The Tally Newsletter, Issue 26

April 7, 2021

Welcome back for issue 26 of the Tally Newsletter, a publication focused on all things decentralized governance. We’ll keep you updated on key proposals, procedural changes, newly launched voting systems, shifting power dynamics, and anything else you need to know to be an informed citizen. 

This week we cover: 

  • Aave’s deactivation of v1 stable borrowing rates

  • Inverse Finance’s proposed merger with vault competitor

  • Balancer’s multisig governance transition

And Tally is hiring full stack engineers anywhere in the Americas time zone. If you’re interested in working with us to make on chain governance work, apply on our jobs page!


Aave Votes to End Stable Borrowing on v1

TL;DR: Poorly tuned rates mechanisms in Aave v1 led to excessive market utilization and hampered migration to v2, forcing deactivation of stable borrowing.

When Aave v1 launched at the beginning of 2020, most features were highly similar to the preexisting Compound money markets. These included algorithmically set interest rates and utilization curves. One thing that set Aave apart was their option to borrow certain assets at a “stable” interest rate.

While the stable borrowing product technically is not a fixed rate as borrowers can have their rate increased in certain cases, many users still preferred this option due to greater certainty on borrowing costs. But due to recent bullish market sentiment, interest rates have been far higher than expected which has proven problematic for Aave v1’s stable rates mechanism.

To understand why, it’s important to look at the mechanisms behind algorithmic money markets. Protocols like Compound, Aave, and Cream use an interest rate function that increases lending rates as a greater percentage of deposited funds are utilized by borrowers. As utilization increases, higher rates incentivize additional deposits and loan repayments and help ensure the market is never fully utilized (which is problematic as it prevents depositor withdrawals). 

Pictured: Example of Aave interest rate model for BAL token

Aave’s stable rates allow users to lock in an interest rate, and continue paying that same rate regardless of changes in utilization. While this is intended to improve depositor returns, certain large borrowers have figured out how to game the system and pay rates far below fair market prices. Because rates were no longer increasing with utilization, Aave v1’s stablecoin markets were fully utilized for much of the past month. This prevented users from withdrawing their assets to migrate to v2.

Aave’s team has responded with a proposal to deactivate stable borrowing on Aave v1. Once borrowers can no longer lock up liquidity with stable rate loans, market forces will once again be able to balance supply and demand and enable continuing migrations. With the vote now passed and queued for execution, the present market dislocations should subside in the coming days. 

With this being said, winding down v1 is unlikely to be a simple process due to certain sticky aToken integrations. First and foremost, Yearn’s original Curve pools are some of the most popular stablecoin investments and are immutably linked to providing Aave v1 liquidity. Solving this issue may require deeper collaboration with integrators and users.

Inverse Finance Moves to Acquire Competing Vault Protocol

TL;DR: The proposal would bring on a new core developer and absorb Tonic Finance’s assets at a cost of $1.7 million.

With competition in the yield aggregation space remaining strong, Inverse Finance has taken initial steps towards industry consolidation with a first of its kind acquisition deal. The proposal would grant roughly $1.7 million worth of INV tokens for purchase of Tonic Finance assets and onboarding their lead developer.

This deal has potential for considerable synergies, as both Inverse and Tonic’s vault products focus on the “dollar cost averaging (DCA)” segment. In this product structure, users deposit one form of asset, but receive their yield in another target asset (eg deposit DAI, earn ETH), approximating a DCA strategy which minimizes risk of purchasing assets at excessively high prices. Tonic is still on testnet presently, but would likely become Inverse’s key competitor on launch. 

In keeping with Inverse founder Nour’s predisposition to real, token holder driven governance, the proposed M&A deal will involve a full on chain vote and exchange of assets. This is a notable counterpoint to typical crypto partnerships such as Yearns’ ecosystem deals struck last year, which tended to focus on marketing and distribution.

Balancer Launches First On Chain Governance Mechanism

TL;DR: The genesis governance mechanism would comprise an 11 member multisig, with plans to increase decentralization over time.

Since launching in the middle of last year, Balancer has been running on a minimum viable governance implementation. With Balancer v1 deployed without any governance controllable parameters or other on chain admin powers, this has worked well to date and doesn’t present much risk to token holders or users. But the upcoming v2 upgrade with create several important controls which require reliable, decentralized execution, necessitating a different approach. 

Presently, Balancer uses the Snapshot voting mechanism to allow participation without any transaction fees. This has been a boon for community participation, but on the other hand this requires substantial trust in the core Balancer Labs team to execute votes’ will faithfully. 

This past weekend, BAL holders supported the proposal to authorize multisig formation, with a vast majority of participants voting in favor. By including a broad group of protocol participants beyond the core team, Balancer may be able to reduce both operational and regulatory risk stemming from excessive centralization. Utilizing a Gnosis multisig also opens the door to an easier future transition to on chain governance through Safe Snap, which triggers proposal executions based on Snapshot vote results.


In Brief:

  • Fei Protocol completes genesis successfully, but was forced to turn off part of their stabilization mechanism due to a technical fault:

  • Aave proposes integration with MakerDAO to cap DAI borrowing rates:

  • LidoDAO and Paradigm negotiate potential private placement of LDO tokens:

  • Sushiswap chooses to honor vested SUSHI rewards for aggregator users, bypassing the introducing protocols:

  • Inverse Finance seeks to leverage Anchor collateral for voting power:


Thanks for joining us for issue 26 of the Tally Newsletter! Be sure to check out the Tally governance app, join us on Discord, and subscribe to our protocol calendar for the latest updates!

Anything we missed? New developments or protocols you’d like to see covered? Drop us a line at newsletter@withtally.com

Best,

Nate, Tally