title: [BIP - XXX] Approve the smBPT gauges for the Aave SM
shortDescription: Sentiment check to support creation of smBPT gauges to support Aave’s Safety Module integrating the Balancer ecosystem.
author: @Llama, @TokenLogic and @dydymoon
created: 2023-07-05
Summary
This publication serves as a sentiment vote to learn if Balancer and Aura Finance communities will support the introduction of smBPT gauges.
A favorable outcome here will de-risk the project for the Aave DAO in the lead up to committing significant time and resources to building out the integration.
Abstract
This publication follows a successful TEMP CHECK to integrate BPTs into the Aave Safety Module (SM) with the introduction of the smBPT gauges mechanism.
The SM on the Aave Protocol rewards depositors taking the risk of being slashed in case of shortfall event. Since the goal for deposited funds is to insure the protocol, it is very important that BPTs deposited by users remain in the SM contract at all times, just like the current v1 integration. This requires a specific type of gauge.
The approval of smBPT gauges will enable Aave Safety Module (SM) depositors to receive rewards from Aura Finance and Balancer whilst their BPT is held within the SM contract. Aave DAO will provide a budget to attract/sustain liquidity within the SM which attracts deposit TVL to both Balancer and Aura Finance.
This publication and subsequent vote is a sentiment check supporting the creation of gauges that receive smBPTs upon BPTs being integrated into the SM. Enable classic gauges on GHO pools at launch & migrate it to smBPT gauges once the SM upgrade is ready will be published on separate proposals at a later stage.
This integration is expected to drive over $100M in TVL to Balancer v2 with just the initial pool being migrated from v1 to v2. Overall this will improve the sustainability of the SM for Aave and drive considerable TVL to Aura Finance and Balancer deeping the already strong relationship between the communities.
Motivation
Llama recently proposed an upgrade to the Aave SM mechanism. In total, there are 6 parts. The proposed upgrade covers the following topics:
- Upgrade AAVE/ETH 80-20 to Balancer V2 (Part 1)
- Asset diversity, SM categories & Slashing updates (Part 2)
- Enable smBPT gauges (Part 3)
- Incentives management upgrade (Part 4)
- Strategic assets management framework (Part 5)
- Future considerations (Part 6)
This publication will focus on part 3, introducing the concept of smBPT gauges and the benefits for the Aave DAO associated with the gauge accepting the smBPT rather than BPT.
For the purpose of this publication, the following definitions are adopted:
- Classic Gauge - Gauges that receive BPTs
- smBPT Gauge - Gauges that receive smBPTs
Requirement for an asset being included in the Aave SM:
- SM must at all times hold the underlying asset
In the event of a shortfall, the Aave auctions a portion of the BPT held in the SM. For this to happen, the SM must hold the underlying asset(s).
The solution is the creation of smBPT gauges. The smBPT gauge is the same as the Classic gauge but receives smBPTs deposits rather than BPTs. Within the Aave SM, upon receiving the BPT deposit, two internal tokens are created:
- “smBPT” represents the wrapped BPT that will be deposited into Aura Finance and then into the Balancer gauge.
Aura will receive smBPT-XX-gauge and mint the second token internal to the SM:
- “aurasmBPT-XX-gauge” enabling the SM contract to claim the yield on Aura. The SM contrat can then mint a proof of deposit 1:1 to users: “stkaurasmBPT-XX-gauge” which represents the BPT deposited in the smBPT gauge strategy.
These tokens are called “internal” because the SM contract would be the only one able to mint/burn/stake/unstake smBPTs & aurasmBPT-XX-gauge tokens.
Users receive StkaurasmBPT-XX-gauge with the following functionality:
- Ability to vote within Aave Governance
- Proof of deposit in a strategy within the SM
- Ability to claim rewards on the SM
With the implementation of the smBPT gauges, Aave DAO can vote to distribute rewards (AAVE and potentially GHO) directly at the SM contract level, or use a portion of the reward budget to provide vote incentives for veBAL & wrappers holders. The exact implementation of how best to utilize this budget is subject to Aave DAO’s governance vote. Some early ideas are expressed here. The net outcome for Balancer and AURA is TVL that is sustained by Aave DAO.
smBPT gauges enable participants in the Aave SM to earn rewards in BAL + AURA (as the deposited LPs would be deposited on Aura Finance) whilst participating to insure to Aave protocol. The potential inclusion of GHO pools further helps provide sustained liquidity on the native assets and generate revenue for Aave through GHO’s borrow rate.
“Classic” gauges
Classic gauges receive BPT deposits & allow anyone to stake in gauge & earn rewards. Implementing classic gauges for BPTs in the SM means that these LP positions could be further utilized by staking in gauge to earn yield without the risk of being slashed and avoid the cooldown period, which can highly dilute the SM reward budget currently distributed in AAVE LM (+ potential GHO from protocol fees) if partially switched to vote incentives as proposed in Part 4.
Part 4 considers allocating 75% of the current reward budget for volatile & stable BPTs in the SM (825 AAVE/ day), which explains why dilution needs to be avoided so this strategy can be profitable. To address this issue, an alternative is what this publication refers to as “smBPT gauges” which was initially suggested by Solarcurve.
“smBPT” gauges
The method requires implementing a wrapper contract in the SM that mints/burns smBPT when BPTs are deposited/withdrawn.
smBPTs are minted within the SM & are deposited in strategies. This enables the SM to receive another underlying (also internal) with the right to claim rewards on Aura (aurasmBPT-XX-gauge). Finally, users receive a proof of deposit minted by the SM contract (StkaurasmBPT-XX-gauge) allowing users to claim rewards in the SM and participate in the Aave governance.
If Balancer approves smBPT gauges eligibility, Aura can claim the BAL emission + any other reward assets déposited on gauges, and add AURA rewards on top. All rewards can be claimed by the SM and redistributed to depositors. This only requires deploying the gauge so it can receive the smBPT rather than the BPT. User then have two options:
- Hold BPT to earn swap fees
- Deposit BPT in SM to earn swap fees + BAL + AURA
The SM would be the only contract in capacity to mint/burn/stake/unstake it on the gauges. The following shows the steps involved:
- User deposits BPT in SM
- SM receives BPT
- BPT deposited into wrapper contract
- smBPT minted
- smBPT deposited and staked in Aura Finance contract
- smBPT deposited by Aura Finance into Balancer gauge
- Aura receives smBPT-XX-gauge to claim rewards on Balancer gauges
- SM “receives aurasmBPT-XX-gauge” to claim rewards on Aura
User receives “stkaurasmBPT-XX-gauge” to claim rewards on the SM
To withdraw the BPT from the SM, users will need to activate the cooldown period. At the end of the cooldown period, the SM contract performs the following:
- Unstake smBPT from Aura Finance which burns the “aurasmBPT-gauge”
- Burn smBPT to redeem the underlying BPT in the wrapper contract
The user then needs to withdraw the BPT from the SM which performs the following:
- Burns stkaurasmBPT-gauge to receive BPT
A high level overview of the SM upgrade is visualized below.
Due to timing considerations, the initial GHO pools are not included in the SM yet and are to be launched with Classic Gauges to bootstrap the liquidity.
Once the SM upgrade is done, a migration from “classic” BPT gauges to “smBPT’’ gauges should be proposed for two of the three initial GHO pools proposed by TokenLogic. The SM budget is expected to become the main source of incentives to sustain these pools.
Next Steps for Aave Community
- Proceed with the temp check of part 4-5-6
- Proceed with the ARFC of part 1-2-3
- BGD to deploy wrapper contract to wrap BPT into smBPT
- BGD to work on finishing the SM Upgrade Implementation
- Migrate classic gauges to smBPT on pools voted in Part I & II
- Enable SM Staking on Aura for Volatile & Stables LP categories
- Release GHO & vote on GHO splitter infrastructure
Voting Options
- Yes, let’s do it
- No, This is not the way
- Abstain