An Aave proposal to offer $5M in incentives every quarter to encourage adoption is advancing through governance.

On Feb. 17, Marc Zeller, the founder of Aave DAO delegate, Aave-Chain, tweeted that the proposal for “Merit – A New Aave-Alignment User Reward System” has now entered a request for comment (RFC) phase after passing an initial temperature check.

Merit proposes a period airdrop mechanism designed to reward users in the form of its wrapped Ether (WETH) and Aave’s native GHO stablecoin for behavior deemed to be aligned with Aave’s strategic objectives and bolsters the competitiveness of the Aave protocol.

“Addressing the competitive DeFi landscape, “Merit” seeks to elevate Aave’s appeal and efficiency through a rewarding mechanism that prioritizes DAO-beneficial actions, distinguishing Aave from competitors employing artificial incentive methods,” the RFC proposal said.

The plan would budget $2.1M worth of wETH and $2.9M worth of GHO as rewards for weekly distribution over 90 days for users who either borrow wETH against liquid staking token (LST) deposits or borrow GHO against stablecoin or AAVE deposits.

Rewards would also be boosted for users who stake AAVE or GHO, participate in governance, long-term AAVE holders or stakers, use minority LSTs, or migrate their funds over from rival lending protocols.

However, users who quickly offload their airdrops, do not participate in governance either directly or through a delegate, or actively use rival protocols would face penalties in the form of reduced rewards.

The Merit proposal exclusively concerns Aave’s v3 deployment on Ethereum at present, with Zeller hinting that Merit could expand in the future. The rival lending platforms named in the proposal are MakerDAO’s SparkLend and Morpho’s v2, v3, and Blue deployments.

Aave now aims to modify the Merit proposal to incorporate public feedback from the community before conducting another snapshot vote followed by a final vote to determine whether it will be implemented.

Previous incentive campaigns from Aave proved highly effective at growing its market share, with the launch of AAVE incentives for users following its v2 launch driving up the protocol’s total value locked (TVL) from $3.5B in late April 2021 to $12B in early June 2021.

While Aave did away with offering inflationary incentives 12 months later, Layer 1 and Layer 2 networks hosting Aave v3 deployments have recently put up their own native tokens as rewards to encourage adoption.

Aave is currently the third-largest DeFi protocol with a TVL of $8.46B. The Aave token is up 9.7% in the past seven days, according to CoinGecko.

Community feedback

On Aave’s governance forum, Zeebradoom, questioned whether up GHO as incentives would place negative pressure on the stablecoin’s price. The Merit proposal comes shortly after GHO finally achieved parity with the U.S. dollar after consistently trading below $1 throughout the first six months following its launch.

While Zeller did not address the impact of GHO incentives on the token’s price, he argued that increasing GHO’s adoption will “ensure its adoption, stability, and appeal.” Zeller added that GHO borrowing is a significant source of revenue for the Aave protocol, currently accounting for roughly 5% of the Aave DAO’s revenue from just 35M worth of borrows.

Hexonaut, a protocol engineer at MakerDAO, took exception to the proposed mechanism penalizing SparkLend users, threatening to propose the current revenue from Spark to Aave for forking its v3 codebase be pulled.

Zeller replied that Spark could harm its reputation by backing out of the deal, adding that the current agreement between Aave and Spark is mutually beneficial for both parties and could also pave the way for additional synergies in the future.