specific fair launch to users, investors, and partners. Badger DAO executed this well. A fair launch means we will get some fresh liquidity from outside our community. Also, 1hive does not have to pay for the entire Agaave project. Some of the compensation can come from the Agaave token itself. The community is much less likely to use a large portion of the HNY pool because again we would crash the HNY price, and even if we did, we would not have the flexibility of a protocol-specific token.
Is there any reason to believe the 2nd token doesn’t have a value that decays toward zero?
- Consider this project is simply a fork of Aave. If Aave is a successful token why wouldn’t Agaave have value? Agaave has all the same value propositions as Aave.
- We are not reinventing the wheel. If you look at a token like COMP, its only utility is governance of the protocol. The inflation goes to borrowers and lenders since they are the actual stakeholders of the system.
- The primary objective is to accrue value towards HNY holders with as little risk as possible. Of course, we want this new token to also be valuable (and if designed right it will). This can be discussed further but for example, 1hive’s support in funding the project and the great community it offers In return Agaave could mint ~20% of it’s total token supply over to 1hive common pool. It is worth noting that with delegated voting honey holders could vote on the Agaave governance through the holding of HNY.
What about protocol fees?
If we use a second token, this should be used for governance and the token can be used for shortfall insurance staking. This way those who have a vested interest in governance are those who take the risks. This is no different than Aave. However, if 1hive has 20% of the token supply they could stake the entire token supply and receive 1/5 of the total staking rewards. Just like with Honeyswap fees, all Agaave token rewards would be swapped for HNY tokens providing a constant buy pressure on the honey token.
What would this new token look like?
If we decided to use a second token, there are a lot of ways we can approach this so we would establish a team to work on the issuance policy.
The main goal here is to grow our ecosystem and accrue value to HNY not necessarily utility. The utility is not the end, it’s a means. HNY value is the end.
Announcing Agaave, Aave on xDAI