Using palStkAave as a liquid wrapper for Staked Aave :

General Research
1

Tldr : Create an Aave / palStkAave Curve pool to enhance liquidity between Aave and stkAave while auto-compounding the Safety Module for users.

Context :

The primary mechanism for securing the Aave Protocol is the incentivization of AAVE holders to stake tokens into a Smart Contract-based component called the Safety Module (SM).

To contribute to the safety of the protocol and receive incentives, AAVE holders will deposit their tokens into the SM. In return, they will receive stkAAVE tokens that they can redeem for AAVE tokens after a cooldown period of 10 days.

To avoid this cooldown period, it is possible to directly swap on an AAVE / StkAAVE UNI v3 pool.

State of the UNI v3 pool :

  • 271 AAVE & 2580 stkAAVE → $383.6K TVL
  • $43.5K volume (01/24/2022) - $299K volume (7d)

By the design of the Safety Module, stkAave used as LP cannot claim rewards. This means that almost 350,000$ of stkAAVE are currently forfeiting their yield.

Furthermore the pool’s depth has a negative slippage exploding over 227 stkAAVE sale (ie: for 208 AAVE there is a 7% slippage).

State of paladin Stk Aave pool :

  • palStkAAVE : 11,750 stkAAVE - top 30 holder
  • palAAVE : 2,930 AAVE
  • Over 2M$ of AAVE in TVL

Rationale :

Creating an AAVE/palStkAAVE Curve V2 pool would allow a new and efficient strategy for users to enter and exit the stkAAVE market without impacting the idea of the cooldown period. Of course, by using our wrapper LPs would also be able to keep earning the yield from the SM.

Doing it on Curve has several advantages :

  • Concentrated AMM means little depth is needed for good arbitrage opportunities ;
  • Will keep proving our good faith towards protocol we implement ;
  • By enabling a gauge this allows aave holders to benefit from the Curve Wars ;
  • Creating such pools will enable us to create flywheels between our product and our partner protocols ;
  • Admin fees can be implemented by Paladin to generate another revenue stream for the DAO

The nature of lending protocols is such that the rate of return on loaned assets is inversely proportional to the size of the capital pool available to borrowing counterparties. In the presence of an excess of available capital in one pool, arbitragers could do the work to balance the Curve and DEX pools and make some profit on it.

Moreover, we are using mechanism similar to fast exit liquidity protocols like Hop that allows stkAAVE holder to avoid the need to wait the 10 days lockup period, by making swap with native AAVE token. In the other side, it allows LP to benefit from swap fees and interests generated by the yield bearing token in the pool.

Please refer to the scheme attached to my proposal to make it easier to understand.

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7 Likes
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@Beguin thanks for taking the time to outline this new pool.

The greatest benefit of this new pool seems to be increased liquidity - the same amount of fees and limited IL is already a feature of the current pools.

I am cautious about this quote below:

If Curve Wars ends up being a passing trend, is this pool still best hosted on Curve?

Second question - how well has palStkAAVE held its peg?

5 Likes
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Hello Fig !

Thanks for asking, since the curve pool allow you to interact with Paladin and so auto-compounding the yield for Safety module users, I think it would still be best hosted on curve.

Also, as of today the palStkAAVE have nicely held its peg, and will be even more adjusted by arbitragers :slight_smile:

3 Likes
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I like it,
Enable users to autocompound their stkAave yield while being LP + increase paladin TVL is great!
Maybe (in looking to the future of course) enable users to stake their curve LP to get $PAL yield on top of that would be the icing on the cake ahah ;))

1 Like
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That can be done on Curve v2, we could redirect part of the LM to this pool in the next LM adjustments.

3 Likes
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Thanks for the interesting suggestion.
However I have doubts about having a pool where there is staave and aave mixed. In my opinion, this goes against the concept of the safety module and the lock period.

If there is a black event on Aave which I hope will never happen. We can have insiders who will drop their staave on paladin and dump on the curve pool very quickly. Curve liquidity providers will end up with an asset that may lose some of that value.
The perception of Paladin in the world of defi after this incident could be very negative.

I would like to know how you feel about that?

2 Likes
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That’s an important point. This pool doesn’t go against Aave’s system because the Redeem feature is 1:1 which means that you can simply arbitrage a pool by staking of redeeming.

In case of black swan, Curve LPs will just have to keep their basket of Aave & stkAave and redeem in 10 days as is normal (if you redeem in one asset, you will be victim of IL).

This is a feature that allows more liquidity for players who have holding in stkAave, while not affecting the volume of the Safety Module.

I don’t see a way to blame Paladin DAO in such case…

1 Like