Incentives

Incentives within the Aave Protocol encourage active participation from suppliers and borrowers, enhancing liquidity and the overall efficiency of the protocol. It should be noted that there is no one source of various incentive initiatives, but they can originate from multiple sources, including the Aave DAO treasury and external entities interested in promoting liquidity for specific reserves.

The Aave DAO, governed by AAVE token holders through proposals and voting, can allocate funds from the DAO treasury to incentivise certain activities within the protocol. Incentive programs funded by the DAO are proposed, discussed, and approved through the Aave Governance process, ensuring community involvement and transparency.

Incentives can also be applied to the supply or borrow side of Aave liquidity pools, promoting activity of the incentivised reserve. By offering rewards to suppliers and borrowers of certain assets on Aave, the visibility and adoption of tokens can be boosted. Such external incentives require governance approval.

Approved incentives are distributed continuously over time proportional to the amount of liquidity a user supplies or borrows. Users can claim these rewards via the protocol’s incentive controller, which manages the allocation and distribution of incentives. This system adds value for those actively participating in the protocol while aligning user interests with the health and stability of the Aave ecosystem.

AAVE holders can stake their tokens in the Safety Module, a reserve designed to secure the protocol against unexpected shortfalls. In return for staking their AAVE tokens and taking on the associated risk, participants earn rewards, typically in the form of additional AAVE tokens or other incentives approved by governance. These rewards not only compensate stakers but also enhance the protocol's security by ensuring sufficient reserves are available to cover potential deficits.

Merit is an Aave-alignment user reward system, designed as a merkle-tree-based periodic airdrop to incentivise Aave-aligned behaviours and enhance the competitiveness of the Aave protocol. More information and interface to access merit distribution can be found here.